ASI UK Smaller Companies Pension Fund and my retirement plan

Malthusian

A few questions spring immediately to mind:

How much time have you spent modelling the conversation you will have with your wife where you tell her you can't go on holiday for a year or two because you spanked all your money into a single UK smaller companies fund, compared with the time you spent modelling performance?

Harry Nimmo is 62, where do you plan to invest your funds when he retires? And if you have enough faith in those alternatives to invest in them later as an alternative to Nimmo, why not do so now just in case Nimmo has lost his touch?

Why just UK smaller companies and not global small caps? Smaller companies exist in other countries as well and the UK might do a Japan.

Even if you have worked out that you can afford to take the risk of investing 100% in smaller companies, that's not a reason to bung everything with one single fund manager.

The thing about sequence of returns risk is that if you invest in a diversified portfolio (leaving aside that yours isn't) and can avoid drawing from the fund when markets are falling, you can't lose. The problem is that people often massively overestimate how easy it will be to avoid drawing from the fund.

In your case you are essentially relying on two years' worth of expenditure and after that it will be a combination of drastically tightening your belts and going back to work (as you will only have £5k of income beyond the pension fund).

Two years' worth of expenditure is not a lot. If you stopped drawing income from your investment in 2008 and 2009 and then started again in 2010 when your money run out, a spreadsheet might show that you would have been OK as the fund caught the upswing, but at the time it would have felt anything but OK. In 2010 experts were still forecasting a decade of recession and anyone who talked about "green shoots of recovery" was howled out of the building. Without the benefit of hindsight, resuming income from a drawdown fund at that point would have felt suicidal to all but the most aggressively optimistic.

Pension funds are supposed to sustain your lifestyle, not the other way around.

bostonerimus

You have developed a risky plan and have not stress tested it enough. What happens if your fund loses 50% of its value? What if you and your wife both live into your late 90s? Also by retiring at 55 you are giving up 10 earning and contribution years. Your plan might work, but the probability of failure is too high to make it a sensible road to take.

GazzaBloom

Thanks all for the comments, plenty to consider.
This is the start of a planning process and there will be plenty of revisions over the next few years and expectations re-alignment.

I'm already looking to reduce the drawdown by £10K a year to a starting point of £25K with the savings in S&S ISA providing the discretionary spend through a mix of growth and slow capital withdrawal as and when needed.

I will absolutely diversify my investment fund selection.

Today I have been discussing the pension recycling rules, drawing the final salary pension lump sum will prevent me making any significant increases in contributions to the DC pension or HMRC could very well view that I am recycling the lump sump.

As I said plenty to ponder but I have plenty of time to work this out.

jamesd

GazzaBloom said:

Today I have been discussing the pension recycling rules, drawing the final salary pension lump sum will prevent me making any significant increases in contributions to the DC pension or HMRC could very well view that I am recycling the lump sump.

The DB tax free lump sum is 35k so why do you think that it will have an effect on your DC contributions?

Is the increase all going to be made out of current income? No restrictions on that.

Taking the DB at 55 is just normal retirement planning.

If the five year rule does concern you:

1. increase DC to max in 2019-20, using savings and annual allowance carry-forward if pay is high enough. This is to boost the baseline for expected contributions.

2. 2020-21 is year 1

3. 2021-22 is year 2

4. take DB in 2022-23

Another possible approach is to ensure that the  cumulative increase is no more than 30% of your combined DB and DC tax free lump sums. At the moment you have 185k DC, 25% tax free lump sum would be 21.25k. Add DB and the total is 56.25k so far.  30% of that is 16.875k allowed increase above baseline expected contributions due to recycling so far. More as your DC pot grows.

Also remember that as of  a few years ago HMRC had never applied these rules to an individual because they were intended to block organised schemes.

ermine

GazzaBloom said:

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.

Your plan is pie in the sky. Why?

You have a DB pension of 5k p.a and 185k DC pension. You aim to have savings of 90k at the point of retirement at 55. So you have 275k. You want a combined income of 35k p.a. 5K comes from the DB pension, easy win. You want to derive an income of 30k p.a from a capital base of  275k. That means you need an annual rate of return of nearly 11% on that capital. You haven't got a hope in hell.

Your situation gets better when you and you wife reach State pension age, assuming you are paid up, that will be roughly when you are 67, the max SP is about 8.7k-ish so you might get 17k of your 30k target about 12 years after you retire. 13k is slightly less than 5% of 275k, so a much more reasonable target.

But the rub is that you have to live for 12 years on thin air and those will be your years of best health, so you want to do all the stuff you'd like to do. And that will run down your capital.

You can't get from here to there. Keep on working. If you put your mind to it you can probably retire earlier than 67. But if you go all in, at high stock market valuations, into a single smallcap fund, you're just asking to be hammered because you have no contingency.

GazzaBloom

ermine said:

GazzaBloom said:

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.

Your plan is pie in the sky. Why?

You have a DB pension of 5k p.a and 185k DC pension. You aim to have savings of 90k at the point of retirement at 55. So you have 275k. You want a combined income of 35k p.a. 5K comes from the DB pension, easy win. You want to derive an income of 30k p.a from a capital base of  275k. That means you need an annual rate of return of nearly 11% on that capital. You haven't got a hope in hell.

Your situation gets better when you and you wife reach State pension age, assuming you are paid up, that will be roughly when you are 67, the max SP is about 8.7k-ish so you might get 17k of your 30k target about 12 years after you retire. 13k is slightly less than 5% of 275k, so a much more reasonable target.

But the rub is that you have to live for 12 years on thin air and those will be your years of best health, so you want to do all the stuff you'd like to do. And that will run down your capital.

You can't get from here to there. Keep on working. If you put your mind to it you can probably retire earlier than 67. But if you go all in, at high stock market valuations, into a single smallcap fund, you're just asking to be hammered because you have no contingency.

Yes, I know it's not going to work and needs a rehash but there are some errors in your assumptions.
1) The £185K will be higher in 4 years after contributions and growth, as will savings. It's £187K already as of today. I don't plan to jump at 55 but as soon as after as I can comfortably with some risk. maybe 57-58
2) Stare pension may be nearer £12K by the time I reach 67 if it index link at 2% a year so more like £24K for me & the wife (yes we have full NI contributions) 

GazzaBloom

What's a sensible growth rate to work with? all of the above funds appear to be doing better than 5% pa

GazzaBloom

Here is the model I built that shows the historical sequence risk of the ASI UK Smaller Companies Pension Fund. 22 scenarios using the actual historical annual returns starting at a different point. Plus the historical quarterly performance is at the bottom.

Notepad_Phil

GazzaBloom said:
 2) Stare pension may be nearer £12K by the time I reach 67 if it index link at 2% a year so more like £24K for me & the wife (yes we have full NI contributions) 

 However... I assume you want your retirement income to be inflation proofed, so the amount of income you will want to drawdown will also be affected by inflation. I.e. instead of £35k you'll be looking for approx £48k or so (following your figures of the state pension going from £8.7k to 12k due to inflation).

GazzaBloom

Notepad_Phil said:

GazzaBloom said:
 2) Stare pension may be nearer £12K by the time I reach 67 if it index link at 2% a year so more like £24K for me & the wife (yes we have full NI contributions) 

 However... I assume you want your retirement income to be inflation proofed, so the amount of income you will want to drawdown will also be affected by inflation. I.e. instead of £35k you'll be looking for approx £48k or so (following your figures of the state pension going from £8.7k to 12k due to inflation).

Yes I have that factored in. The DB pension is indexed as well. I have created a plan that covers from 55-100 years of age where I can adjust the growth rates, drawdown amounts accordingly with a 2% assumption on inflation covered by a 2% increase after tax of the amount from drawdown. Plus I have included fund fees and income tax allowing the £12.5K tax free allowance and assuming a 20% rate after that. 

What I need is a crystal ball so I can predict growth rates and so tweak the drawdown accordingly.