Looking to start a pension - advice needed

NSG666

bpk101 said:

Audaxer said:

Did the IFA advise what percentage equities in your SIPP you will need for 6% average annual growth over 20 years?  

Not explicitly no, they did ask me to complete a risk assessment to get a more accurate picture.

The risk factor they based these initial calculations on (5 or 6 out of 10) might indicate something around 50-60% equity (?) which feels a little too cautious for now perhaps. 

Don't think it works quite like that. The risk scale on funds goes from 1-7. As an example the VLS100 is 5 and the VLS60 is 4

Albermarle

NSG666 said:

bpk101 said:

Audaxer said:

Did the IFA advise what percentage equities in your SIPP you will need for 6% average annual growth over 20 years?  

Not explicitly no, they did ask me to complete a risk assessment to get a more accurate picture.

The risk factor they based these initial calculations on (5 or 6 out of 10) might indicate something around 50-60% equity (?) which feels a little too cautious for now perhaps. 

Don't think it works quite like that. The risk scale on funds goes from 1-7. As an example the VLS100 is 5 and the VLS60 is 4

There are different scales to assess risk . The simpler ones go from 1 to 7 but there are also ones that go from 1 to 10 that are more used by advisors ..

You are right that VLS60  is a 4 , but so are VLS 40 and 80 ( according to Vanguard ) so the 1 to 7 scale  is a pretty blunt instrument.

[Deleted User]

bpk101 said:

Audaxer said:

Did the IFA advise what percentage equities in your SIPP you will need for 6% average annual growth over 20 years?  

Not explicitly no, they did ask me to complete a risk assessment to get a more accurate picture.

The risk factor they based these initial calculations on (5 or 6 out of 10) might indicate something around 50-60% equity (?) which feels a little too cautious for now perhaps. 

These are silly numbers. People respond to these questionnaires differently depending on day of the week, weather and stock-market news on a given day.  Ignore them.  

You should really be in stocks 100% because your main risk is that having started late you won’t have enough when you retire.  Stocks have the largest potential for growth.  Once you have a sufficiently large fund and volatility becomes hazardous to your plans to retire, you can reduce stock allocation. Until then you have little choice.  The key is to ignore market fluctuations or consider falls as a good thing: means you can buy assets cheaper. 

Albermarle

Deleted_User said:

bpk101 said:

Audaxer said:

Did the IFA advise what percentage equities in your SIPP you will need for 6% average annual growth over 20 years?  

Not explicitly no, they did ask me to complete a risk assessment to get a more accurate picture.

The risk factor they based these initial calculations on (5 or 6 out of 10) might indicate something around 50-60% equity (?) which feels a little too cautious for now perhaps. 

These are silly numbers. People respond to these questionnaires differently depending on day of the week, weather and stock-market news on a given day.  Ignore them.  

You should really be in stocks 100% because your main risk is that having started late you won’t have enough when you retire.  Stocks have the largest potential for growth.  Once you have a sufficiently large fund and volatility becomes hazardous to your plans to retire, you can reduce stock allocation. Until then you have little choice.  The key is to ignore market fluctuations or consider falls as a good thing: means you can buy assets cheaper. 

A rider to this - The OP has to be sure that facing a stock market crash , they would not panic and pull out . A possible 40% drop can scare inexperienced investors , especially when the news is all doom and gloom .
If the OP has not got the stomach for this scenario , which I for one can fully understand , they would be better off not holding a 100% equities fund , as they would be less likely to make poor decisions when facing the market turbulence that comes along regularly .
Otherwise of course it is equities that bring the long term growth , so from that point of view the higher the better.

[Deleted User]

Albermarle said:

Deleted_User said:

bpk101 said:

Audaxer said:

Did the IFA advise what percentage equities in your SIPP you will need for 6% average annual growth over 20 years?  

Not explicitly no, they did ask me to complete a risk assessment to get a more accurate picture.

The risk factor they based these initial calculations on (5 or 6 out of 10) might indicate something around 50-60% equity (?) which feels a little too cautious for now perhaps. 

These are silly numbers. People respond to these questionnaires differently depending on day of the week, weather and stock-market news on a given day.  Ignore them.  

You should really be in stocks 100% because your main risk is that having started late you won’t have enough when you retire.  Stocks have the largest potential for growth.  Once you have a sufficiently large fund and volatility becomes hazardous to your plans to retire, you can reduce stock allocation. Until then you have little choice.  The key is to ignore market fluctuations or consider falls as a good thing: means you can buy assets cheaper. 

A rider to this - The OP has to be sure that facing a stock market crash , they would not panic and pull out . A possible 40% drop can scare inexperienced investors , especially when the news is all doom and gloom .
If the OP has not got the stomach for this scenario , which I for one can fully understand , they would be better off not holding a 100% equities fund , as they would be less likely to make poor decisions when facing the market turbulence that comes along regularly .
Otherwise of course it is equities that bring the long term growth , so from that point of view the higher the better.

That’s true. But… For someone just starting losses are small in absolute terms and a lot less painful for someone who has accumulated just enough to retire losing hundreds of thousands in a few days.  I just think that its best to learn to not to do stupid things during a bear market and invest in shares which would give him a chance to succeed.

dunstonh

Be wary of people telling you to ignore risk assessments.   They do not have your interests at heart.   We see it time and again on this site where people are encouraged by certain posters to take risks beyond their behaviour, knowledge or comfort levels and then at the first sign of a tiny negative, they are back on the site panicking.

There is no point going heavy in risk if the first thing you are going to do when a risk event occurs (and it will occur) is sell the investments at a loss.

Secret2ndAccount

At 65k profit you will be paying 40% tax on the top 15k of that. If you paid 12,000 (in one tax year) into a SIPP, two things would happen:
1. The taxman would top it up with 3,000 into the SIPP
2. He would also increase your tax code by 15,000 so that you ended up paying only 20% tax rather than 40%, and save another 3,000. So, for a loss of 9,000 in spendable cash, you've got 15,000 in your pension.

This should be your aim. You are late starting, and need to put a lot more than 10% into your pension anyway. This 40% tax saving provides a natural boundary that coincides with a sensible compromise. Maybe you have to make extra effort to pay this much in, but the payback is highly encouraging. Pay in any less than this, and you risk having to work more years, or be poorer in retirement.

Since this 40% trick only works up to the top ~15k of your earnings, and since you will be paying in 1k/mth next year (won't you...) then you should open a SIPP this tax year, and try to get, say, £1,000 in there before Arpil 5th. That will be topped up to 1250, but will only cost you 750 in spendable cash.

Roughly, you are talking about paying in for 20 yrs, then taking out for 20 yrs. So, again roughly, the rate at which you pay in will be the rate at which you will be able to take out. Hopefully your investment will grow, but there will be inflation to eat into the value too. So, in today's money, you will only get out slightly more than you put in. Pay in only 6k/yr, and your pension, in today's money, will be...

[Deleted User]

dunstonh said:

Be wary of people telling you to ignore risk assessments.   They do not have your interests at heart.   We see it time and again on this site where people are encouraged by certain posters to take risks beyond their behaviour, knowledge or comfort levels and then at the first sign of a tiny negative, they are back on the site panicking.

There is no point going heavy in risk if the first thing you are going to do when a risk event occurs (and it will occur) is sell the investments at a loss.

Whose interest do I have at heart? Do tell.   But… I agree.  One should take advice of a financially disinterested financial advisor on whether to pay financial advisers.  Because IFAs know for a fact how an investor will behave in 5 years’ time during a fall. 

Back in the real world, we have solid guidance on this issue. For example the “Deep risk” book by Bernstein.  What I am saying above is aligned but one should read that himself. 

What we are seeing on this site time and again is people coming having received bad financial advice from financial advisers.  For which they had paid. Rip off… And that’s unfortunate. 

dunstonh

Whose interest do I have at heart? Do tell.   But… I agree.  One should take advice of a financially disinterested financial advisor on whether to pay financial advisers.  Because IFAs know for a fact how an investor will behave in 5 years’ time during a fall. 

The risk analysis carried out by a financial adviser should include behaviour.    You can never know for sure how an individual will react during their first crash but you try your best to put them in that scenario and ask what they would do before they invest. Usually by using multiple scenarios explained in different ways to see if you get a different response.

But you wouldn't know that as you are not in this country and have no experience of IFAs or what they do.

Back in the real world, we have solid guidance on this issue. For example the “Deep risk” book by Bernstein.  What I am saying above is aligned but one should read that himself. 

And how many consumers are going to read stuff like that before they invest.  And why would they need to?  It is you that is not in the real world.

What we are seeing on this site time and again is people coming having received bad financial advice from financial advisers.  For which they had paid. Rip off… And that’s unfortunate. 

Except we don't actually see that very often.   
Over 80% of IFA firms have never had a complaint with the FOS.    The FOS complaint stats show IFAs account for around 1% of complaints made.   In numbers terms that is around 1500-2000 a year.    That number is tiny when you consider the volume of transactions that are carried out by IFAs.     That includes the factory line firms that have been so damaging.  They are not true IFAs but fall under the classification.  They were just vehicles set up take advantage.   Criticism of them is correct and reasonable.    There isn't perfection but what you say doesn't match reality.

bpk101

Secret2ndAccount said:

At 65k profit you will be paying 40% tax on the top 15k of that. If you paid 12,000 (in one tax year) into a SIPP, two things would happen:
1. The taxman would top it up with 3,000 into the SIPP
2. He would also increase your tax code by 15,000 so that you ended up paying only 20% tax rather than 40%, and save another 3,000. So, for a loss of 9,000 in spendable cash, you've got 15,000 in your pension.

This is a great trick! I remember now reading it here (tip #6) a while back so thanks for the reminder. 

Be interesting to see how easy i can put that strategy into practice as i'll only really know how much over the threshold i'll be as i get closer to the end of the tax year. If it's looking to be more than i'd estimated for then i'd suddenly need to start adjusting pension contributions on the fly as i edge closer to April to keep me under the threshold. Not the invest-and-forget plan i had in mind but makes total sense and definitely worth trying!

Secret2ndAccount said:

open a SIPP this tax year, and try to get, say, £1,000 in there before Arpil 5th. That will be topped up to 1250, but will only cost you 750 in spendable cash.

Also a very good point which i hadn't considered. £500 free? I'm in. Just need to get my skates on and make the platform / fund decision.