Pension/investment advice

mark55man

personally (and in exact same position with my OH except she is starting with 0 in the DC pot but reasonable DB benefit I am going to put it all in to Vanguard Lifestrategy 80% in the cheapest pension vehicle I can find at the small end of the scale, and just leave it there for now.


but you really shouldn't take investment guidance off of a stranger on the internet as I really don't know to the required level of diligence your requirements, your appetite for risk o ryour extended family circumstances


there are - if you care to spend some of your winter evenings in front of a screen a number of where should I invest threads on here. I would find one you feel right with. As long as its a major fund (ie invests in many assets) with a major pension provider (so they take your security seriously) you shouldn't go too far wrong.


please don't do anything rash like Zimbabwean trouser bonds or bitcoin arbitrage - know yourself and your limits - if it looks too good to be true it is. You should aim at 4-5% growth per year - if anyone promises more than that ask why they aren't keeping it all to themselves. Also if anyone guarantees income always check what happens to your capital - most scams are I'll pay you 10% for 2 years and then foxtrot Oscar with the rump.

Trinity_Phil

Cheers again Mark...just looking at Vanguard 80 now and their rate of return last year was -4.04% (albeit it went up significantly in the preceding years) and I am guessing that all funds will have dropped similarly last year as our IFA has quoted -11.61% drop in his latest documentation he has sent us, although I am not exactly sure what this figure refers to, is it the market overall that has dropped by this much in 2018 ??
As I have stated above, I am obviously a complete novice when it comes to such matters, but with the current down-turn in the market, do you think we would be better just holding onto it for now until post-brexit etc when the market will surely stabilise again ??
Also, what are your thoughts on the 2 x 20k Pru ISA's that he is recommending for my pension pot, as I have to say that the fund management costs are putting me off that one as well ??

mark55man

Yes the market has dropped / been erratic.

Putting your money into a cheap index fund (like Lifestyle 80) basically means you have given up hope of beating the market but are too worried about inflation to stay in cash. However given that the majority of professionals don't beat the market (in their publically available funds anyway) that is probably a false hope. There are other general funds but you need to make your decision as to what you are happy with meets your needs. I would use some of your spare time reading although nothing is more dangerous in investing than someone who knows some, but not all, of it :-).

You need to get a grip on terminology - ISAs are not pensions. Both are investment mechanisms which are independent of the underlying investments. eg Pension is tax free on the way in taxed on the way out. ISA is taxed on the way (ie you usually save from your salary) and tax free on the way out.

The Pru ISA's are presumably a ISA type product investing in PRU funds- which he is suggesting as a home for your pension money (in that context an ISA is a good idea, but not necessarily with Pru).

A Pru Pension is a pension type product investing in PRU funds

The difference between PRU and Vanduard is probably about 1% a year on fund fees and 1% a year in Advisor fees. I would also be put off by that.

All from me for now - good luck

DairyQueen

OP has a low appetite for risk so the volatility of a fund with a 80/20 split is likely to give him the heebie-jeebies.

More importantly, fund selection is the last stage of the planning process, and that assumes investing in the markets is appropriate for him.

OP:

Here are the basic steps that you need to consider before making any decisions (all figures are at today's value - i.e. inflation means that the sums will raise over time):

1) How much annual, household income will you need when you and spouse are both fully retired? This needs some serious thinking. What do you both want to do? Projects? Hobbies? Travelling? RV? Caravan? Boat?

First make a list of all your essential spends (utilities, food, clothes, car?, etc.). This is the baseline which you will need. Then add the cost of the jam on the bread (eating out, socialising, hobbies, holidays, gifts). The latter are your discretionary spends. The sum of these will guide how much net income you would like in today's prices. Remember that you will have no mortgage payments, no commuting, no pension and savings payments, no cost of supporting kids.

2) Then work out how much income the survivor of you will need on the first death. At the moment you are better provided for if you survive your wife. She will receive (presumably) a 50% widow's pension (from your police jobbie) plus her own SP giving a total of around £18.5k if she survives you. Even so, that's significantly less than the 28.5k you will receive if you survive her.

3) Assuming that your gross £37k (police pension plus 2 x SPs) is sufficient to provide the lifestyle you need in the first stage of retirement (60s/early 70s) then your remaining funds (whether within a pension or not) will provide the cherries and cream unless you need to reserve something to supplement income on the first death. You may also wish to reserve an amount for inheritance. Also, consider the possibility of needing residential care in your dotage. This isn't cheap and a common strategy is to earmark your property for this possibility. You wife is more likely to be the beneficiary and, believe me, if push-comes-to-shove she will be glad she has the means to self-fund.

4) You currently have the £40k balance from your police lump sum available in your plan, plus spouse's 37k DC. This is your current portfolio (I have excluded the 15k emergency fund). But this may be required in later retirement to provide income for the survivor of you two. This is an often-overlooked element of retirement planning.

5) Let's assume that you don't need that £77k for at least 10 years. Let's also assume that you will both continue to build-up pension (as you will both be working for the same period). Final assumption is that you and wife will have some surplus funds from your P/T incomes.

6) The next part of the plan involves income tax planning. Your police pension will eat all of your tax allowance so you will pay 20% tax on all your P/T earnings and, eventually, on all your SP. However, your wife's SP won't use all of her tax allowance. Therefore, it is better to boost pension funds in her name whilst you can. She can pay all of her earned income into a pension (less any contributions she and her employer make into her employer's scheme) and receive tax relief on the lot. As her income is below the tax threshold she won't pay tax on it but will receive an instant cash uplift of 20%.

She can then withdraw the cash entirely tax free providing she doesn't exceed the tax allowance in any tax year. For example: tax allowance £12k. Wife's SP = £8.5k. Difference of £3.5 can be withdrawn from pension without paying tax. Even more if she foregoes the 25% tax free cash at outset and, instead, opts to take 25% of each payment tax free. This form of drawdown is called 'UFPLS' (Google it or search the forum).

7) You won't benefit as much from adding more to a pension as you will receive tax relief on the ''way in' but will be taxed at least 20% on the 'way out'.

8) So, let's assume that you can afford to stash £5k of your wife's income into a pension for the next 10 years. That's £50k plus the tax uplift = £62,500. Plus your wife has that £37k and you have £40k. You are therefore looking to manage a drawdown portfolio of £77k at the outset, rising to £139.5k (plus growth) by the time you are 60. For management purposes this pot could be seen as one pot. Whether it's held within or outside a pension, or in your wife's or your name, isn't pertinent. Optimising tax is the important bit. Note that anything held within a pension wrapper is inherited entirely free of income tax if the holder dies before age 75.

9) ISAs would be a better vehicle for any additional savings in your name. No tax uplift but no tax on the way out either. Your spouse can inherit ISAs tax free,

10) At this point you will have an idea of what kind of sums you are likely to have, and will spend, through retirement

Next the investment bit....

11) You have a very cautious attitude to risk but, arguably, the guaranteed way to lose money is to hold cash as inflation will definitely erode its value. No cash savings vehicle beats inflation. The other option is to take some risk and mitigate that possibility.

12) Over a 10+ year period (and remember you will probably hold a chunk of this money for much longer than that) equities are likely to outperform every other investment. No guarantee of course but if shares don't continue to rise over the long-term then capitalism has ended and we'll all be in shelters eating baked beans.

13) I can suggest ways to invest and vehicles through which to invest but you will be much better-served researching and learning for yourself. However, I would strongly recommend that you include equities in the mix. Forget Brexit, The UK is only 5% of the global stock market and Brexit is a blip even in the UK.

14) For a new investor the usual suggestion is to choose a single, highly-diversified, global tracker (aka 'passive') fund. Vanguard is a popular provider. So are HSBC and Blackrock. As an example, Vanguard (already mentioned) offer a suite of funds called the 'life strategy' range (VLS). These each offer a split between bonds (low volatility and lower risk) and equities (high volatility and high risk). The higher the %age of equities, the higher risk.

'VLS80' has 80% equity exposure and VLS40 only 40% equities. Other percentage splits are also offered. If you drop below 40% equities then the long-term benefit of exposure to shares declines. Your risk profile suggests that something like VLS40 would be better for you.

Take a look at Vanguard's website as they provide a great deal of clear information. Having learned the basics about these types of funds also look at HSBC's and Blackrock's equivalents. All of these offerings are low charges (much cheaper than any fund offered by the Pru) and can be bought through a Pension fund or an ISA.

Last year's drop in the market is nothing dramatic. Rises and falls are a daily occurrence and sometimes the trend is up, sometimes down. It's possible for the markets to crash (20%+ down) at any time. This will happen at some point. However, shares are the best-performing investment by some margin over the long term. The key is to ignore the ups/downs, ignore the gyrations, and don't sell. Short of WWIII the overall, long-term trend should continue upward, as it has for the last 100+ years.

Of course this is only one suggestion but it is a good starting point for newbie investors.

I am no expert but I have learned sufficient over the last two years to manage a large-ish portfolio without feeling sick every time the markets drop.

I hold VLS as the core of my portfolio so I am obviously a fan. However, what's good for me may not suit you.

The very best piece of advice is to read, read, and then read some more. By all means park your cash in premium bonds until you feel confident to take a first step. Over time you will understand enough to at least avoid the biggest pitfalls e.g. investing in a single sector, country or, God forbid, individual shares, and the biggest one of all.... selling when the markets fall.

Investing in the markets doesn't exclude investing in cash but I think you have the interest and ability to join-in with we DIY-ers and make your money work as hard as possible.

End of essay

mark55man

DQ's post above is very good.

However, I didn't just pick VlS80 out of the air my analysis for my OH (and my implication for OP's OH) was something like
* This is money for a long time away
* I have and she has reasonable DB pension coming (inflation linked)
* We have a state pension coming (inflation linked)
* I have good equity in my house

Therfore why should I choose a low number VLS fund that replicates the security those last 3 elements - in asset allocation terms I feel that is now double covered. but as you say its OP'schoice and OP's risk

Its not wrong to watch each element of your portfolio, but Ithink its wrong to design every element of it to the same level of risk, when things like a Govt DB and the state pension (for someone already there) are very low risk and you can't control that element

GreasyPalms

Trinity Phil have you obtained a state pension forecast for you and your wife? Just scanned the thread and it was only briefly touched on but as you have a DB pension, it is likely that you were ‘contracted out’ and if so it is important you know your actual state pension entitlement to avoid any nasty surprises.

Trinity_Phil

Guys ... I started a comprehensive reply 6 hours ago but then had to break off for a few hours before continuing with my reply, but when I just tried to submit it the connection had timed out and it has erased my entire reply, so bear with me...I will have another go later
Jeez, it was easier being a traffic cop !!!

atush

Yeah, it always does that.

So copy the text if you do a long one next time. Then if it disappears once you hit send, you have it still.

ColdIron

Trinity_Phil wrote: »

Guys ... I started a comprehensive reply 6 hours ago but then had to break off for a few hours before continuing with my reply, but when I just tried to submit it the connection had timed out and it has erased my entire reply

That's why it's worth pressing Ctrl-A (select all) and Ctrl-C (copy) from time to time so most of it will be safely tucked away in your clipboard :cool:

Trinity_Phil

Yep...lesson learned guys, let's try again.

Mark....thanks again for your valued input, it's very much appreciated.

DairyQueen....what can I say but WOW...that must have taken some serious thought and time to compose that and I am so grateful that you did, so will try and keep the corresponding stupid questions to a minimum, but here goes :-

Regarding permanent retirement, we haven't really given it too much thought yet, but realistically we are not looking at doing anything extravagant such as caravans (I've cleared too many smashed up ones off the roads over the past few years to contemplate spending silly money on one !!), or boats, RV's etc, so I guess we will have to decide what we both want, and can afford, to do when we do finally permanently retire, but the 37k should more than adequately cover it.

The figures/calculations up to and including point 5, I would concur with.

Point 6 - the tax issue - I will clearly have to look at this UFPLS thing to see what that is all about and try and get my head around it, as I stiil don't understand what this "tax relief on the way in, but not on the way out" means...sorry for being thick...again but I really don't have a clue when it comes to financial matters...if you want me to sort out a multi-vehicle traffic collision on the M1 then I could do it blind-folded every day of the week, but with this stuff, I feel like I am swimming in treacle...sorry !!

Point 8 - I appreciate that you have to use some guessswork for your calculations, but realistically the wife is only paying £40 per month into her current pension pot and the remainder of her wage combines with mine to pay the day to day bills etc, so she doesn't really have anything left at the end of each month, but just using your figures as an example, how would the 77k pot suddenly rise to 139.5k by the time we are 60, as the wife is 56 now and I am 53 ??

Point 11+....Investments - as I have previously mentioned on several occasions ( I am sure you have picked up on this ), but I am a true Yorkshireman, so consequently am tighter than a ducks back-side when it comes to risking my hard-earned cash, so am very reluctant at putting it somewhere where I could potentially lose some, or even all, of it. (My mum and step-dad got their fingers burned back in the great crash of 2008 - as I'm sure lots of others did - and were losing £800 a day on their previously profitable investments and were unable to get their money back out due to the terms and conditions in the small print of their contracts...they reckon that they have lost £30k in lost income in the past 11 years !!), so as you can imagine I want to avoid this at all costs.

With regards to the two investment portfolios that our IFA is recommending with the Pru, I am really struggling with the figures for the wife's £21,900 pension pot, as they are quoting over an 11 year investment period, that they are going to charge us £5,400 in administration/service fees for a net return of £900 profit !!
Now even to a thicko like me, this doesn't sound like a good investment !!!

With regards to the 2 x Pru ISA's at £40k total, they are quoting a set-up fee of £400 plus on-going annual charges of 1.27% to them and 0.75% to our IFA at Ebor Financial Planning (unless the 0.75% is already included in their 1.27% ??), so if my calculations are correct, then in the first year we are looking at £954 in fees, followed annually by another £554 p.a ??
So,in total, (again if my calculations are correct), we are looking at annual maintenance fees of just over £900 p.a for their combined services. ??

Now, obviously I want to pay as little as possible to them, whilst protecting our cash, so wondered what alternatives would be considered a better option ( I WILL have a look at Vanguard, HSBC and BlackRock), and want to know if it is possible to avoid any annual fees altogether, or with my current skill-set on such matters being as it is, would this leave us looking at the baked bean scenario ???

Also, if ISA's are going to be the best, safest option FOR US, then could/should we look at potentially putting £20k of the wife's previous pension into one before 6th April and then take out the other 2 in the next financial year, or would it be better invested into another pension fund ??

Greasy Palms - yes we have, and we both qualify for full SP