How does this look for a balanced agressive portfolio?

peterg1965

EdInvestor wrote: »

It would be quite useful if peterg provided a full list of all his various assets and investments.Doing it wrapper by wrapper without knowing what elese there is could easily cause a big error.

So how much (what percentage) in

cash or fixed interest (bonds)
property (residential)
property (commercial, funds)
equities (local and foreign)
commodities

?

I am a budding amateur and clearly showing my true colours! I have posted a few times over the last few weeks (you may or may not recall them) with my goal of investing the repayment part of my mortgage to pay the mortgage off earlier and maximise my ISA and pension investments at 55. I am now 41. I have a 'gold plated' occ pension scheme - no issues. I have a secondary SCot Eq PPP (PR funded) that I have been 'playing' with since Jan. Breakdown:

SE UBS GBL EMG MKTS (A) £1,983.84
FIDELITY EUROPEAN (A) £1,784.36
INVESCO PERP INC (A) £3,364.24
JPM NATURAL RESOURCE (A) £4,224.57
SE SCHROD UK MID 250 (A) £3,351.50
SE BGI PACIFIC RIM (A) £1,777.72
PACIFIC FUND (A) £1,612.26
Total £18,098.49

I have done well - probably more luck than judgement. I pulled out of Property last week after reading some articles in the press about commercial property market becoming very fragile. This is a risky portfolio, I am limited by SE external funds. I have had my 'free' switch this year.

In two months time I will have £924/month to invest. I was going to put an extra £350net (£7000/year gross) into the SE pension and £583/month into ISAs. I currently have £175000 equity in my house (£259K mortgage) and £6000 in cash ISA (not yet touched 07/08 allowance - will use this and subsequent years as a Maxi S&S ISA). As far as the SE pension goes I am undecided what new fund to put the added contributions into.

As far as the ISA goes I have researched (probably cursory!) and have come up with the following fund spread:

UK Equity - 60% looking at NewStar Hidden Value/UBS Smaller Cos/AXA UK select/Jupiter UK Growth
North America - 6% looking at Shroeder US small co's and M&G American Fund
Emerging Markets - 3% - Jupiter Euro Emerging mkts
Asia Pacific/Specialist - 6% Fidelity SE Asia/Gartmore China/SW Latin America
UK protected Growth - 5% Gartmore Safeguard
European - 20% -looking at Newtar Euro Growth/Artemis Euro Growth/JPM Euro smaller Co's

Not sure how I can buy into these funds starting from scratch. I need to speak to H-L Vantage ISA office tomorrow to discuss. I do not have £7K to start off with striaght away, will fund monthly.

My overall aim is to have ~ £120K-£150K in the ISA fund at 55, and ~ £250K in the pension at 55. (My Occ scheme will give me £31500 Index linked and £100K tax free gratuity at 55 - todays prices) That means I can pay off mortgage and have tax free cash spare, put the remaining pension in a USP drawing down each year.

I think I need to take specialise advice - I have an IFA calling me to arrange appointment on monday - but am concerned that Initial Charges/AMCs and comission to IFA will eat too much in monies available. Am happy to be persuaded otherwise.

dunstonh

I think I need to take specialise advice - I have an IFA calling me to arrange appointment on monday - but am concerned that Initial Charges/AMCs and comission to IFA will eat too much in monies available. Am happy to be persuaded otherwise.

Annual management charges are the same as the retail funds. The difference is the intial charge. The FSA record the average commission taken by IFAs as 1.8%. Average means some take less, some take more. The typical maximum is 3%. So, if you look at 1.8% as the guide, you can work out if the cost is worth it or not for what the IFA can offer.

IFAs can undercut HL on pensions with little effort but it would be near impossible to do so with ISAs.

EdInvestor

peterg1965 wrote: »

My overall aim is to have ~ £120K-£150K in the ISA fund at 55, and ~ £250K in the pension at 55. (My Occ scheme will give me £31500 Index linked and £100K tax free gratuity at 55 - todays prices) That means I can pay off mortgage and have tax free cash spare, put the remaining pension in a USP drawing down each year.

One thing stands out straightaway: on the assumption will also receive a state pension, you are bang on target for paying higher rate tax in retirement.

BIG mistake. This would totally negate much of the advantage of pensions.

You should not be putting any more money at at all into pensions. Instead you should max out your ISA first and then either invest direct into unit trusts or overpay your mortgage.

Are you a higher rate taxpayer at the moment?

peterg1965

Ed, I am a higher rate tax payer and, I and my wife, have entiltlement to full state pensions. She also has an NHS pension also (3 years older than me). I knew I would be in higher rate tax territory anyway, but the pension contributions attract 40% tax relief which appears attractive. Is this thinking flawed?

EdInvestor

It is flawed,because you will be taxed on the income @40% when you take the money as a pension.The tax 'relief' is only deferred tax. You only actually get relief on the 25% tax free cash.

You do get an advantage if you get relief at the higher rate on the contri butions and pay basic rate on the pension income.So you need to make sure your taxable income in retirement is under the higher rate threshold.

You look to be close to the borderline now.

So better to concentrate all efforts on maxing out both your investment ISAs and paying off the mortgage from now on. No more money into the PPP.

peterg1965

Would it be different if the PPP was in my wife's name (ie a new PPP). She is a basic rate taxpayer, current NHS pension about £4000 and full NI contributions made to date. And still contribute to one ISA.

EdInvestor

Not really.

As a basic rate taxpayer she will get BR "relief" going in and pay BR on the pension income coming out, so again we are talking deferred tax apart from the TFC.

The age allowance is going up to 10k p.a in the next few years, so that allows for 10k of income to be tax free after retirement.But if she already has a full state pension plus 4k in company pension, she's also very near the borderline.

Both of you would be best to max out your 7k annual ISA allowances and reduce your mortgage.

The investment fund choices of course are the same whether pension or ISA is used these days.Oh and BTW, with your gold plated pension arrangements, I would see no problem in you adopting a fairly high risk investment strategy as long as you can see clearly that higher risk does equal higher returns.

In recent years the best returns have often come from lower risk strategies..

jamesd

EdInvestor, you should read this discussion of how to finance the house purchase and the pension possibility. There's a little prospect of being a basic rate tax payer in retirement and none if a pension is used to finance the house payment. Avoiding exceeding the lifetime allowance is a factor when doing that.

peterg1965, you're not doing badly at all. Don't let us commenting on the details get to you.

Making pension contributions for your wife won't improve the situation. The money would in effect come from your after tax income but get her tax relief rate, a tax loss compared to using your own pension. The 25% tax free lump sum is the only place where you're likely to be able to gain from the pension, with 40% of that being the tax relief. But so long as ISA investing can do the job, you should first max out the ISAs for both of you since those are more flexible.

Switching some of that money to the pension when it's more clear how much you can switch and still be basic rate would be useful - if most of it produced basic rate income you'd get higher rate tax relief and pay basic rate in retirement. But with your high risk/high reward investing I have a feeling that you're going to do that with the pension even without adding this money to it. Looks better to defer using the pension for a while until that's more clear, since if you are higher rate in retirement there's no benefit in using the pension rather than the ISA. You do also clearly have a risk of exceeding the pension lifetime allowance given the possible returns on your investments.

The IFA might mention using an investment bond as a tax wrapper. The problem there is that you're already certain to have an income in retirement above the age allowance loss level so that can't be avoided, leaving management convenience and possible inheritance tax as considerations. But paying off the mortgage is your objective and that suggests both not having a huge amount left over and being concerned with the possibility of taking the money early. So I don't see much point in using an investment bond for this purpose.

EdInvestor

I gather there is 10.5k in total to invest (including contributions to PPP)?

My suggestion would be 7k into one maxi S&S ISA, and the rest to overpay the mortgage for the moment.Cancel the PPP contributions.
IMHO the investment funds currently used for the PPP would be fine in the ISA. Suggest https://www.h-l.co.uk for the provider.

Wife should also start using her maxi ISA allowance.

peterg1965

Thanks again Ed and James.

Can I just challenge the argument about not funding the second PPP. Allow me to explain. If I invested the total £10K per year in two S&S ISAs (myself/wife) I could get £270K tax free cash assuming 13 years and a gain of 10% per annum. If I invested £10000 per year (net) into the PPP (£16667 Gross with 40% tax relief) I would have a pension pot of £512K over 13 years and 10% gain pa. (this is taking into account that my current PPP is worth £18K now) I could take £128K tax free and drawdown (max) £29.4K (taxable at 40%) so £17.6K Net. That is 7.6% drawdown using the max GAD figure today.

So.....If I went down the pension route my Mortgage would be paid off at 55 (£128K TFC + occ pension gratuity £130K - projected figure) and I would have a pensionable income of £61K Gross (£31.5K occ pens + £29.4 USP drawdown) and still have a significant figure invested for subsequent annual drawdown, and if wisely invested this would decline in value very slowly. At 66 (or whatever) my wife and I would pick up State pensions (£9.2K pa)+ wife occ pension (~ £4-£5K pa).

If I went down the ISA only route My mortgage will be paid off at 55 and I will have my Occ scheme pension £31K + £140K tax free cash + small pension from unfunded PPP.

It seems to me that Pension route is financially more attractive, isnt it? and although not tax efficient would net me more money in retirement (from 55).

There is a third way, splitting the investment between PPP and ISA. The pension route appeals because I cannot be tempted to take the money earlier than 55.

Thoughts?