Pension Query

LAPORTS1

Hello All,
I've spent a fair amount of time consolidating debts over the past few years thanks mainly to tips I've picked up reading MSE forums.

While not completely debt free, I'm in a position now where I'd like to start planning for the future but frankly pensions baffle me. I've spoken with 2 separate financial advisors and their recommendations contradict each other which isn't helping. So, in short, if you folks can help steer me in the right direction I'd be very grateful.

Goal
I would like to be in position to retire in around 17 to 20 years with a fund which can generate at least£15,000 in today's money. Right now, my pensions are in low risk funds but I'm not adverse to moving to medium risk.

Old workplace pension
Aegon - value £99,000 in a low risk fund - averaging 5.5% per year.

Current workplace pension
L&G - value £2000 in a low risk fund - averaging 5.6% per year.

Current contributions £312 per month

Any and all advice/suggestions are greatly appreciated.
Regards
LAPORTS1

mgdavid

What is your age now?
Have you obtained a State Pension forecast?

LAPORTS1

Hi MGDavid,
Thanks for replying, I'm 42 now. I've not got a state pension forecast yet but I'm not taking that into account. If I retire at 60(ish) I'll not be eligible for 7 or 8 years.

xylophone

https://www.moneyadviceservice.org.uk/en/tools/pension-calculator

might help.

If you contribute more to your workplace pension, will your employer match your contributions?

bigadaj

If you look at websites from the big insurers or maybe Hargreaves landsdlwn then that'll show what pot you might end up with, on assumed growth rates, sustainable drawdown in that pot might be around 4%, though you'll obviously have state pension kicking in later.

So for £15k per year you might be looking at a near £400,000 pot which would suggest that you might need to up your contributions .

kidmugsy

If you are paying higher rate tax there's a case for contributing enough so that you don't. If you are paying by salary sacrifice, again it would be attractive to contribute more. To repeat x's point, it's worth contributing more if that would harvest more employer contribution.

LISAs might be attractive: worth keeping an eye open in case HMG changes the maximum age for opening one (currently pencilled in to be 40).

As for doing sums about the future: if you reckon that £15k p.a. (index-linked) would do you, then if you'd get (say) £8k p.a. from the State Retirement Pension, then your funding goal falls into two parts. (i) To yield £15k p.a. from age 60ish to State Pension Age (that would include your using the Pension Commencement Lump Sum), and (ii) about £7k p.a. after SPA.

Note that if (i) were part drawdown of taxable income, and PCLS, then there's some prospect that you could get the lot tax-free, if the income tax system bears any resemblance to the present one. If.

Triumph13

A quick bag-of-a-fag-packet calculations suggests that your aims may be achievable, but only if you factor in the state pension.
Assuming you get a full £8k state pension that leaves another £7k to fund from your pension. That will probably take funds of around £200k to generate. 7 or 8 years before the state pension kicks in means another £60k odd to bridge the gap. From your current position you'd need 20 years of current contributions (uplifted annually for inflation) and average real returns of 2.5% pa (which you probably won't get on 'low risk' investments, but may do on medium ones.)
If you meant £15k after tax then that adds another £30k ish to what you need so you'd need to increase your contributions, work longer or take more risk.

LAPORTS1

All,
Thanks for all your suggestions.
My employer matches what I save into my pension up to 5%, I'm saving the full 5% at the minute.

Once the mortgage is paid off (9 years) a further £600 per month will be added to the retirement fund.

I plan to look on Hargreaves Landsdown this evening. I think I can find a fund with a better return that what I'm getting at the minute.

Thanks again!

atush

what rate are your existing debts?

bowlhead99

LAPORTS1 wrote: »

I plan to look on Hargreaves Landsdown this evening. I think I can find a fund with a better return that what I'm getting at the minute.

On your 17 to 20 year timescale you would expect to get more from a higher risk fund than a lower risk one. So if you want to turn a £100k pot into a £400k real-terms pot in only a couple of decades, the two things to address are the amount you are putting in and the fact that you've selected only low risk investment choices in both your plans.

Generically, lower risk funds are more suitable for when you already have most of what you need and are trying to preserve capital, while by contrast you are still in 'accumulating' mode, trying to grow your assets.

You mention clearing your mortgage in 9 years. So you would be investing in paying off your mortgage for the first 9 years and then making large pension contributions in the 9 after that. This can mean that the money which you eventually get around to putting into the pension has limited time to grow.

As mortgage rates are on the floor at the moment you might get a better result by putting the bare minimum amount towards your mortgage for the time being and making those larger contributions now (benefiting from both tax relief and the fact that long term investment returns in medium risk funds are likely to outpace the return that your mortgage lender seeks on his secured loan to you, which is likely to only be 2-3% at the moment). Certainly it can be quite efficient to use a pension tax free lump sum to clear the remnants of a mortgage balance when you get to 55-60+.

Obviously there is an inherent risk in choosing to leave a debt outstanding and lock the money away in a pension when you can't get it back for a decade or more, but if you are willing to accept a generally higher level of risk in order to achieve your goal of quadrupling the size of your existing pension pot over the next couple of decades, it's something that shouldn't be dismissed out of hand.

Also if you already have the maximum employer matching at the moment and would not get 40% relief on all of your further contributions to a pension scheme this year, one option is to invest via S&S ISA in a similar fund (i.e. same level of growth but not locked away until pension age) and then move some of the proceeds of that investment over to a pension later instead.

LAPORTS1

Hi Bowlhead99,
Thanks a million for your response. I've been speaking with H&L reps this evening and they are recommending opening a SIPP with my current pension savings spread across 4 or 5 separate funds in a master portfolio. The specific funds they mention have returned an average of around 7% tp 10% a year over the last 4/5 years. If that level of return (or close to it) was to continue the £400,000 total is certainly achievable.

You've given me something to think about regarding the mortgage. The current rate is 2.5%, I had never considered paying the minimum and investing the difference. To be honest, I think my focus will continue to get rid of this debt as quickly as possible for my own peace of mind but I'll certainly give your suggestion some thought.

I'm going to take a closer look this week at H&L funds and hopefully have the transfer underway before the end of the week.

Thanks again