Realistic Growth Rates

BeatTheSystem

I have about 780K in SSAS and a SIPP .

I am trying to arrive at 1800K by 55 in 12 years time.

My employer can put 20K in now before April and another 50K in the summer.

I can alternatively choose to take it as salary but this will be less employers NI and less tax at 40%, so I can either have 70K in my pension or 37K cash to put in my wifes ISA for this year and next and mine for next with a few K left over.

In order to have the 1800k allowance (instead of the 1500K one) I wont be able to put any more in after April 2012 - I will have to sign the relevant HMRC form before April 12.

My question is this:

What is a REALISTIC growth rate for a 12 year plan. Most of the pension is in a medium risk portfolio and managed by a decent advisor.

At 6% FV=780e(0.06 X 12.25) = 1626K
At 7% FV=780e(0.07 X 12.25) = 1838K

What realistic growth rates do you guys use?

Thanks

vbm

Medium risk, but say 80% equity ? Between 6 & 7% is about right, depending on the charges you are paying. It is only an estimate. Are you going to annuitise or use drawdown for income? If you may be looking to purchase an annuity you may want to look at derisking your portfolio in the years running up to your retirement which will reduce the growth rate, but protect capital.

Also the LTA is likey to be way above £1.8m in 12 years time. Obvioulsy no downside for applying for fixed protection, but remember you can always supplement that if your FV is under the LTA in 12 years time.

BeatTheSystem

VBM,

Thanks for your reply.

It is about 60% equities, 20% fixed interest\bonds and 20% commerical property. The latter being mostly a building with 8% rental yield.

I think annuities are attrocious value so it will be in drawdown, possibly in multiple tranches.

I am just vexing over if I need to put anymore money in between now and April 2012 as after then I cant without reducing the LTA from 1800 to 1500. In my own mind I dont want to put any more in as I feel that I ought to be building funds (non ISA) to target 10K p/a equivlanet income by using my annual CGT allowance.

But like you say, the LTA may increase, but then again it may not, I believe it is frozen until 2016, if the economy is still in dire straights then I doubt any govt will increase it.

I am cautious over my expectations for income and consider 4% for drawdown as being reasonable, with a large pot I believe I can remain in equities.

JOHNGT

rates of return on assets are driven by inflation. The higher the rate of inflation the higher the return (although this does not happen every year, this is what happens in the longer term).

Therefore for realistic rates of return, you need to know the long-run real rate of return on assets. For property and equities it is 5-6% above inflation. For fixed interest 2-3% above inflation.

So, if you assumed inflation was 2.5%, equities and property would return 7.5% to 8% over the longer term and fixed interest 4.5% - 5.5%.

For you there is the added complication of having the business' own commercial property in the portfolio which is generating generous rental yield. At 2.5% inflation, also expect the property value to inflate at 4%-5% a year. So the total property return is 12%. This is because it is a specific property rather than general commercial property investment. The rental is inflated to increase the deduction from the company (tenant) so that more of its profits are tax deductable and shielded in the pension.

Finally, these are gross returns, you have to deduct charges that are coming out of the pension to pay for administration and perhaps to pay for financial advice fees. As a rough rule of thumb, deduct 1% from the gross return to account for these.