Pension/investment advice

enthusiasticsaver

OP we were in your position a few years ago around 2 years before my husband was due to retire, I was 55 and he was 56 and did not have a clue about investing. My husband was due to get around £150k pension and an annual DB pension of £21k which was increased due to what they call a smoothing pension until he gets his state pension. We were risk averse too and wanted to gift our daughters money, replace my husbands company car and do some home improvements and holidays. I was planning on retiring a year later.


I did a lot of research on investing, we saw a financial advisor who we were not impressed with and he came up with a Pru scheme and suggested because we were risk averse we do 50/50 with sticking half our money in something like premium bonds and investing the other half in a cautious managed fund. The fees looked high to me though and he made a massive mistake on calculating the figures (I worked in a mathematics environment so spotted it immediately) so could not trust him after that.


We worked out how much capital we wanted to keep back from our current savings and my husbands lump sum. We were generous as we had an 8 year gap before state pension kicked in as you will. My DH was not planning on working at all after retirement and I only worked part time and have a much smaller pension. I investigated SIPPs and stocks and shares ISAs and researched a multi asset fund (Vanguard Life Strategy which is very popular on here). It is low cost and well diversified and you choose the level of risk by balancing equities (shares) against fixed term (bonds) with the bonds having a lower potential for growth but are less volatile in the case of a market drop. I also looking into low charging multi asset income funds to subsidise pensions as we wanted a £25k minimum income. No mortgage. Gradually over 4 years we have got into investing and both have stocks and shares isas, I have a SIPP to subsidise my pension and we left some in my husbands DC pension pot. All these terms may be confusing but just taking a bit of time to familiarise yourself with them is well worth it.


For you initially therefore I would maybe invest £10k - £15k each into a stocks and shares isa out of the lump sum. I don't think you can do a SIPP yourself out of your lump sum as I think that is called pension recycling but you can do one for your wife. Others may correct me on that. She can invest up to 100% of her annual salary in one year less any existing pension contributions and HMRC will top her contribution up by 25%. So you could stick half of your £60k spare into premium bonds or an internet saver or fixed term bond with a high street bank. It wont make a fortune but will keep the capital safe. You could invest the other £30k in stocks and shares isas in the Vanguard lifestrategy (we went for 60 so 60% equities and 40% bonds) but you could go even lower on the equities if you wanted less volatility by going for the LS40 or LS20. You need to educate yourself on investing platforms (we use Halifax but there are loads out there). It is well worth doing.


It is mind boggling to start with but very soon you start to know when people start talking about the difference between DC pensions and DB pensions. Indeed you have a DB and as Dairy queen says you would be crazy to give it up. It gives you certainty on what you will get in income each year without worrying about stock market performance.

Trinity_Phil

Okay, following your advice, I'm looking at Vanguard and HSBC now and their fees are considerably less than the Pru and our IFA's charges, (have had a brief look at BlackRock but their website isn't as numpty friendly as the other two !!
Vanguards LifeStrategy40 looks to be ideal for our risk profile and has no set-up fee and only 0.22% annual costs although it's performance suffered a -2.25% loss in the past 12 months, but I accept that this is probably the same across the rest of the market ??
HSBC's Conservative portfolio seems to have a very similar investment profile but I'm not quite sure on the fees....on one page it says 0.58% p.a. but then when you click on the link it says 0.44%, but again with no entry or exit fees, so again this appears to beat the Pru hands-down ??

enthusiasticsaver

I would not take money out of your wifes existing pension now while the markets are down. I am not sure why you would need to do that personally. The difference between isas and pensions principally is that pensions are tax advantageous when paying in and isas pay out tax free. If your wife is a low earner or works part time she probably does not pay a lot of tax anyway. This means paying into a pension or SIPP gives her top ups from HMRC either by reducing the tax in her payslip or by money going into a SIPP. An ISA gets no such tax benefits but does pay out tax free. If your wife has a low pension income once she retires though she probably will not pay tax anyway.

A stocks and shares isa though for you is definitely worth it as you will be using all your tax allowance with your DB pension of £19k so you will still be a tax payer. That means when you do draw money out of your isa, hopefully some years ahead though, it will be tax free. Your wife would be better off with a SIPP if it is either or.

enthusiasticsaver

Trinity_Phil wrote: »

Okay, following your advice, I'm looking at Vanguard and HSBC now and their fees are considerably less than the Pru and our IFA's charges, (have had a brief look at BlackRock but their website isn't as numpty friendly as the other two !!
Vanguards LifeStrategy40 looks to be ideal for our risk profile and has no set-up fee and only 0.22% annual costs although it's performance suffered a -2.25% loss in the past 12 months, but I accept that this is probably the same across the rest of the market ??
HSBC's Conservative portfolio seems to have a very similar investment profile but I'm not quite sure on the fees....on one page it says 0.58% p.a. but then when you click on the link it says 0.44%, but again with no entry or exit fees, so again this appears to beat the Pru hands-down ??

Yes, that is right. Vanguard has suffered a drop over recent months but mine increased by about 17% up until last August I think it was. It did well in 2016 and 2017 until then. You will also have a platform fee which is the company you use to actually invest in as you cannot go straight to Vanguard or HSBC. Or you can but I am not sure that is the cheapest way of doing it. Hargreaves Lansdown is popular. We use Halifax and Nutmeg are becoming more popular. Loads of them out there. Comparemyplatform is a good place to start where you input the amount you intend investing and it gives you a breakdown of fees.

Trinity_Phil

Thanks for joining the debate, Enthusiastic....as you say your circumstances are very similar to ours
Am just going to re-read your inputs again, to try and get my head around them

enthusiasticsaver

Yes, it is confusing to start with. I have just read Dairy Queens advice which is spot on and probably more concise than mine. As many others have said it is daunting to DIY but the thought of paying almost £1k each year to a financial advisor for often not that much gain sticks in my gut a bit. A friend of ours retired the same time and used the FA we rejected and regretted it dearly. With a relatively small portfolio I do not think they give value for money. Remember diversify both in terms of assets, geography and sector. Fund Fees is a tricky one as managed funds where they pick the companies tend to charge higher and there is an ongoing debate as to whether passive funds perform just as well as if not better than managed funds. Passive funds charge much lower and HSBC and Vanguard are passives although obviously the percentages invested in each geographical area are originally set by the fund managers. Pru is a managed fund. Legal and General do similar funds to Vanguard Lifestrategy with appropriate levels of risk. Legal and General Multi Index funds I think they call them and are numbered according to level of risk. The difference between these and Vanguard is the L and G funds include some sort of property investment as well as bonds and equities. They could be worth reading up about. In the end though Vanguard were cheaper.

Trinity_Phil

Okay...so putting the actual figures on the table then, after subtracting paying off the mortgage (35k), payments to daughters (20k), house improvements (10k), replacement car (13k), emergency fund (15k) then that leaves :-

£40k

plus the wife's Royal London Pension :-

£21,900.

So would you recommend transferring all or part of the wife's above pension into a SIPP and if so which one, and then possibly £20-30k into something like the Vanguard Lifestrategy40 ??

enthusiasticsaver

I had not read the bit about why you were moving your wife's pension and so just briefly skimmed it. Incidentally I transferred an old pension into my LGPS and it bought an additional 7 years service. Is this an option? I had been working for them for a while so I don't think the working for them less than 12 months applies although it was a while ago and the scheme has changed from final salary to career average so this might not be possible. I would explore that first.

Why did the FA advise moving it? Can you get the details of the performance, which fund the RL pension is invested in and charges? Is it from an old employment? If you have decided to go down the route of Vanguard LS funds then I would stick to that for the SIPP too. No point in just transferring part of it. £20k is not a huge amount. If the RL pension is performing badly and/or expensive or you just want to keep it in one pension then yes I would put it into the Vanguard LS40 if that is the risk level you are comfortable with.

Most platforms do SIPPS and stocks and shares ISAs so once you decide on the platform you could do both. I have not transferred an old pension into a SIPP before though so that needs exploring as to the mechanics of doing it and whether she has to ask Royal London to transfer it to whichever platform you are choosing or whether you open the new SIPP first then request RL to transfer it over. It very much depends on the funds that it is invested in. If RL charge a lot but the funds the pension are invested in are doing ok you can elect to leave them in the funds but just put them into the SIPP in the same fund. You have to make sure though that the funds are not sold and the cash sent instead as the price may go up in the meantime. I did that with my stocks and shares ISA when I moved platforms from Fidelity to Halifax as Halifax offer a fixed price regardless of portfolio size and Fidelity operated on percentage basis. Just kept the same funds. I think they call it an in specie transfer. Depends on how Royal London have it invested though. If it is an expensive fund and you want it to go to a VLS40 they will need to sell and transfer the cash but still within a pension wrapper.

enthusiasticsaver

On the figures you quote above though I would open a stocks and shares ISA for you using the VLS40 if that is the one you are comfortable with. So that is £20k as that is the maximum in each tax year. Personally for your wife I would investigate moving the RL pension to her LGPS. After April you could put a further £20k in but I think I would hesitate to tie up too much given you are not yet retired and don't know exactly what your plans will be. Give yourself some time to sort things out, see how you manage on the pension and whether you get a part time job etc etc.

DairyQueen

I suspect that OP is now just about ready to hang himself under the weight of our collective suggestions

I hadn't picked-up that wife was a member of the LGPS. Even if she is, I believe that you can only transfer-in pensions to the LGPS within the first year after beginning employment. Hopefully, someone can confirm. If so, this option may not apply to the OP's wife.

OP: My previous post assumed several things. Firstly, I had assumed that you were both 50 and retiring at 60 (sorry if I got that wrong). I will try to pick-out the most important things for you to consider.

a) Don't think of your joint assets as different pots of money for management purposes. For example, add your lump sum to spouse's DC pot (so approx £62k?). The only thing that I would recommend ring-fencing is that £15k emergency cash.

b) My example assumed that you could add £5k p.a. to your wife's pension from income surplus for the next 10 years (thus £50k over 10 years). Even if £5k pa isn't do-able, and even if your wife will only work for another 4 years, then anything you can add to her pension would be worthwhile. Your wife doesn't pay tax on her income but she will receive a basic rate tax uplift for every pound she adds to her pension. This is free money. The beauty of her position is that she will also be able to withdraw this money tax free if she withdraws only up to her tax allowance each year. Thus the tax payer is giving her a nice chunk of money.

c) Your position is different. There is little advantage in adding to a pension as you will be taxed on it when you withdraw it. This means that you will only receive a small benefit from the tax uplift. This is why any savings in your name should be invested in ISAs.

d) Think about how much of that £62k you are likely to need within the next 5 years. Let's assume you will want £20k of it when wife reaches 60, and the remaining £42k will not be needed for at least 10 years (perhaps until wife reaches SP age).

This is what I would do (as an example ONLY and not what you should do). This is intended to see how it could work.

- £20,000 - put this into cash or premium bonds. High interest fixed term accounts are worth considering as the return will likely beat premium bonds.

- Transfer wife's pension (£22k) to a SIPP. I would suggest Hargreaves Lansdown for (small) pots of this size as the charges are good, and the website and customer service is excellent. They will charge 0.45% annual platform fee on her £22k each year (£99). You then have total flexibility re: which funds in which to invest. Any extra charge will only be imposed by the fund. HL offers some global passives with very low fund charges. They have arrangements with these providers. Can't recall whether HSBC and Blackrock are amongst them but worth checking.

- If wife only pays £40p.m. into her employer's pension then find-out how much her employer pays-in. Very likely that you will have a big difference between the sum of those two figures and your wife's salary. The difference is the sum you should aim to invest in wife's pension.

- For the next 3/4 years use the balance of your lump sum to add a chunk to wife's (new SIPP) pension every year. Let's say that you add £5k each year. The government will top this up to £6,250.

- In year 1 you will have the initial £22k plus the £6250 in the SIPP to invest. I would invest the whole £28,250 in something like VLS40.
- in year 2 also invest the £6250 in VLS 40.
- Year 3? Review your plan. Assuming that you still believe that you won't need any of wife's pension for 10+ years then invest the next chunk into VLS40.
- Year 4 = ditto.

Rinse and repeat until you have filled wife's pension with as much surplus cash as you have available. If you think you may need the money within 5 years then still add it to the SIPP but leave it in cash. That tax uplift is likely to beat any cash savings vehicle over the short term.

When you are ready to take some cash from wife's pension then you have two choices:

1) Take 25% of the whole amount tax free up-front and put the rest into flexible drawdown. Wife will then be able to withdraw up to her tax allowance tax free each year (net of any other taxable income).
2) Use 'UFPLS' to take 25% of each payment tax free and the remaining 75% will form part of her taxable income. The trick is to not let the 75% exceed any remaining tax allowance. This means that she will receive the tax uplift on her pension contributions on the 'way in' but will not be taxed on them on the way out. A guaranteed gain of 25%.

I'm not sure how your in-laws managed to lose on the markets after the 2008 crisis, Unless they panicked and sold when the markets crunched? Or they were holding funds that were not diversified across the globe and all sectors (no such problem with VLS or HSBC/Blackrock). Within a couple of years the markets had recovered all of the loss and it was gravy thenceforth until last year.

My portfolio is down around 4% since the beginning of last year (markets have recovered some of last year's losses in the last month) but that's par for the course. If you can't accept a 2% year-on-year loss then you definitely shouldn't invest in shares. Some years you can expect a 20% gain, on occasion the loss will be around 20% (invested in 40% equities). On average (over 10+ years) the gain should be around 5% p.a. net of charges. the whole point in doing this is to beat inflation.

Hope that helps.