Downsized and want investment advice

2_4

Hi, my wife and I downsized and now have no mortgage and about £115k to invest but don't know much about investing or pensions. When the new tax year starts we will probably put 20k each into a stocks and shares Isa. We are mid/late 40s so retirement a long way off. I have a small Sipp (18k) and my wife has a small work pension (it was a good pension but she stopped working last year and may not add to it). I also have savings worth an extra 40k in cash and investments. Most of my investments (including sipp are in Vanguard 100).

I suppose the aims are long-term growth but we would maybe want some of the funds to provide income - if we could generate around 2k pa whilst also seeing some growth with a chunk of the money, whilst the rest was aimed more squarely at growth that would be great.

Hmmm, I don't really know where to start with what info anyone might need if they are kind enough to offer advice so let me know and I can provide answers. One obvious crucial bit of info is that we have no kids. Also, the savings may be needed at some stage to buy a more expensive property (sort of re-upsize I suppose!) but that is just a possibility and not a huge factor. The two main cncerns/areas I want advice on are:

1. How to invest this next year's 20k allowance
2. How much of the pot we should put into pensions now and what form that investment should take. And assuming the government doesn't change the rules around pensions, is there any real upside to putting it into a pension wrapper now, rather than the future (so putting it into an ISA now and transferring it down the line, versus putting it into a pension now).

Thanks in advance!

dunstonh

We are mid/late 40s so retirement a long way off. 

I don't want to burst your bubble there, but it's not a long way off. Each decade of age gets faster and faster.

 I have a small Sipp (18k) and my wife has a small work pension (it was a good pension but she stopped working last year and may not add to it). 

One of the old sayings is that you should aim to have £35k in a pension by age 35. Just £18k for mid-to-late 40s is seriously behind.

I suppose the aims are long-term growth but we would maybe want some of the funds to provide income - if we could generate around 2k pa whilst also seeing some growth with a chunk of the money, whilst the rest was aimed more squarely at growth that would be great.

Are you spending everything you earn or living beyond your means?

Drawing money now that is put aside for later life will reduce what you have later. Rather than rob your older self of that money, maybe you need to take a closer look at your budget now and see where you can make savings.

Doing that earlier whilst you have the choice vs doing it later to a larger degree when you no longer have a choice can be easier to swallow.

This £115k is a chance to put yourself back in a healthier position. So, you need to decide whether you want to do that or blow it on your middle age.

How much of the pot we should put into pensions now and what form that investment should take. And assuming the government doesn't change the rules around pensions, is there any real upside to putting it into a pension wrapper now, rather than the future (so putting it into an ISA now and transferring it down the line, versus putting it into a pension now).

You don't say how much you earn but it sounds as if you are spending everything you earn and want to spend more than you earn. So, let us know how much you earn and we can work out how much pain you are going to suffer in your retirement years.

If you have a household income around £25k, then actually, you are not heading for any pain as long as both of you are alive. Two state pensions puts you largely in the same position. It would be financially harder on first death when dropping to one state pension though.

If you have a household income of around £50k, then you are going to need around £200k to £250k in today's money to provide an income that meets your spending (that's just income - you would need more to cover capital expenditure. Plus, it assumes you won't spend quite as much when you are not working compared to when you are - ie, less costs travelling. However, many people actually spend more. So, you may need further £100k to £200k on top).

For the moment, you need to map out your life more clearly, including where you want to be now, in the medium term, and in the long term. You have to make sure that you can cover all phases of your life and not go over the top, focusing on just one of those phases.

You have a good opportunity to put things in a good place with this £115k. Its up to you whether you are prepared to do that or not.

InvesterJones

To address the last, most specific, question first - Pension vs ISA: Under the current tax incentives, there is at worst a small tax break in the form of the tax free lum sum for pensions. If you pension via salary sacrifice then there is an additional break in the form of NI contribution savings (until 2029 when they reduce in size). Furthermore, if you pay in at one income tax band but withdraw at a lower band, there can be quite a saving there as well. So far, so in favour of a pension by the numbers.. but of course you can't access it until pensionable age, therefore you need to do some planning and work out quite how much you might need before then, and aim to build up your ISA for that goal. As well as planning what you will need to have in total by retirement.

Once you have your goals, and timeframes, then you can start looking at what sorts of investments you need in order to meet those goals, given your risk appetite/tolerance.

If planning from the end backwards is too difficult, try planning from now forwards: work out what size emergency fund you need - keep this in easy access savings, then project out what next expensive thing you need to plan for and pick an investment/savings strategy for this, then what you will need before pension age, pick a strategy for this, and put the rest into pension. They will both result in a layered strategy where you have different timeframes, and therefore different investments, from savings for short term, and equities for long (>20yrs).

2_4

Dunstonh - you have made a lot of false assumptions. Obviously I didn't give yuo all the info you might have needed but from what I said you created your own idea about my set-up and I'm not sure how you reaached some of your conclusions.

InvesterJones - With the pension v ISA, my point is about timing. With my limited understanding, if I have money in an ISA now I could move that to a pension in 10 years and end up with the same amount as if I moved it to a pension now (assuming no gvernment changes and the funds were the same, just a different wrapper). That's what I want to double check though - is that true? I don't envisage having more cash than I would be able to move into a pension so whether I get the tax break now or down the line it all works out the same…doesn't it? But if I stay with ISAs for now I have more flexibility?

My situation is fairly unusual and I can explain in great depth if needed and that would help. As a starter, my wife took voluntary redundancy and our intention is to travel while I work remotely. We bought a flat to use as a base. My post-tax income is around 22k pa, paid through a LTD company set-up.

InvesterJones

On direct pension vs move out of ISA into pension later: it will depend what/how you're earning at the point when you move it later - in a more straightforward scenario contributions are limited by your salary/60k so if you stop working then you might lose the ability to contribute as much. Being paid through a LTD company set up probably brings it's own considerations but I haven't researched that, sorry.

dunstonh

Dunstonh - you have made a lot of false assumptions. Obviously I didn't give yuo all the info you might have needed but from what I said you created your own idea about my set-up and I'm not sure how you reaached some of your conclusions.

I based my response on what you told us. The key takeaways from that were:

• mid to late 40s - gives us an idea of where you are in your life stages
• You brushed aside your time to retirement as being a long time away
• just £18k in a pension - tells us what you have already.
• Wanting an income from the investments now rather than reinvesting it

From that information, it leans towards the following:

• You underestimate how quickly retirement will be upon you. A very common issue.
• Your existing retirement provision is extremely low. It's a value a mid to late 20s individual would be be expected to have.
• indicates you want to spend more than you earn, as you wouldn't draw the yield if you didn't need it. It would be reinvested if you didn't need it.

A forum thread will never have all the necessary information in the first post to ensure accuracy, but it's a starting point. And remember, you wrote that first post and set out the info and asked for advice. If we haven't followed it as you wanted, then it either means a) you didn't give us the details required, b) we misinterpreted the details, or c) you are in denial about your financials over your lifetime. It could be one of those things or a combination.

Usually, responses to the posts lead to more information that allows fine-tuning or a change of direction.

My situation is fairly unusual and I can explain in great depth if needed and that would help. As a starter, my wife took voluntary redundancy and our intention is to travel while I work remotely. We bought a flat to use as a base. My post-tax income is around 22k pa, paid through a LTD company set-up.

Useful new information as it opens up the option of making pension contributions via the limited company, drawing less from the company and using the £115k to live on.

With my limited understanding, if I have money in an ISA now I could move that to a pension in 10 years and end up with the same amount as if I moved it to a pension now (assuming no gvernment changes and the funds were the same, just a different wrapper). 

No, that would be a worse outcome for you as you are a shareholding director of your own company. How you pay into a pension is different to a self-employed or employed individual. You have corporation tax relief and it gets money out of the company without dividend tax. If you take money out of the company to put into an S&S ISA and then later move that S&S ISA into a pension, then it has cost you more in tax than paying it into the pension in the first place.

ISAs have more flexibility but it will come at a cost.

2_4

OK, I appreciate your help and I'm sure neither of us are here to argue.

I have 20+ years, or around half my life, till retirement. That to me and most people (I think) is a long way off. However, I accept time passes quickly. The 18k pension is small, clearly, but as said, I have 40k in savings as well, plus half of the £115k. If I was living above my means I would not have accumulated that and if I intended to live above my means I would not be asking about investing but looking for deals on an Aston Martin.

The use of the yield, again is not to fund an English sparking wine lifestyle, but is to accommodate my wife's preference to preserve her redundancy payout a little and pay our service fee. I understand it isn't probably the best option financially but it is probably a short-term thing anyway while we try and make the most of travelling before our parents really need us around.

As for the pension, I have business partner and I do not think he would want to take cash out of the company as a pension as his living expenses are far greater than mine.

Happy to provide any further info needed and appreciate the advice.

Bostonerimus1

This is what I might do.

• Do a budget to see where you are spending money and look for areas to save.
• Pay off any high interest debt you have.
• Put at least 6 months spending in an easy access bank saving account.
• Max out your employer DC pension contributions, VS100 is an aggressive investment and if you want a less volatile fund and the potential for a bit more income look at VLS80 or 60)
• Put anything that's left over in an ISA again in the VLS series.

jimjames

As for the pension, I have business partner and I do not think he would want to take cash out of the company as a pension as his living expenses are far greater than mine.

Surely there's no reason why you both have to do exactly the same thing? He might be paid £50k and get taxed on that, you get £22k but the remainder is paid into pension for example

2_4

https://forums.moneysavingexpert.com/discussion/comment/81926517#Comment_81926517

No debt, not looking to cut back my outgoings.

I have heard people saying that there are better alternatives to VS100 and maybe even cheaper ways to hold it than directly through vanguard.

JimJames - we pay minimum salary and use dividends. To use salary would be less efficient for him and dividends have to be equal.

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/81926802#Comment_81926802

Depends what you mean by better. There are cheaper 100% global equities funds, but they won't contain the same weightings that VLS100 does.