My Pension arrangements - opinions please!

ratechaser

Hi all,

I’ve been taking the opportunity to spend a bit of time looking at my various accumulated pension funds. May be some scope for some consolidation/rationalisation here, but before I go and seek out an IFA, I thought I’d post what I’ve got, in case anyone here has any suggestions, or indeed can point me to any questions that I ought to be asking myself or an IFA. Here goes:

Pension 1 – Fidelity administered DB scheme
1) Benefits – accrued benefit of Annual payment of ~£2000 from age 60, 50% spousal pension, still trying to nail down specifics on annual growth or any lump sum as it’s a closed scheme from an ‘infamous’ insolvent company that’s just come out of Pension Protection Fund assessment – luckily the trustees were able to secure the original benefits.
2) Valuation - ~£88,000 guaranteed transfer value based on a current Statement of Entitlement valid until the end of October

Pension 2 – Fidelity administered DC scheme from previous employer. Holdings/Performance:
1) L&G Global Equity 70:30 Fund - ~£42k – 1 Yr 9.5%, 5 Yr annualised 8.3%
2) L&G Over 15 Year Gilts Index Fund - ~£24k – 1 Yr 26.7%, 5 Yr annualised 11.5%
3) L&G UK Equity Index Fund - ~£15k – 1 Yr 6.3%, 5 Yr annualised 8.1%
4) L&G Global Emerging Markets Equity Index - ~£14k - 1 Yr 13.3%, 5 Yr annualised 2.2%
5) L&G Japan Equity Index Fund - ~£2k – 1 Yr 26.6%, 5 Yr annualised 6.4%

Pension 3 – Friends Life administered DC scheme from previous employer:
1) FL Newton Multi-Asset Balanced - ~£12k - 1 Yr 6.8%, 5 Yr annualised 8%
2) FL Property - ~£7k - 1 Yr 14.3%, 5 Yr annualised 10.4%
3) FL Baillie Gifford Managed - ~£13k - 1 Yr 6.5%, 5 Yr annualised 11.1%
4) FL Blackrock Over 15 Year Corporate Bond Index (Aquila C) - ~£18k - 1 Yr 8.5%, 5 Yr annualised 8.6%
5) FL Blackrock US Equity Index (Aquila C) - ~£16k - 1 Yr 14.4%, 5 Yr annualised 19.9%

Pension 4 – JLT administered DC scheme from current employer:
1) BlackRock Aquila Connect 50/50 Global Equity Fund - ~£236k – 1 Yr 5.34%, 5 Yr annualised 10.75%

My current thoughts/questions:
1) The valuation on Pension 1 seems too good to be true, and unless there turns out to be a lot of extra benefits, it’s a clear candidate to transfer out. Understand this requires an IFA to confirm it’s in my interests.
2) On the face of it, the 3 DC pensions look like a messy set of holdings that are a bit too UK Equity weighted. That said, they have returned 8.23% in 1 year, and 10.31% annualised over 5 years, which seems like a decent return. So should I just leave them alone rather than tinkering/consolidating? Or are there any real ‘dogs’ in there that I need to address?
3) Given I’m 42 years old and my total holdings including the DB pot valuation come to nearly £500k, it looks like I’m going to exceed the £1m lifetime allowance by the time I’m 55, even if I don’t put another penny in. Should I stop making contributions (other than what my current or future employers will put in for ‘free’)? Given I’m already maxing out on ISAs, is there any better investment option?

Thanks for any opinions, thoughts or pointers that you can share here!
RC

Loughton_Monkey

I will only comment on a couple of your points...

Fund choice is such a 'personal' issue, and by asking 100 people, you would normally get 100 different answers. You should look at "where you want to be" [with the help of IFA if you require that] and then go 'shopping' for the funds that match this. Not easy, because you need to think about risk, volatility, and balance between asset classes and sectors. But I would point out that you currently have only three management companies running 11 funds. Ask yourself if L&G (for example) can be (or are) the 'best' in gilts, and Japan, and UK equity etc.

When an existing pension has (say) 0.5% charges, and a new one charges 0.75%, then over a long period of compounding, the 'cost' of the higher charges can be quite compelling to leave things where they are. But if, by moving to new fund managers who can (say) produce 15.6% this year, rather than the 5.9% from a middle of the road lacklustre fund, then it puts the charges issue into the 'sod-all' box.

Lifetime allowance relates to contributions and has little to do with the resulting value of pensions after growth. So you are currently well away from any limits.

When retired, you will almost certainly find advantages in having both pensions and ISA's. Building up a pension (or an ISA) is pretty much the same these days. They both have different contribution limits. All other things being equal, pensions have a slight advantage because of the tax relief. At 20% tax (when contributing, and drawing out) the advantage comes by way of the tax free 25% lump sum. So in essense, it can produce about 6.25% 'more money'. If you contribute to pensions at 40% tax relief, and draw out at 20% tax, then the benefit of pensions is considerably more.

At age 42, I would have been putting most of my spare money into equities [rather than cash savings, or even bond/fixed interest investments]. But for the sake of conservatism, I would save some cash. With recent pension (and ISA) reforms, it makes both instruments rather more flexible. Therefore, personally I would be attracted to use the ISA allowance all for 'cash', and then put considerably more in pension equities. The reason I say this is that when you retire, you hopefully will have a large comfortable wealth, and (for safety's sake) a larger proportion of it in cash. Hence you will be grateful for having built up a large ISA wrapper for all your cash, giving you virtually no cash savings interest to eat into tax allowances set against your pension income.

It is one [albeit very minor] regret of mine that I often failed to 'fill' my Tessa/ISA limits as I was bunging away all my 'hard-earned'. I tended to favour pensions, or other investments. Then later on, at retirement, with lump sums and the like, it can take a very long time to salt it back into a tax shelter, even using spouse allowance.

atush

Have a rethink on pension 1.

88,000 would only buy you a pension of abt 1400. less than 1K for an index linked pension (as I assume yours is). right now, it is guaranteed, no matter the markets, for the rest of your life.

Instead I would consider it the bedrock platform of your pension, using the DC posts to hopefully provide more.

ratechaser

atush wrote: »

Have a rethink on pension 1.

88,000 would only buy you a pension of abt 1400. less than 1K for an index linked pension (as I assume yours is). right now, it is guaranteed, no matter the markets, for the rest of your life.

Instead I would consider it the bedrock platform of your pension, using the DC posts to hopefully provide more.

Good grief! So based on that annuity rate from age 60, I'd have to live till I was 124 before I broke even on that 88k pot??


Or rather look at it another way, I'd be rather surprised if I even lasted the 40-ish years that the £2k that they are already promising me. Yes, I get the point about indexing etc, so I do want to take a look at the benefits in more detail, but the point I thought was telling was that for lifetime allowance purposes, the HMRC calculation is 20x the annual pension, which puts my valuation at more than double that level.

ratechaser

Loughton_Monkey wrote: »

Fund choice is such a 'personal' issue, and by asking 100 people, you would normally get 100 different answers. You should look at "where you want to be" [with the help of IFA if you require that] and then go 'shopping' for the funds that match this. Not easy, because you need to think about risk, volatility, and balance between asset classes and sectors. But I would point out that you currently have only three management companies running 11 funds. Ask yourself if L&G (for example) can be (or are) the 'best' in gilts, and Japan, and UK equity etc.

When an existing pension has (say) 0.5% charges, and a new one charges 0.75%, then over a long period of compounding, the 'cost' of the higher charges can be quite compelling to leave things where they are. But if, by moving to new fund managers who can (say) produce 15.6% this year, rather than the 5.9% from a middle of the road lacklustre fund, then it puts the charges issue into the 'sod-all' box.

Firstly, many thanks for your comments! And fair enough on both points here, although as most of my funds are trackers rather than actively managed, does the individual manager really make a huge difference provided the fund is closely tracking its benchmark? Same with costs really, the charges on the passive funds are all pretty low, although I'm going to go and have another look just to be certain.


So 5.9% this year would be considered 'lacklustre'? Oh dear... maybe I'm too close to my cash savings day to day, but I didn't really see that as being all that bad! And using my headline >10% annualised for the past 5 years, I actually thought it was doing pretty well!

Loughton_Monkey wrote: »

Lifetime allowance relates to contributions and has little to do with the resulting value of pensions after growth. So you are currently well away from any limits.

Really?? I agree regarding the ANNUAL allowance, but everything I've read on LIFETIME says that it's the value of the overall pot(s) that counts? I'm pretty sure that I'm going to bust that limit as it stands, if existing long term performance is maintained...

Loughton_Monkey wrote: »

When retired, you will almost certainly find advantages in having both pensions and ISA's. Building up a pension (or an ISA) is pretty much the same these days. They both have different contribution limits. All other things being equal, pensions have a slight advantage because of the tax relief. At 20% tax (when contributing, and drawing out) the advantage comes by way of the tax free 25% lump sum. So in essense, it can produce about 6.25% 'more money'. If you contribute to pensions at 40% tax relief, and draw out at 20% tax, then the benefit of pensions is considerably more.

At age 42, I would have been putting most of my spare money into equities [rather than cash savings, or even bond/fixed interest investments]. But for the sake of conservatism, I would save some cash. With recent pension (and ISA) reforms, it makes both instruments rather more flexible. Therefore, personally I would be attracted to use the ISA allowance all for 'cash', and then put considerably more in pension equities. The reason I say this is that when you retire, you hopefully will have a large comfortable wealth, and (for safety's sake) a larger proportion of it in cash. Hence you will be grateful for having built up a large ISA wrapper for all your cash, giving you virtually no cash savings interest to eat into tax allowances set against your pension income.

It is one [albeit very minor] regret of mine that I often failed to 'fill' my Tessa/ISA limits as I was bunging away all my 'hard-earned'. I tended to favour pensions, or other investments. Then later on, at retirement, with lump sums and the like, it can take a very long time to salt it back into a tax shelter, even using spouse allowance.

Bingo! My ISAs are all cash as a conscious strategy to balance my predominantly equities exposed pensions. And although I've got similar regrets to you in that I didn't maximise these until about 8 or 9 years ago, the fact that the allowances have risen so fast in that period means that I've probably not missed out too badly - have about £75k spread around there, and as a 45% taxpayer, even a 2.3% rate doesn't look all that bad.


Overall, along with my NSI tax free inflation bond and my piddly friendly society investments, I'm running out of tax efficient options now.

Aretnap

You're correct about the lifetime allowance but it's by no means certain that you'll hit it by 55 as (a) it's supposed to increase with inflation from 2018 which gives some breathing room and (b) the last 5 years have been exceptionally kind to investors and it would be foolish to assume you'll continue to see the type of annualised returns you quote. 5 year figures don't include the crash of 2008, or 2001-2003, or the next crash (whenever that might be).

5% above inflation is a reasonable long term average for equities and if that was what you achieved your £500K pot would still be (just) below the LTA in 13 years. It may well be less than 5% given that (a) you'll probably want to reduce equity exposure as you near retirement and (b) there'sa view that the next decade will see below average returns given the headwinds facing the global economy and the fact that the markets are starting from a high level in historical terms.

That said I wouldn't be planning on putting a lot more in for a lot longer. However there are some major changes to pensions in the pipeline which may change things completely soon.

kidmugsy

ratechaser wrote: »

the point I thought was telling was that for lifetime allowance purposes the HMRC calculation is 20x the annual pension, which puts my valuation at more than double that level.

Why is it "telling" that one actual value is twice a fictional value chosen by hmrc because they presumably wanted to protect government employees from the rigours of LTA?

Suppose hmrc increased the 20x to 40x - why would you care? £88k would remain £88k.

Another way to look at it is that while hmrc indulges in the fiction of 20x you can protect yourself from the aforesaid rigours by eschewing a transfer.

atush

Good grief! So based on that annuity rate from age 60, I'd have to live till I was 124 before I broke even on that 88k pot??

Where do you get your figures from exactly?

Annuity rates (ie guaranteed income) are for life. Some have indexing ie they grow at a certain rate set to inflation), some pay a pension for your spouse when you die etc.

Some just pay that they pay for you at your age now and stay the same (even if a loaf of bread triples). They are all differnt.

ratechaser

atush wrote: »

Where do you get your figures from exactly?

Annuity rates (ie guaranteed income) are for life. Some have indexing ie they grow at a certain rate set to inflation), some pay a pension for your spouse when you die etc.

Some just pay that they pay for you at your age now and stay the same (even if a loaf of bread triples). They are all differnt.

OK, maybe a little bit of a simplistic calculation, but that example annuity rate would take about 63 years to fully draw down the 88k current guaranteed value. And yes, I get there are variables like indexing, but by the same token, if I took that 88k into one of my other pensions now, I'd like to think that it would also grow somewhat over then next 13 years!

ratechaser

kidmugsy wrote: »

Why is it "telling" that one actual value is twice a fictional value chosen by hmrc because they presumably wanted to protect government employees from the rigours of LTA?

Suppose hmrc increased the 20x to 40x - why would you care? £88k would remain £88k.

Another way to look at it is that while hmrc indulges in the fiction of 20x you can protect yourself from the aforesaid rigours by eschewing a transfer.

Well that's a fair point (and I thought I was a cynic)... as you say, left alone it might at least provide a disproportionately high benefit to the amount of my LTA that it actually takes up...

ratechaser

Aretnap wrote: »

You're correct about the lifetime allowance but it's by no means certain that you'll hit it by 55 as (a) it's supposed to increase with inflation from 2018 which gives some breathing room and (b) the last 5 years have been exceptionally kind to investors and it would be foolish to assume you'll continue to see the type of annualised returns you quote. 5 year figures don't include the crash of 2008, or 2001-2003, or the next crash (whenever that might be).

5% above inflation is a reasonable long term average for equities and if that was what you achieved your £500K pot would still be (just) below the LTA in 13 years. It may well be less than 5% given that (a) you'll probably want to reduce equity exposure as you near retirement and (b) there'sa view that the next decade will see below average returns given the headwinds facing the global economy and the fact that the markets are starting from a high level in historical terms.

That said I wouldn't be planning on putting a lot more in for a lot longer. However there are some major changes to pensions in the pipeline which may change things completely soon.

Well that last statement is certainly a teaser... care to elaborate on what those 'major changes' are as I may have missed something? Rather like the inflation linking of the LTA from 2018 - I missed that one as well so thank you, good to know that £1million isn't the hard cut off point in perpetuity. Although as the government seems to love tinkering with LTA anyway, I'd probably need a crystal ball to predict what it might be in 13 years...


Given the outlook for the next decade that you mentioned, perhaps a bit of rebalancing is needed after all. Less reliance on UK equity and perhaps a bit more fixed income. Looking at the fund returns, I'm kicking myself for not having had more US equity exposure over the past 5 years but c'est la vie, I tend to think I may have missed that boat now. And anyone want to make a call on commodities bottoming out soon?