I've had confusing pension advice - help!

HappyHarry

The initial lump sum will beat regular contributions in the vast majority of cases. 

However there will always be periods of time when this is not the case.

SimonSeys

ON AVERAGE it is better to contribute now rather than later, as you will get the benefit of more years of growth.  

It is riskier in both directions, as the market could go up or down dramatically in the next year.

You could split the payments into four quarterly payments or even eight payments over two years if you were worried about this risk. 

dunstonh

I wonder if you can help.  I have had two advisors state different opinions, and I could do with some clarity.

In simple terms, is it better to pay £320 a month into my pension each month for the next 10 years, or is it better to put £38,400 (the equiilent amount over the 10 years) in straight away and then no more.  Which would likely perform the best?

Not sure any adviser can tell you which will be best as they won't have a crystal ball.  However, statistically, the single option would be expected to give the best outcome in the majority of cases but not in a minority of cases.

DRS1

I am reminded of the debates you get on the Savings board about the pros and cons of Regular Savers where the RS advocates say you mustn't just look at the interest earned on the monthly payments into the RS but also at the interest earned on the lump of money from which you are making those payments and which is sitting in another account in the meantime.

So if you are contributing £320 a month what is the rest of the £38400 going to be doing?  Will it be in an S&S ISA? If so and if it is earning the same return as the money in the pension then it will probably not make much difference.

You will of course have a small period of time when you turn each £320 payment into cash and then contribute it to the pension and you could miss out on some investment return in that period but that could be good or bad.

Also depending on what your tax rate is it may be better to spread a contribution over different years - eg because more of it may save you higher rate tax.

kempiejon

Lufeplanner44 said:

Hi All,

I wonder if you can help.  I have had two advisors state different opinions, and I could do with some clarity.

In simple terms, is it better to pay £320 a month into my pension each month for the next 10 years, or is it better to put £38,400 (the equiilent amount over the 10 years) in straight away and then no more.  Which would likely perform the best?

Thanks,

Surely it depends where we invest it. In a cash-like account with very low risk all in always wins barring catastrophe. Depending on market risk investing at the start or staggered changes all possible outcomes. Statistically all-in beats monthly drips but some outliers will see poorer returns; who'd want to be them? So drip monthly looks like a hedge.
The tax environment might change over the next decade such that the relief claimable might not be the same for future contributions, ditto drawing.

leosayer

From an investment perspective, according to a study of historical data by Vanguard, "Lump-sum investing beats cost averaging about two-thirds of the time.".

I guess they would say that but the evidence is clear.

https://www.vanguard.co.uk/professional/vanguard-365/financial-planning/financial-well-being/cost-averaging

GenX0212

DRS1 said:

Also depending on what your tax rate is it may be better to spread a contribution over different years - eg because more of it may save you higher rate tax.

Is the lump sum taxable? What is the OPs usual marginal tax rate?

If the OP is going to end up paying 40% because of the lump sum but normally pays 20% then paying the lump sum into the pension is likely the best option.

DRS1

GenX0212 said:

DRS1 said:

Also depending on what your tax rate is it may be better to spread a contribution over different years - eg because more of it may save you higher rate tax.

Is the lump sum taxable? What is the OPs usual marginal tax rate?

If the OP is going to end up paying 40% because of the lump sum but normally pays 20% then paying the lump sum into the pension is likely the best option.

Fair point OP just says they have a lump sum not how they got it.  Nor do they say what their tax rate is.  I was just thinking that if they earned say £60k pa then contributing it all in one go would not be as tax effective as spreading it over 3 or 4 years.

dunstonh

leosayer said:

From an investment perspective, according to a study of historical data by Vanguard, "Lump-sum investing beats cost averaging about two-thirds of the time.".

I guess they would say that but the evidence is clear.

https://www.vanguard.co.uk/professional/vanguard-365/financial-planning/financial-well-being/cost-averaging

There have been many studies from different sources covering different timescales, and they all fall within the same ballpark, which is typically 65-85% of the time, single beats phased.

Bobziz

dunstonh said:

leosayer said:

From an investment perspective, according to a study of historical data by Vanguard, "Lump-sum investing beats cost averaging about two-thirds of the time.".

I guess they would say that but the evidence is clear.

https://www.vanguard.co.uk/professional/vanguard-365/financial-planning/financial-well-being/cost-averaging

There have been many studies from different sources covering different timescales, and they all fall within the same ballpark, which is typically 65-85% of the time, single beats phased.

And studies also suggests that those times where cost averaging has beaten lump-sump investing is during bear or volatile markets. They also suggest that the extent of cash drag plays a role too, i.e. the return that you're getting on your cash whilst you wait. 

Are we in a volatile or bear market ? No, but the forward p/e of the s&p has only ever been higher once. Precious metal prices are through the roof and money market funds are still paying an inflation beating return. Personally I'd sleep better at night in the current climate by pound cost averaging.