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AVC Investment Advice Please

Hi,

Wonder if you can help with some AVC investment advice?

I am lucky enough to still be in a DB pension scheme with around 24 years service. I'd like to retire at 60 (will be 50 this year) and have been paying AVC's since 1/3/12 at £200 per month. I will raise this to £300/month this year and intend raising further over coming years. I pay 40% tax if it's relevant. My DB pension fund will allow me to use the cash raised in AVCs to minimise any lump sum I may take from my main pension.

The AVCs are through Friends Life and 9 different funds are offered. Without any real advice I picked what I thought looked reasonable funds (looked at their risk profile, previous performance etc etc). Obviously I'm no expert and simply wondered if you could take a look at the mix I have and let me know if it looks reasonable or if there are glaring errors.

The 9 funds I have to choose from are:

FL Blackrock (50:50) Global Equity Index (Aquila HP)
FL Newton Balanced
FL Pre-Retirement Fixed Interest
FL Cash
FL Blackrock UK Equity Index (Aquila HP)
FL Newton Global Equity
FL Stewardship
FL Stewardship Managed
FL Index Linked

My current fund holdings total £4637.58 as of today (£4400 invested so far), split as follows:

51% FL Newton Balanced, Value £1321.18, Growth 7.31%
21% FL Pre-Retirement Fixed Interest, Value £955.57, Growth -4.65%
28% FL Stewardship, Value £2360.82, Growth 10.10%

The growth % I have shown is the % increase over the actual investment in the individual fund - not sure if this is right?

I stooped investments into FL Pre-Retirement Fixed Interest sometime ago and began investing in FL Stewardship at the same time.

I now split my £200 monthly payment 50% to FL Newton Balanced and 50% to FL Stewardship.

I'd be grateful for any comments on whether this mix is reasonable or if I should consider any of the other funds and if so why?

Many thanks in advance.

Comments

  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    My policy would be
    (i) Don't use the cash fund - the interest is bound to be awful (but by all means check).
    (ii) If two funds try to do the same thing, choose the cheaper. (You've not told us the charges.)
    (iii) If switching is free, I might go for something like 15% fixed interest, 25% index-linked, 60% equity, and rebalance once per annum.

    What's the Stewardship fund: does it do the balancing of asset allocation for you?
    Free the dunston one next time too.
  • Linton
    Linton Posts: 17,939 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Hung up my suit!
    Your choice of funds looks sensibly cautious to me. With 10 years to go you could reasonably take a little more risk with the 50:50 or global equity funds.

    If you arent planning to go for drawdown with the remains of the AVC you should look to steadily move the portfolio into pre-retirement, index linked, and finally cash starting in 4-5 years time with the aim of being completely in these funds by the time you retire. This will prevent any unpleasant surprises when its too late to recover the situation.
  • kidmugsy wrote: »
    My policy would be
    (i) Don't use the cash fund - the interest is bound to be awful (but by all means check).
    (ii) If two funds try to do the same thing, choose the cheaper. (You've not told us the charges.)
    (iii) If switching is free, I might go for something like 15% fixed interest, 25% index-linked, 60% equity, and rebalance once per annum.

    What's the Stewardship fund: does it do the balancing of asset allocation for you?

    Kidmugsy - thanks for your quick reply and advice. Switching is free and the charges for the funds I've invested in are as follows:

    FL Newton Balanced: 0.7% Annual Management, 0.15% Additional Fee
    FL Pre-Retirment Fixed Interest: 0.5%
    FL Stewardship: 0.5%

    With regards to Stewardship fund - not sure I really understand the question - sorry. I have provided a link to the fund website if that helps?

    Forgive my ignorance but what do you mean by rebalancing?

    Thanks again.

    http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=FPSA&univ=N
  • dunstonh
    dunstonh Posts: 118,602 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    Forgive my ignorance but what do you mean by rebalancing?

    If you do not use self balancing funds and build your own bespoke portfolio you should periodically rebalance the sector allocations to ensure the portfolio remains invested in line with your chosen strategy and consistent with your risk profile.

    If you had say 10 funds with 10% in each (not that you would be purely for this example) then over time they would perform differently and would no longer be 10% each. Rebalancing them brings them back in line or moves them to the latest allocations suitable.

    Self balancing funds do this internally.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • dunstonh wrote: »
    If you do not use self balancing funds and build your own bespoke portfolio you should periodically rebalance the sector allocations to ensure the portfolio remains invested in line with your chosen strategy and consistent with your risk profile.

    If you had say 10 funds with 10% in each (not that you would be purely for this example) then over time they would perform differently and would no longer be 10% each. Rebalancing them brings them back in line or moves them to the latest allocations suitable.

    Self balancing funds do this internally.

    Thanks dunstonh - got you, I understand!
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    Thanks dunstonh - got you, I understand!

    Yup. There's no need to be obsessive about it: a 15-25-60 allocation might be rebalanced if any fraction moved (say) by more than 25% - thus you could say that really it's 60 +/- 15 and so on. You could also alter the desired fractions over the years, following Linton's advice, so you'd simply change the fractions once per year e.g. after one year 15-35-50 and so on. It's often possible to do much of the rebalancing task just by directing the continuing contributions into the fraction you want to increase.
    Free the dunston one next time too.
  • I was wondering about "switching being free". There may not be a charge applied, but would I be right in thinking that, for equity funds in particular, you effectively lose the bid/offer spread value, which could be 5%+ in the more exotic funds?
  • I find myself in almost exactly the same position as the OP. In a Final Salary scheme with 34 years accrued at age 54. Would seriously consider going in 5 years.
    Have built up a nice nest egg of £32K in Friends Life AVC fund although mine is 100% in FL Newton Balanced. Likewise I can take 100% of AVC in lieu of some lump sum from main scheme.
    My question is, should I be splitting my £200 or so per month AVC deduction into different funds at this stage? I am only a 20% tax payer but I am quite happy to get moderate/steady growth to ensure a decent pot at the end of the day.
    Also, later this year I will be mortgage free and will have around another £200 to invest. Should I increase my AVC level of contribution or look elsewhere to invest.
    Thanks in advance.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    I find myself in almost exactly the same position as the OP. In a Final Salary scheme with 34 years accrued at age 54. Would seriously consider going in 5 years.
    Have built up a nice nest egg of £32K in Friends Life AVC fund although mine is 100% in FL Newton Balanced. Likewise I can take 100% of AVC in lieu of some lump sum from main scheme.
    My question is, should I be splitting my £200 or so per month AVC deduction into different funds at this stage? I am only a 20% tax payer ….

    Should I increase my AVC level of contribution or look elsewhere to invest.

    In reverse order: I like the idea of diversification and therefore of avoiding an AVC, but I suspect that your advantage over the lump sum would trump that concern so that AVCs might look a good bet.

    Secondly: there's a suggestion around that the fraction of equities in your portfolio should equal 4% for each year until you need the money. So if you hope to retire in 5 years time, that suggests an equity fraction of 20% now, gliding downwards over time. Whereas the Newton Fund boasts 40%-85% equities, which would have suited the younger you.
    (http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=FPNB&univ=P)

    So there may be a case for switching, assuming (see taktikback) that it's cheap/free. I wonder whether any of the professionals might care to opine?

    P.S. Come to think of it, as you get close to retiring, there's even a case for the cash fund even though it pays (presumably) nearly zero. At least you shouldn't lose any money on it if interest rates rise.
    Free the dunston one next time too.
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