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What thoughts do people have on the pension models used by financial advisors or in online tools? The reason for asking is that I believe a lot of these models use assumptions based on the long terms holding of interest baring assets, eg bonds etc and don't really allow for the returns you get long term with equities.

Having been through all my pension funds, which are all in stocks, the average return over the last 10-15 years has been nearer to 13.5% per year. Whilst this is good and better than the assumed 7% average, it does pose an interesting problem. Basically I can model my fund on retirement being somewhere between £1.4m and £3.6m.  Obviously these are huge differences, and the tax implications are massive.  

Normally I'd wind down my contributions some what and stick it in an ISA, but then I forgo the  matched employer contribution on that element and I lose the tax relief. It also seems foolhardy not to invest in stocks, as the difference between these and bonds is massive, even allowing for the extra risk of equities.

 

 

 

Edited by Mikhail Liebenstein

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19 minutes ago, Mikhail Liebenstein said:

What thoughts do people have on the pension models used by financial advisors or in online tools? The reason for asking is that I believe a lot of these models use assumptions based on the long terms holding of interest baring assets, eg bonds etc and don't really allow for the returns you get long term with equities.

Having been through all my pension funds, which are all in stocks, the average return over the last 10-15 years has been nearer to 13.5% per year. Whilst this is good and better than the assumed 7% average, it does pose an interesting problem. Basically I can model my fund on retirement being somewhere between £1.4m and £3.6m.  Obviously these are huge differences, and the tax implications are massive.  

Normally I'd wind down my contributions some what and stick it in an ISA, but then I forgo the  matched employer contribution on that element and I lose the tax relief. It also seems foolhardy not to invest in stocks, as the difference between these and bonds is massive, even allowing for the extra risk of equities.

13.5% is far better than I've been able to manage but our portfolios also sound very different.

My portfolio is reasonably balanced (over my tracked period it's been effectively a 63% equities : 37% bonds portfolio) covering multiple asset classes as well as countries. I started tracking in 2007 so went through the GFC bear and the subsequent bull market we are currently in so have seen a boom and a bust.  I've managed a nominal 7.0% which is a real (based on RPI) 4.2% or so.  Early in my journey my back testing research suggested that over a very long period a real 4% was not a silly assumption so I've pretty much matched my assumption.

Don't forget that from April 2018 the LTA will be uprated by the CPI.  Depending on your age you might want to also consider that private pension access age will be greater than 55.  From 2028 it's already set to be 57.  At age 45 I'm assuming age 60 in my models which if I continue to manage similar performance will put me over the LTA. 

Of course they'll tinker with pensions plenty more times before I see any of it so who really knows...

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30 minutes ago, Mikhail Liebenstein said:

What thoughts do people have on the pension models used by financial advisors or in online tools? The reason for asking is that I believe a lot of these models use assumptions based on the long terms holding of interest baring assets, eg bonds etc and don't really allow for the returns you get long term with equities.

Having been through all my pension funds, which are all in stocks, the average return over the last 10-15 years has been nearer to 13.5% per year. Whilst this is good and better than the assumed 7% average, it does pose an interesting problem. Basically I can model my fund on retirement being somewhere between £1.4m and £3.6m.  Obviously these are huge differences, and the tax implications are massive.  

Normally I'd wind down my contributions some what and stick it in an ISA, but then I forgo the  matched employer contribution on that element and I lose the tax relief. It also seems foolhardy not to invest in stocks, as the difference between these and bonds is massive, even allowing for the extra risk of equities.

 

 

 

I used to build portfolios for HNWs and the asset allocation in the standard models drifts towards lower risk equities and bonds as you move towards the end of the investment term. In the earlier years though there should be no interest bearing investments unless you've instructed this. 

IMHO unless you're 5-10 years away from retirement equities are fine and go for a very cheap global index tracker with a very low TER, not any of this managed stuff. The exception for managed funds should come as you move into draw down. Assuming you don't fancy annuitising at pretty low interest rates then there is a good selection of income targeting funds specifically designed to provide a dividend income. A favourite was the Schroder Income Maximiser fund, and the Invesco Perpetual High Income fund (when it was run by Neil Woodford - he's since departed to set up the Woodford Trust). 

Pushing through the LTA ceiling causes pretty hefty tax implications and you should weigh these up carefully with other options such as exploiting tax incentives on VCTs, contributing to your wife's and children's pension funds. With that much money inheritance tax becomes an issue to so you might want to look at skiing chalets in the Swiss Alps. 

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11 minutes ago, adarmo said:

I used to build portfolios for HNWs and the asset allocation in the standard models drifts towards lower risk equities and bonds as you move towards the end of the investment term. In the earlier years though there should be no interest bearing investments unless you've instructed this. 

IMHO unless you're 5-10 years away from retirement equities are fine and go for a very cheap global index tracker with a very low TER, not any of this managed stuff. The exception for managed funds should come as you move into draw down. Assuming you don't fancy annuitising at pretty low interest rates then there is a good selection of income targeting funds specifically designed to provide a dividend income. A favourite was the Schroder Income Maximiser fund, and the Invesco Perpetual High Income fund (when it was run by Neil Woodford - he's since departed to set up the Woodford Trust). 

Pushing through the LTA ceiling causes pretty hefty tax implications and you should weigh these up carefully with other options such as exploiting tax incentives on VCTs, contributing to your wife's and children's pension funds. With that much money inheritance tax becomes an issue to so you might want to look at skiing chalets in the Swiss Alps. 

Yes, almost I daren't consider property especially given this is an HPC forum, but might have too.

The irony of the last 15 years has been that in historic terms stock have been flatter than in the past, and we had the massive blow out on 2009.  So part of me says take the risk, and hang in against drops. but then the tax man cometh.

It is quite a dilemma, as the cost of not taking the tax break and employer contribution is high - pretty much over 70%, so even that looks OK relative to the 55% penalty on the LTA.  Of course LTA is indexed, so guessing it may be at £1.4m by the time I retire.

Edited by Mikhail Liebenstein

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10 minutes ago, dugsbody said:

How have you managed 13.5% annualised return? 

Mostly in Black Rock Global Equity funds. That is a mix capital of growth plus dividend reinvestment.

Interestingly I have money in 4 pensions (several funds in each), and broadly they have been fairly similar, one is a bit higher, at14.2% and a smaller one 12.4%, and to be honest some of the difference is down to fees.

My largest fund has £203,000 in it, when I left that job in mid 2009, the fund only had £70k in it.

 

 

Edited by Mikhail Liebenstein

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1 hour ago, Mikhail Liebenstein said:

What thoughts do people have on the pension models used by financial advisors or in online tools? The reason for asking is that I believe a lot of these models use assumptions based on the long terms holding of interest baring assets, eg bonds etc and don't really allow for the returns you get long term with equities.

Having been through all my pension funds, which are all in stocks, the average return over the last 10-15 years has been nearer to 13.5% per year. Whilst this is good and better than the assumed 7% average, it does pose an interesting problem. Basically I can model my fund on retirement being somewhere between £1.4m and £3.6m.  Obviously these are huge differences, and the tax implications are massive.  

Normally I'd wind down my contributions some what and stick it in an ISA, but then I forgo the  matched employer contribution on that element and I lose the tax relief. It also seems foolhardy not to invest in stocks, as the difference between these and bonds is massive, even allowing for the extra risk of equities.

 

 

 

You can hedge, drop 50% , and hope limit gets bumped up.

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21 minutes ago, dugsbody said:

How have you managed 13.5% annualised return? 

Eqities have had good returns. Whether they acontinue andor hold, dont know.

Ive just under 500k at the grand old age of 45.

Ive been stick in 12k a year for about 17 years. Matched by company to 8k.

If the fund grows at cpi + 4% for the next 20 years  ill be deliriously happy.

The fund has srarted to grow by more than my cintributions in  the last few years. Thats the good kind of compound interest.

 

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4 minutes ago, spyguy said:

Eqities have had good returns. Whether they acontinue andor hold, dont know.

Ive just under 500k at the grand old age of 45.

Ive been stick in 12k a year for about 17 years. Matched by company to 8k.

If the fund grows at cpi + 4% for the next 20 years  ill be deliriously happy.

The fund has srarted to grow by more than my cintributions in  the last few years. Thats the good kind of compound interest.

Early on in the journey it's all about generating savings which you then need to invest.  Later on it's all about the miracle of compound interest.

On my 10 year FIRE journey 59% of my wealth came from savings with 41% coming from investment return.

I'll also be very happy with a CAGR of CPI+4% over the next 20 years given I only intend to drawdown at 2.5% per annum.

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3 minutes ago, spyguy said:

Eqities have had good returns. Whether they acontinue andor hold, dont know.

Ive just under 500k at the grand old age of 45.

Ive been stick in 12k a year for about 17 years. Matched by company to 8k.

If the fund grows at cpi + 4% for the next 20 years  ill be deliriously happy.

The fund has srarted to grow by more than my cintributions in  the last few years. Thats the good kind of compound interest.

 

That is basically my situation and quite similar numbers, though I am perhaps 18 months younger.

Will you get to take it at 55?  My big issue is that because  the state pension age has risen to 67, they also slipped in changes raising the  private pension age by the same amount, so typically 10 years before state, i.e. 57.  Of course this means 2 more years sat on a massive fund that could grow another 25%.

So in summary, I probably have 14 more years to go on a fund growing at 13% PA,  which in compound terms  is 5.5 x.  

Whilst it is good news, I am not sure how best to plan for tax  as none of the options seem great. Part of me  says sod it and keep going for the biggest number possible, I already pay close to 50% tax anyway, and won't have a mortgage to cover by then.

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7 minutes ago, wish I could afford one said:

Early on in the journey it's all about generating savings which you then need to invest.  Later on it's all about the miracle of compound interest.

On my 10 year FIRE journey 59% of my wealth came from savings with 41% coming from investment return.

I'll also be very happy with a CAGR of CPI+4% over the next 20 years given I only intend to drawdown at 2.5% per annum.

Drawdown of 5% on a 500k fund will suit me. 25kincome is good going. Im not planning on stopping work, ever. Although i plan on being more selective and having longer summer holidays. Winters sh1t, so going to works not an issue.

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5 minutes ago, Mikhail Liebenstein said:

That is basically my situation and quite similar numbers, though I am perhaps 18 months younger.

Will you get to take it at 55?  My big issue is that because  the state pension age has risen to 67, they also slipped in changes raising the  private pension age by the same amount, so typically 10 years before state, i.e. 57.  Of course this means 2 more years sat on a massive fund that could grow another 25%.

So in summary, I probably have 14 more years to go on a fund growing at 13% PA,  which in compound terms  is 5.5 x.  

Whilst it is good news, I am not sure how best to plan for tax  as none of the options seem great. Part of me  says sod it and keep going for the biggest number possible, I already pay close to 50% tax anyway, and won't have a mortgage to cover by then.

It's already worse than that.  If you're 43 and a bit then you're State Pension age is already planned to be 68.  I'm assuming no State Pension in my models.

As far as I'm aware Private Pension age still doesn't go to State Pension age -10 years until 2028 but that means you're unfortunately looking at a Private Pension of 58 as you're a bit younger than me.  Of course there'll be more tinkering before then...

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9 minutes ago, Mikhail Liebenstein said:

That is basically my situation and quite similar numbers, though I am perhaps 18 months younger.

Will you get to take it at 55?  My big issue is that because  the state pension age has risen to 67, they also slipped in changes raising the  private pension age by the same amount, so typically 10 years before state, i.e. 57.  Of course this means 2 more years sat on a massive fund that could grow another 25%.

So in summary, I probably have 14 more years to go on a fund growing at 13% PA,  which in compound terms  is 5.5 x.  

Whilst it is good news, I am not sure how best to plan for tax  as none of the options seem great. Part of me  says sod it and keep going for the biggest number possible, I already pay close to 50% tax anyway, and won't have a mortgage to cover by then.

About 10 years ago i remember someone talking themselves into not doing a pension as they could not touch the fund and had to an annuity. 

Ive no problems with annuities - as long as i can shop around. The problems are more to do with qe fuxup rather than annuities as a whole.

Anyhow, that issue has gone.

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4 minutes ago, spyguy said:

Drawdown of 5% on a 500k fund will suit me. 25kincome is good going. Im not planning on stopping work, ever. Although i plan on being more selective and having longer summer holidays. Winters sh1t, so going to works not an issue.

I'm planning on work being optional and going somewhere that winter isn't sh1t.

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2 minutes ago, spyguy said:

Drawdown of 5% on a 500k fund will suit me. 25kincome is good going. Im not planning on stopping work, ever. Although i plan on being more selective and having longer summer holidays. Winters sh1t, so going to works not an issue.

Sounds like a sensible life plan.  Mine is not that sensible as I still have kids under 8, though the wife is 4 years younger, so could keep her out at work I guess.

I have an old University friend who was even more diligent with his pension and he has just protected  it at £880k aged 44.  I said he was a bit crazy as he'd have been  better to spend more on property rather than fully stuff his pension and lose the matched contribution, but then he said he could retire in a few years, to which I said fair point, but he has no kids.

 

 

 

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Really interesting topic for a thread so thank you Mikhail.

If the returns continue like before on those funds that would be good for your pot. But if we get the deflationary collapse predicted on the other thread, do you think staying in the same Blackrock funds still make sense to hold through that and they will still come good in your retirement horizon? 

WICAO I would love to hear your take on it.

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1 minute ago, wish I could afford one said:

I'm planning on work being optional and going somewhere that winter isn't sh1t.

Working is a good example to my kids.

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4 minutes ago, Mikhail Liebenstein said:

Sounds like a sensible life plan.  Mine is not that sensible as I still have kids under 8, though the wife is 4 years younger, so could keep her out at work I guess.

I have an old University friend who was even more diligent with his pension and he has just protected  it at £880k aged 44.  I said he was a bit crazy as he'd have been  better to spend more on property rather than fully stuff his pension and lose the matched contribution, but then he said he could retire in a few years, to which I said fair point, but he has no kids.

 

 

 

If i didnt have kids then i could have stopped working at 40ish.

But life would be not so fun. Or frustating. Or expensive.

 

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2 minutes ago, Thorn said:

Really interesting topic for a thread so thank you Mikhail.

If the returns continue like before on those funds that would be good for your pot. But if we get the deflationary collapse predicted on the other thread, do you think staying in the same Blackrock funds still make sense to hold through that and they will still come good in your retirement horizon? 

WICAO I would love to hear your take on it.

In that case I might need a gold fund :ph34r:
(Watch as gold bugs swarm).

My gut feeling though is that we will see a good run for equities at least until 2024/5, which is when I am calling the next downturn (devotee of Fred Harrison). If you look at things now things are picking up in Europe, the US and Japan are doing well, and China is still growing as is India, so I can't see global equities underperforming for a while yet. I think we may be in a bear trap phase on stocks. a few have said they are overvalued, but we had a major crash in 2009, and on an 18 year cycle, that says to me the next real downturn is 2024/5.

 

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2 minutes ago, spyguy said:

If i didnt have kids then i could have stopped working at 40ish.

But life would be not so fun. Or frustating. Or expensive.

 

:lol:

Same here.

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Id add that pretty much everyone i speak to is doing sod all saving.

Im private sector, so DB are hens teeth. At best people are doing 200/m.

Even in public sector i hear of people not putting in the req contrib - always housing cost.

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BTW, in terms of modelling pensions, I've found the above tool pretty good:

http://www.iii.co.uk/sipp/pension-calculator

 

That said I also have an HP 12C Platinum Financial Calculator which is awesome for the task.

(You can use an online 12C here:  https://epxx.co/ctb/hp12c.html   there is also an app on the Apple AppStore.)

You  might need to download the HP 12C manual unless you are familiar with RPN and financial calcs http://h10032.www1.hp.com/ctg/Manual/bpia5309.pdf

 

Edited by Mikhail Liebenstein

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2 minutes ago, Thorn said:

Really interesting topic for a thread so thank you Mikhail.

If the returns continue like before on those funds that would be good for your pot. But if we get the deflationary collapse predicted on the other thread, do you think staying in the same Blackrock funds still make sense to hold through that and they will still come good in your retirement horizon? 

WICAO I would love to hear your take on it.

No matter what comes I'll be in the same balanced portfolio state.  That's because I'm not smart enough to know what's coming.  To demonstrate my point how many people at the start of 2017 predicted the S&P 500 would put on 20%?

I'm now getting to the point where annual returns are not going to be so important but instead it will be about sequence of returns and portfolio survivability.  That's a very different proposition.  We can have inflation or deflation based bears provided it's not much worse than what has happened historically.  Backtesting my strategy would have worked through the 1907 bankers panic, the great depression, the 70's high inflation and a couple of world wars.  If it gets much worse than that then a portfolio probably isn't what I will need - more like guns, beans, a fresh water supply and a bunker.  

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  • 407 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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