Taking advantage of high contributions at a young age?

pensionplanning

I am approaching 22 years old, my employer set up a good benefits package for employees late last year and I am looking to take best advantage of this and some advice regarding the pension would be appreciated.

The company matches my pension contributions up to 6%, I opted to contribute 10% of my salary and chose to use salary sacrifice, this means in total my pension contributions are just over £1200 per month. As of May the pension has just over £10,000 contributed and the total value is £10,900 from the investments returns.

I have a good salary and do not expect to be retiring on this pension, I plan to invest cash savings into property and other investments and retire before my state retirement age however as I am quite young I expect my plans may change and I do not want to miss an opportunity to secure my age based retirement if I can and provide myself supplemental income if I do retire early, once I reach retirement age.

As my current pension value is only £10,000 and could be replaced with another 8 months of contributions I suspect that investing in a more risky strategy is more valuable for me long term, if I were to lose a significant portion of my pension in the next few years the long term effects would not be disastrous (as I cannot access this money for another 40 years) and if the effects of risky investments were positive it could provide me with security for my retirement early on in my life. I don't want to throw this money away however I am not against losing it all early on, as I will have a chance to make up for the losses.

The current structure of the investments (as set up by the adviser I spoke to at our office) is as follows:

Global Equity      31.65%
UK Equities        25.21%
Fixed Interest     16.51%
Other	           10.21%
Property	   9.95%
Cash	           6.48%

This seems to be labelled as a "balanced" investment plan by Aviva, with the following options being available: Defensive, Cautious, Balanced, Adventurous, Speculative.

As my pension is so far away from being accessible, is not part of my primary retirement plan and is yet to reach a significant size is it okay for me to move to the "speculative" or "adventurous" plans?

The speculative plan option comes with a few caveats, it says that a speculative investor may:

Have high levels of financial knowledge and a keen interest in financial matters.
Be considered as 'hobby investors' with a lot of investment experience.
Be active in managing their investments.
Be looking for the highest possible return and is willing to take a lot of risk to achieve this.
Make their financial decisions quickly as they have firm views on investment.
Not regret when their financial decisions turn out badly.
Know how to turn significant investment fluctuations to their advantage.

Are these just generic warnings to prevent people close to retirement from thinking they can just invest everything into a speculative plan and triple their pension value in a few months, or are these genuine things I should be looking at/into if I intend on moving to a speculative style?

In general I'm looking for advice / thoughts on what I should do.

bigadaj

You seem to have a good level of financial knowledge for your age but good background informationa Nd research is key, smarter in vesting by tim hale is recommend here as well as these forums, monevator, motley fooll and others.

In terms of your pension are you totally restricted to those five options or can you invest in other external funds?

If not then you do seem to be in the medium risk category, however I think the adviser might be too conservative here, and given your age and level fo contribution then you should be between one and two stages more adventurous in my opinion.

That's a very good contribution you are currently making, might be useful to provide a breakdown of the make up of te adventurous and speculative finds as you have done for the balanced and someone can provide a bit more interpretation.

In terms of property then yo will find many a devising against buy to let here, though there are obvious benefits to owning your own home. Buy to let would have a place in a well diversified portfolio so long as it wouldn't make up more than say 20% of your investments.

You obviously need an emergency fund, but saving into isas is also valuable in terms of getting flexibility both in investment choice and the ability to draw on this money or at least the income from it.

jamesd

I suggest that you eliminate the extra contributions above what is required to get full employer matching. The problem is that at just 5% real growth per year, the value at age 55 would be more than £1.28 million. That is above the lifetime allowance in effect from next year. 5% real growth is below the long term average for equity investing so you could easily end up doing better than that.

So for this reason it's better to divert the extra into S&S ISA investing if you are not already using your full limit on that. At present there is no lifetime allowance for ISA pot growth.

If you are a higher or top rate tax payer you might consider some use of VCT investing to get the 30% tax relief on that vehicle. Or you could plan on not contributing to the pension for the whole time until you are 55, but it seems better to start doing other things now than just defer the decision.

You are both young enough and with sufficient income for it to be entirely fine for you so use adventurous and speculative investments with a significant portion of your investing. Speculative doesn't mean triple your money in three months, more using investments where it is expected that there will be regular drops of 50-70% in value along with corresponding and higher gains at other times. A roller coaster ride to better long term growth. This is the sort of volatility that is provided in emerging markets and natural resources funds.

In your case, the pension can be a backup plan with more cautious investing than your non-pension investing. The non-pension part might then let you retire well before 55 or pursue different work or non-work opportunities sooner.

The balanced plan you're using now has about three times as much UK equity investing as the weight of the UK stock markets worldwide has, so it's very overweight in the UK. If you were close to retiring that would make more sense, but you're not.

At the moment you seem to be in a plan that is intended for older people or younger people who will be scared and give up on investing the first time they see a significant drop in value. There is a real tendency for new investors to react in that way so you need to seriously ask yourself whether you will be able to deal with a 20% or 40% drop in value without panic selling. You are going to see drops of 20% every few years and drops of 40% and more every ten years or so with mixtures that have substantial equity portions - those are the levels that the UK markets go through routinely. Don't fake this: you can pick volatility levels by adjusting the mixture of assets and the task is to pick the right mixture for your own risk tolerance.

bigadaj

James just wonder about your point aBout being overweight in the UK, which is correct, but why your reasoning that this would be ok close to retirement?

Surely approaching retirement the classic approach would be life styling, so moving away from equities into bonds and other lower risk asset prices, planing more funds into UK only stocks would surely be a higher risk than global diversification. I wondered if this might be a currency risk question, but most fates arge cap earnings are not in steeling anyway so there would be a degree of natural hedging there in any case.

mania112

If you have £11,000 already and were contributing £1,200 per month with a 5/10 attitude to risk, i would calculate the following splits:

Fixed Interest 29%
UK Equity 28%
US Equity 19%
Property 11%
Far East Equity 8%
European Equity 5%

This assumes investment for 30 years (the maximum the software allows).

I'm not keen on a generic 'global equity' and prefer to break it into specific percentages in specific locations.

I might tweak this auto-generated result by dropping Fixed Interest to 20% or so and putting that 9% into Emerging Market funds.

The UK Equity portion is similar to yours, and I see no issue with it.

jamesd

bigadaj, close to retirement there can be merit in having more of your investments linked to the economy in which you are living. That reduces exchange rate risk among other things. You're right about the other types of risk so it's a case of finding a balance.

bigadaj

mania112 wrote: »

If you have £11,000 already and were contributing £1,200 per month with a 5/10 attitude to risk, i would calculate the following splits:

Fixed Interest 29%
UK Equity 28%
US Equity 19%
Property 11%
Far East Equity 8%
European Equity 5%

This assumes investment for 30 years (the maximum the software allows).

I'm not keen on a generic 'global equity' and prefer to break it into specific percentages in specific locations.

I might tweak this auto-generated result by dropping Fixed Interest to 20% or so and putting that 9% into Emerging Market funds.

The UK Equity portion is similar to yours, and I see no issue with it.

But the split you have calculated is low risk for someone young with a good income and the potential for other isa investments, are you saying this is what might be appropriate or defending the allocation of the original ifa?

The fixed interest looks to be far too high with a 30 year time horizon, also in my opinion growth is far more likely to be better over that horizon in Asia and emerging markets, the allocation to the UK and, to a lesser extent, the us seems a bit high given the stated aims of the OP.

You do seem very reliant on the software you use, and this black box approach is very generic.

mania112

bigadaj wrote: »

But the split you have calculated is low risk for someone young with a good income and the potential for other isa investments, are you saying this is what might be appropriate or defending the allocation of the original ifa?

The fixed interest looks to be far too high with a 30 year time horizon, also in my opinion growth is far more likely to be better over that horizon in Asia and emerging markets, the allocation to the UK and, to a lesser extent, the us seems a bit high given the stated aims of the OP.

You do seem very reliant on the software you use, and this black box approach is very generic.

Did you read my whole message or just look at the numbers?

I said it's for a moderate investor (5/10) and I also said I would tweak it.

Sure, someone in the OP's situation will likely be 7+ out of 10 (but that's for him to decide).

The point I was making was really in response to the poster who said UK Equity was too high. I think it's reasonable.

atush

The OP was talking risky and is young so there is a long time horizon.

I too think the fixed interest is too high for that type of profile.

jamesd

mania112, rather than UK being reasonable, I'd perhaps say it's traditional. Reasonable as well, of course, but the reason why it's reasonable is of interest.

There's a general trend for investors and asset allocation tools to be overweight in the market of their home country. But overweight is what you do to places where you think there's more potential than other places and I don't think that it's sensible to have a three times overweight level in the UK market because I don't think it's likely that the UK market will have higher growth than other markets around the world.

But I'm not surprised to see asset allocation tools intended for UK investors having a high UK weight.

I agree with you about dropping the fixed interest portion in favour of emerging markets. I'd also want to substitute commercial property for more of the fixed interest, given the current price of fixed interest investments. Not forever, just given current market conditions.

bigadaj

mania112 wrote: »

Did you read my whole message or just look at the numbers?

I said it's for a moderate investor (5/10) and I also said I would tweak it.

Sure, someone in the OP's situation will likely be 7+ out of 10 (but that's for him to decide).

The point I was making was really in response to the poster who said UK Equity was too high. I think it's reasonable.

I said the UK equity was too high.

And the OP has confirmed that he is prepared and keen for a high risk and high reward strategy, which is why I questioned your approach.

You seem to be yet another ifa who is ignoring the feelings of what would be a potential client and deciding you know best, with potentially damaging consequences to him.