How fast should I assume my pot of money will grow?

Eggy1971

Hi All,

I am 49 this summer and I am hoping to retire at 55.  I have been actively planning my retirement for the last 8 or 9 years but haven't taken professional advice as yet.  I have a couple of questions that I would really appreciate peoples views on.

1) How fast should I assume my DC pot will grow?  I have based all my calculations on 5.9% growth per year.  I arrived at that figure by taking an 10 year average of the fund I was invested in and then taking half a % off.  I know past performance isn't a guarantee of future performance but I thought it was the best indicator available to me.  Have I been too aggressive as I can see some people referring to assumed growth of 4%?

2) My DC pot is currently worth approx. £240K.  Most of that is with Aviva but I spent a short period with a different employer and have a small pot of approx. £4k with another provided.  Is there any benefit in amalgamating the pots or is it better to keep them separate so there is some level of diversification?

3) All of the pot is in the default fund.  With the value of my pot and the time until I hope to retire does it make sense to leave it that way or should I spread it between different funds.?

4) I understand you can take 25% of the pot tax free or drawdown and each amount you draw down will be 25% tax free.  If I have understood that correctly is there any advantage in taking the 25% lump sum?  Is the main reason for doing it to minimise the risk of a new government removing the ability to take a tax free amount.

5) I started my career at L&G (general insurance not pensions) when they still had a final salary scheme.  I believe it will pay an index linked £6k per year when i am 62.  I have heard that it is possible to convert these pensions into an amount that can be added to the DC pot.  Do you think that is worth considering or given that most of my income will come from a DC pot is it worth leaving as is so I get some fixed income?

6) I will have worked 35 years by the time I am 53 so should get my full state pension from the age of 67.  Is it worth considering deferring this?


I look forward to hearing your view.

Thanks

Eggy1971


 

[Deleted User]

What age have you put on your current scheme as your Target Retirement Date?

Eggy1971

Hi, I have just checked and it is 65 years of age which I hadn't appreciated.  I guess that was the default age when I took it out

OldMusicGuy

1) Probably, but it depends how you are invested. More aggressive investments might beat that but with greater volatility and potential risk. Also, the last 10 years has been a massive bull run so the past figures will look good. Many commentators think growth in the next 10 years will be lower, for example (before his death) Jack Bogle reckoned it would be around 4%. You should do some scenario planning and run your numbers based on different percentages to see what the impact will be of different growth rates. 

2) Number of pots is irrelevant for diversification, it is how they are invested that gives you diversification. Make sure you understand the difference between the pension platform (pot) and the funds themselves, and how you choose funds to create diversification (eg by using global multi-asset funds).

3)  You should choose funds to achieve your investment objectives. This book is a good starting point "DIY Simple Investing: A Guide to Simple but Effective Low Cost Investing" by John Edwards, as is "Investing Demystified" by Lars Kroijer (check out his website as well). If you don't want to learn about all of this, consider employing an IFA to help you with fund choices and investment strategy.

4) No. You take the 25% if you want to/need it for something. You don't have to take it all in one go either. Read up on the options here "https://www.pensionwise.gov.uk/en/explore-your-options".

5) My entire pension is in a large DC fund. I am fairly risk averse and I would give my right arm to have a DB pension which, when added to my SP, gave me a nice guaranteed income floor that would cover most of the basics. You don't sound like you are skilled in investing so exchanging guaranteed income for something you have to manage yourself may be risky. Personally I would love to be in your situation but YMMV.

6) You won't get a full pension by working 35 years. This is only true if you start work after 2016. You need to get a state pension forecast to find out what you will get and how many years you need to work.     

Albermarle

1) 5.9 % before taking inflation into account is possible for a medium risk default fund ( maybe a bit on the high side) but would be a big ask for it to be 5.9% after inflation. To avoid confusion many people refer to a target growth of x% after inflation .
4) Many people take the full 25% tax free lump sum, just because they can and then wonder what to do with it . The chance of any govt removing it is extremely low as it would be electoral suicide. It is is popular at all income levels and older people vote a lot more than younger ones.
5) I agree with Old Music guy + if you did want to transfer it , it is an expensive and potentially tricky process.

Eggy1971

Thanks for your comments OldMusicGuy. I really appreciate it.  

dunstonh

1) How fast should I assume my DC pot will grow?

Depends on the assets you invest in.    At age 49 and expecting to retire at 55, you would probably be worth assuming zero growth with just the current value plus premiums paid until retirement.

Is there any benefit in amalgamating the pots or is it better to keep them separate so there is some level of diversification?

Diversiifcation comes from where you invest.  Not who the administrator is for the pension.  e.g. if you have 10 different providers all investing in the same FTSE100 tracker then you do not have diversification.  If you have one pension provider spread over 10 funds then you have diversification (unless you happen to pick 10 funds all tracking the FTSE100!)

3) All of the pot is in the default fund.  With the value of my pot and the time until I hope to retire does it make sense to leave it that way or should I spread it between different funds.?

Depends on your investment strategy.   And if you are using multi-asset funds or single sector funds.

4) I understand you can take 25% of the pot tax free or drawdown and each amount you draw down will be 25% tax free.  If I have understood that correctly is there any advantage in taking the 25% lump sum?  Is the main reason for doing it to minimise the risk of a new government removing the ability to take a tax free amount.

If you dont need it or there is no justifiable reason for taking it then you dont take it up front.

The risk of the tax free cash being removed is very low.  Both Labour and Conservative Governments have increased the availability of tax free cash over the years.   Tax free cash helps the economy.   Its one of the smaller tax hits for the treasury.  More likely targets are higher rate relief and salary sacrifice.  The latter has grown significantly in recent years.

5) I started my career at L&G (general insurance not pensions) when they still had a final salary scheme.  I believe it will pay an index linked £6k per year when i am 62.  I have heard that it is possible to convert these pensions into an amount that can be added to the DC pot.  Do you think that is worth considering or given that most of my income will come from a DC pot is it worth leaving as is so I get some fixed income?

Historically, around 9 out of 10 people in DB schemes are best sticking with them.    It is currently fashionable and the 9/10 would be better than that.  However, last time it was fashionable (1988-1994) a review was carried out and it was found around 4 out 5 people who transferred were worse off.   History is appearing to repeat itself so far.

6) I will have worked 35 years by the time I am 53 so should get my full state pension from the age of 67.  Is it worth considering deferring this?

Partly answered higher up but it is also way too early to be deciding that.  Impossible to call the terms you may be offered in 18 years time.

Eggy1971

Thanks for your comments Albermarle. Very helpful.
1) 5.9 % before taking inflation into account is possible for a medium risk default fund ( maybe a bit on the high side) but would be a big ask for it to be 5.9% after inflation. To avoid confusion many people refer to a target growth of x% after inflation .
This comment has given me more confidence in my calculations as I had factored in a 2.5% inflation each year so in reality its target growth of 3.4% after inflation and from what people are saying that might be more realistic.

Eggy1971

Another extremely helpful response.  Thanks Dunstonh

Audaxer

Eggy1971 said:

I am 49 this summer and I am hoping to retire at 55.  I have been actively planning my retirement for the last 8 or 9 years but haven't taken professional advice as yet.  I have a couple of questions that I would really appreciate peoples views on.

1) How fast should I assume my DC pot will grow?  I have based all my calculations on 5.9% growth per year.  I arrived at that figure by taking an 10 year average of the fund I was invested in and then taking half a % off.  I know past performance isn't a guarantee of future performance but I thought it was the best indicator available to me.  Have I been too aggressive as I can see some people referring to assumed growth of 4%?

When looking at average growth, and estimating 5.9% or even 4%, that estimate is usually based on at least a 20 year time period. If you are looking to retire in 6 years time at 55, that is too short a time frame to be sure that you will get further growth of your pot during that time. 

Albermarle

 If you are looking to retire in 6 years time at 55, that is too short a time frame to be sure that you will get further growth of your pot during that time. 
Of course growth is never 'sure' and the shorter the time frame the less sure .  I think for planning purposes though you could sensibly plan for at least keeping up with inflation and then maybe plus 1% ?