Correct pension fund / consider other investments?

Victorwelldue

Have a couple of questions around my pension I was hoping people can help with. Apologies for the long post which is mostly just the details of my situation, feel free to jump to the questions at end first!

I'm 49 years old with £60K salary in Scotland, single with no dependants. I have a Legal & General workplace pension L&G PMC multi-asset 3 (Fund ID NTW3) current pot value £108K.

I started pension relatively late in life and have no other pots. I currently contribute 16% of salary monthly with employer 4%. Sometime next year I hope to increase my contribution to 30%, maybe even 40% if I can stretch to it. I get the 25% gross tax uplift then claim the balance from HMRC every year. I don't think my employer has a salary sacrifice scheme but I'm not 100% certain so will need to check this out soon.

I have paid full NI contributions since age 17 and only been unemployed for around 2 months during that time so believe I will be entitled to the full SP.

I own my property outright worth approx. £80K to £100K and next summer I have an endowment policy maturing so should then have around £170K in savings which is kept between Marcus savings account & Coventry ISA plus a low amount in a couple of current accounts. I have no other investments and have no debts.

My plan A is to buy another property sometime from next summer onwards to live in worth around £200K to £250K and pay for it by selling current place and using savings, so will own new place outright. Then focus on maximising retirement income and retiring as early as possible.

My plan B is to simply stay where I am and focus on maximising retirement income and retire as early as possible, putting as much of my savings as possible towards pension or investments.

I am risk averse but appreciate some risk is required to gain with any investment so I’m happy with medium risk so far as pension/investments go. Being risk averse I would probably like to keep around £30 to £40K in liquid savings and understand that inflation will chip away at those savings.

From private pension (or investments if that’s the way to go) I’d like to be taking home around £1800 to £2000 per month when retired in todays money, index linked but obviously the more the better and would like to retire between 58-62 or earlier if possible.

My Questions:

1. Is the fund I am invested in a good balance between risk & return for my aims or should I be looking at a different fund?

2. Should I focus all my efforts on pension or should I be also thinking about other types of investments too? I’m thinking mainly with plan B above that I may be limited in what I can contribute to pension every year so may have to think about other investments? If so what would be suggested keeping in mind I know very little about stocks & shares etc.

3. If my employer does have a salary sacrifice scheme would this be a better option? I assume salary sacrifice is always better option but don't know much about this stuff so just want to be sure.

 4. Any other comments/suggestions?

Thanks to anyone who read through it all

Linton

From the Fund Fact Sheet it is quite cautious at 40% equity.  I think you could reasonable look for something rather more adventurous.

I havent absorbed all the details you give but the key points I note is that currently your pension is worth £108K with cash savings of £170K making a total of £278K.  You would like an income from that of £1800/month=£21600/year.  In very crude ballpark figures you can sustainably withdraw 3.5% of the initial value of your pot increasing with inflation.  So to get £21600/year you would need a pot of about £600K.

To achieve this when you want to retire in 10 years time seems somewhat ambitious, especially if you invest cautiously.  You would certainly need to up your pension contributions significantly.   It would help if you moved some of the £170K savings into investments.  Your plan A where you use most of your savings to buy a house would seem to me to make achieving your retirement goals very difficult.

Your other problem is that 10 years is a short period for serious investing.  A severe crash could reduce equity investments by say 40% and there may not be time to recover.  So you will need to remain flexible as to when you can retire.

Albermarle

I am risk averse but appreciate some risk is required to gain with any investment so I’m happy with medium risk so far as pension/investments go

I would class Multi index 3 as low to medium risk and is the sort of investment many people have when they are close to , or in retirement, when they have already built up a decent sized pot. Even if you are not the adventurous type I would to look to move up to Multi Index 5 , or at least 4 . Have a look at the data for the past performance of all of them to get a better feel of the way they have performed, although of course past performance is no guarantee for the future.

If you are still feeling cautious you could leave the current pot in 3 but have new contributions going into 5 , or vice versa.

 Should I focus all my efforts on pension or should I be also thinking about other types of investments too? I’m thinking mainly with plan B above that I may be limited in what I can contribute to pension every year so may have to think about other investments? If so what would be suggested keeping in mind I know very little about stocks & shares etc.

Pension is better due to the tax benefit , especially as you are specifically looking at improving retirement income.

You are already invested in 'stocks and shares' via the L& G pension multi index fund .

As mentioned above , your retirement income ambitions and time scale are  somewhat ahead of your actual funds, probably due to the late start to pensions savings. 

Dazed_and_C0nfused

I'm 49 years old with £60K salary in Scotland

I currently contribute 16% of salary monthly with employer 4%. Sometime next year I hope to increase my contribution to 30%, maybe even 40% if I can stretch to it. I get the 25% gross tax uplift then claim the balance from HMRC every year. 

Even with your current contributions you will be paying 41% tax on £4.5k so increasing your (net) contribution from 16% to 22% would be extremely tax efficient.

jamesd

1. long term, no, 40% equities is too low to minimise risk. Not the rollercoaster in reverse risk of equities bouncing around but the risk of not achieving your 50 year retirement plan. Short term you're well positioned, see the CAPE last paragraph of the first post in Drawdown: safe withdrawal rates for why. Take the time to read the posts and references in that thread, it's there to educate you about how and why drawdown works, so you can plan for it. Long term plan risk is likely to be well served with a 65% global equities : 35% bonds and cash mix, or somewhat higher equities. Whether you can be comfortable with intermittent drops that matter little in the long term picture is a matter for you. You might find the covid drop recovery charts in Pension recovery from covid useful.

2. yes, focus on pension but see VCT below.

3. except for part time low earners who might end up with no tax relief, salary sacrifice is better, providing 12% employee NI saving on most money (if you concentrate sacrifice into as few months as possible, because NI is calculated per pay period, not year) and 2% on each month's unavoidably higher rate NI range. It's also common for employers to add half of their NI saving to employee pension contributions, otherwise the 2% higher rate employee saving isn't enough of an incentive to the employee to use the work  scheme instead of a personal one.

VCTs invest in collections of companies that are quite small and normally looking for money to expand profitable things. This makes them a particularly volatile part of equity investment and unless looked at as part of a total plan they won't be acceptable to those who want low risk. To incentivise taking that risk you get tax relief of 30% of your purchase price, capped at tax payable in the year, has to be repaid if you sell within five years. Capital gains and dividends are tax exempt, with it being common to use dividends instead of accumulating capital growth. This is interesting for basic rate tax planning since the 20% tax on £37,500 of basic rate pay can be covered by £25,000 of VCT purchases. Since you can sell after five years you can recycle the money instead of constantly increasing amounts invested. Basic rate salary sacrifice offers at least 32% but minimal recycling opportunity to repeatedly get 30% like VCTs. On mine the tax exempt dividends are about 7% of current market value or about 8% of after tax relief cost. Capital gain is about 16% of after tax relief cost, a couple of more recent purchases being down, the rest up. Dividend payouts on top of this take the overall gain well above the tax relief effect.

Victorwelldue

Thanks for everyone's replies, given me some things to think about. I will do more research taking into account the points raised. The main theme seems to be that it may be a stretch to reach my target which I accept but I'm just trying to get my head around the arithmetic. I've perhaps got this wrong but from what I can find online with the fund I'm currently invested in £1000 invested 5 years ago would now be worth £1500 which seems to equate to approx 8% annual compounded interest over last 5 years. So if I were to be conservative and estimate 5% annual growth over next 10 years or so and I increase my contribution to 40% I could potentially have a pot of around £600K assuming an estimated "starting point" of £120K in summer 2021? I'm basing this on a £2000 per month personal contribution + 25% gross tax uplift + £200 from employer = £2700 per month. I realise the past is no guarantee to the future but is 5% annual growth an unrealistic estimate?

Linton said:

 You would certainly need to up your pension contributions significantly.

Planning to increase contributions to 30% or hopefully 40% in 2021.

Linton said:

In very crude ballpark figures you can sustainably withdraw 3.5% of the initial value of your pot increasing with inflation.

Is it ever it a valid strategy to drawdown more than that, say 6% in first 10 years then dropdown lower once state pension kicks in?  

Albermarle said:

I would class Multi index 3 as low to medium risk and is the sort of investment many people have when they are close to , or in retirement, when they have already built up a decent sized pot. Even if you are not the adventurous type I would to look to move up to Multi Index 5 , or at least 4 . Have a look at the data for the past performance of all of them to get a better feel of the way they have performed, although of course past performance is no guarantee for the future.

The L&G fact sheet has multi-asset 3 as risk factor 4 on a scale of 1 to 7 then the multi-index 4 fact sheet is 4 on a scale of 1 to 10 which I find a bit confusing. I would have thought they'd use the same scale but I guess it can't be an apples for apples comparison? Also although I can see multi index 4 & 5 on main L&G site they don't appear to be available as options when I sign into my pension management options online?

Albermarle said:

probably due to the late start to pensions savings. 

Yes, really kicking myself for not getting the ball rolling sooner. Had all sorts of justifications at the time of course but ultimately only have my self to blame.

Linton

Victorwelldue said:

Thanks for everyone's replies, given me some things to think about. I will do more research taking into account the points raised. The main theme seems to be that it may be a stretch to reach my target which I accept but I'm just trying to get my head around the arithmetic. I've perhaps got this wrong but from what I can find online with the fund I'm currently invested in £1000 invested 5 years ago would now be worth £1500 which seems to equate to approx 8% annual compounded interest over last 5 years. So if I were to be conservative and estimate 5% annual growth over next 10 years or so and I increase my contribution to 40% I could potentially have a pot of around £600K assuming an estimated "starting point" of £120K in summer 2021? I'm basing this on a £2000 per month personal contribution + 25% gross tax uplift + £200 from employer = £2700 per month. I realise the past is no guarantee to the future but is 5% annual growth an unrealistic estimate?

Linton said:

 You would certainly need to up your pension contributions significantly.

Planning to increase contributions to 30% or hopefully 40% in 2021.

Linton said:

In very crude ballpark figures you can sustainably withdraw 3.5% of the initial value of your pot increasing with inflation.

Is it ever it a valid strategy to drawdown more than that, say 6% in first 10 years then dropdown lower once state pension kicks in?  

Albermarle said:

I would class Multi index 3 as low to medium risk and is the sort of investment many people have when they are close to , or in retirement, when they have already built up a decent sized pot. Even if you are not the adventurous type I would to look to move up to Multi Index 5 , or at least 4 . Have a look at the data for the past performance of all of them to get a better feel of the way they have performed, although of course past performance is no guarantee for the future.

The L&G fact sheet has multi-asset 3 as risk factor 4 on a scale of 1 to 7 then the multi-index 4 fact sheet is 4 on a scale of 1 to 10 which I find a bit confusing. I would have thought they'd use the same scale but I guess it can't be an apples for apples comparison? Also although I can see multi index 4 & 5 on main L&G site they don't appear to be available as options when I sign into my pension management options online?

Albermarle said:

probably due to the late start to pensions savings. 

Yes, really kicking myself for not getting the ball rolling sooner. Had all sorts of justifications at the time of course but ultimately only have my self to blame.

Don’t forget inflation. If we assume it to be 2% your 8% should be seen as to 6% above inflation.  Then we have the fact that the past few years, and particularly this current year, have seen unusually high returns if you are invested globally. And finally in the next 10 years there is a good chance of a major crash, that is very roughly how often they occur. This could knock you back a year or more.

So I suggest a prudent estimate of returns is perhaps 3% above inflation though even that could be seen as a bit high given your cautious approach. In my retirement planning I used 1% above assumed inflation of 3%. Fortunately this has proven to be very pessimistic with my investing being less cautious than yours.  But better that than over optimistic.

The final flaw in your reasoning is that you have seen the tax rebate as a simple 25% uplift. However you will of course be paying tax on your drawdown.

If you retire before State Pension Age it is essential to plan for the missing SP in the early years. For a quick estimate just add £9K to your required pot for each year

By this stage in your planning the quick estimate approach is breaking down as things are getting too complex.  I think it’s time to put together a proper year by year spreadsheet taking account of inflation, investment return and tax.

jamesd

Victorwelldue said:

Is it ever it a valid strategy to drawdown more than that, say 6% in first 10 years then dropdown lower once state pension kicks in?  

Entirely normal and expected.

You account for it by deducting (number of years to go) * (expected state pension) from your pot value and calculating the safe income based on the remainder.

AnotherJoe

Victorwelldue said:

Linton said:

In very crude ballpark figures you can sustainably withdraw 3.5% of the initial value of your pot increasing with inflation.

Is it ever it a valid strategy to drawdown more than that, say 6% in first 10 years then dropdown lower once state pension kicks in?  

Of course, or much more than 6%. An extreme but not uncommon example of that would be someone that might have a SIPP, a DB pension and SP, and they would burn their SP down to zero in between retiring at say 60 and getting the DB & SP at 65/66, but you can of course go for intermediate values , maybe the DB kicks in at 60 and SP 66, whatever and so you take the SIPP in two stages, higher at teh start when no DB, then lower as DB kicks in, but still taking it to zero. OR not, maybe you retain 50% by the time SP kicks in. Whatever works for you. Its just maths.

Albermarle

£600K minus say 15 years inflation ( although it is low at the moment an average of 2.5% is often used ) means that in todays money/spending power it would only be worth about £400K . So to calculate real growth it is investment growth minus inflation as Linton also pointed out.

Victorwelldue

Thanks to all. Does anyone have any links to a good pension projection spreadsheet template?