Pension Fund Investment Choices

fcjf

I have been reading this forum for a number of weeks now to help me review our pension and investment provisions. I am 46, employed on a salary of £61000 gross and my wife is 44, self-employed with a net profit of £13000. We have always targetted retiring when I am 60. We have 10 BTL properties which we bought between 2003 and 2007 which were intended for paying university fees and a pension provision for my wife, who doesn’t have any other form of pension. The properties are highly geared and at present I have discounted these from providing any form of future income especially given the future taxation changes. In the way of Pension provisions I have a protected DB pension of £18,500 (as at 2009 increased by RPI). Since 2009 I have been paying into a DC pension with my employer and this is where I know I need to make sureI making the right decisions, which is the reason for my post as I am hoping for some comments and sanity check on my current and proposed investment choices in the DC pension. In the DC pension we have a choice of a Freestyle option whereby we get to choose which funds contributions are made into or a Lifestyle option which runs with a set investment choice dependent upon how you want to take the money in the account in the future. I took the ‘Freestyle’option for no other reason than to keep some flexibility on my contributions. The pension scheme is run by LGIM and the fund choices I have are;

LGIM Diversified Growth Fund (Actively managed 0.275% annual charge)
LGIM UK Equity Index Fund (Passive 0.0525%)
LGIM Global Equity Fund (Passive 0.075%)
LGIM Emerging Markets Equity Fund (Actively Managed 0.925%)
LGIM Ethical Fund (Passive 0.3%)
LGIM Property Fund (Active 0.68%)
LGIM Annuity Fund (Passive 0.07%)
LGIM Gilts Fund Over 5 Year Index Linked Gilts Index Fund(0.04%)
LGIM Cash Fund (0.05%)

I currently have the following funds in my Plan

Diversified Growth Fund £49887
Cash Fund £24595
Property Fund £11977
UK Equity Index Fund £11207
Annuity Fund £6053

I changed choices last year and am currently contributing £1200 per month in the following funds;
UK Equity Index 40%
Diversified Growth Fund 30%
Annuity Fund 20%
Property Fund 10%

As a target I was hoping to achieve a total of £500,000 in the DC account in 14 years’ time to add to the DB pension already banked. I have run the figures through some online calculators on pensions websites andhave received various results which I presume is determined by different rates of growth applied by the calculators, which isn’t made clear. This may be adaft question but can the future maturity amount in 14 years’ time be calculated using a basic compound interest app by using the starting amount, monthly contributions and annual interest rate or is it more complicated than that? I have done this and have been happy with the projections but probably used a higher growth rate than the online pension’s websites. Do the online pension websites keep growth rates low as a means encouraging higher investments? To take account of management charges do you simply reduce the interest rate by the management charge to get the effective annual interest rate i.e. 6% - 0.275% management charge = 5.725% annual interest?

I appreciate that as I approach retirement I should change the holdings in my plan out of equities into something less volatile but what should be a reasonable growth target be for the next 14 years? Should this be say 6% growth average for 10 years followed by 3% over the last 4 or is this too high. Is £500,000 achievable given my current fund size and monthly contributions?

I want to change the Investment choices I am currently making to remove the Cash, Property and Annuity Funds. I was looking at transferring the full value of the account (approx. £103k) into the DiversifiedGrowth Fund and then splitting future contributions 70:30 between the Global Equities Fund and the UK Equities Fund however this is where I would like some comments. Given the larger management charge is the Diversified Growth Fund worth it over say putting all of the current fund into Global Equities? The Diversified Growth Fund is split 50/50 between the LGIM Diversified Fund and BlackRock DC Aquila Life Market Advantage. The LGIM diversified fund looks OK but the historic performance of the BlackRock fund isn’t good with a 1 FE Crown rating.S hould I be considering some of the other funds to diversify the holdings? Should I mix the index funds with say the Emerging Markets Fund to take advantage of the potential gains in the next 10 years or is the 0.925% fee a little high. I don’t mind speculating a small proportion of my contributions. As a comparison the Lifestyle choice for my age would be investing 100% in Global Equities, is this a safer hassle free strategy? I apologise for the lengthy post and appreciate I may have missed out some information that I should be providing to get fully informed responses probably because I haven’t thought about yet which is the reason I am canvassing opinion. Any comments appreciated.

dunstonh

Can you change the tiny font. It is virtually unreadable on large screens (which ironically have quite small text at high resolution). The forum default is best.

fcjf

Sorry, I cut and paste from a separate document, hopefully should be OK now? Newbies eh!

fcjf

Anybody? Any comments welcome!

princeofpounds

You ask a massive list of questions there, which means for someone to answer you properly, it's going to take some commitment.


Also, you have this huge elephant in the room of 10 BTL properties with high gearing. Depending on the type of mortgages you have in place, that might be a liability at some stage, let alone a breakeven asset. I think you would benefit from some professional advice on how to structure that portfolio so your exposure is not excessive. Can you be more specific on the total rental/sale market value, gearing, mortgage type on the properties at all? Just to give a sense of the exposure.


I fail to understand why you hold any property funds in your pension portfolio given your massive exposure outside (yes, I know residential and commercial is not the same, but it's close enough).


If I had more time, I'd answer as much as I could of the rest, might pop back later if I can.

fcjf

Hi thank you for your response and I would appreciate any further advice, if only on the choice of funds to transfer my current holding into and future contributions. The idea of having 10% in a property fund was to take advantage of the commercial sector but I now want to transfer this fund into something else.

I actually have 15 BTL properties, 9 of which are with a friend (so a 50% ownership in my wife's name) and 6 are owned in mine and my wife's name. We have a strategy in place to dispose of the higher LTV properties where the mortgage terms expire in the next few years however the bulk of the mortgages I have are on terms rangin between 0.95% to 1.95% above base rate and expire between 2026 to 2029. I am not too concerned about these as until the BBR rises to over 4% the overall rental profits will be positive (taking into acount the future tax changes) although I will have to change some of the ownership percentages from the current 50:50 of properties owned with my wife but avoiding my wife's income rising into HRT teritory. The only reason for mentioning the BTL properties was that I could have some income / access to capital gains once I reach 60 but wanted to have a pension arrangement whereby I wasnt counting on this but I take on board your recommendation for seeking professional advice on the BTL portfolio.

sandsy

fcjf wrote: »

As a target I was hoping to achieve a total of £500,000 in the DC account in 14 years’ time to add to the DB pension already banked. I have run the figures through some online calculators on pensions websites andhave received various results which I presume is determined by different rates of growth applied by the calculators, which isn’t made clear. This may be adaft question but can the future maturity amount in 14 years’ time be calculated using a basic compound interest app by using the starting amount, monthly contributions and annual interest rate or is it more complicated than that? I have done this and have been happy with the projections but probably used a higher growth rate than the online pension’s websites. Do the online pension websites keep growth rates low as a means encouraging higher investments?

Just focussing on this bit...

Do you want £500,000 as an amount in 14 years time or an amount which will buy the same as £500,000 today?

The online calculators will differ but the apparent low growth rates of many will be because they are based on a growth rate which is after inflation, ie. they'll help you target an amount which will buy the same as £500,000 today.

Linton

It is diffiult to make suggestions as I am having difficulty finding information about your fund options. However with some time to go before retirement and the fact that you have other sources of retirement income I think a 100% equity allocation is best. Sadly your only options appear to be the Global Equity Fund which is 50% UK, a rather high figure these days, and at the other extreme the EM fund. You certainly need to invest outside the UK and you certainly dont need more UK than provided by the Global Equity fund. So as the best of a bad choice I suggest something like 90-95% Global Equity and 5-10% EM

As to what % growth to use in the calculations - I used 3% inflation and 4% growth in planning retirement. Luckily, this has proved to be very pessimistic. So, depending on your personality, you need to assume something very safe and expect something better, aim for something ambitious, or go somewhere in the middle. I wouldnt go higher than 6%.

fcjf

sandsy wrote: »

Just focussing on this bit...

Do you want £500,000 as an amount in 14 years time or an amount which will buy the same as £500,000 today?

The online calculators will differ but the apparent low growth rates of many will be because they are based on a growth rate which is after inflation, ie. they'll help you target an amount which will buy the same as £500,000 today.

Good point, I was actually thinking of £500,000 in today’s terms, so yes in reality this will be worth less in real terms in 14 years’time. So would the pension’s websites be giving say a 6% Growth rate factored with inflation? Why wouldn’t they say what growth rate they were basing their projections on?

fcjf

Linton wrote: »

It is diffiult to make suggestions as I am having difficulty finding information about your fund options. However with some time to go before retirement and the fact that you have other sources of retirement income I think a 100% equity allocation is best. Sadly your only options appear to be the Global Equity Fund which is 50% UK, a rather high figure these days, and at the other extreme the EM fund. You certainly need to invest outside the UK and you certainly dont need more UK than provided by the Global Equity fund. So as the best of a bad choice I suggest something like 90-95% Global Equity and 5-10% EM

As to what % growth to use in the calculations - I used 3% inflation and 4% growth in planning retirement. Luckily, this has proved to be very pessimistic. So, depending on your personality, you need to assume something very safe and expect something better, aim for something ambitious, or go somewhere in the middle. I wouldnt go higher than 6%.

So at present would you recommend avoiding the diversified growthfund altogether?

Linton

fcjf wrote: »

So at present would you recommend avoiding the diversified growthfund altogether?

Yes - the Diversified Fund part is specified as being 20-50% bonds. Unfortunately apart from that the fund documentation implies it can invest in anything the manager wants, which isnt very illuminating. The other half of the Growth fund - Aquilla Life Market Advantage is only 15% equities, almost all of it Small Cap and EM. Calling the whole thing a "Growth" Fund seems a little odd. The equity asset allocation looks bizarre to me. Perhaps someone can explain what is going on here.

Note that the fund information is rather opaque so it's more than possible I have missed something.