Advice for large pension pot

stranex

I am 45 years old and in a very fortunate position of having a pot worth c. £1.65M. I’m by no means frugal but believe I can live very comfortably on around £3.5k per month. Given my current pot would provide around that sum already, I’m inclined to be adventurous over the next 12 years (plan to retire at 57) and try to get to a figure that will allow me to make a substantial purchase upon retirement and still have c. £2m to provide income in retirement. 

Would I be far out of line to “anticipate” growth of c.8% pa. in an adventurous portfolio? Like I say, I can afford to take a higher level of risk over the next 12 years in the assumption (?) I can protect what I need for income and buy whatever I can afford with whatever growth I make. 

I fully appreciate I have to take account if inflation and, more importantly, 55% tax on whatever I have above the LTA but my view (?) is that I’d rather have 45% of something than 100% of nothing? 

My ultimate dream would be to purchase a motorboat upon retirement but rather than aim for a figure, I’m thinking go adventurous and see where I’m at in 12 years time? 

Am I right to think that whatever I have above my requirements for income, I can take as a lump sum (minus the 55% tax) and do with as I please? Obviously a boat in not a great long term investment but I want to enjoy my trappings! And it’ll still be worth “something” in future so able to either sell if I need more income or pass on as inheritance (appreciating the IHT issues!)

Does this sound like a sensible plan? Anyone see any potential pitfalls? 

GunJack

I recon you'd be living way more than comfortably on £3.5k a month.....around 1.5 times average income for working people.  

Thrugelmir

stranex said:

Would I be far out of line to “anticipate” growth of c.8% pa. in an adventurous portfolio?

With a concentrated portfolio of individual shares anything is possible. 

stranex

GunJack said:

I recon you'd be living way more than comfortably on £3.5k a month.....around 1.5 times average income for working people.  

Yes, I very much appreciate how fortunate I am. I guess it’s all relative to my current income though I totally understand and it makes sense why some would find that statement obscene. Apologies for any offence caused 

El_Torro

Wow, having a £1.65M pension pot at 45 is an interesting problem to have. Perhaps steps should have been taken some years ago to not let it grow that big, but you are where you are.

Are you still paying into your pension? Is it worth doing so knowing that you’re going to be paying a lot of tax on it?

As for how fast the pot will grow, if you are planning to have it 100% invested in equities in a global tracker then yes, I would say that 8% is too optimistic. As Thrugelmir alludes to you can go even higher risk by using predominantly managed funds or even individual shares. I personally wouldn’t recommend doing that though. 

For a global tracker some people would use 7% average annual growth (including inflation). Personally I would stick to 5%, which may be a bit conservative. Anything over that is a bonus.

tacpot12

You would not be far out of line to “anticipate” growth of c.8% pa. in an adventurous portfolio, but it is ambitious over a 12 year period. That's enough time for a recovery and another crash!  

However, your strategy of investing in an adventurous portfolio and buying what you can with the value of the portfolio is a sensible strategy, if you have what you need for your retirement in a slightly safer portfolio. You can always delay liquidating the portfolio if you think a recovery is a year to 18 months away - you might get a much better boat!

There are those who would argue that even our retirement portfolios should be invested adventurously as they may have to last 40 years (e.g. 57 to 97). 

Your strategy will lead to you paying a lot of tax - you might look at options that would allow you to have access to the motorboat you want for periods of time, but pay for it out of income rather than purchasing it outright and accepting the depreciation and costs that come with ownership.

stranex

El_Torro said:

Wow, having a £1.65M pension pot at 45 is an interesting problem to have. Perhaps steps should have been taken some years ago to not let it grow that big, but you are where you are.

Are you still paying into your pension? Is it worth doing so knowing that you’re going to be paying a lot of tax on it?

As for how fast the pot will grow, if you are planning to have it 100% invested in equities in a global tracker then yes, I would say that 8% is too optimistic. As Thrugelmir alludes to you can go even higher risk by using predominantly managed funds or even individual shares. I personally wouldn’t recommend doing that though. 

For a global tracker some people would use 7% average annual growth (including inflation). Personally I would stick to 5%, which may be a bit conservative. Anything over that is a bonus.

Thanks Torro.
I was in a very good company DB scheme and withdrew 4 years ago when annual allowance, LTA and inheritance started to become a reality to me. So I’m not making any more payments into my SIPP but instead self investing into a SS ISA and reaping the tax efficiencies of that. Will also give me a pot to give me flexibility at 55....early retirement, kids uni fees, mortgage payoff etc

I have my SIPP invested in a broad range of mainly managed funds across many sectors and geographical areas. Over the last 10 years I reckon, on average, they’ve grown by c.10-12% a year but I appreciate past performance format indicate future hence me dropping to my 8% estimation

stranex

tacpot12 said:

You would not be far out of line to “anticipate” growth of c.8% pa. in an adventurous portfolio, but it is ambitious over a 12 year period. That's enough time for a recovery and another crash!  

However, your strategy of investing in an adventurous portfolio and buying what you can with the value of the portfolio is a sensible strategy, if you have what you need for your retirement in a slightly safer portfolio. You can always delay liquidating the portfolio if you think a recovery is a year to 18 months away - you might get a much better boat!

There are those who would argue that even our retirement portfolios should be invested adventurously as they may have to last 40 years (e.g. 57 to 97). 

Your strategy will lead to you paying a lot of tax - you might look at options that would allow you to have access to the motorboat you want for periods of time, but pay for it out of income rather than purchasing it outright and accepting the depreciation and costs that come with ownership.

Thank you! 

Yes, I have considered the “renting” a boat idea as an alternative to giving 55% to the taxman but (whilst it’s still 12 years away!) it’s our current dream to have a boat we can spend long periods on. Of course for that we need a bigger boat! 

I’m a reasonably experienced investor and like to think I appreciate the risks vs rewards. Over a long period, investments can be expected to double every 8-10 years if you’re willing (and able) to ride out the crashes. I hope my strategy of having at least 50% of my pot set aside for income and the other 50% set aside for toys, or income if there was an extended market crash, is sound?

El_Torro

stranex said:

I have my SIPP invested in a broad range of mainly managed funds across many sectors and geographical areas. Over the last 10 years I reckon, on average, they’ve grown by c.10-12% a year but I appreciate past performance format indicate future hence me dropping to my 8% estimation

If you started your investment journey in 2010 then you’ve been fortunate, things have been pretty rosey since. If you had started a couple of years earlier you would have hit the Great Financial Crisis, which the stock markets took a couple of years to recover from. 

If your investments have grown 10-12% over the last 10 years then you’re right in thinking that they probably won’t hit the same return in the next 10 years. Maybe they will, I’ll let you know for sure in 10 years time. How much lower than 10% you should aim for depends on how optimistic / pessimistic you are. Most people are of the view that it’s better to expect too little and be pleasantly surprised than to go the other way.

Let’s not forget that we’re due another correction that will take years to recover from, like the GFC. The crash we had earlier this year was a small blip in the grand scheme of things, I think we were all taken by surprise at how quickly the markets recovered from that one.

Thrugelmir

stranex said:

El_Torro said:

Wow, having a £1.65M pension pot at 45 is an interesting problem to have. Perhaps steps should have been taken some years ago to not let it grow that big, but you are where you are.

Are you still paying into your pension? Is it worth doing so knowing that you’re going to be paying a lot of tax on it?

As for how fast the pot will grow, if you are planning to have it 100% invested in equities in a global tracker then yes, I would say that 8% is too optimistic. As Thrugelmir alludes to you can go even higher risk by using predominantly managed funds or even individual shares. I personally wouldn’t recommend doing that though. 

For a global tracker some people would use 7% average annual growth (including inflation). Personally I would stick to 5%, which may be a bit conservative. Anything over that is a bonus.

 Over the last 10 years I reckon, on average, they’ve grown by c.10-12% a year but I appreciate past performance format indicate future hence me dropping to my 8% estimation

Not indicative of long term returns. Then there's fees and inflation to be factored in.  Currency movements will impact returns for UK based investors. 

[Deleted User]

1. 8% is certainly plausible. Thats roughly what markets have returned on average, net of inflation. 

2. We have not experienced this in the last 10 years, but bear markets can last for a long time.   How will you respond if your adventurous portfolio drops by 70% and stays there for 3 years or so?  Difficult to know until we experience something like this for real.
 
3. “Large” is a relative term. Good amount for sure (net of mortgage?) but you don’t have enough to be careless.  

4. Becoming more “adventurous” as you start getting closer to retirement seems counterintuitive. 

5. Its a game you win by not losing rather than by buying bigger yachts.  If you have enough to cover your needs, preservation is the recipe. Don’t get me wrong - you still need to be in stocks as you have a while to go.