ASI UK Smaller Companies Pension Fund and my retirement plan

GazzaBloom

I have been spending the last year reviewing and developing some retirement plans. After much thought and wrangling with spreadsheets and talking to as many people either retired or also preparing for retirement, I am trying to refine my plans as far as I can without paying for financial advice. It appears to me that there are 2 principle unknowns that make pension planning difficult - how long you will live, and how much do I need in my pot when I retire to last the unknown length of time I will live in retirement, ie how will the stock market perform in the future?


I'm 53 this year and want to retire as soon after 55 as I can. I will to be debt free at 55 and my current pension arrangements are 2 pensions:


1) 14 years of defined benefits pension from a previous job. This can be drawn from age 55 with a tax free lump sum of £32K and an index linked £5K a year until death then 50% goes to my wife.
2) A defined contribution pension with my current employer with £185K in it now.

After waking up to pension planning far too late in life, and after some research, I have switched my defined contribution pot, managed by Standard Life, into a different, higher performing fund, it's now 100% in the ASI UK Smaller Companies Pension Fund managed by Harry Nimmo of Aberdeen Standard Investments. I have researched the fund and Harry's profile and this fund has been the best performing fund that I have access to via Standard Life for the last 10 years. My pot grew over £42K last year with £31K of that investment growth, so it was a good year.


My plan is to take the defined benefits pension at 55 and take the tax free lump sum. At some point after that I plan to take the defined benefit pension as a flexible drawdown with no tax free lump sum.


Target for annual pension income is as follows:

• £12-15K - household everyday expenses, council tax, gas. leccy, food shopping, car fuel & servicing, Sky TV, mobile phones, broadband etc.
• £10K - £100 a week each for me & wife - pocket money
• £10K - Discretionary capital expenditure. Holidays, leisure, save for new car etc.

So, £35K a year.


I aim to have savings of £60K at the point of retirement with another £30K+ available when my wife takes her pension at 55 ( (she only has a pot of £32K so we plan to take it as a lump sum and put it in a S&S ISA)


50% of my savings will be in a stocks and share ISA, in a different but equally high performing fund to my pension, and be the rainy day emergency fund and 50% will be in a regular ISA that can be accessed immediately if and when required.


I have my funds 20 year performance history and am trying to calculate a starting pot value that would be resilient enough to survive the market swings and downturns, ie sequence risk. In the historical performance I have, the fund took a big hit in 2001/2 post 911 and again in 2008 with the banking financial crisis. I have allowed for the fund fees and also Standard Life's annual drawdown fees and my forecast model it suggests a pot of £426K would have survived with a drawdown of £34K which after tax when added to my £5K DB pension would give us the £35K, escalated 2% a year, and then dropping down the withdrawal amount when we start receiving state pension from age 67 each. So that's a starting withdrawal of 8%+ but depending on fund peformance can go down as the pot increases.


I have a healthy appetite for risk and want to keep the pension pot invested in this fund through retirement to maximise the growth potential. Obviously historical performance is no indication of future performance but 20 years history does hopefully give a flavour of how the fund may peform going forward and it's grown an average of 16% a year over the last 20 years.


If we hit trouble, or a double digit loss making year on my fund then I have the savings to fall back on, or we may have to have a couple of lean years while it recovers, or absolute last gasp crisis plan would be us both trying to go back to work part time and maybe using equity release some of the house value - but that would not be desirable.


Is my plan pie in the sky or is it sound? All advice online suggests I need a much bigger pot and that 4% drawdown a year only can be taken for your pot to survive but I think the 4% rule is cautios and the SmallCap market returns can facilitate higher drawdown.

Linton

Your investment strategy is seriously risky, to put it mildly. The past 10 years is not a reliable guide to the future as it has seen the longest rising market in history.


Betweeen June and November 2008 the Aberdeen UK Smaller Companies fund dropped by about 53% (judging from the Trustnet/tools/charting graphs) and did not fully recover for another 4 years. Have you included a fall of that magnitude in your testing?


I think you should be holding a much more balanced portfolio including a range of investments from across the world and enough cash or very cautious investments to cover your income needs for 5 years.

Thrugelmir

To counter the cyclical nature of investing. Diversification is key. In retirement protecting ones capital is paramount. As the opportunity to replenish lost capital through ones own endeavours has gone.

4% rule is based on US data alone. In an era where bonds (40%) consistantly generated far higher levels of return.

DairyQueen

Wildly, wildly optimistic.

Just for starters, take a look at this link:
https://www.onefpa.org/journal/Pages/AUG15-Sustainable-Retirement-Spending-with-Low-Interest-Rates-Updating-the-Trinity-Study.aspx

(Referenced on the monevator blog this weekend - also worth a read): https://monevator.com)

Plus a highly risky, single-fund portfolio that is guaranteed to tank when the market drops.

Plus only £90k in savings of which 1/3rd will be subject to tax on withdrawal as you intend to take the lot as a single lump sum.

Plus only £5kp.a. in guaranteed income, plus £185k DC, against an income requirement of £35k.

I would hesitate if I had 3 x these resources.

GazzaBloom

Thanks all for feedback, I know my provisional plan is too risky and optimistic so needs further work. A few things in reply:


The 2008 crash hit this fund but also hit all equity funds. These global events such as 9/11 and 2008 banking crisis will hit all pension funds with equity investments. If you want gains then risk has to be taken. In my scenario testing, I modelled 22 scenarios I used a different starting point on the 22 year history of the fund and found that by not taking any drawdown in the year after a double digit loss in the fund allwed the pot to recover and grow beyond the original capital amount.


My initial withdrawal amount of £35K will not be constant and we actually only need £25K with some extra occasionally so the drawdown will vary year to year.


Also, even if I did make the leap at 56/57 and start drawing down from the DC pension either or both my wife and I will probably continue working part time so there will be additinal income.


Theree is also some sizeable chunks of inheritance money that will come within the next 10 years or so. (I know that's grim to consider!)


The £5K DB pension is index linked so will rise.


There is an interesting article on SmallCap equity returns allowing a higher drawdown rate, I can;t post links as I'm new but if you search "FA small cap withdrawal magic" you'll see it.


I still challenge the 4% drawdown "rule" and think it's too cautious as it's based on a Cash/Bonds/Equity mix but I do recognise the need for diversification but I am not going to follow the traditional path of percentage split with cash & bonds.


Bottom line is, I am thinking about it, learning more and dont have to make any decisions for the next few years.

Albermarle

My plan is to take the defined benefits pension at 55 and take the tax free lump sum. At some point after that I plan to take the defined benefit pension as a flexible drawdown with no tax free lump sum.

I presume for the second line you mean defined contribution , not benefit ?

First point is that as you will be taking the DB pension quite early, you need to consider carefully whether taking the lump sum is a good idea , or whether a larger index linked annual pension for possibly the next 40 years would be better.
For the DC pension , I can not see the logic of paying tax on 25% of it , when there is no need .
Are you aware that with a modern drawdown pension you do not have to take the full 25% in one go and you can take it in stages?

Thrugelmir

GazzaBloom wrote: »

I still challenge the 4% drawdown "rule" and think it's too cautious as it's based on a Cash/Bonds/Equity mix but I do recognise the need for diversification but I am not going to follow the traditional path of percentage split with cash & bonds.

Have you made allowance for inflation?


Return on the UK market over the past 100 years or so (with income reinvested) is around 5% after inflation. 0.5% if income is withdrawn.


Global equities closer to 4%.


Management fees and dealing costs etc would reduce these figures further.

GazzaBloom

Albermarle wrote: »

I presume for the second line you mean defined contribution , not benefit ?


Yes sorry 2nd line shoud read DC


I have calculated the the DB pension would pay out £83K between age 55-65 as a combination of a £32K tax free lump sum and then a taxable £5K a year indexed. If I left it until 65 it pays out £8.9K indexed taxable a year.


It would take 21 years for taking it at 65 to exceed the £83K of benefits between 55-65, so I would be 86 years old before there is any benefit of leaving until 65. I might not live that long!


I won't pay tax on 25% of the DC pension, the first 25% of each drawdown will be tax free, what I meant is that I won't be taking the 25% tax free as a commencement lump sum but will take the first 25% of each drawdown tax free instead.

MK62

I have my funds 20 year performance history and am trying to calculate a starting pot value that would be resilient enough to survive the market swings and downturns, ie sequence risk. In the historical performance I have, the fund took a big hit in 2001/2 post 911 and again in 2008 with the banking financial crisis. I have allowed for the fund fees and also Standard Life's annual drawdown fees and my forecast model it suggests a pot of £426K would have survived with a drawdown of £34K which after tax when added to my £5K DB pension would give us the £35K, escalated 2% a year, and then dropping down the withdrawal amount when we start receiving state pension from age 67 each. So that's a starting withdrawal of 8%+ but depending on fund peformance can go down as the pot increases.

While this single fund may have returned an average 16%pa over the last 20yrs, have you checked what it would have returned in an 8% annual drawdown scenario, using actual return figures over those 20yrs?
If you'd retired on 6th Feb 2000, with a pot of 426k all invested in ASI UK Smaller Companies, drawing 8% index linked, first payment upfront, you'd have run out of money sometime last year.......the initial 4 year poor sequence of returns would have shafted you.

For accurate historic portfolio modelling for drawdown (which as you say is "historic" only anyway, and won't predict the future), you can't use long term averages and just assume it will all work out, you need to use the real figures - in many cases the true outcome is radically different to the picture painted by using averages.

No offence, but I really do suggest you take a step back and have a rethink over all this.
There is a high probability that your assumptions will turn out to be overly optimistic, to put it mildly.

Also, have you checked that taking a lump sum from your DB pension is wise (assuming you have the option not to), and have you considered the tax implications of cashing your wife's DC pension in?

Lastly, where does the 426k figure come in?.......how have you worked out that you will have that amount in 2 years time?

GazzaBloom

MK62 wrote: »

While this single fund may have returned an average 16%pa over the last 20yrs, have you checked what it would have returned in an 8% annual drawdown scenario, using actual return figures over those 20yrs?
If you'd retired on 6th Feb 2000, with a pot of 426k all invested in ASI UK Smaller Companies, drawing 8% index linked, first payment upfront, you'd have run out of money sometime last year.......the initial 4 year poor sequence of returns would have shafted you.

For accurate historic portfolio modelling for drawdown (which as you say is "historic" only anyway, and won't predict the future), you can't use long term averages and just assume it will all work out, you need to use the real figures - in many cases the true outcome is radically different to the picture painted by using averages.

No offence, but I really do suggest you take a step back and have a rethink over all this.
There is a high probability that your assumptions will turn out to be overly optimistic, to put it mildly.

Also, have you checked that taking a lump sum from your DB pension is wise (assuming you have the option not to), and have you considered the tax implications of cashing your wife's DC pension in?

Lastly, where does the 426k figure come in?.......how have you worked out that you will have that amount in 2 years time?

Unfortunately I can't post the spreadsheet but I I haven't used averages for gains, I know that's way too crude, I have taken the 22 year actual performance history of the ASI UK SmallCap fund and created 22 scenarios starting at a different starting point in the cycle for each version, and modelled the outturn 22 times. This highlighted sequence risk when there is a double digit negative return percentage year or two early in the cycle and the significant impact it has towards the end of the cycle.


I have allowed for fund fees and platform fees. I raise the starting pot in the model and £426K was the minimum point at which all scenarios kept in the black. If you don't take any drawdown in the year after a double digit loss year then it has a huge impact later on helping the recovery.


Of course, it's historical data and just a spreadsheet model and no prediction of the future but does help highlight potential outturn/risks.


The drawdown amount reduces when our 2 state pensions kick in at age 67 so it's not a constant 8%, in fact, in real life it will vary and probably be much less as £10K of that annual drawdown is discretionary spend which we may not need, certainly will ot need each year.


As posted above, taking the DB lump sum at 55 and then annual £5K indexed is the best option. Leaving it until 65 at getting annual £8.9K indexed would take 21 years to be more beneficial.


Ref. my wife's £32K, it will be more than this by the time we can draw it as she's still working and contributing and it's still gaining. We would take it tax free over 2/3 years by taking 25% tax free then use her annual tax allowance of £12.5K to take the rest out and move it to a better fund. Ther choices she has through her company pension provider are limited for investments.


I'm a big fan of keeping invested in SmallCap markets which have performed notably better than the markret average and this will factor in my portolio after retirement as well as now.


I hope to be around £400K mark in my DC pot in around 4 years with £60K-£80K savings

AlanP_2

GazzaBloom wrote: »

I'm a big fan of keeping invested in SmallCap markets which have performed notably better than the markret average and this will factor in my portolio after retirement as well as now.

Factor it in by all means but do you really want go "All In" on one sector, of one country and ignore the rest of the world.

The UK represents about 5% of the investable global equity market.

Small Caps are probably 20% of that at most, so 1% of global markets.

The active selections the Fund Manager is making are probably 10% of UK Small Cap stocks at most so you are investing in 0.1% of the global equity options available to you.

Feeling Brave Punk as Clint once said? :beer: