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SIPP - 0 - £400,000.00 in 11 years - is this a realistic plan?
scrooge2008
Posts: 1,393 Forumite
I have my own business, plan to fully retire in 11 years and I am about to start saving in earnest. I would like a SIPP pot of £400,000.00 on my 68th birthday. I am about to commit some money so I wanted a sanity check on the plan below.
Pay in £830.00 a month employee contributions to get £1037.50, with tax uplift and £1,000.00 a month employer contributions, to save on NI and corporation tax. Total savings per month of £2037.50. I also want to immediately pay in an initial amount of £25,000.00, from projected profits from my financial year, which ends on 31st July 2023, to save on corporation tax.
I have been reading around the subject and looked at various providers and the one that I like is the Pension Bee, self employed option and investing it all in the tracker fund - State Street Balanced Index Sub Fund - . My reasoning for this is that the fees are low - 0.5% and go down incrementally, the more money that is in the pot and from what I have read, low cost tracker funds are difficult to beat and I do not wish to actively manage my funds. I am nervous about the supposedly 'safer options', because of the big hit that those heavily invested in gilts and bonds market took in 2022 and funds invested in cash seem to make almost nothing.
I have put figures into a compound interest calculator and if the tracker fund returns 3%, a year, after costs, and I increase my monthly contributions by 3% a year, then I would hit my target of £400,000 in 11 years. This sounds a bit simplistic, so I am wondering whether I have miscalculated something or misunderstood what I have read?
Pay in £830.00 a month employee contributions to get £1037.50, with tax uplift and £1,000.00 a month employer contributions, to save on NI and corporation tax. Total savings per month of £2037.50. I also want to immediately pay in an initial amount of £25,000.00, from projected profits from my financial year, which ends on 31st July 2023, to save on corporation tax.
I have been reading around the subject and looked at various providers and the one that I like is the Pension Bee, self employed option and investing it all in the tracker fund - State Street Balanced Index Sub Fund - . My reasoning for this is that the fees are low - 0.5% and go down incrementally, the more money that is in the pot and from what I have read, low cost tracker funds are difficult to beat and I do not wish to actively manage my funds. I am nervous about the supposedly 'safer options', because of the big hit that those heavily invested in gilts and bonds market took in 2022 and funds invested in cash seem to make almost nothing.
I have put figures into a compound interest calculator and if the tracker fund returns 3%, a year, after costs, and I increase my monthly contributions by 3% a year, then I would hit my target of £400,000 in 11 years. This sounds a bit simplistic, so I am wondering whether I have miscalculated something or misunderstood what I have read?
| Year | Deposits & Withdrawals | Interest | Total Deposits & Withdrawals | Accrued Interest | Balance |
|---|---|---|---|---|---|
| 0 | £25,000.00 | – | £25,000.00 | – | £25,000.00 |
| 1 | £24,450.00 | £1,099.40 | £49,450.00 | £1,099.40 | £50,549.40 |
| 2 | £25,183.56 | £1,886.68 | £74,633.56 | £2,986.09 | £77,619.65 |
| 3 | £25,939.08 | £2,720.53 | £100,572.64 | £5,706.62 | £106,279.26 |
| 4 | £26,717.28 | £3,603.03 | £127,289.92 | £9,309.64 | £136,599.56 |
| 5 | £27,518.76 | £4,536.36 | £154,808.68 | £13,846.00 | £168,654.68 |
| 6 | £28,344.36 | £5,522.79 | £183,153.04 | £19,368.80 | £202,521.84 |
| 7 | £29,194.68 | £6,564.69 | £212,347.72 | £25,933.48 | £238,281.20 |
| 8 | £30,070.56 | £7,664.49 | £242,418.28 | £33,597.97 | £276,016.25 |
| 9 | £30,972.72 | £8,824.74 | £273,391.00 | £42,422.71 | £315,813.71 |
| 10 | £31,901.88 | £10,048.10 | £305,292.88 | £52,470.81 | £357,763.69 |
| 11 | £32,858.88 | £11,337.32 | £338,151.76 | £63,808.14 | £401,959.9 |
I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.
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Comments
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Impossible to say if 3% returns are realistic. Hopefully it will surprise somewhat on the upside
Since you only have 10 years to retirement. That affects things.
Your true investment horizon is that long PLUS all the drawdown years. More like 40 years.
Nonetheless as of 68 - you will want it to be in the shape required for income to be taken (asset allocation) that you consider acceptable in terms of risk and cash being available i.e. that not being the moment of the big volatility dip with none available.
So it needs to either be saved up like that during the 11 years or more aggressive at the start and then glide towards the desired mix when taking out. Some added complexity. Which will behave according to whatever sequence of return happens to turn up the next decade. Unknown and unknowable as to which plan - static or adjusting will work better. A volatiltiy dip and recovery would suit you very well allowing more units to be bought cheap.
Some providers offer product (funds) which do this for target retirement dates.
Or you can just save in the target mix of equities and bonds that suits your risk appetite.
There are cheaper options than the ones you mention. I think a 0.25% - 0.5% annual difference is worth chasing to hold the same assets (geo spread of equities and bonds). It's just like buying branded beans at Waitrose or Asda at wildly different prices. Same beans. Differences at the 0.05 - 0.1% level less compelling for time spent hunting them.
A very simple passive global indexer approach (see also Lars Kroijer hold the market cheaply - youtube, bogleheads etc.)
can be around or below 0.1% for fund management costs. And with a low capped fee for a platform. Balance of holding costs and trading costs as they all do it differently.
Example. ETF with global developed equities in it - at Fidelity (index tracker). % of pot fee but capped £45/year for exchange traded. 0.12% fund management for the "hold part". Trades are more costly than some other SIPPs but can be done larger less often - as you control that. Or trade more and use a platform a bit more expensive for the hold but cheaper for the trades. Entirely up to you which one suits your intended use and preferred holdings.
All I am saying is that it would not be especially difficult to create something similar in underlying asset class mix and geographic spread to the fund you mention - at a materially lower annual cost - cumulative returns that you keep.
But it will take a little time to do it. Time you could spend generating profits to offset the employer contributions against.
Good luck
3 -
gmO - that is really helpful - thank you, I will take a look at all the things you have mentioned. It does make sense, if I have decided on a strategy to do it more cost effectively. "Every little helps". Thank youI learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.0
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If you are missing something, it is that £400K will not buy you the same amount of goods and services in 11 years as it will today, due to inflation. As a very big guesstimate it might be worth around £275K in real terms.
So to get to £400K in real terms you need a growth rate of 3% above inflation, which is pushing it.2 -
What's the employee contributions all about?
Why are you not contributing everything direct from your business. Are you Ltd? Are you a director?
There might be an explanation but it doesn't sound like a very tax efficient way of doing things.
If you are salary sacrificing that £830 employee contribution you will not get a 20% tax uplift.
To get the 20% uplift you would need to contribute post tax salary , so money that's already been taxed.
(Or from sources such as inheritance/gifts where you haven't been personally taxed)
Taxes have changed a little in 23/24 but the fundermentals remain the same.
1. Pension contribution via company.
2. Salary upto the annual 0% tax allowance
3. Dividends
1 -
Has already been discussed at length here!billy2shots said:What's the employee contributions all about?
Why are you not contributing everything direct from your business. Are you Ltd? Are you a director?
There might be an explanation but it doesn't sound like a very tax efficient way of doing things.
If you are salary sacrificing that £830 employee contribution you will not get a 20% tax uplift.
To get the 20% uplift you would need to contribute post tax salary , so money that's already been taxed.
(Or from sources such as inheritance/gifts where you haven't been personally taxed)
Taxes have changed a little in 23/24 but the fundermentals remain the same.
1. Pension contribution via company.
2. Salary upto the annual 0% tax allowance
3. Dividends
https://forums.moneysavingexpert.com/discussion/6438814/highest-return-lowest-risk-pension-options1 -
Hi sorry Billy, yes it is a LTD company and I am the sole director. Thanks for the clarification on the 20% tax uplift, I have really struggled to get my head around that. I will use savings for that. I am planning to pay the majority of my profits in to my pension and my salary is currently up to annual 0% tax allowance and the rest is paid in dividends. You are right Abermarle about inflation eroding the £400,000.00.I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.0
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No offence Dazed and Confused, but on that thread I said I would come back with a plan and here it is. I am only now getting my head around that 20% uplift and apologise if I am not as bright as the majority of the posters here, but when I commit my money it will be the best solution for me and I will understand what I am doing.I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.0
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What difference does it make where you actually pay the money from?scrooge2008 said:Hi sorry Billy, yes it is a LTD company and I am the sole director. Thanks for the clarification on the 20% tax uplift, I have really struggled to get my head around that. I will use savings for that. I am planning to pay the majority of my profits in to my pension and my salary is currently up to annual 0% tax allowance and the rest is paid in dividends. You are right Abermarle about inflation eroding the £400,000.00.
That would still be a personal contributions and be eligible basic rate tax relief (upto the amount of your pensionable earnings).
Just because you say it's come from savings and not your salary doesn't alter that.
1 -
Well why has Billy said it does? He seems to be saying the opposite to you? which is perhaps why I am confused??I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.0
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Is this true?To get the 20% uplift you would need to contribute post tax salary , so money that's already been taxed.
(Or from sources such as inheritance/gifts where you haven't been personally taxed)I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.0
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