Saving outside the pension

GazzaBloom

The lifestyling point is spot on. There's a fella at my work who wants to retire early and has this switched on in his pension and has no idea what it's doing. I have taken the time to explain what is happening and that it's really designed for taking an annuity at the point of retirement. After I explain what an annuity is and that rates may drop if interest rates come back down a bit, he says that's not what he plans to do, fogs over and wanders off muttering that he needs to look into it…

He's rotting away in the Aviva default fund, with money being moved over to bonds funds, and, in my view will not have the growth he needs to sustain his required drawdown in retirement.

You really can't help some people.

Pipthecat

GazzaBloom said:

As the annual allowance has increased to £60K this year I have diverted more money via salary sacrifice into my pension reducing the amount I will have outside the pension in order to maximise the benefit. 

I'm thinking the same thing.  I'm planning to push much more of my available money into my pension.  I have a cash buffer for emergencies and I'm only 3 years away from being able to access my SIPP at 55, so have access to money if I need it.

I'm planning on retiring at 60 and I'm trying to get my head around what to do with my current ISA funds.  Why not take advantage of being a higher rate tax payer for my last few years of work and funnel my ISA funds into my SIPP.  It's very likely I'll be a basic rate tax payer in retirement and I can't see any major advantages of holding the funds in an ISA

Rich1976

GazzaBloom said:

The lifestyling point is spot on. There's a fella at my work who wants to retire early and has this switched on in his pension and has no idea what it's doing. I have taken the time to explain what is happening and that it's really designed for taking an annuity at the point of retirement. After I explain what an annuity is and that rates may drop if interest rates come back down a bit, he says that's not what he plans to do, fogs over and wanders off muttering that he needs to look into it…

He's rotting away in the Aviva default fund, with money being moved over to bonds funds, and, in my view will not have the growth he needs to sustain his required drawdown in retirement.

You really can't help some people.

But the average person doesn’t understand anything about any of that. So if he had stayed and listened to you where would you tell him he needs to be investing?

the vast majority of people are in lifestyle funds ( myself included) because how does Average Joe know or even begin to understand what they should be investing in from the hundreds of funds available to them through their workplace pension?

QrizB

Rich1976 said:

GazzaBloom said:

The lifestyling point is spot on. There's a fella at my work who wants to retire early and has this switched on in his pension and has no idea what it's doing. I have taken the time to explain what is happening and that it's really designed for taking an annuity at the point of retirement. After I explain what an annuity is and that rates may drop if interest rates come back down a bit, he says that's not what he plans to do, fogs over and wanders off muttering that he needs to look into it…

He's rotting away in the Aviva default fund, with money being moved over to bonds funds, and, in my view will not have the growth he needs to sustain his required drawdown in retirement.

You really can't help some people.

But the average person doesn’t understand anything about any of that. So if he had stayed and listened to you where would you tell him he needs to be investing?

the vast majority of people are in lifestyle funds ( myself included) because how does Average Joe know or even begin to understand what they should be investing in from the hundreds of funds available to them through their workplace pension?

Here's what I have done.

My pension was initially in the default lifestyle, which (at my age, and my default retirement date) meant it was being moved month-on-month from an 80% equities passive multi-asset fund into a 60% equities passive multi-asset fund.

A few years ago I looked at my retirement plans (which include a useful DB pension that makes up at least half of my retirement assets) and decided I had a higher risk tolerance for my DC pension than the default lifestyle assumed. I chose to opt out of lifestyling and instead moved everything back into the 80% fund.

I didn't look very hard at other funds from the same provider, or those from other providers, as the funds used inside the default lifestyle had low fees and broadly similar performance to other passive funds (the SW 80% fund is barely distinguishable from VLS80).

GazzaBloom

Rich1976 said:

GazzaBloom said:

The lifestyling point is spot on. There's a fella at my work who wants to retire early and has this switched on in his pension and has no idea what it's doing. I have taken the time to explain what is happening and that it's really designed for taking an annuity at the point of retirement. After I explain what an annuity is and that rates may drop if interest rates come back down a bit, he says that's not what he plans to do, fogs over and wanders off muttering that he needs to look into it…

He's rotting away in the Aviva default fund, with money being moved over to bonds funds, and, in my view will not have the growth he needs to sustain his required drawdown in retirement.

You really can't help some people.

But the average person doesn’t understand anything about any of that. So if he had stayed and listened to you where would you tell him he needs to be investing?

the vast majority of people are in lifestyle funds ( myself included) because how does Average Joe know or even begin to understand what they should be investing in from the hundreds of funds available to them through their workplace pension?

Self educate and take an interest would be a start. Our future financial life is important and basic concepts and understanding of how the main investment assets of equities, bonds, property/real estate, commodities and cash work with regards to historical returns within investment funds aren't difficult to understand. Nor is just taking enough interest to understand what the historical returns of the default fund you are in.

There is ample free information available at your finger tips, ignorance is no excuse for being unintentional with your retirement planning. This guy in question is a highly qualified professional, but didn't even show much interest in listening. 

If he had choses to ask I would have recommended turning life styling off and switch from the default fund to lower cost index fund with a higher percentage of equities. He didn't even know what the percentage fees he was paying.

Cus

Independent of the tax argument, I think that there should be a push for people to save outside of their pension. Many people (me included for a while) found pension saving easy as it's kind of money that you don't have through your hands if you have salary sacrifice, but saving after being paid if a different and more difficult mindset.  Should be promoted more.

GazzaBloom

Cus said:

Independent of the tax argument, I think that there should be a push for people to save outside of their pension. Many people (me included for a while) found pension saving easy as it's kind of money that you don't have through your hands if you have salary sacrifice, but saving after being paid if a different and more difficult mindset.  Should be promoted more.

I'm not sure I agree, money is money, it's the same stuff whatever account it is in. DC pensions, ISAs, bank accounts are all just accounts, just with differing tax treatments and withdrawal rules. Once you pass the age when you can withdraw from a pension this becomes more apparent and pensions don't seem so mysteriously untouchable.

Pat38493

As a general point I agree.  However if you are in the situation that myself and it seems like Gazzabloom was in, it doesn't seem to make sense to put money into an ISA or savings, when you can make an instant 20% net return on it, plus all the intermediate growth on the 40% of it that would have otherwise disappear immediately to HMRC.  I am not seeing any way that this would be outweighed by an IFA planning process during retirement in our situations.  Of course if you are in a different status (e.g. expecting to pay HR tax in retirement) it would be a different analysis.

Also I guess if you took the view that the government wants everyone to pay 40% tax and they will just freeze the allowances forever until everyone is paying 40%, again that would change the analysis, but that doesn't seem like a good bet to me in the long term.

Itsme01x

I have just seen that Nat West/RBS are offering 5.9% interest on a 2yr Fixed Cash ISA.  Transfer ins allowed.  I would keep the flexibility of a Cash ISA with rates offering these good rates.

(3yr rates with Virgin are not too bad either)

GazzaBloom

Itsme01x said:

I have just seen that Nat West/RBS are offering 5.9% interest on a 2yr Fixed Cash ISA.  Transfer ins allowed.  I would keep the flexibility of a Cash ISA with rates offering these good rates.

(3yr rates with Virgin are not too bad either)

Those "good" rates are below the level of inflation.