Can I run a SIPP alongside my LGPS pension?

FatherAbraham

blizeH wrote: »

I feel like I must be missing something here, but I’ve just done some very quick calculations:

An ARC calculator shows that paying £173.80pm for 36 years will result in an annual pension of £5,000. Not bad!

However, if I put that same amount (less the tax benefits of 25%, so £130.35p/m) into the stock market and achieve a fairly modest 5% return, I will have £153,937 generating £7,696 in income each year... plus at the end of it, I’ll still have £150k+ in the bank to either spend if needed, or pass to kids/charity/whatever.

I know it’s a lot riskier, but it’s also a lot more flexible, and I will still hopefully have my LGPS pension to fall back on too.

I think for anyone who can fill their S&S ISA allowance each year, or anyone who is in the 40% tax bracket then ARCs/ACPs are fantastic, but after just a quick look at the numbers I’m not sure they’re for me... unless I have actually missed something (which is very likely)

Any thoughts please?

Yes, your suspicion was right -- you missed something which has entirely skewed your result.

You allowed tax relief on the investment-based pension contribution, but didn't on the ARC. That's utterly wrong. Both types of pension saving qualify for tax relief. Why would the tax system give tax releif on one way of pension saving and not the other?

The ARC pension is index-linked, so for comparison you should use a real (inflation-adjusted) return on the stock market. A 5% real return is wildly optimistic, not "modest" -- from April 2014, the FCA has mandated that pensions providers must use 2.5% real return for pensions projections.

Oh, and you asked whether there was an advantage to paying ARCs more quickly than over the maximum term. I would suggest you buy as quickly as possible, because you can't know how long you'll be employed in that job. Clearly, you can't buy at a rate higher than your annual nett salary, of course, otherwise there can't be enough tax relief (in fact, it's worse, because since LGPS is not relief-at-source, when you get down to the level of paying no income tax due to high pension contribs, you have to pay the gross contribution, and reclaim the tax after the end of the tax year, which limits your rate of accumulation).

Warmest regards,
FA

jamesd

FatherAbraham wrote: »

The ARC pension is index-linked, so for comparison you should use a real (inflation-adjusted) return on the stock market. A 5% real return is wildly optimistic, not "modest" -- from April 2014, the FCA has mandated that pensions providers must use 2.5% real return for pensions projections.

A 5% real return is the long term average. It's not wildly optimistic, it's what has been averaged by the main UK stock market through the time of the Great Depression, two world wars, the cold war and all the rest. What the study says in the short to medium term for equities is that "our analysis suggests that expected returns have declined from a range of 4¾% to 6% to 4% to 5½%" (page 5). It's not wildly optimistic even in the context of that FCA requirement, since it's a bit above the middle (4.75%) of their range of expected returns for equities.

Part of the reason that the FCA the projection requirement is lower than the stock market is that it uses "57% equity, 23% government bonds, 10% property and 10% corporate bonds" (page 5), roughly a balanced managed fund, while 5% is 100% equities.

The FCA mandate also assumes uncommonly low returns for a few years, then a return to normal long term returns, in a context of "an investment time horizon of around 10 -15 years" (page 10). At 28 now, blizeH is a classic long term pension investor, with a time horizon of at least 27 years until any disinvesting can happen, then quite likely 30-40 more years of drawdown. That's well beyond the time horizon for which the 2.5% is intended to apply and is also a time horizon where a 57% equity fund isn't a great choice compared to mostly equities.

As it happens, the April 2012 Rates of return for FSA prescribed projections study that the FCA used to set those returns is starting to look unduly pessimistic two years on and 2/3 of the way to the end of the to 2016 short term lower returns period.

FatherAbraham

jamesd wrote: »

A 5% real return is the long term average. It's not wildly optimistic, it's what has been averaged by the main UK stock market through the time of the Great Depression, two world wars, the cold war and all the rest. What the study says in the short to medium term for equities is that "our analysis suggests that expected returns have declined from a range of 4¾% to 6% to 4% to 5½%" (page 5). It's not wildly optimistic even in the context of that FCA requirement, since it's a bit above the middle (4.75%) of their range of expected returns for equities.

Part of the reason that the FCA the projection requirement is lower than the stock market is that it uses "57% equity, 23% government bonds, 10% property and 10% corporate bonds" (page 5), roughly a balanced managed fund, while 5% is 100% equities.

Of course, if you're comparing a guaranteed benefit with a volatile investment, you will surely acknowledge that an allowance must be made for taking on the extra risk. The OP didn't do that.

jamesd wrote: »

The FCA mandate also assumes uncommonly low returns for a few years, then a return to normal long term returns, in a context of "an investment time horizon of around 10 -15 years" (page 10). At 28 now, blizeH is a classic long term pension investor, with a time horizon of at least 27 years until any disinvesting can happen, then quite likely 30-40 more years of drawdown. That's well beyond the time horizon for which the 2.5% is intended to apply and is also a time horizon where a 57% equity fund isn't a great choice compared to mostly equities.

James, the extra expected return of a 100% equities allocation is not free, you know.

Drawdown is an irrelevance, since it's not a guaranteed pension. An index-linked annuity is a far more sensible basis for comparison. The OP already has enough to think about comparing the index-linked promise of an ARC with a volatile investment fund during the accumulation period -- let's not totally confuse the matter by introducing unnecessary differences. After all, one could theoretically transfer an LGPS pension fund into a drawdownable private pension just before taking bennies -- if it weren't such a colossally stupid thing to do that no-one would advise in favour of doing the transfer for fear of a misselling suit -- so there's no real difference here.

jamesd wrote: »

As it happens, the April 2012 Rates of return for FSA prescribed projections study that the FCA used to set those returns is starting to look unduly pessimistic two years on and 2/3 of the way to the end of the to 2016 short term lower returns period.

Maybe it is, and maybe it isn't.

Any projection of stock-market returns is bound to differ from actual performance, but that doesn't invalidate the forward-looking projection. However, do bear in mind that the recent aabove-project performance of the stock market may lead to subsequent underperformance, since the mid-term prospects for relevant economic fundamentals (such as corporate earnings, which is more-or-less what drives stock market returns) are not significantly changed. Low returns on cash deposits and interest-bearing securities have driven many into the stock market, bidding up the price of income there too.

I really love the way you consistently argue against a really big, sound, expensive, peer-reviewed study, design to provide prudent guidance for retirement savers, by cherry-picking some stats (you prefer the long-term stock-market returns to the returns of the last twenty years, for example). I mean, it's not as if the study's conclusions are that controversial. Plenty of financial economists have been warning about the "cult of the equity" in the past five years, perhaps most accessibly in The Economist Guide to Investment Strategy.

Do, however, bear in mind that, were you a pensions provided, making projections exceeding the FCA's mandated rates in order to achieve sales would result in enormous fines.

Warmest regards,
FA

blizeH

Thank you both again very much for the replies, you both raise some valid points and I think if possible it's good to have both the annuity from the ARC and the more accessible S&S ISA - should mean that I have both bases covered if either the stock market or inflation has a high rate until I retire.

I've already applied for my ARC quote, and have a medical booked next week, so it hopefully won't be too long before it's all setup.

I've done the maths and could probably just about justify paying it off in 5 years (£587p/m) and I'd also get the full tax benefits then too, but will likely stagger it out over a slightly longer time frame (8 to 10 years) so we don't have to stretch ourselves too thinly, and can hopefully throw the difference into the S&S ISA if possible.

jamesd

FatherAbraham wrote: »

Do, however, bear in mind that, were you a pensions provided, making projections exceeding the FCA's mandated rates in order to achieve sales would result in enormous fines.

The rates that the FCA says should normally be used from April 2014 are:

Low rate: 2% down from 5%
Mid rate: 5% down from 7%
High rate 8% down from 9% URL="http://www.theguardian.com/business/2012/nov/02/fsa-cut-pension-projection-rates"]1[/URLURL="http://www.ifaonline.co.uk/ifaonline/feature/2296786/what-advisers-need-to-know-about-the-pension-projection-changes"]2[/URLURL="http://fshandbook.info/FS/html/handbook/COBS/13/Annex2"]the FCA iteslf, scroll down through [I]COBS 13 Annex 2 Projections[/I][/URL

FatherAbraham wrote: »

I really love the way you consistently argue against a really big, sound, expensive, peer-reviewed study, design to provide prudent guidance for retirement savers, by cherry-picking some stats (you prefer the long-term stock-market returns to the returns of the last twenty years, for example).

That study said about equities that "our analysis suggests that expected returns have declined from a range of 4¾% to 6% to 4% to 5½%". The 5% used by me and by BlizeH for equity returns is comfortably within that range and also the middle of the three FCA projection values.

You should apply a mirror to your claims and recant.

FatherAbraham wrote: »

Of course, if you're comparing a guaranteed benefit with a volatile investment, you will surely acknowledge that an allowance must be made for taking on the extra risk. The OP didn't do that.

Of course. And you might notice that I suggested using the maximum permitted amount of ARC. I still think that it is sensible to do that and only use investments for extra money beyond it.

FatherAbraham wrote: »

James, the extra expected return of a 100% equities allocation is not free, you know.

Of course, it comes with volatility and assorted other things to deal with, as well as more flexibility.

FatherAbraham wrote: »

Drawdown is an irrelevance, since it's not a guaranteed pension. An index-linked annuity is a far more sensible basis for comparison. The OP already has enough to think about comparing the index-linked promise of an ARC with a volatile investment fund during the accumulation period -- let's not totally confuse the matter by introducing unnecessary differences.

One of the choices a person has to make is between taking a guaranteed lower income level or a likely but not guaranteed to be higher alternative. If the alternative is investing there's then the choice of drawdown or annuity purchase.

FatherAbraham wrote: »

I mean, it's not as if the study's conclusions are that controversial.

The end of the cult of equities has been predicted for decades now, for example in 1982 just before a great equity bull market, mentioned by the FT's John Authers in a May 2012 column "Cult of equities is dead. Long live equities". Presumably it'll happen sometime, just as the decades long bond bull market will presumably end sometime. Meanwhile both are controversial, each having supporters and opponents.

Current projections from the BoE and others that unusually low interest rates are likely to be around until 2020 and may not resume the long-run averages even after that. Unfortunately, this is somewhat contrary to the projections made in the FCA's study. It now seems that for the first eight of the ten to fifteen years that their projection is intended to cover there will be a lower value effect on bonds than they expected.

jamesd

blizeH wrote: »

Thank you both again very much for the replies, you both raise some valid points and I think if possible it's good to have both the annuity from the ARC and the more accessible S&S ISA - should mean that I have both bases covered if either the stock market or inflation has a high rate until I retire.

I think that's a very good approach, mixing certainty with variability to meet your various timing needs.

Do try not to be worried by FatherAbraham and I disagreeing. Even though I often disagree with him I value his posts because he often raises interesting points and it's nice to have contrary views presented. It may look more "hot" than it is, at least from me.

blizeH

Urgh! After all that, and paying £45 for my doctors note (as well as going in 4 times in total after they lost the form) I have just received this email[FONT=&quot]:

Further to receiving your election to purchase ARC’s, I confirm that from 1st April 2014 (with the introduction of the new CARE scheme) ARC’s are being replaced with something similar called APC’s (Additional Pension Contributions). The ARC’s information that you have been sent therefore no longer applies and we cannot implement your request to start deductions.

[/FONT]

atush

you could be better off (if trying to retire before scheme age) to use a DC pension given the new budget rules.

blizeH

Thank you, I may have misunderstood but I think I already have a DC plan - I just liked the idea of ARCs as a nice top up

atush

They are nice, but you lose more by taking the pension early than you would for a arc perhaos, do the math.

A DC pension with other savings can be better used by keeping you from taking a FS/DB pension early and therefore reduced for life.