Diminishing returns on a private pension

LucyTheWestie

dunstonh said:

Where is the post Trump/Covid/Brexit world going to take us?

Historically, short term events only affect the short term and not the long term.

Brexit has been good for most investors due to fall in Sterling.  Trump has been good the US stockmarket.   Covid is an in progress issue but history tells us that these things come and go and we adapt.

Stock Market crashes, UK Plc with huge tax debt and so on.

The UK has had higher debt in the past (relative)

No mortgage... that sounds good if jobs are at risk.  No need to pay mortgage protection.  No fear or returning to the interest rates of the 1990s. 

Interest rates rise when countries need to control money supply.    Typically to reign in spending to slow down growth to reduce inflation.      What is more likely is that inflation will be allowed to increase to a controlled higher level which will reduce government debt in real terms.   Both the US and the UK have used this method in the past.   However, if higher interest rates were to filter through, then you could always draw the money then. 

Money that can be saved in tax efficient ISAs,  government bonds and so on. 

Pension is more tax-efficient than ISAs.  Gilts are not a tax wrapper.   Gilts can be held in an ISA or pension or unwrapped or directly (no that you would likely hold them directly).   

Am I going to pay it now or do I end up paying it when I stop work in 12 years time?

Pay it now and you suffer 30% tax.  In retirement, if you are a basic rate taxpayer then you are looking at 15% tax.

Is it really worth paying 15% of your money to reduce a debt that is likely costing you are around 2% a year.     And missing out on around 5% a year in growth on average?  Even if you think that there is going to be zero growth over the next 7 years, you would still be better holding the money in the pension.

dunstonh said:

Where is the post Trump/Covid/Brexit world going to take us?

Historically, short term events only affect the short term and not the long term.

Brexit has been good for most investors due to fall in Sterling.  Trump has been good the US stockmarket.   Covid is an in progress issue but history tells us that these things come and go and we adapt.

Stock Market crashes, UK Plc with huge tax debt and so on.

The UK has had higher debt in the past (relative)

No mortgage... that sounds good if jobs are at risk.  No need to pay mortgage protection.  No fear or returning to the interest rates of the 1990s. 

Interest rates rise when countries need to control money supply.    Typically to reign in spending to slow down growth to reduce inflation.      What is more likely is that inflation will be allowed to increase to a controlled higher level which will reduce government debt in real terms.   Both the US and the UK have used this method in the past.   However, if higher interest rates were to filter through, then you could always draw the money then. 

Money that can be saved in tax efficient ISAs,  government bonds and so on. 

Pension is more tax-efficient than ISAs.  Gilts are not a tax wrapper.   Gilts can be held in an ISA or pension or unwrapped or directly (no that you would likely hold them directly).   

Am I going to pay it now or do I end up paying it when I stop work in 12 years time?

Pay it now and you suffer 30% tax.  In retirement, if you are a basic rate taxpayer then you are looking at 15% tax.

Is it really worth paying 15% of your money to reduce a debt that is likely costing you are around 2% a year.     And missing out on around 5% a year in growth on average?  Even if you think that there is going to be zero growth over the next 7 years, you would still be better holding the money in the pension.

Thumps calculator again!. I forgot that a retired person usually pays tax at the lower rate! (Thank you)
....I will keep on crunching the numbers till I am happy!

Paul_Herring

I forgot that a retired person usually pays tax at the lower rate! (Thank you)

Rates. The first £12,500 (presuming no other income) is taxed at 0%. Which will reduce that 20%->15% further.

[Deleted User]

LucyTheWestie said:

Deleted_User said:

I was always taught to pay off my debts first, so should I pay off my mortgage with the proceeds from my personal pension pot? 

“You were taught incorrectly. Or possibly misunderstood.    You should certainly clear short term expensive debts before investing.  However, long term cheap debts that cost less in interest than investment returns “

Wow. That is a very strong and confident statement about the future. The more certain someone is about the future, the worse the advice. In reality we do not know future investment returns. 

And while in the long term stocks are likely to do well, a 55 year old with a significant debt is exposing himself to significant risks. 

Individual circumstances vary, and incurring lots of tax wouldnt be smart but the general advice is:
- borrow when you are young
- get rid of the debt and make use of Fixed Income as you get closer to retirement

I agree with what you say.
I am well grounded - I am not looking at spending my retirement funds now - in fact, I wish to protect and build on them.  
Where is the post Trump/Covid/Brexit world going to take us?   Back to the 1930's?  Stock Market crashes, UK Plc with huge tax debt and so on.
The key to the question is how much risk to take.
No mortgage... that sounds good if jobs are at risk.  No need to pay mortgage protection.  No fear or returning to the interest rates of the 1990s.   A big chunk of money to re-invest each month - maximising my work pension. Money that can be saved in tax efficient ISAs,  government bonds and so on.   There is a question on how much tax I will pay.   Am I going to pay it now or do I end up paying it when I stop work in 12 years time? 
I would love to see someone to work the numbers!

The numbers are simple. You need to generate stock returns that exceed your interest minus the tax hit. If you do then you are better off not paying the mortgage from your pension. But the future is unknown.

I wouldn’t try to predict which way the stocks will move. Yes, there is a lot of uncertainty and political risks but in truth... Nobody knows. So you need to be able to get by under most scenarios.
Investing for retirement is a game and you win by not losing. The objective isn’t to max returns but to make sure we don’t run out of money and have to count pennies before we die. 

If you have enough then repay the mortgage right now and quit playing. Otherwise you need to take a certain amount of calculated risk. 

Personally, I wouldn’t do any rush moves involving tens of thousands of extra tax, but I would pay off the mortgage from your new income as fast as I can. Prioritize it over maxing pension contributions. That won’t necessarily max your net worth if all is well but it would work out better under the bear market scenarios. 

AnotherJoe

Deleted_User said:

I was always taught to pay off my debts first, so should I pay off my mortgage with the proceeds from my personal pension pot? 

“You were taught incorrectly. Or possibly misunderstood.    You should certainly clear short term expensive debts before investing.  However, long term cheap debts that cost less in interest than investment returns “

Wow. That is a very strong and confident statement about the future. The more certain someone is about the future, the worse the advice. In reality we do not know future investment returns. 

If we don't think they will be better than a mortage we shouldn't be investing at all including in pension. And over a say 35 year period I doubt there's ever been a time that's happened. 

- get rid of the debt and make use of Fixed Income as you get closer to retirement 

Except fixed income is problematic these days and no longer the safe haven it once was. And with mortgage rates at or lower than inflation it's no longer a great idea to rush to pay it off when time will do some of that for you. 

If OP does want to reduce mortgage the best plan woudl be, take just the TFLS, pay that off the mortgage and keep repayments at same current level to pay it off quicker. That way there's no tax hit on their money, otherwise the mortgage repayments are costing them tens of thousands extra and it's a worse than futile exercise. 

[Deleted User]

AnotherJoe said:

Deleted_User said:

I was always taught to pay off my debts first, so should I pay off my mortgage with the proceeds from my personal pension pot? 

“You were taught incorrectly. Or possibly misunderstood.    You should certainly clear short term expensive debts before investing.  However, long term cheap debts that cost less in interest than investment returns “

Wow. That is a very strong and confident statement about the future. The more certain someone is about the future, the worse the advice. In reality we do not know future investment returns. 

If we don't think they will be better than a mortage we shouldn't be investing at all including in pension. And over a say 35 year period I doubt there's ever been a time that's happened. 

- get rid of the debt and make use of Fixed Income as you get closer to retirement 

Except fixed income is problematic these days and no longer the safe haven it once was. And with mortgage rates at or lower than inflation it's no longer a great idea to rush to pay it off when time will do some of that for you. 

If OP does want to reduce mortgage the best plan woudl be, take just the TFLS, pay that off the mortgage and keep repayments at same current level to pay it off quicker. That way there's no tax hit on their money, otherwise the mortgage repayments are costing them tens of thousands extra and it's a worse than futile exercise. 

Firstly, you are mixing my words with someone else’s within the quoted section.

Secondly, fixed income isn’t and never has been “safe haven”. Its an investment which by definition comes with risks. Portfolios include it as a different asset class to equities to diversify as it often goes up when stocks go down. Nothing has changed. So far this year my FI is up 10%. 

Thirdly, regardless of low mortgage rates, leverage will hurt someone about to retire in a bear market. Mortgage payments still have to be made even as your leveraged assets go down by, lets say, half. And future interest rates could be higher. As your investment loses money in a bear market, you ought to be reducing expenditure if you are retired or close to retirement.  Thats hard with a mortgage - mortgage payments still have to be made out of a much smaller pot. In fact, in a deflation scenario, your portfolio gets decimated while the real value of your mortgage debt goes up.  

Retirees in the early days are far more vulnerable to 2-5 years of market turmoils. Thats why it is generally recommended to remove debt as you approach retirement. 

[Deleted User]

“If we don't think they will be better than a mortage we shouldn't be investing at all including in pension. And over a say 35 year period I doubt there's ever been a time that's happened. “

Google “sequence of return” risk. A retiree can be vulnerable to bear markets in the years preceding and immediately following retirement. It can take less than 5 years to irrevocably destroy ones portfolio. 35 years are irrelevant in this context. 

LucyTheWestie

Deleted_User said:

LucyTheWestie said:

Deleted_User said:

I was always taught to pay off my debts first, so should I pay off my mortgage with the proceeds from my personal pension pot? 

“You were taught incorrectly. Or possibly misunderstood.    You should certainly clear short term expensive debts before investing.  However, long term cheap debts that cost less in interest than investment returns “

Wow. That is a very strong and confident statement about the future. The more certain someone is about the future, the worse the advice. In reality we do not know future investment returns. 

And while in the long term stocks are likely to do well, a 55 year old with a significant debt is exposing himself to significant risks. 

Individual circumstances vary, and incurring lots of tax wouldnt be smart but the general advice is:
- borrow when you are young
- get rid of the debt and make use of Fixed Income as you get closer to retirement

I agree with what you say.
I am well grounded - I am not looking at spending my retirement funds now - in fact, I wish to protect and build on them.  
Where is the post Trump/Covid/Brexit world going to take us?   Back to the 1930's?  Stock Market crashes, UK Plc with huge tax debt and so on.
The key to the question is how much risk to take.
No mortgage... that sounds good if jobs are at risk.  No need to pay mortgage protection.  No fear or returning to the interest rates of the 1990s.   A big chunk of money to re-invest each month - maximising my work pension. Money that can be saved in tax efficient ISAs,  government bonds and so on.   There is a question on how much tax I will pay.   Am I going to pay it now or do I end up paying it when I stop work in 12 years time? 
I would love to see someone to work the numbers!

The numbers are simple. You need to generate stock returns that exceed your interest minus the tax hit. If you do then you are better off not paying the mortgage from your pension. But the future is unknown.

I wouldn’t try to predict which way the stocks will move. Yes, there is a lot of uncertainty and political risks but in truth... Nobody knows. So you need to be able to get by under most scenarios.
Investing for retirement is a game and you win by not losing. The objective isn’t to max returns but to make sure we don’t run out of money and have to count pennies before we die. 

If you have enough then repay the mortgage right now and quit playing. Otherwise you need to take a certain amount of calculated risk. 

Personally, I wouldn’t do any rush moves involving tens of thousands of extra tax, but I would pay off the mortgage from your new income as fast as I can. Prioritize it over maxing pension contributions. That won’t necessarily max your net worth if all is well but it would work out better under the bear market scenarios. 

I have seen the stress and worry of a retired relative, as they watched their investments fail. IMHO their greed was their downfall.   My approach is a lot more cautious.

An extra spanner in the works.....My current fixed rate mortgage, which is due to be re-negotiated, only allows me overpay by a percentage.  Being a good little pup, I overpay to the maximum. 

dunstonh

I have seen the stress and worry of a retired relative, as they watched their investments fail. 

Investments in the mainstream do not fail.     That is a generalistic statement with caveats but it is extremely rare for mainstream stuff to go wrong.   And where it has done, it is in areas where you would only typically have a limited amount allocated.

If he lost money due to failure then its likely he went into extremely high risk unregulated investments away from the mainstream.   e.g. a cold caller scammer.          Greed is a common factor with those. Along with naivety.

[Deleted User]

dunstonh said:

I have seen the stress and worry of a retired relative, as they watched their investments fail. 

Investments in the mainstream do not fail.     That is a generalistic statement with caveats but it is extremely rare for mainstream stuff to go wrong.   And where it has done, it is in areas where you would only typically have a limited amount allocated.

If he lost money due to failure then its likely he went into extremely high risk unregulated investments away from the mainstream.   e.g. a cold caller scammer.          Greed is a common factor with those. Along with naivety.

We have to define “failure”. I define it as retiring and dying poor. And categorical statements like the one above are very wrong; demonstrate fundamental lack of understanding of investment risks. 

Here is a simple test for a mainstream Canadian investor who retired with  $1M in the year 2000. The portfolio value has been tracked  for over a decade. The products used were standard 20 years ago. There are 4 portfolios with various asset allocations. Right now all of them have a chance of lasting for the total of 30 years, but the all equity portfolio came close to failure early on and would have been nerve breaking to have. Might still fail, as of Jan 1st our retiree is left with only 500k. Thats not that different from the value of this portfolio in 2008. Never fully recovered once depleted early on in the retirement. The “Growth” portfolio with some bonds isn’t doing much better. 

https://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=108990&hilit=2000+retiree

Prism

Deleted_User said:

dunstonh said:

I have seen the stress and worry of a retired relative, as they watched their investments fail. 

Investments in the mainstream do not fail.     That is a generalistic statement with caveats but it is extremely rare for mainstream stuff to go wrong.   And where it has done, it is in areas where you would only typically have a limited amount allocated.

If he lost money due to failure then its likely he went into extremely high risk unregulated investments away from the mainstream.   e.g. a cold caller scammer.          Greed is a common factor with those. Along with naivety.

We have to define “failure”. I define it as retiring and dying poor. And categorical statements like the one above are very wrong; demonstrate fundamental lack of understanding of investment risks. 

Here is a simple test for a mainstream Canadian investor who retired with  $1M in the year 2000. The portfolio value has been tracked  for over a decade. The products used were standard 20 years ago. There are 4 portfolios with various asset allocations. Right now all of them have a chance of lasting for the total of 30 years, but the all equity portfolio came close to failure early on and would have been nerve breaking to have. Might still fail, as of Jan 1st our retiree is left with only 500k. Thats not that different from the value of this portfolio in 2008. Never fully recovered once depleted early on in the retirement. The “Growth” portfolio with some bonds isn’t doing much better. 

https://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=108990&hilit=2000+retiree

I would see it as encouraging that someone who retired at one of the worst times in recent history and used a now out dated withdrawal rate has still managed to likely not run out until year 20+. A small adjustment to the withdrawal rate calculation is probably all that would have been needed. In those early years it there is more chance of being able to top up any income shortfall with a bit of part time income.