# Take control of my pension now?



## nest egg (19 Jun 2020)

Hi, 38 year old who is thinking about taking control of his pension. The pot is currently 100% invested in a passive global equity fund. I had planned to take control of it before I turn 41, and stay passive, as otherwise it will automatically move to more expensive managed funds from then on.

Considering where the world is today though, I'm giving serious thought to fast forwarding that decision, and taking control now.  My plan at 41 was to move to a 60 passive equity / 40 bond mix, rebalancing on an annual basis. Last but not least, I'd like the option to retire in 12 years time at 50 if I need to (the scheme allows for this).

Want to make an informed decision, throw stones please!


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## Oisin19 (20 Jun 2020)

Have you worked out how much of a pension pot you require to retire at age 50? If you haven’t done that then figure out how much of your current income would you like to replace in retirement. 

Id imagine that getting to that pot/income will involve maxing out contribution rather than switching from active to passive funds for the purposes of fees.


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## Zenith63 (20 Jun 2020)

I’m in a similar position actually. However my view is that I’ll be putting the pension into an ARF invested in equities after retirement anyway, and if I got to 50 and equities were deeply depressed I could decide to work a few more years while they recover or perhaps keep my drawdown as low as possible from the ARF in the first few years of retirement.

Obviously your risk appetite, ability to continue working, other means to support yourself if you don’t draw down earlier etc will impact this, but shifting into power risk assets at 41 seems very excessively conservative to me! I may be at the other end of the risk spectrum, intending to leave it in equities right up to 50 however.


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## Conan (20 Jun 2020)

Whatever about the financial aspects of retirement at age 50 (with a potential 40 years of retirement) I would question de-risking in the run up age 50 if at 50 you are going to re-invest 75% into an ARF and perhaps invest in a Managed Fund type strategy (typically 70% Equity).
If on the other hand you plan to continue with a low risk strategy after age 50 in the ARF then the likelihood is that you are going to have to accept a very low rate of return (based on current environment). If your drawdown exceeds your net return then your capital will gradually diminish over time. And once you reach age 61 you must drawdown a minimum of 4% pa (5% after age 71). 
I don't know what you expected fund size will be , what other income or assets you might have or what you retirement income needs will be, but retirement at age 50 is challenging, at least financially.


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## nest egg (20 Jun 2020)

Fergal19 said:


> Have you worked out how much of a pension pot you require to retire at age 50? ...
> Id imagine that getting to that pot/income will involve maxing out contribution rather than switching from active to passive funds for the purposes of fees.



Exactly, maximising contributions every year, my aim is to have a pension pot of approx 1.1-1.2m (assuming 5% p.a. returns between now and then), and overpaying the mortgage to have the house repaid.  Whether I actually retire is another question all together, really it's about having the freedom to walk away.  Staying in passive funds seems like a no-brainer to me, given the fees are lower, therefore maximising returns, unless I'm missing something?


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## nest egg (20 Jun 2020)

Thinking further about this, after the 200k lump sum, is it better to pay the 20% on the next 300k, or leave it in an ARF?

Option 1: ARF of 1m (subject to income tax and 4/5% minimum drawdowns), and 200k investment pot subject to CGT.
Option 2: ARF of 700k, and 440k investment pot
I tend to favour Option 2, as it gives more flexibility, but haven't run the numbers yet.


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## Conan (20 Jun 2020)

mojoask said:


> Thinking further about this, after the 200k lump sum, is it better to pay the 20% on the next 300k, or leave it in an ARF?
> 
> Option 1: ARF of 1m (subject to income tax and 4/5% minimum drawdowns), and 200k investment pot subject to CGT.
> Option 2: ARF of 700k, and 440k investment pot
> I tend to favour Option 2, as it gives more flexibility, but haven't run the numbers yet.


Really depends on your expected marginal tax rate in retirement.
If you marginal rate Is 40% in retirement, then go for the higher lump sum.
At the other extreme, if your income is below the 20% tax threshold, then worth considering whether to pay 20% tax on the extra €300,000


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## Oisin19 (20 Jun 2020)

And will 1.2m be enough for a potential 40 year retirement. After lump sum you would be left with an arf of 900k. With such a long retirement what would be a safe withdrawal rate? 2% or 3%. At 3% that would be 27k per annum. Will that be sufficient?

There’s a lot more to the active vs passive argument than just fees. Anyway I think all that is secondary until you get the first part right. once you have the first bit sorted you just deploy your funds accordingly. Then investment selection is important


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## 50andOut (20 Jun 2020)

mojoask said:


> Thinking further about this, after the 200k lump sum, is it better to pay the 20% on the next 300k, or leave it in an ARF?
> 
> Option 1: ARF of 1m (subject to income tax and 4/5% minimum drawdowns), and 200k investment pot subject to CGT.
> Option 2: ARF of 700k, and 440k investment pot
> I tend to favour Option 2, as it gives more flexibility, but haven't run the numbers yet.



Isn't the max you can take as cash 25% of the fund value??

 So If you have a pension pot of €1m then the 25% = €250k. you need €2m pension pot to get €200tf + €300@20% 

Therefore for €1m you "only" have 200k tax free plus 50k at 20%


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## Conan (20 Jun 2020)

50andOut said:


> Isn't the max you can take as cash 25% of the fund value??
> 
> So If you have a pension pot of €1m then the 25% = €250k. you need €2m pension pot to get €200tf + €300@20%
> 
> Therefore for €1m you "only" have 200k tax free plus 50k at 20%


Correct


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## moneymakeover (20 Jun 2020)

50andOut said:


> Isn't the max you can take as cash 25% of the fund value??
> 
> So If you have a pension pot of €1m then the 25% = €250k. you need €2m pension pot to get €200tf + €300@20%
> 
> Therefore for €1m you "only" have 200k tax free plus 50k at 20%


The Pensions Authority:

*Tax*
*Tax on lump sums at retirement*
The first €200,000 of pension lump sums payable is currently (2016) tax free. This is a total lifetime limit even if lump sums are taken at different times and from different pension arrangements. Lump sums between €200,001 and €500,000 are taxed at 20%, with any balance over this amount taxed at your marginal rate and subject to the Universal Social Charge.
The amount of cash you can take out of a pension arrangement is limited, with different rules applying depending on the type of arrangement you have.
For RACs, PRSAs and people transferring to AMRF/ARFs at retirement, the cash limit is 25% of the retirement fund.
The amount of cash you can get from an occupational pension scheme at normal retirement age is broadly 1.5 times your Final Remuneration, if you have completed 20 years’ service and have no benefits from a previous scheme


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## Gordon Gekko (20 Jun 2020)

It’s 25% of the value of the fund if you’re ARFing or 1.5 times salary (sic) if you’re buying an annuity.

You can’t mix and match.


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## Oisin19 (20 Jun 2020)

Gordon Gekko said:


> You can’t mix and match.



unless you have avc’s


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## moneymakeover (20 Jun 2020)

moneymakeover said:


> Lump sums between €200,001 and €500,000 are taxed at 20%,


Doesn't that suggest the cash limit, strictly speaking is

200k plus 0.8 times 300k plus fully taxed remainder if so choose

So maybe as per OP he might choose option 2
200 +240 = 440


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## Gordon Gekko (20 Jun 2020)

Fergal19 said:


> unless you have avc’s



Yes but that’s something else.

The implication was that someone could take 1.5 times plus ARF.


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## Conan (20 Jun 2020)

moneymakeover said:


> Doesn't that suggest the cash limit, strictly speaking is
> 
> 200k plus 0.8 times 300k plus fully taxed remainder if so choose
> 
> ...


No.
The overall lump sum limit is either 25% of the fund OR 150% of Final Salary (in which case you must use the residual fund to buy an Annuity- current rules). 
So if the estimated fund is €1m, then the 25% gives a lump sum of €250,000. The first €200,000 is tax free and the extra €50,000 is taxable at 20%. So a net €40,000, giving a total lump sum of €240,000.


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## nest egg (20 Jun 2020)

Conan said:


> No.
> The overall lump sum limit is either 25% of the fund OR 150% of Final Salary (in which case you must use the residual fund to buy an Annuity- current rules).
> So if the estimated fund is €1m, then the 25% gives a lump sum of €250,000. The first €200,000 is tax free and the extra €50,000 is taxable at 20%. So a net €40,000, giving a total lump sum of €240,000.



Thanks, that's much clearer than the guidance I'd read. If I achieve a 1.2m pot, 25% is 300k, of which 100k would be taxed at 20%, leaving me with 900k ARF, and 280k pot to invest.


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## nest egg (21 Jun 2020)

Fergal19 said:


> And will 1.2m be enough for a potential 40 year retirement. After lump sum you would be left with an arf of 900k. With such a long retirement what would be a safe withdrawal rate? 2% or 3%. At 3% that would be 27k per annum. Will that be sufficient?



That's the million dollar euro question. Taking the lump-sum and investing it would provide a pot of 1.18m, at 3.5% drawdown rate, 41,300 p.a. (in 2032 Euros). Not exactly a lavish lifestyle, but with the mortgage paid off, would cover the essentials. That's not of course the life I'd want to live, but that's a different question...

Going back to the original question, does anyone think it's the wrong choice to take control now? If doing so, what are people's views on introducing bonds into the mix?


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## Conan (21 Jun 2020)

Not really sure what you mean by “take control now”? I assume that within your existing structure you have a choice of funds, so to that extent you can control the fund mix as is. 
As for increasing the Bond mix, current Bond yields are extraordinarily low, so any increase in the Bond yield will result in a lower capital value. Bonds do well when Interest rates are falling. But how much lower can rates go Over the next 10 years? Bonds are not necessarily a lower risk option than Equiries.


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## nest egg (21 Jun 2020)

Conan said:


> Not really sure what you mean by “take control now”? I assume that within your existing structure you have a choice of funds, so to that extent you can control the fund mix as is.
> As for increasing the Bond mix, current Bond yields are extraordinarily low, so any increase in the Bond yield will result in a lower capital value. Bonds do well when Interest rates are falling. But how much lower can rates go Over the next 10 years? Bonds are not necessarily a lower risk option than Equiries.



Currently the pension pot is automatically managed by the pension provider. Once I turn 41, they start progressively moving portions into other actively managed funds, bonds & eventually cash, so that by the time I hit 65, it's all in a very safe, very low yielding portfolio. That might have been fine in the days where you would buy an annuity, but I don't think that's a great idea these days.

My thoughts on including an equity / bond mix is that it's less volatile, which is important when you're drawing down every year. By taking control now, I would in effect, start the process earlier than planned to move towards a 60/40 mix by the time I hit 50.


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## Conan (21 Jun 2020)

But most providers have a wide choice of funds and allow you to determine your own mix of funds, if you wish. I suspect you are in a “default fund” which typically reduces risk as you get closer to retirement (which is logical if you intend to buy an Annuity with the residual fund). But I would think that there are other funds open to you if you wish to “take control”. Check it out.


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## Sarenco (21 Jun 2020)

Conan said:


> Bonds are not necessarily a lower risk option than Equiries.


Equities are always riskier (more volatile) than investment-grade bonds.  If that was not the case, there would be no equity risk premium.


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## nest egg (21 Jun 2020)

Conan said:


> But most providers have a wide choice of funds and allow you to determine your own mix of funds, if you wish. I suspect you are in a “default fund” which typically reduces risk as you get closer to retirement (which is logical if you intend to buy an Annuity with the residual fund). But I would think that there are other funds open to you if you wish to “take control”. Check it out.



Their default isn't a fund per se, rather it's a "strategy", i.e. you start in their 100% passive equity fund and as you get closer to retirement they move your pot progressively into other managed equity funds, bond funds and cash funds. I can choose however to take control and ignore their default, and pick from the funds they offer. There are only 5 or 6 of these from what I can see via their portal but that doesn't overly concern me as there's the existing passive fund I'm already in, and a long term bonds fund.

Is there any downside to taking control myself, other than the inherent risk with staying invested in equities? Has anyone done this with their own pension pot?


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## Conan (21 Jun 2020)

In that case it’s entirely up to you as to whether you determine the investment strategy (fund mix) going forward or let the provider determine the strategy. 
The only downside of “taking control” is that you call it wrong. How actively will you monitor markets, will you tend to make decisions after the market has moved etc? 
I think it is worth bearing in mind what you plan to do with the fund if you do retire early ie Will you invest in an ARF and what investment strategy will you adopt for the ARF. If you are going to transfer the residual fund into an ARF, with a potential 40 year investment timeframe then you need to consider whether a conservative investment strategy in the 10 year run-up to age 50, is the optimum strategy.
In developing an investment strategy, perhaps you need to look , not 10 years ahead, but more like 50 years.


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