Saving and Investment Advice Needed

venturahighway · 22 June 2018 at 12:40PM

I would appreciate some thoughts as to what to do with savings. I am typically risk averse and hold all of my savings in cash, except my pension.

However, low returns has lead me here and I am interested to see what people think and if there are any options I haven't thought of or should consider.

Happy to consider longer term options, the dream would be for both of us to retire at 60. I understand that all depends how much you save/make between now and then.

I am married, my partner and I are both mid-30s private sector with two children under 10. I am a higher rate tax payer, she is basic rate.

I pay 25% of my monthly income into pension, wife pays 10%. I am not near the annual savings allowance, however, tying this money up until at least 55 worries me somewhat.
My pension is currently invested in a "Lifestyle Strategy" plan, which although doesn't seem to have many risks, the growth has been minimal.

Mortgage is £400,000 which is completely offset at a rate around 3% and is instantly available for emergencies etc..

We do not currently hold any ISAs.

I have an additional £30,000 to play with as a lump sum (currently getting around 1.5% interest cash) and would like to do something with an additional £1-2,000 per month.
I have been there, done it with all of the high interest current accounts and drip feed into all of the main regular savers.

Thanks

Wildsound · 22 June 2018 at 1:23PM

venturahighway wrote: »

I pay 25% of my monthly income into pension, wife pays 10%. I am not near the annual savings allowance, however, tying this money up until at least 55 worries me somewhat.
My pension is currently invested in a "Lifestyle Strategy" plan, which although doesn't seem to have many risks, the growth has been minimal.

As you are contributing quite a bit to your pension, one thing to consider, which a lot of people miss, is the Lifetime Allowance (currently £1.03 million rising with inflation every year), although at your age, who knows what will happen to this over the next decade. It's a stupid system implemented by the government and a double standard. On the one hand they are encouraging people to save into pensions, but at the same time penalising them when they save too much (can be up to a 55% charge on withdrawals if you have exceeded). It's something at least worth considering as it's not based on what you contribute, but the value of your investments at the time of withdrawing. Whilst people make modest contributions today and it may not look like a problem, it could be a problem later down the line, especially if the investments grow, your contributions grow or the lifetime allowance changes for the worst.

Anyways, it looks like you have considered your retirement in to at least some detail, which is good. I would challenge you to consider what your short/medium term goals are as a family? From that point, you can then work out a strategy on how to achieve them.

Also, consider performing a risk assessment on yourself and your other half. You may discover that you are less risk averse than you think. I know there are free risk assessments available online (Standard Life do one I believe which isn't too bad) so maybe do a couple (answer them honestly and truthfully) and see what the results bring.
From that point, work out maybe a 6 month emergency fund (assume a worst case scenario and then work out how to cover it for this period). Any excess look to pay off any high interest debts (e.g. credit card debt). After that, invest according to your risk profile discovered above and your time period for investing towards your particular targets.

Another thing to consider is protection in the forms of life insurance etc... It always pays to have security in place for your family should the worst happen. You should seek professional advice though on this matter.

AlanP_2 · 22 June 2018 at 1:40PM

If you are thinking long term, which it sounds like you are, holding the majority of your assets in CASH is not Risk Averse. It is accepting inflation risk which will reduce the real value of those £s over time.

The 400k offset is just about breaking even whilst the 30k at 1.5% is losing out.

Nobody knows what inflation will be going forwards but we do know that the levels seen over the last few years have been exceptionally low compared to historical averages, or at least those within living memory.

DunstonH, an IFA who posts on here, refers to risk being a continuum as opposed to On/Off if that helps to put it into context.

Investments, historically, have provided above inflation returns. Quite logical if you consider that inflation is an increase in the cost of goods i.e. more income to the manufacturer (ignoring VAT etc.), so if they operate on 10% profit margin it will mean higher £ profits which is reflected in the £ share price.

You are paying a good percentage into your pension, and getting the 40% tax relief / benefit as a HR taxpayer. 10% for your wife is reasonable but not exceptional. What do your employers contribute?

Why does tying it up to 55+ worry you? If it is for retirement and you don't want to retire until 60 what's the problem?

If your current pension has only seen minimal growth (over what period by the way?), then you may be in a too low risk option where only a small proportion is in equities which will typically be the greatest growth generator.

As it is a life styling plan the amount in equities will reduce as you get closer to the date you told them you wanted to retire, but this only starts between 5-10 years beforehand from what I have seen.

Life styling plans are ideal if you have a fixed point in time where you need, or must, cash in. For example I have an AVC scheme alongside my Local Gov defined benefit pension because I must cash it in at the point of taking the main DB pension so a "fixed point".

If I didn't have that restriction I wouldn't be life styling it as I would need to stay invested and generate income / growth to see me through 20-40 years of retirement. You could opt for an annuity in which case you have a "fixed point" again but alternatives exist these days so not as popular as they were particularly in low interest rate environment.

It would be like going to an all cash pension at age 20 as I plan to retire at age 60 and nobody would do that.

Have a look at what the funds are, yours and your wife's. Post on here for wider thoughts / comments.

Think about how much you need / want in retirement. If you use 4% per annum withdrawal rate you won't be far out you can see whether you are on track. Don't forget State Pension.

Other options to consider are LISAs and ISAs - Stocks & Shares ones, not cash.

Monevator website has some good material to help you understand investing and the risks and the benefits so have a browse on there.

kidmugsy · 22 June 2018 at 1:51PM

The belief that cash always loses to inflation is simply a myth. Sometimes it does, sometimes it doesn't. It's like the belief that equities "always" beat cash, at least over some modest number of years. Just rubbish. Sometimes they do, sometimes they don't.

kidmugsy · 22 June 2018 at 2:01PM

First up: are your insurances in order? How will the survivor cope after first death, especially while the children are young?

Secondly, are your pension contributions logical? Is your partner contributing 10% to maximise employer contributions? Or to exploit salary sacrifice? If neither is true it might be wiser to contribute more to your pension to get the 40% relief and delay adding surplus to hers until she becomes a higher rate taxpayer, or the tax relief system changes to her advantage, or she gets the ability to use salary sacrifice.

Thirdly, I don't see why there need be much doubt that ISAs are your next port of call. If you think undiversified equities are not to your taste you can diversify what you invest it.

AlanP_2 · 22 June 2018 at 3:40PM

kidmugsy wrote: »

The belief that cash always loses to inflation is simply a myth. Sometimes it does, sometimes it doesn't. It's like the belief that equities "always" beat cash, at least over some modest number of years. Just rubbish. Sometimes they do, sometimes they don't.

So are you saying you would expect £430k of cash (OPs pot) to generate a better return than £430k of investments over the next 25 years (OPs timescale)?

kidmugsy · 22 June 2018 at 4:52PM

AlanP wrote: »

So are you saying you would expect £430k of cash (OPs pot) to generate a better return than £430k of investments over the next 25 years (OPs timescale)?

Why do you try to put words in my mouth? I meant precisely what I said.

atush · 23 June 2018 at 12:45PM

Wildsound wrote: »

As you are contributing quite a bit to your pension, one thing to consider, which a lot of people miss, is the Lifetime Allowance (currently £1.03 million rising with inflation every year), although at your age, who knows what will happen to this over the next decade. It's a stupid system implemented by the government and a double standard. On the one hand they are encouraging people to save into pensions, but at the same time penalising them when they save too much (can be up to a 55% charge on withdrawals if you have exceeded). It's something at least worth considering as it's not based on what you contribute, but the value of your investments at the time of withdrawing. Whilst people make modest contributions today and it may not look like a problem, it could be a problem later down the line, especially if the investments grow, your contributions grow or the lifetime allowance changes for the worst.

Anyways, it looks like you have considered your retirement in to at least some detail, which is good. I would challenge you to consider what your short/medium term goals are as a family? From that point, you can then work out a strategy on how to achieve them.

Also, consider performing a risk assessment on yourself and your other half. You may discover that you are less risk averse than you think. I know there are free risk assessments available online (Standard Life do one I believe which isn't too bad) so maybe do a couple (answer them honestly and truthfully) and see what the results bring.
From that point, work out maybe a 6 month emergency fund (assume a worst case scenario and then work out how to cover it for this period). Any excess look to pay off any high interest debts (e.g. credit card debt). After that, invest according to your risk profile discovered above and your time period for investing towards your particular targets.

Another thing to consider is protection in the forms of life insurance etc... It always pays to have security in place for your family should the worst happen. You should seek professional advice though on this matter.

As for risk asessment, dont forget that DB pensions are pretty much risk free, esp pub;ic sector ones. So you can take more/higher risk choices in your S&S isas and maybe DC pensions to balance your risk over all.

atush · 23 June 2018 at 3:07PM

Equities ALWAYS beat cash over longer periods of over 10 years. Certainly for every 25 year period.

but I agree that having 430K in cash is probably too much so I would certainly invest the 30K. As the 400K is essentially getting 3%.

kidmugsy · 23 June 2018 at 9:33PM

atush wrote: »

Equities ALWAYS beat cash over longer periods of over 10 years. Certainly for every 25 year period.

Make up your mind: 10 years or 25? And in which countries?

System · 23 June 2018 at 10:06PM

kidmugsy wrote: »

Make up your mind: 10 years or 25? And in which countries?

Lets do the maths. At best you're going to be getting 2-3% returns on cash on large sums in a cash investment thanks to an almost decade long historic low BoE base rate.

So lets say in 2008 you had £100,000 in cash.

Inflation over the last 10 years means today to have the same purchasing power as £100,000 in 2008 we need £132,000 in 2018 so £132k is our target.

3% annual return on your cash would make £100k worth about £134k over a decade so only giving you a roughly 1.5% increase in your purchasing power of your £100k investment. Your £100k has effectively not increased in value at all, merely kept pace with inflations so you're effectively no better off than you were back then.

If you had invested it in a FTSE 250 fund in 2008, whilst it would have lost 38% in the crash, in 2009 it rose 50% and 27% in 2010 and four of the last 10 years it had growth over 20%, 8 of the last 10 years growth was at least double inflation with only 2008 and 2011 being a loss. By the end of 2017 it had risen 158% over a 10 year period for a 9.9% average annualised return. Your £100,000 invested in a FTSE250 fund in 2008 would be worth £257,000 today, which taking into account inflation makes it the equivalent of £194k in 2008 so you've almost doubled the purchasing power of your initial £100k investment over a decade.

Saving and Investment Advice Needed

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