New (Financial) Year Resolutions - Index Investing

nemoes

Having done a fair bit of research over the last few months I've decided to start of the New (Financial) Year with some investing resolutions.

I've never invested in Stocks and Shares (ISA) before but i'm interested and motivated to plan for a better retirement. I'm currently 47 and have a good works pension plan. I'm on track to pay off my mortgage within the next 10 years and have no other debt.

I have an emergency fund of about 3 months expenses and want to start investing in broad based index funds. I'm looking at regular monthly payments of £750 + over a 10 - 15 year period - maybe longer!

I'm very interested in Vanguard index funds due to their low cost. I'm happy to invest 100% in stocks initially but am unsure whether to go for a target retirement fund, life strategy fund or FTSE world index fund?

I'm leaning towards the world index fund given the level of diversification and relatively low cost.

I'd welcome any thoughts from others who may already be on this path. Thanks!

cloud_dog

Can you just clarify your thoughs and reasons for investing? The reason I ask is that mention using a retirement fund so, are you investing for retirement? Having a clear purpose for the monies (or not) helps the product funnelling process.

nemoes

Hi cloud_dog,

My plan is to work towards a level of financial independence. Not sure I want to work until I'm 67 in my current job - so i'm hoping to have the financial flexibility to opt out of full time work ideally before 60.

I hope to build a portfolio over the next 10 - 15 years that will allow me to draw an income and step out of full time work. Once the mortgage is paid off my annual expenses will be quite low and I can still work part time until my full pension kicks in at 67.

bostonerimus

Can your describe your "works pension". An ISA is good to have as a tax shelter for easily accessible funds, but it should be considered in relation to your other financial accounts ie a pension. Depending on your plans and circumstances you might want to open a SIPP or contribute more to the work's pension if you can

cloud_dog

bostonerimus wrote: »

Can your describe your "works pension". An ISA is good to have as a tax shelter for easily accessible funds, but it should be considered in relation to your other financial accounts ie a pension. Depending on your plans and circumstances you might want to open a SIPP or contribute more to the work's pension if you can

Just to add...is the employer scheme DC ot DB scheme and also does your company operate salary sacrifice? Are you a higher rate tax payer.

nemoes

So I'm a higher rate taxpayer. I pay 12.5% into a salary sacrifice with an employer match of 12.5%, as a government backed scheme it's index linked. I have 20 years invested in my pension plan so by the time I retire I estimate my pension pot will be around £450k.

AVCs seem expensive and if I want to retire early I'll have to take a significant reduction in terms of my pension - so I'd rather let it ride and use my ISA allowance to build a savings pot.

I realise I can open a SIPP in parallel and this would allow me to save at source and as a higher rate tax payer has advantages in terms of tax relief when saving and I could draw this down from 55 but would pay tax when drawing down.

Would this be a better option than using the ISA allowance, my interpretation is its less flexible but as a higher rate tax payer may be worthwhile over the long term?

cloud_dog

nemoes wrote: »

So I'm a higher rate taxpayer. I pay 12.5% into a salary sacrifice with an employer match of 12.5%, as a government backed scheme it's index linked. I have 20 years invested in my pension plan so by the time I retire I estimate my pension pot will be around £450k.

I'm a little confused so, please help clarify.

Is it a defined benefit / CARE scheme?

Where do you get the £450k from? Have you just extrapolated based on contributions or is this a projected value or a CETV?

Assuming you retire early and have built up a SIPP/pension pot you will be able to withdraw £15625k per annum without paying any tax (using current allowances). Additionally, whilst amounts above this would be taxed you would not be deducted NI contributions.

As a 40% tax payer making additional contributions in to a SIPP/pensionis a no brainer, unless access before age 55 currently / 57 proposed is a deal breaker.

nemoes

Hi cloud_dog,

Its a combination of a final salary scheme and a defined benefits scheme. The £450k is simply based on my own estimates extrapolating from the current pot with future contributions - so only a guideline.

Good to know I could potentially draw £15625k per annum without paying tax so that might be worth considering. Thanks.

cloud_dog

nemoes wrote: »

Hi cloud_dog,

Its a combination of a final salary scheme and a defined benefits scheme.

Final salary and Defined benefits are the same thing. Basically your DB pension is based on your final salary (or one of them, depending on scheme rules, i.e. highest salary in last 3 years), and will be a percentage of your FS based on how many years you have accrued (worked there).

nemoes wrote: »

The £450k is simply based on my own estimates extrapolating from the current pot with future contributions - so only a guideline.

There is no pot of money based on contributions. There can be Cash Equivalent Transfer Value (CETV) but, this has no relationship to contributions, usually to the members benefit.

nemoes

Yes, I meant to say originally the scheme was final salary but has now shifted to career average.

The SIPP seems like a great option to help boost my retirement funds so I think I will get some professional advice and explore further. Thanks.