My thinking is the movement to bonds as you approach retirement only applies if you are thinking of buying an annuity. I’m in drawdown and still have a significant proportion of my pot in equities but keep around 5 years drawdown in bonds and cash to cover any significant market correction. Your attitude to risk may vary.
to I’m throwing money at pension, ISA and mortgage overpayment in that order of priority.
I did mine the other way around - mortgage, ISA and pension albeit I’m lucky enough to have 2 company contributing SIPP for the last 32 years.
my mortgage ends in November, 50% of what was the monthly payment will get added to my salary sacrifice contribution, the balance to ISAs.
Edit - I should add that this was more luck than judgement on my part, I wasn't financially educated enough to understand that my pension might outperform my mortgage interest until I got into it during 2020 lockdown, from which point it wasn't anyway. I just thought it was a good idea to sink sales commission into the mortgage and live off the basic salary. Therefore then I'm very lucky to have paid off a mortgage and have a decent if not huge pension sum as well at the age of 52.
Index trackers do better even when taking into account market crashes.
Do you have a source for that, I'm genuinely interested?
My understanding was the volatility of index trackers impacted their returns, hence the need for a diversified portfolio and rebalancing.
I did mine the other way around – mortgage, ISA and pension albeit I’m lucky enough to have 2 company contributing SIPP for the last 32 years.
my mortgage ends in November, 50% of what was the monthly payment will get added to my salary sacrifice contribution, the balance to ISAs.
Edit – I should add that this was more luck than judgement on my part, I wasn’t financially educated enough to understand that my pension might outperform my mortgage interest until I got into it during 2020 lockdown, from which point it wasn’t anyway. I just thought it was a good idea to sink sales commission into the mortgage and live off the basic salary. Therefore then I’m very lucky to have paid off a mortgage and have a decent if not huge pension sum as well at the age of 52.
You don't have to justifty it to randoms... be happy and enjoy...
I'm currently allocating about 60% to pension, 10% to S&S ISA and 30% to the mortgage.
This is calculated so as to have the mortgage paid off by 50 (unless we move to a more expensive house which I'm currently mulling over) and then maximise pension tax efficiency while still adding a little to the S&S ISA as an insurance policy against possible changes to private pension access age and or tax treatment.
As for bonds, personally I think they have a place to reduce volatility. We haven't had a proper sustained equity crash for about 15 years which I think might be making people a little complacent. If you can't handle seeing your portfolio drop by 40%+, history suggests you probably shouldn't be in 100% equities.
As for bonds, personally I think they have a place to reduce volatility. We haven’t had a proper sustained equity crash for about 15 years which I think might be making people a little complacent. If you can’t handle seeing your portfolio drop by 40%+, history suggests you probably shouldn’t be in 100% equities.
This is my understanding too.
@intheborders that's of the amount left over after all other costs. If my total income including pension contributions is 100% then the current split is approx 40% costs, 60% pension/ISA/mortgage equity
You don’t have to justifty it to randoms… be happy and enjoy…
It wasnt a justification, merely an explanation to clarify IANAE and my “portfolio management” isn’t some expert insight or advice.
Be wary of bond funds though, as opposed to holding actual bonds. They are far more volatile than just holding actual bonds to maturity, although that is far harder in the uk than the us, for some reason.
The Americans are far more advanced than the uk at buying bonds and gilts, I think it's because they have been doing it longer. My investment platform doesn't let me buy short dated gilts online, has to be submitted as a trade, if it were like trading shares I would do it.
You only have to look at long term stock market returns - with crashes included - compared to bonds to see the difference. Bonds are supposedly safe but market conditions can still make them volatile, as we found out recently.
Don’t disagree about possible market crash in near future though. Given worldwide markets will be affected the only sensible option in my opinion is to get the returns while you can and then just ride the crash when it comes…
Ok, thanks for the answers.
The old fashioned method, before the new pension freedoms, was based on buying an annuity on the day you retired. Because this was a fixed date, you couldn’t risk a crash just before you retired, so you were gradually moved into bonds and cash in the 10 years prior.
Now, if you plan to use drawdown, you need to build 3 years supply of fixed income/cash, which will allow you to ride out the maximum expected length of stock market crashes without having to sell equities/funds whilst they are down.
The potential growth of an equity portfolio whilst retired is massive compared to bonds. So even low risk investments are a risk in themselves…..
Definitely not as nice as Adrian Newey's.
My plan is to have 70% in low cost global tracked funds, 20% in government bonds and 10% in money market funds.
Im 50, and planning to retire at 60. Whilst the funds are growing, I will sell them down to pay myself an income supplementing my RAF pension from 60, plus state pension from 67. In a market downturn, I will draw on the money market funds and maturing bonds, rather than reinvesting them.
Gosh it’s such a minefield. My tiny pension from being self employed kicks in soon. The IFA advised taking the 25% tax free per month , not in a lump sum. When the state pension goes up and kicks in, I’ll be paying more tax than I expected. Although I don’t mind paying tax , it seems that once again the small average hardworking person gets hardest hit
someone mentioned that Rachel Reeves could be changing the way pensions are paid. I really hope as chancellor she doesn’t take away the 25% tax free sum. It makes me wonder was it all worth while not having some sort of wage just to make sure I had a private pension.
someone mentioned that Rachel Reeves could be changing the way pensions are paid. I really hope as chancellor she doesn’t take away the 25% tax
I searched for ‘labour government pension reforms Rachel reeves’. Lots of right wing newspaper hits in the results. Some referring to ‘raid on public pensions’, some on the 25% tax free piece. With the, expected, skewing of results I noticed one like ‘Hunt says Reeves…’. On to a fact checker as there was a bit of a smell about the hits.
This is stamped July 2024 https://fullfact.org/online/rachel-reeves-pension-quote-false/
WHAT WAS CLAIMED
Chancellor Rachel Reeves announces new pension rules by saying “the State Pension is a benefit, it can no longer be an entitlement for all”.
OUR VERDICTThere’s no evidence Ms Reeves has said this or that she has announced any changes to the pension system since becoming chancellor.
Edit. The ‘what was claimed’ refers to the state pension. Though vague, the ‘our verdict’ refers to ‘the pension system’. I’d be interested in more facts on this.
Buffering an invested draw down against a fall is what I was doing by sticking money in ISA’s, I’m not clued up on Bonds/money market funds if there is such a thing, can someone provide a short explanation?
They’re basically investments based on Government / Treasury debts with reasonably guaranteed returns over a period of time. As someone said earlier mostly in SIPPs there are bond funds rather than the ability to buy actual bonds. I’m not sure about money market funds or what the actual difference is.
Given many SIPPs give interest on cash I wonder if it’s simpler to just set aside part of your portfolio as cash if you want the security of not having to sell during a fall during a drawdown.
I highly recommend two books:
- Overall investing, especially the accumulation phase: Tim Hale, "Smarter Investing: Simpler Decisions for Better Results"
Goes into plenty of details around why low-cost tracker ETFs are best for building wealth, bonds are best for stabilising the portfolio, and what sort of mix makes sense for you individually. - Optimising your money in retirement: Michael H McClung, "Living off your money"
Goes into even more detail about how to use your money in drawdown, with tons of research & data evidence (US, UK, Japan & others, going back 100 years or more). Very data-driven: your basically looking to reduce the probability of dying before you run out of money to <1%. Basic strategy is to spend from bonds, periodically sell equities to buy more bonds, and vary each year's income according to how well the portfolio does (within upper & lower limits).
Given the above strategy, it then makes sense to be mostly in equities until about 10 years from retirement and then gradually shift the portfolio balance to 30-40% bonds at retirement age - a so-called "bond tent".
Gulp, I knew there was something I forgot to do when I was younger. We need a work until drop thread.
you're basically looking to reduce the probability of dying before you run out of money to <1%.
EH? I really don't think you are
Apologies, I mis-typed. First of all, thanks for adding the apostrophe in "you're" 🙂
Of course, it's the other way around: you want to reduce the probability of running out of money before you die to <1%, i.e. *increase* the probability of dying without running out of money to >99%.
For example, there may be a 10% chance of being alive at 97. There may also be a 10% chance of running out of money aged 97 based on your portfolio, spending plans and past market behaviour. Naively, you might think "there's at least 1 in 10 chance (10%) that I run out of money before I die, that's too high". However, probabilities multiply: the chance of being alive at 97 and running out of money are 0.1 * 0.1 = 0.01, or 1%. This means that there is a 99% chance that you die without running out of money.
Smiley
@intheborders that’s of the amount left over after all other costs. If my total income including pension contributions is 100% then the current split is approx 40% costs, 60% pension/ISA/mortgage equity
Go 50/50, spend more while you're younger - you're a long time dead.
Currently age 55, will likely not be able to retire until state age 67. This makes me sad, I would chuck it now if I could afford to.
Kind of regret not putting more into pensions when I was younger, I thought what I was doing was enough, clearly not. When I started working for my current employer 13 years ago, I transferred all the little pots in to their Scheme. Im currently paying 10% of salary, they pay in 12.5%, pot stands at £130k. Seems pretty small after 38 years of working.
We're in the decent position of having no debt, fair amount of savings and only £44k on the mortgage.
The house has a decent amount of equity in it, so I suppose we're in a fortunate position. Just look back on those early years of work with a wee bit of regret.
Im currently paying 10% of salary, they pay in 12.5%, pot stands at £130k. Seems pretty small after 38 years of working.
We’re in the decent position of having no debt, fair amount of savings
I wonder, in this situation, whether it would be beneficial to increase your pension contributions significantly to gain the tax relief on the contributions and supplement your reduced take home monthly salary by drawing down on your savings ? IANAFA !
wonder, in this situation, whether it would be beneficial to increase your pension contributions significantly to gain the tax relief on the contributions and supplement your reduced take home monthly salary by drawing down on your savings ? IANAFA !
Good point. I've been considering this too on and off. Basically if I took a grand out of my savings to live on next month, and reduced my take home by a commensurate amount I'd pretty much double my money....
BUT. The reason I don't is:
Eggs all in 1 basket
The fact that the government may raid my pension in some form, or change the rules/timings on access.
The £grands are currently sitting in an ISA, so any retirement income on them will be tax free, whereas if I put them in my pension pot then they become taxable ( admittedly at a tiny rate)
The fact that the government may raid my pension in some form, or change the rules/timings on access.
The £grands are currently sitting in an ISA, so any retirement income on them will be tax free, whereas if I put them in my pension pot then they become taxable ( admittedly at a tiny rate)
But on the plus side everything you put into your pension is increased by your highest tax rate - which for me as a +30 year higher rate payer, is a 'no brainer'. Unless someone tells me otherwise?
But on the plus side everything you put into your pension is increased by your highest tax rate – which for me as a +30 year higher rate payer, is a ‘no brainer’. Unless someone tells me otherwise?
this is my logic also. I am fortunate to get a large annual bonus, which I get in December, put into Premium Bonds, and then draw down every month or so to make up shortfall in take home pay, whilst at same time maximising my pension contributions into Scottish Widows workplace pension, which I transfer annually into an Investec SIPP.
Ultimately the biggest retirement saving for me is i am able to move to Iberia with its lower cost of living.
^ I err with you intheborders. I am putting far more into pension for that reason at present.
I save a little, but if I need cash suddenly I have access to significant credit if needed and am earning well currently, so savings are not too much of an issue.
Unless someone tells me otherwise?
Does it not depend on the tax rate you'll pay on the way out? If you are fortunate enough to retire as a higher rate tax payer, then it is tax deferred. Of course 25% of the pot may be taken tax free, so there is the bonus over an ISA. But in general for most people, it will be higher rate relief in and standard rate when taken out. So that is a better deal Than an ISA.
Overall investing, especially the accumulation phase: Tim Hale, “Smarter Investing: Simpler Decisions for Better Results”. Goes into plenty of details around why low-cost tracker ETFs are best for building wealth, bonds are best for stabilising the portfolio, and what sort of mix makes sense for you individually.
I’m just reading this one now and would back up that strong recommendation.
Ultimately the biggest retirement saving for me is i am able to move to Iberia with its lower cost of living.
A villa in the Balearics is an option in my future, I'd love to know if you investigated the process and how you find it. The advice I get varies from "easy" to "ex pat nightmare, don't bother just have holidays instead".
Lots of my cousins have done it. The more wealthy spend summer in Ireland and winters in Portugal.
I'm currently a 55% income tax payer as repay child benefit on 3 kids. So I'm currently dumping loads into pension and drawing down savings to fund it. I'm 51 so could get the pension cash in under 6 years if I needed it so it feels more like a 5 year Savings vehicle than a 'lock away forever ' as pension used to.
With 3 young kids (9, 7, 4) I don't expect to retire very early though. I'll likely be forced to work until my pension income is into high rate tax bracket, but with getting 25% tax free and the kids being older, tax on the way out would be closer to 40% or less, rather than the 55% relief going in.
As well as the sipp I've just started to build, I've Civil Service db pensions, one I can get at 60 without reduction, the other 67. My hope is the sipp and first pension allow me to go before 67, using the sipp to tied over until that second db pension comes.
Now...recycling. recycling is allowed for within small limits, so I think I might take the 25% tax free lump from the sipp at 57 and recycle while 57-60, getting 55% boost again. Then at 60 the first db pension kicks out the lump sum and I recycle that over the next 3 or 4 years.... i think this...no..I hope this will make me enough to then retire at 63ish, not64 -65. I've lots of sums to do around all this... what to pay in, what to recycle and remain within limits, and when to start drawing the second db pension. Also need to consider if I should fund some sipp for my wife who currently looks after the kids and doesn't earn. A few £k for a sipp for her doesn't feel as attractive as she'd just get basic rate relief going in, but would pay no tax when drawing it.... but she's also 7 years younger than me so couldn't access it until much later.
All these sums are also made more complicated by the error the government made when it closed the classic pension (available at 60) and moved us to alpha (available at 67). The McCloud judgement and Remedy solution means I'll get to choose, on first retirement (ie, when I access the classic pension at 60) where 6ish years of pension is.. 6 more years in classic or 6 more in alpha (not available until 67, but worth more then).
Probably ought to pay an IFA to do all these sums for me and talk me through the scenarios.
I know I've a good pension... but feel envious of those of you talking of retirement in your 50s!
Much speculation on budget tax changes and how pensions might be affected. One that wasn’t mentioned is the potential for taking 25% tax free triggering the reduced annual allowance of £10k. This only happens if you take draw down income. If you leave the remainder untouched, the higher allowance is still retained. Would be easy to trigger the lower allowance on taking the initial tax-free lump sum, regardless.
if they remove the allowance completely, I’ll probably retire. But that would be such a huge change to the long-term financial planning for millions, it won’t happen. It will of course be subject to fiscal drag.
But on the plus side everything you put into your pension is increased by your highest tax rate
You're replaying back what IanC and me just said!
DOH, also I've just remembered the fourth and main reason I don't use savings to live on and then dump more of my take-home into my pension...... I'm already paying everything above the high rate tax threshold into my pension anyway. So the saving would only be 33% rather than 53%
As you say Tired, lots of speculation Reeves will raid pensions in some way. I hope not, but something seems likely. Any changes reduce incentives to save and too few save enough anyway. As you also point out, changes will make many just retire which isn't what is wanted, particularly if it's the likes of consultants.
