Retirement planning dilemma

coyrls

A pension wrapper is not a generally a great place to hold cash.  You say you can save £10 to £15K a year.  Why don't you build up your required cash outside your pension?

Pat38493

Linton said:

Pat38493 said:

zagfles said:

 Most global index trackers are up around 30% over 3 years and 50% over 5 years. 

This makes me wonder then if my current employer pension is poorly invested then.  My 2 DC funds - legacy one is showing 95% growth over 10 years and 17.23% over 5 years which seems ok but not 50% as you say (November factsheet).   The other one which is my current default employer fund has only been going less than 10 years but is showing only 2.4% per year over 5 years (September factsheet). (Aegon MI Savings (H) )

Maybe I am not looking at the right numbers and need to look somewhere else or maybe I am in the wrong funds if trackers could have achieved 50% over 5 years.

If that is a valid comparison I guess I need to look at changing out of the default funds.

Looking at your Aegon MI (H) fund:  it's about 70% equity and 30% bond/cash. It performed in line with its category up to the Covid mini-crash but did not recover as quickly. Possibly because the equity is about 50% US which is slightly lower than average. 100% equity would have provided higher growth but in general you would expect the Aegon fund to be rather less volatile.  However over the past year bonds have fallen significantly due to increasing interest rates.

Conditions in the next 5 years may be very different to those in the past 5 years so they do not give a proven case for a transfer.

The 50% 5 year return quoted for 5 years return from a global rracker seems rather high.  The FTSE World factsheet shows a return of 40%.

So in my view nothing very much to be concerned about for the long term with as regards your Aegon fund unless you really want to go for 100% equity.

Well this is actually a good question - I already have a DB pension that should be worth about £14K from 55 or £24K from 65 in real terms, plus full SP.  Also, reading above the comment that lots of people think £36K is plenty for a couple, my wife already receives nearly that amount in her NHS MHO pension (already retired) just on her own - maybe I can just retire and she can look after me .  Joking aside, given the situation we are in there might be quite a strong case for me to increase risk in my funds.  The counter to this case is that I’m hoping to stop work, or at least scale it back, in about 3-4 years from now so depending on strategy I might end up touching the funds within the next 5 years.  I don’t really have any significant savings outside the pensions.  £110K mortgage but also contemplating downsize.

noclaf

Albermarle said:

noclaf said:

GazzaBloom said:

I spent too may years languishing in my company pension providers default fund. I would probably be retired now if I knew 20 years ago what I know now...

I can relate to this too, only started tweaking my workplace pension funds and taking a hands-on approach after my mid 30's.....I don't want to even think about what could of been but..... I only landed in the higher rate income tax bracket at around 35/36 so part of me thinks it actually worked out ok, anyway what's done is done ...onwards we march after pensions enlightenment!

Mid 30's is pretty early for a hands on approach. Usually it is around 50 when retirement first pokes its head over the horizon. Plus of course for the majority, they never think about it at all !

The upside of taking control was switching away from the default lifestyling funds and optimising fees..the potential downsides are completely b*ggering it up by over-tinkering as I am still on the learning curve for investing though I'm exercising better restraint in this regard e.g: I don't panic sell or trade...that was something I did early on during my investing journey and successfully built some mental fortitude to just let the markets do their thing whether up or down.
 The other aspect is I obsess over my pensions checking the fund performance daily, logging in far too often and over analysing my workplace fund options, though to be fair I find the subject interesting...yes I need to get out more

GazzaBloom

coyrls said:

A pension wrapper is not a generally a great place to hold cash.  You say you can save £10 to £15K a year.  Why don't you build up your required cash outside your pension?

For what reasons is cash inside a pension wrapper not such a good idea? 

Pat38493

GazzaBloom said:

coyrls said:

A pension wrapper is not a generally a great place to hold cash.  You say you can save £10 to £15K a year.  Why don't you build up your required cash outside your pension?

For what reasons is cash inside a pension wrapper not such a good idea? 

Possibly because you don’t get much interest on it?  However, on the flip side if you get 40% tax relief plus employer payments on the way in, it would have to be there for a heck of a long time for it to be better outside.

Thing is though - I’m not the expert but I think if it’s in a pension wrapper, and it’s going to be there for a while, there are investments with a guaranteed return over a fixed timescale that you could use rather than just leave it effectively shrinking.

Edit: Well actually that’s what bonds are isn’t it?

coyrls

GazzaBloom said:

coyrls said:

A pension wrapper is not a generally a great place to hold cash.  You say you can save £10 to £15K a year.  Why don't you build up your required cash outside your pension?

For what reasons is cash inside a pension wrapper not such a good idea? 

Usually, you have no access to retail savings rates.  Outside a pension you can hold cash in fixed term savings at much higher interest rates than are typically available in a pension wrapper.  There are more specialist SIPPs that have some access to fixed term rates but they generally charge higher fees.

GazzaBloom

Pat38493 said:

GazzaBloom said:

coyrls said:

A pension wrapper is not a generally a great place to hold cash.  You say you can save £10 to £15K a year.  Why don't you build up your required cash outside your pension?

For what reasons is cash inside a pension wrapper not such a good idea? 

Possibly because you don’t get much interest on it?  However, on the flip side if you get 40% tax relief plus employer payments on the way in, it would have to be there for a heck of a long time for it to be better outside.

Thing is though - I’m not the expert but I think if it’s in a pension wrapper, and it’s going to be there for a while, there are investments with a guaranteed return over a fixed timescale that you could use rather than just leave it effectively shrinking.

Edit: Well actually that’s what bonds are isn’t it?

BOE base rate is offered within the pensions wrapper, plus as you say 40% tax relief on way in plus 30% of the monthly payment is from my employer along with the NI saving. I would say that it's more beneficial for me to add cash inside the pension than outside, when I decide to do so.

Bonds? they were low risk until this year weren't they? I don't like or fully understand the complexities of bonds, even before this year's crash. Equity index funds and cash I understand enough about. 

GazzaBloom

coyrls said:

GazzaBloom said:

coyrls said:

A pension wrapper is not a generally a great place to hold cash.  You say you can save £10 to £15K a year.  Why don't you build up your required cash outside your pension?

For what reasons is cash inside a pension wrapper not such a good idea? 

Usually, you have no access to retail savings rates.  Outside a pension you can hold cash in fixed term savings at much higher interest rates than are typically available in a pension wrapper.  There are more specialist SIPPs that have some access to fixed term rates but they generally charge higher fees.

a few percent better savings rates don't outweigh the 40% tax benefits from salary sacrifice vs after tax cash savings on the way in for me. Plus I would only be paying up to 20% tax on the way out later in life.

Pat38493

GazzaBloom said:

Pat38493 said:

GazzaBloom said:

coyrls said:

A pension wrapper is not a generally a great place to hold cash.  You say you can save £10 to £15K a year.  Why don't you build up your required cash outside your pension?

For what reasons is cash inside a pension wrapper not such a good idea? 

Possibly because you don’t get much interest on it?  However, on the flip side if you get 40% tax relief plus employer payments on the way in, it would have to be there for a heck of a long time for it to be better outside.

Thing is though - I’m not the expert but I think if it’s in a pension wrapper, and it’s going to be there for a while, there are investments with a guaranteed return over a fixed timescale that you could use rather than just leave it effectively shrinking.

Edit: Well actually that’s what bonds are isn’t it?

BOE base rate is offered within the pensions wrapper, plus as you say 40% tax relief on way in plus 30% of the monthly payment is from my employer along with the NI saving. I would say that it's more beneficial for me to add cash inside the pension than outside, when I decide to do so.

Bonds? they were low risk until this year weren't they? I don't like or fully understand the complexities of bonds, even before this year's crash. Equity index funds and cash I understand enough about. 

Well other experts can clarify - maybe it's a particular type of bond that I mean, or some other investment, but I'm pretty sure there are investments other than cash that offer a guaranteed return over a fixed timescale, with the catch that you cannot back out or get your money back until the end of the agreed time or suchlike.

Mutton_Geoff

coyrls said:

A pension wrapper is not a generally a great place to hold cash.  You say you can save £10 to £15K a year.  Why don't you build up your required cash outside your pension?

There are a few occasions when it is. How about an over 55 about to retire, currently paying tax & NI in the high rate band? They could put £1,000 cash into their pension via salary sacrifice (if available to them). The cost to them is a loss of £580 net income. Then they could retire, take the £1,000 out with 25% tax free cash and then 20% tax on the balance, so £850 back from their £580 deposit. In days if so arranged. Who cares about zero interest in the short term?

In simple terms, if someone was retiring before state pension was due, they could put in £16,760 in their last year of work (cost to them £840 a month, ie £10,080 in the year net of 40% tax) then retire & take 25% TFC, the rest as income, paying no tax at all (assuming £12,570 personal allowance) over a year. That's a gain of 66%. £10,080 in, £16,760 out. This is why tax wrappers (especially pension ones) are handy for squirrelling nuts.