Lump sum pension contribution - making the right investment choices

kjs31

I am taking voluntary redundancy next month and will be sacrificing part of my severance into my DC workplace pension scheme to save tax, but am restricted to a degree because of the annual allowance. I have calculated that I can contribute around 100k to my pension. 

I am going to retire so this should be the final (and largest) pension contribution I ever make, so I want to make sure I’ve made the right choice. I don’t get a choice as to when to invest. The whole lot will go into funds on 20th May. I have been relatively comfortable with my fund choices when I was just paying in a standard monthly contribution but with such a large lump sum I’m wondering whether I need to have a rethink. My current fund choices are 2 global equity funds with quite different strategies; 45% to the better performing one (heavily invested in US tech) and 5% to the other, 10% to the North American fund (I have a fair chunk in this fund already so reduced the % recently), 15% to Europe excl UK fund and 25% to the cash fund. I have deliberately avoided bonds as the performance of the bond fund available to me seems pretty dire (2.4% currently). I only have a small number of funds to choose from.

I do have some investments in the Japan fund and UK but am not currently contributing to them. There is also a Mixed investment fund available which is a mix of equities and bonds but hasn’t historically performed that well compared to the benchmark. 

My Workplace pension doesn’t allow drawdown so I will need to move it anyway and am researching options for that currently. 

The cash fund is currently returning 5.25% (better than the mixed fund at 4.59%) and seems ‘safer’ so I wonder whether I should just put more there? My overall pot size is fairly large and I do need some growth but it doesn’t need to be much more than inflation realistically. 

Any advice is welcome. Thanks. 

Marcon

kjs31 said:

I am taking voluntary redundancy next month and will be sacrificing part of my severance into my DC workplace pension scheme to save tax, but am restricted to a degree because of the annual allowance. I have calculated that I can contribute around 100k to my pension. 

I am going to retire so this should be the final (and largest) pension contribution I ever make, so I want to make sure I’ve made the right choice. I don’t get a choice as to when to invest. The whole lot will go into funds on 20th May. I have been relatively comfortable with my fund choices when I was just paying in a standard monthly contribution but with such a large lump sum I’m wondering whether I need to have a rethink. My current fund choices are 2 global equity funds with quite different strategies; 45% to the better performing one (heavily invested in US tech) and 5% to the other, 10% to the North American fund (I have a fair chunk in this fund already so reduced the % recently), 15% to Europe excl UK fund and 25% to the cash fund. I have deliberately avoided bonds as the performance of the bond fund available to me seems pretty dire (2.4% currently). I only have a small number of funds to choose from.

I do have some investments in the Japan fund and UK but am not currently contributing to them. There is also a Mixed investment fund available which is a mix of equities and bonds but hasn’t historically performed that well compared to the benchmark. 

My Workplace pension doesn’t allow drawdown so I will need to move it anyway and am researching options for that currently. 

The cash fund is currently returning 5.25% (better than the mixed fund at 4.59%) and seems ‘safer’ so I wonder whether I should just put more there? My overall pot size is fairly large and I do need some growth but it doesn’t need to be much more than inflation realistically. 

Any advice is welcome. Thanks. 

Just double checking (sorry if you've already done so with great care!) - you will have 'relevant earnings' in the tax year of at least the amount being contributed to enable you to use carry forward? https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100 

Dazed_and_C0nfused

I don’t get a choice as to when to invest. The whole lot will go into funds on 20th May

Why is that?  It seems unusual as with most (DC) pensions you usually have the option to hold contributions in cash and invest at a time of your choosing.

MallyGirl

Given that you are transferring elsewhere anyway I could see an argument for leaving in the cash fund and making the big decisions in the new provider. The funds you are in now may not be available there so you may need to transfer the lot as cash anyway rather than in specie

Linton

kjs31 said:

I am taking voluntary redundancy next month and will be sacrificing part of my severance into my DC workplace pension scheme to save tax, but am restricted to a degree because of the annual allowance. I have calculated that I can contribute around 100k to my pension. 

I am going to retire so this should be the final (and largest) pension contribution I ever make, so I want to make sure I’ve made the right choice. I don’t get a choice as to when to invest. The whole lot will go into funds on 20th May. I have been relatively comfortable with my fund choices when I was just paying in a standard monthly contribution but with such a large lump sum I’m wondering whether I need to have a rethink. My current fund choices are 2 global equity funds with quite different strategies; 45% to the better performing one (heavily invested in US tech) and 5% to the other, 10% to the North American fund (I have a fair chunk in this fund already so reduced the % recently), 15% to Europe excl UK fund and 25% to the cash fund. I have deliberately avoided bonds as the performance of the bond fund available to me seems pretty dire (2.4% currently). I only have a small number of funds to choose from.

I do have some investments in the Japan fund and UK but am not currently contributing to them. There is also a Mixed investment fund available which is a mix of equities and bonds but hasn’t historically performed that well compared to the benchmark. 

My Workplace pension doesn’t allow drawdown so I will need to move it anyway and am researching options for that currently. 

The cash fund is currently returning 5.25% (better than the mixed fund at 4.59%) and seems ‘safer’ so I wonder whether I should just put more there? My overall pot size is fairly large and I do need some growth but it doesn’t need to be much more than inflation realistically. 

Any advice is welcome. Thanks. 

I take it from your post that you will be retiring almost immediately and so need to structure your investments  accordingly. I am also assuming that you need your DC pension to provide an essential part of your retirement income.

In planning your retirement you should have determined how much you will be spending and how you are going to manage your wealth to ensure the income you need is there when you need it and you dont run out of money before you die.

I also take it from your post that your wealth is largely Invested in global equities with a leaning towards US Tech. In 2000 global equities fell by about 50%, mainly caused by an even larger crash in US tech.  Those markets did not recover until perhaps 2007/8 when global equity was hit again by the banking sector crisis.  What would you do in those circumstances? 

There are a wide range of strategies available to deal with risk.  Your chosen strategy should lead you to what balance between return and risk is appropriate and from there to what type of funds you need.  You seem to be focussing on questions that are unlikely to make a life changing difference which suggests to me that you may not have been through this process.  If you have I apologise.  It would be helpful in providing informed comment if you let us know the results.

If you have not thought deeply about strategies and risk,  and feel you are unclear how to, you could do a lot worse than consult an IFA.

kjs31

Marcon said:

Just double checking (sorry if you've already done so with great care!) - you will have 'relevant earnings' in the tax year of at least the amount being contributed to enable you to use carry forward? https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100 

Thanks. My taxable earnings will be circa 80k this tax year by the time I leave in May what with earnings, taxable severance, and unpaid holiday so I should be fine. That’s after all pension contributions. 

kjs31

Dazed_and_C0nfused said:

I don’t get a choice as to when to invest. The whole lot will go into funds on 20th May

Why is that?  It seems unusual as with most (DC) pensions you usually have the option to hold contributions in cash and invest at a time of your choosing.

We have a cash fund to invest in so still technically a fund, but no option to hold as cash. 

https://documentscdn.financialexpress.net/Literature/ECA0ADBA54B8D3B063DACCD9714DBFA8/210048448.pdf

kjs31

Linton said:

I take it from your post that you will be retiring almost immediately and so need to structure your investments  accordingly. I am also assuming that you need your DC pension to provide an essential part of your retirement income.

In planning your retirement you should have determined how much you will be spending and how you are going to manage your wealth to ensure the income you need is there when you need it and you dont run out of money before you die.

I also take it from your post that your wealth is largely Invested in global equities with a leaning towards US Tech. In 2000 global equities fell by about 50%, mainly caused by an even larger crash in US tech.  Those markets did not recover until perhaps 2007/8 when global equity was hit again by the banking sector crisis.  What would you do in those circumstances? 

There are a wide range of strategies available to deal with risk.  Your chosen strategy should lead you to what balance between return and risk is appropriate and from there to what type of funds you need.  You seem to be focussing on questions that are unlikely to make a life changing difference which suggests to me that you may not have been through this process.  If you have I apologise.  It would be helpful in providing informed comment if you let us know the results.

If you have not thought deeply about strategies and risk,  and feel you are unclear how to, you could do a lot worse than consult an IFA.

Thanks. I am going to retire in May but won’t be drawing from my pension until the next tax year as with taxable earnings and savings income I’ll be very close to hitting 100k this tax year, if not over it. 

My DC Workplace pension is mostly invested in equities (with 16% in the cash fund currently). I do have a (larger) SIPP with a mix of bonds and equities and a 7k PA DB pension that I will start to draw next tax year so am not completely reliant on my workplace pension. My SIPP tanked a fair bit when the Truss era imploded the bonds market so even investing in bonds doesn’t seem to be that low risk. My SIPP has largely recovered but it’s not performing brilliantly IMO. 

I know what income I am likely to draw from my current combined pot which is just under 3% which should keep me just in the basic rate tax bracket. With savings being used for larger purchases that should be enough I believe.  I have had some modelling done by an FA (not an IFA) of my savings, pension pots and other assets and should not run out in my lifetime in theory. Once I retire I am going to transfer both my SIP and Workplace pension to a different platform and put the pot into drawdown next tax year. So I have done some of that thinking, just not completed the process yet. I may get an IFA onboard but need to decide when and who. That will be something to focus on when I retire as I’m moving house next week so have been pretty tied up with that. 

kjs31

MallyGirl said:

Given that you are transferring elsewhere anyway I could see an argument for leaving in the cash fund and making the big decisions in the new provider. The funds you are in now may not be available there so you may need to transfer the lot as cash anyway rather than in specie

Thanks. I think I’m leaning that way TBH. I should still get a small return in the meantime and as you say it’s likely that I may need to transfer the whole lot as cash when I move anyway. 

Linton

kjs31 said:

Linton said:

I take it from your post that you will be retiring almost immediately and so need to structure your investments  accordingly. I am also assuming that you need your DC pension to provide an essential part of your retirement income.

In planning your retirement you should have determined how much you will be spending and how you are going to manage your wealth to ensure the income you need is there when you need it and you dont run out of money before you die.

I also take it from your post that your wealth is largely Invested in global equities with a leaning towards US Tech. In 2000 global equities fell by about 50%, mainly caused by an even larger crash in US tech.  Those markets did not recover until perhaps 2007/8 when global equity was hit again by the banking sector crisis.  What would you do in those circumstances? 

There are a wide range of strategies available to deal with risk.  Your chosen strategy should lead you to what balance between return and risk is appropriate and from there to what type of funds you need.  You seem to be focussing on questions that are unlikely to make a life changing difference which suggests to me that you may not have been through this process.  If you have I apologise.  It would be helpful in providing informed comment if you let us know the results.

If you have not thought deeply about strategies and risk,  and feel you are unclear how to, you could do a lot worse than consult an IFA.

Thanks. I am going to retire in May but won’t be drawing from my pension until the next tax year as with taxable earnings and savings income I’ll be very close to hitting 100k this tax year, if not over it. 

My DC Workplace pension is mostly invested in equities (with 16% in the cash fund currently). I do have a (larger) SIPP with a mix of bonds and equities and a 7k PA DB pension that I will start to draw next tax year so am not completely reliant on my workplace pension. My SIPP tanked a fair bit when the Truss era imploded the bonds market so even investing in bonds doesn’t seem to be that low risk. My SIPP has largely recovered but it’s not performing brilliantly IMO. 

I know what income I am likely to draw from my current combined pot which is just under 3% which should keep me just in the basic rate tax bracket. With savings being used for larger purchases that should be enough I believe.  I have had some modelling done by an FA (not an IFA) of my savings, pension pots and other assets and should not run out in my lifetime in theory. Once I retire I am going to transfer both my SIP and Workplace pension to a different platform and put the pot into drawdown next tax year. So I have done some of that thinking, just not completed the process yet. I may get an IFA onboard but need to decide when and who. That will be something to focus on when I retire as I’m moving house next week so have been pretty tied up with that. 

The recent crash in bond values was due to the large and quick change in interest rates over the past 2 years. Truss just made what was already a bad situation worse.  Nothing that severe has been seen for perhaps 100 years or more.  Also, I would contend, that the wrong sort of bonds could have been used.  The crash particularly affected long term bonds whereas if you are using short or medium term bonds in line with your timeframe the effects would have been much smaller.

So dont damn all bonds, they can form an essential part of your portfolio. Just make sure you are choosing the right ones.

dunstonh

My SIPP tanked a fair bit when the Truss era imploded the bonds market so even investing in bonds doesn’t seem to be that low risk. My SIPP has largely recovered but it’s not performing brilliantly IMO. 

Bonds started falling from November 2021.  Almost a year before the Liz Truss budget.    They continued to fall until around October 2023.  A year after the Liz Truss had been gone.  Bonds rebounded in in the final months of 2023 but fell away again over 2024.   It is too simplistic to blame Liz Truss for everything.

Investments perform within expected ranges 95% of the time.   2021-2023 was a range of events that fell inside that 5%.  A perfect storm of multiple issues.

Even with the crash of bonds, they have still beaten cash over the last 15 years. 

You do not hold bonds in a portfolio to make you money.   You hold them because you cannot handle or afford to handle the volatility of equities.  It is equities where you make the money over the long term.      Equities have doubled over the last 7 years but bonds are slightly down over that period.

Any portfolio with a weighting to bonds has had an anchor dragging down the returns.  However, before you think about going heavier in equities, its worth noting that the first decade of the millennium was the other way around.  The last 5 years have been unusual and not typical.