Investing more in SIPP vs S&S ISA

jdw2000

Alice_Holt wrote: »

Just as an illustration of the benefits of starting early and the impact of compounding returns.

I started a SIPP for my 15 yr old neice some 7 yrs ago, putting in the maximum for a non-taxpayer of £240pm.
This now stands at £47k.

I (and my neice!) have been very lucky in that this time period has happened to coincide with strong equity returns, and the chosen investment funds (Global Investment Trusts) outperformed the market.

Of course,I don't expect this rate of growth to continue, but it's a much better start than I ever anticipated.
Now she is earning, I intend to cut back on my contributions, and encourage my neice to start her own contributions.
With 40+ yrs to go, she now stands a decent chance of an adequate retirement fund (even without the advantage of a DB scheme (in which I have been fortunate to be enrolled in)).

Well, she has the same amount as me, and I'm 40 years old. So if she "stands a chance" of an adequate retirement fund then I'm !!!!ed!


Back to a point earlier: what level of mortgage would be considered "big"? I didn't think mine was particularly big (although I sure as hell don't want it to be any bigger).

Alice_Holt

jdw2000 wrote: »

Well, she has the same amount as me, and I'm 40 years old. So if she "stands a chance" of an adequate retirement fund then I'm !!!!ed!

My assumption is a long-term real growth rate of c.3% pa (may be on the pessimistic side).
At 3% it will double every 24 years, so a rough calculation shows the current fund growing to around £200k (in present values) at her SP age.
Lets assume a drawdown percentage of 4% (may be on the optimistic side) giving an annual income of £8k from the current fund.
I'm assuming the SP is still in place at £8k (again this may be on the optimistic side!) in 45 (ish) years time!!
I think an adequate pension figure to aim for would be a total.of £2k per month (again all figures expressed in present values).
So (taken account for 20% tax), she would need to provide c.£10k pension per year from her pension contributions.
Requiring an additional pension fund of £250k (in current terms) at her retirement date.

Over 40 years, with real investment growth of 3% pa she would need to contribute £125pm (increasing each year by 3%) to get to a fund of £250k.
Currently she is on just above minimum wage, with student debts from her degree, living at her parental home (like many of her peers) and saving for her own accommodation - so £125 pm pension contributions is possibly achievable ATM, but not top of her list..

However, if my growth assumption of 3% is pessimistic my neice will have an enjoyable retirement.

Thrugelmir

jdw2000 wrote: »

It's definitely a minority. People who have £30K by the time they are 40, or even 50, are probably a minority too.

Hence people who are starting their working lives now, with mandatory pensions, are lucky.

I started at 17 with £10 a month. As others have said compounding is the real key to growth. As a guide I've never contributed less than 10% of my income to my pension since I was 35. Even if it meant going without. How one spends ones money is a matter of personal choice.

darkidoe

Alice_Holt wrote: »

Just as an illustration of the benefits of starting early and the impact of compounding returns.

I started a SIPP for my 15 yr old neice some 7 yrs ago, putting in the maximum for a non-taxpayer of £240pm.
This now stands at £47k.

I (and my neice!) have been very lucky in that this time period has happened to coincide with strong equity returns, and the chosen investment funds (Global Investment Trusts) outperformed the market.

Of course,I don't expect this rate of growth to continue, but it's a much better start than I ever anticipated.
Now she is earning, I intend to cut back on my contributions, and encourage my neice to start her own contributions.
With 40+ yrs to go, she now stands a decent chance of an adequate retirement fund (even without the advantage of a DB scheme (in which I have been fortunate to be enrolled in)).

That was very nice of you! I wished someone did that for me when I was born, even a minimal amount in the market per month for 20+ years would be generated quite a return.

I am starting to do it for myself now but am gutted I missed the first 20 years of my life. Playing catch up is tough as many people in their 40s,50s can tell. I will definitely do it for any kids I have in the future.

jdw2000

Alice_Holt wrote: »

My assumption is a long-term real growth rate of c.3% pa (may be on the pessimistic side).
At 3% it will double every 24 years, so a rough calculation shows the current fund growing to around £200k (in present values) at her SP age.
Lets assume a drawdown percentage of 4% (may be on the optimistic side) giving an annual income of £8k from the current fund.
I'm assuming the SP is still in place at £8k (again this may be on the optimistic side!) in 45 (ish) years time!!
I think an adequate pension figure to aim for would be a total.of £2k per month (again all figures expressed in present values).
So (taken account for 20% tax), she would need to provide c.£10k pension per year from her pension contributions.
Requiring an additional pension fund of £250k (in current terms) at her retirement date.

Over 40 years, with real investment growth of 3% pa she would need to contribute £125pm (increasing each year by 3%) to get to a fund of £250k.
Currently she is on just above minimum wage, with student debts from her degree, living at her parental home (like many of her peers) and saving for her own accommodation - so £125 pm pension contributions is possibly achievable ATM, but not top of her list..

However, if my growth assumption of 3% is pessimistic my neice will have an enjoyable retirement.

It's great that your niece will have an enjoyable retirement. Thank you for sharing that with us.

jdw2000

Thrugelmir wrote: »

I started at 17 with £10 a month. As others have said compounding is the real key to growth. As a guide I've never contributed less than 10% of my income to my pension since I was 35. Even if it meant going without. How one spends ones money is a matter of personal choice.

Yeah, I've never contributed less than 10% since I was 35 either. I think that's bare minimum. (My problem being that I contributed 0% in all the years leading up to that point... : (

It's great that you had the foresight at 17. My Dad did tell me to. I can't blame him. But of course, I didn't listen.


On a separate note:

Does anyone think it's advisable to put savings into your pension? Or are they best done out of earnings? I could quite easily put £20K in and still have savings for an emergency, but perhaps that £20K best off being invested elsewhere. (I have applied online for a free financial adviser session over the phone).

darkidoe

jdw2000 wrote: »

Yeah, I've never contributed less than 10% since I was 35 either. I think that's bare minimum. (My problem being that I contributed 0% in all the years leading up to that point... : (

It's great that you had the foresight at 17. My Dad did tell me to. I can't blame him. But of course, I didn't listen.


On a separate note:

Does anyone think it's advisable to put savings into your pension? Or are they best done out of earnings? I could quite easily put £20K in and still have savings for an emergency, but perhaps that £20K best off being invested elsewhere. (I have applied online for a free financial adviser session over the phone).

Personally, the question is will you have any use of the 20k until your retirement age. If yes, then don't bother putting into pension, if no, then pension is an option. It might be better to increase your earnings contribution to the pension via additional voluntary contributions rather than sticking your savings into the pension.

Where that 20k goes depends again on the timescale that you might draw on it.<5years high interest cash accounts. >5 years consider mix of cash and investments via ISA.

jdw2000

As I was laying in bed this morning I believe I hit upon the solution for catching up with my pension without using my savings.

As mentioned, I am 40 years old, and have a pension pot of £48K. It should ideally be £100K. I have savings of about £45K which I was thinking of perhaps using some of to catch up with the pension.


However... with my mortgage being so low (interest only on £147K at 1% = £120 per month), I have been living on £800 per month of late. That includes all bills and expenses in total. Therefore, even on a £35K salary, I could afford to pay 70% per month of my salary into my pension. That is over £2K per month, and leaves me with £600 per month to live on.

Do that for a year, and that's the best part of £25K. Add on the interest/growth, and my £48K pension pot could look a lot different within just year.

Doing this I could very well have a 6 figure pension well before I am 45 without spending much of my savings...

TheShape

jdw2000 wrote: »

As I was laying in bed this morning I believe I hit upon the solution for catching up with my pension without using my savings.

As mentioned, I am 40 years old, and have a pension pot of £48K. It should ideally be £100K. I have savings of about £45K which I was thinking of perhaps using some of to catch up with the pension.


However... with my mortgage being so low (interest only on £147K at 1% = £120 per month), I have been living on £800 per month of late. That includes all bills and expenses in total. Therefore, even on a £35K salary, I could afford to pay 70% per month of my salary into my pension. That is over £2K per month, and leaves me with £600 per month to live on.

Do that for a year, and that's the best part of £25K. Add on the interest/growth, and my £48K pension pot could look a lot different within just year.

Doing this I could very well have a 6 figure pension well before I am 45 without spending much of my savings...

If you've got a interest only mortgage, you're going to have to pay off that £147k at some point. Equally important that you plan for that as well as your pension.

jdw2000

Hmm... think that plan might be scuppered by there being a limited on how much you can pay into your pension each year...


Edit: no, I don't believe there is a limit. Someone of £35K can contribute all of that to their pension if they wish.