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    • TheCyclingProgrammer
    • By TheCyclingProgrammer 9th Jan 18, 3:56 PM
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    TheCyclingProgrammer
    Pension planning, finally
    • #1
    • 9th Jan 18, 3:56 PM
    Pension planning, finally 9th Jan 18 at 3:56 PM
    After spending time researching (*cough* procrastinating) I've finally decided to pull my finger out and start putting aside some money for retiring. I wish I'd started 5 or 10 years ago, hindsight is a wonderful thing.

    Just to give you an overview of my situation: I'm 35, have a mortgage which we are affording comfortably (we are down to about 65% LTV now), no other debts, about £4k (between my wife an I) put to one side as an emergency fund and we both have 4 figure general savings/rainy day funds. I run my own business, which is incorporated and has close to a 6 figure sum of retained profits (I limit my annual dividends to the higher rate threshold unless we need the extra money for something) which more than covers me if work is a bit slow so I'm in a position to make company contributions.

    I've recently started contributing £200/month to a S&S ISA on Charles Stanley Direct which I've invested in a balanced portfolio using their portfolio creator. I'm also investing £100/month for each of my two children into a JISA (age 2 and 6), invested into Vanguard Lifestrategy 80.

    In terms of a pension, for the time being I want something I can just invest in and forget about. I can afford to make between £1000-1500 a month as company contributions and I can probably top this up with £100/month or so in personal contributions as well as the occasional lump sum personal contribution as savings permit.

    As I currently have no pension to speak of, I've been looking at the available platforms and it seems like Cavendish would be my best choice, is that right? The only charge for now is 0.25%. I would have preferred to use Charles Stanley so I can keep everything in one place but until my portfolio is over £30k I'd get hit with an extra £100 charge. I could always transfer it back to CS in 3 years time.

    The plan would be to just invest in Lifestrategy 80. I wonder if 100 would be better, I'm willing to tolerate a certain amount of risk. I'm looking for probably at minimum of 25 years investment (I'd love to retire earlier but that may require a plan B). I'd review in 10 years time, by which point I'd hopefully have a 6 figure portfolio and then get professional advice at that point if I feel I need it.

    Are there any flaws with my plan?
    Last edited by TheCyclingProgrammer; 09-01-2018 at 3:58 PM.
Page 1
    • kidmugsy
    • By kidmugsy 9th Jan 18, 11:37 PM
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    kidmugsy
    • #2
    • 9th Jan 18, 11:37 PM
    • #2
    • 9th Jan 18, 11:37 PM
    I'm 35 ...
    I've recently started contributing £200/month to a S&S ISA ...

    In terms of a pension ... I can probably top this up with £100/month or so in personal contributions as well as the occasional lump sum personal contribution as savings permit.

    Are there any flaws with my plan?
    Originally posted by TheCyclingProgrammer
    It seems to me that you might do better putting your personal contributions into a LISA.
    Free the dunston one next time too.
    • enthusiasticsaver
    • By enthusiasticsaver 9th Jan 18, 11:42 PM
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    enthusiasticsaver
    • #3
    • 9th Jan 18, 11:42 PM
    • #3
    • 9th Jan 18, 11:42 PM
    There is a website which compares platform costs but when I first started investing in stocks and shares isas I used Cavendish as they were one of the cheapest but I think Charles Stanley was similar. The website is comparemyplatform.com As my portfolio got bigger I moved to a flat fee one as that was cheaper.

    I like the VLS funds for low costs and just invest and leave approach although my risk appetite is less so I have the VLS60. In your situation it does seem like the VLS80 or 100 would be ok.
    Debt free and mortgage free and early retiree. Living the dream

    I'm a Board Guide on the Debt-Free Wannabe, Mortgages, Banking and Budgeting boards. I volunteer to help get your forum questions answered and keep the forum running smoothly. Any views are mine and not the official line of moneysavingexpert.com. Pease remember, board guides don't read every post. If you spot an illegal or inappropriate post then please report it to forumteam@moneysavingexpert.com
    • TheCyclingProgrammer
    • By TheCyclingProgrammer 10th Jan 18, 1:20 AM
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    TheCyclingProgrammer
    • #4
    • 10th Jan 18, 1:20 AM
    • #4
    • 10th Jan 18, 1:20 AM
    It seems to me that you might do better putting your personal contributions into a LISA.
    Originally posted by kidmugsy
    For what reason? Because I still get the benefit of a 25% bonus but it remains tax free on withdrawal?
    • TheTracker
    • By TheTracker 10th Jan 18, 6:36 AM
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    TheTracker
    • #5
    • 10th Jan 18, 6:36 AM
    • #5
    • 10th Jan 18, 6:36 AM
    If you own a ltdco which has retained profits it seems odd to make small personal contributions. If you’ve got unwrapped money then ISAs would be the way to go.

    If you have 6 figure retained profits, would you not be looking to throw a lot of that into a pension rather than just 1k/month? Unless you have other plans for it. As you probably already know, company contributions are treated as expenses on your books, and you could significantly reduce taxable profits by making significant contributions.

    Your prediction/hope for a 6 figure portfolio in 10 years. You could have an 80k pension portfolio in 3 months if you chose to. What’s your plan for the 6 figure RP?

    Re “no pension to speak of”. What is a pension? What’s important is having savings to live off once retired. There are various tax wrappers including ‘pensions’. But what’s important first and foremost is you have savings. And you have more flexibility than most in how you funnel those savings into tax wrappers. So I wouldn’t sweat the ‘no pension’ part so long as you can accumulate savings fast enough to meet your goals, and have a vehicle for tax efficiency.
    Last edited by TheTracker; 10-01-2018 at 6:58 AM.
    • ex-pat scot
    • By ex-pat scot 10th Jan 18, 10:48 AM
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    ex-pat scot
    • #6
    • 10th Jan 18, 10:48 AM
    • #6
    • 10th Jan 18, 10:48 AM
    I think you need to work backwards from the end point (retirement) to now.
    What does retirement look like? Is it £3,000 net per month? Does this include the mortgage fully paid off? Is this at 55, 60 or some other date? What else will be going on at that time (children university, early career, getting married etc).
    That first set of questions should give you the target.
    For example, if you want £3,000 net per month from your pension, then you can take £40,00 PA. This will require a pot of c£1m if you follow the 4% Safe Withdrawal Rate approach.


    OK now you know the target. £1m.
    (does your statement of getting a six figure amount saved in 10 years' time start to look a little on the small side?)
    The question you should be asking next is how to get there:
    - how long do I want it to take
    - how much risk am I willing to accept
    - what is my epected return on investment
    - how much will I put aside each month.
    (you have an equation with three variables - input amounts, investment return and timescale to reach target. You can play around changing two of the variables and see what impact there is on the third).


    So as another example for your £1m target.
    - initial assumption of investment return 5% net of inflation (which is the long term equities ROI ie assumes you will have a relatively adventurous approach to investment risk and a long investment horizon)
    - target £1m in 25 years time ie by age 60
    - £20,000 pa would give you £1,002,269 ie pretty much there.
    - the same amount at a 4% return would give £866,000 over the same period. This indicates the sensitivity of the calculation to changes in the assumption. (For reference, 4% net return is more cautious, and might sensibly reflect an investment strategy that takes both equities and bonds).
    - if you wanted to hit the target earlier, then £28,850 pa at 5% would get you to the magic £1m by 55 (ie 20 years).


    Then you can start messing about with the numbers.
    Eg zero net investment return (cautious, put your money in bonds) £40,000 pa x 25 years will have £1m input and a £1m pot.
    I suggest you play about quite a lot to see what impact the changing variables have on the outcome.


    Other questions: what about your spouse? In a LtdCo they ought to also be shareholder and you can legitimately set them up with a separate SIPP and split your company contributions into both so that you end up with similar sized pots (so as to take full advantage of their Nil Rate Band and thresholds in both contributions and retirement).
    What about your SP and that of your spouse? Hopefully you are taking sufficient salary so as to trigger NI and get your credited years' contributions.


    Other considerations:
    Direct contribution out of LtdCo is usually the optimal approach.
    Do you need to keep a 6 figure warchest in the LtdCo, or could you put a good amount straight away into a SIPP before 5/4? (Up to £40,000 each, per tax year).


    The formula (I know you will love spreadsheeting this) is the annuity formula at http://www.cs.ucr.edu/~ehwang/interest.html
    Finally: as NLUK would say- have you asked your accountant? AYCOTBAC?
    Last edited by ex-pat scot; 10-01-2018 at 10:51 AM.
    • Prism
    • By Prism 10th Jan 18, 11:22 AM
    • 122 Posts
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    Prism
    • #7
    • 10th Jan 18, 11:22 AM
    • #7
    • 10th Jan 18, 11:22 AM
    I would look at your company retained profits and see how much you can afford to pay into a pension this year as a starting sum. It takes a long time to build pension value with monthly payments. I keep about 9 months - 1 year worth of dividends and salary in my company account and put the rest into a pension.
    • kidmugsy
    • By kidmugsy 10th Jan 18, 12:36 PM
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    kidmugsy
    • #8
    • 10th Jan 18, 12:36 PM
    • #8
    • 10th Jan 18, 12:36 PM
    For what reason? Because I still get the benefit of a 25% bonus but it remains tax free on withdrawal?
    Originally posted by TheCyclingProgrammer
    What better reason? Also it stays available for use in an emergency before 60, albeit with a penalty.
    Free the dunston one next time too.
    • TheCyclingProgrammer
    • By TheCyclingProgrammer 10th Jan 18, 3:59 PM
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    TheCyclingProgrammer
    • #9
    • 10th Jan 18, 3:59 PM
    • #9
    • 10th Jan 18, 3:59 PM
    Thanks for all of your comments, I'll try and address each point raised:

    If you own a ltdco which has retained profits it seems odd to make small personal contributions. If you’ve got unwrapped money then ISAs would be the way to go.
    I'm already making ISA contributions, but don't SIPP contributions get increased according to my marginal rate of tax? I usually only pay basic rate tax but on occasion do go into the higher rate - wouldn't it be beneficial then to pay into a SIPP and get higher rate tax relief?

    If you have 6 figure retained profits, would you not be looking to throw a lot of that into a pension rather than just 1k/month? Unless you have other plans for it. As you probably already know, company contributions are treated as expenses on your books, and you could significantly reduce taxable profits by making significant contributions.
    I'm more comfortable knowing I have a healthy warchest in case I don't get any work. I like to have at least one year's worth of dividend payments covered, which is about £50k but I'm more comfortable with 18 months. I've been fortunate in 9 years to never have to dip into my warchest due to lack of work but you never know what is around the corner as a freelancer. I have no doubt I can certainly afford to put some kind of initial lump sum in though.

    @ex-pat-scot I did run some numbers through several calculators. Using the iii.co.uk, which I'm accounts for their fees, £15k a year over 25 years with 5% growth rate gives me £735k. With a 25% tax free lump sum, this would leave me enough for about £2300/month lasting 40 years, or about £2600/month for 30 years. Add in any state pension from 68 and this seems more than comfortable as a minimum target.

    Of course it could perform worse, it could perform better, but this is why I was aiming for around £1200 as a baseline target. If I can save more, even better.

    My wife is a director and shareholder, she has a small salary - enough to count as a qualifying state pension year.
    • TheTracker
    • By TheTracker 10th Jan 18, 4:13 PM
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    TheTracker
    Thanks for all of your comments, I'll try and address each point raised:



    I'm already making ISA contributions, but don't SIPP contributions get increased according to my marginal rate of tax? I usually only pay basic rate tax but on occasion do go into the higher rate - wouldn't it be beneficial then to pay into a SIPP and get higher rate tax relief?
    Originally posted by TheCyclingProgrammer
    Not sure what you mean. I suspect asking if you get taxed per your personal income tax rate. No! The gross contribution from the company has no personal tax effect on you personally, other than consuming annual allowance. It’s a pure expense so the company avoids CT on it. And any eventual CGT you may pay after ER. So maybe about a 27% relief in a sense. You could squirrel away 40k before April and another 40k from April with no effect on your tax on what you’ve pulled out as salary and dividends already.

    So you like your war chest. You could also make token contributions to lock in the ability to carry forward allowance (3x40k each).
    Last edited by TheTracker; 10-01-2018 at 4:16 PM.
    • TheCyclingProgrammer
    • By TheCyclingProgrammer 10th Jan 18, 5:16 PM
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    TheCyclingProgrammer
    Not sure what you mean. I suspect asking if you get taxed per your personal income tax rate. No!
    Originally posted by TheTracker
    No, I'm talking about personal SIPP contributions - you were saying I'd be better off adding any personal excess savings to a LISA instead of to my SIPP.

    My understanding is with SIPP personal contributions, if I'm a basic rate payer, I pay in £80 and get £100. If I'm a higher rate payer, I pay in £60 to get £100. So similar to the LISA except from what I can see the LISA only adds 25% of whatever you pay in (equivalent to basic tax rate relief on a SIPP contribution), making the only real advantage of the LISA that you can access the money early (with a penalty).
    • TheCyclingProgrammer
    • By TheCyclingProgrammer 10th Jan 18, 5:19 PM
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    TheCyclingProgrammer
    Because the whole point of trying to sort this out was to start procrastinating, I have at least applied for a SIPP through Cavendish and I intend to kickstart it with a £10k lump sum employer contribution. I'll invest this in to the Lifestrategy 80 Acc.

    I assume there's no point in worrying about drip-feed vs lump sum at this stage? Also, when I start making regular company contributions will I be better off making monthly payments or an annual lump sum at the end of my financial year, or does it not really matter?
    • TheTracker
    • By TheTracker 10th Jan 18, 6:23 PM
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    TheTracker
    No, I'm talking about personal SIPP contributions - you were saying I'd be better off adding any personal excess savings to a LISA instead of to my SIPP.

    My understanding is with SIPP personal contributions, if I'm a basic rate payer, I pay in £80 and get £100. If I'm a higher rate payer, I pay in £60 to get £100. So similar to the LISA except from what I can see the LISA only adds 25% of whatever you pay in (equivalent to basic tax rate relief on a SIPP contribution), making the only real advantage of the LISA that you can access the money early (with a penalty).
    Originally posted by TheCyclingProgrammer
    Paying into a pension from personal savings when your company has a 6 figure war chest is mighty odd. To me. Maybe it has some logic but it escapes me.

    The personal savings you’re considering putting in a PP you’ve presumably already paid 20% CT and then 7.5% DT on. You can’t claim 20% or 40% of tax back on this because you never paid that tax rate. You are not a “Basic rate tax payer” because you never paid any Basic Rate tax. You can only claim, afaik, on relevant earned income (ie salary), and since you’ve not paid any income tax on that you are probably not be able to claim any tax relief against it (or maybe20% on the salary part).. Even if you could, you’re only paying yourself <10k salary? As always, happy to be corrected.

    So pay into a SIPP from your retained company funds.
    Pay into a ISA from your retained personal funds.

    EDIT: well I’m willing to eat humble pie. This link says something different and looks more reputable than this anonymous forum member. Seems to say a personal contribution allows one to gain relief on dividend tax paid. Ask your own accountant https://www.accountingweb.co.uk/tax/personal-tax/tax-relief-on-pension-contributions-unravelled
    Last edited by TheTracker; 10-01-2018 at 8:49 PM.
    • ValiantSon
    • By ValiantSon 10th Jan 18, 8:16 PM
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    ValiantSon
    I've recently started contributing £200/month to a S&S ISA on Charles Stanley Direct which I've invested in a balanced portfolio using their portfolio creator. I'm also investing £100/month for each of my two children into a JISA (age 2 and 6), invested into Vanguard Lifestrategy 80.
    Originally posted by TheCyclingProgrammer
    For the children's JISAs you would be better holding them through Vanguard's own platform as the platform charge is lower at 0.15% compared to Charles Stanley at 0.25%. Vanguard charge no other fees either (nothing to trade and nothing to exit), so your overall cost comparison is 0.37% with Vanguard (platform plus OCF) or 0.47% with Charles Stanley. You might want to consider a transfer of these to Vanguard, although Charles Stanley will charge you an exit fee of £10 each, so you would need to consider that too.

    A possible way of avoiding the £10 fees would be to wait until the new tax year and open JISAs with Vanguard then sell the funds held on Charles Stanley and re-buy on Vanguard's platform. That way you would benefit from the cheaper charges, while avoiding the exit fee.
    • kidmugsy
    • By kidmugsy 10th Jan 18, 8:39 PM
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    kidmugsy
    No, I'm talking about personal SIPP contributions - you were saying I'd be better off adding any personal excess savings to a LISA instead of to my SIPP.

    My understanding is with SIPP personal contributions, if I'm a basic rate payer, I pay in £80 and get £100. If I'm a higher rate payer, I pay in £60 to get £100. So similar to the LISA except from what I can see the LISA only adds 25% of whatever you pay in (equivalent to basic tax rate relief on a SIPP contribution), making the only real advantage of the LISA that you can access the money early (with a penalty).
    Originally posted by TheCyclingProgrammer
    This seems odd to me. If you are paying higher rate tax avoid it by withdrawing less in dividends. Why choose to expose yourself to HRT and then try to avoid it?
    Free the dunston one next time too.
    • TheCyclingProgrammer
    • By TheCyclingProgrammer 11th Jan 18, 11:32 AM
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    TheCyclingProgrammer
    For the children's JISAs you would be better holding them through Vanguard's own platform as the platform charge is lower at 0.15% compared to Charles Stanley at 0.25%. Vanguard charge no other fees either (nothing to trade and nothing to exit), so your overall cost comparison is 0.37% with Vanguard (platform plus OCF) or 0.47% with Charles Stanley. You might want to consider a transfer of these to Vanguard, although Charles Stanley will charge you an exit fee of £10 each, so you would need to consider that too.

    A possible way of avoiding the £10 fees would be to wait until the new tax year and open JISAs with Vanguard then sell the funds held on Charles Stanley and re-buy on Vanguard's platform. That way you would benefit from the cheaper charges, while avoiding the exit fee.
    Originally posted by ValiantSon
    Thanks for the tip. Something to consider, but at the current portfolio size Iíd need to do some calculations to factor in the exit fees. Iíll look into the possibility of selling and transferring.
    • TheCyclingProgrammer
    • By TheCyclingProgrammer 11th Jan 18, 12:49 PM
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    TheCyclingProgrammer
    This seems odd to me. If you are paying higher rate tax avoid it by withdrawing less in dividends. Why choose to expose yourself to HRT and then try to avoid it?
    Originally posted by kidmugsy
    Fair point, if I withdraw dividends into the higher rate itís normally only because I need the extra money for a specific purpose.
    • kidmugsy
    • By kidmugsy 11th Jan 18, 3:24 PM
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    kidmugsy
    Fair point, if I withdraw dividends into the higher rate itís normally only because I need the extra money for a specific purpose.
    Originally posted by TheCyclingProgrammer
    Then how can you afford to make a contribution to a pension with it?
    Free the dunston one next time too.
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