De-risking pension pot close to LTA help

[Baldinho]

Hi,

I'm 54 and close to hitting the lifetime allowance for my pensions. The funds are currently invested in medium/high risk funds so am obviously keen to switch out of those asap to low/minimal risk funds until I get myself up to speed with options for future investment routes.

Currently my funds sit within Standard Life and I can switch online.

Any recommendations which funds I should switch to in the short term for a couple of months as I'm geting twitchy at losing a fair chunk if there are any market shocks etc. Don't mind a minimal negative return as just want to crystallise/protect decent gains to date.

Any thoughts warmly welcomed.

[quinny100]

Not familiar with Standard Life, but most providers have either a cash fund or low risk mixed funds which hold some cash and low risk stuff like Government bonds, either of which should hold steady whilst you weigh up your options.

[NickCQ]

Hard to say without seeing the Standard Life options but there are reasons to be wary of traditional "safe" asset choices at this particular moment in time. Usually, low risk products will have a higher allocation to fixed income products (corporate bonds). These are quite vulnerable if US inflation fears are converted into reality and rates do start rising. For a few months, cash is probably the best option.

What's your target retirement age? That's quite important in determining how much you want to de-risk your portfolio. Would it be a good idea to take your cash free tax when available and leave c. £750k in the pension in high risk assets to keep growing?

[rthomp25]

Firstly, well done on getting close to the LTA at 54!

I assume you know the basics, but good fact sheet here:
https://www.pensionsadvisoryservice.org.uk/content...

I am 52 and have started looking at my pensions, and personally found that paying for advice was the best route,
as it is such a complex issue.
Also, they take the commission from the actual pot, so no large upfront costs,
and I am sure you could negotiate a good deal with regard to your pot.

There is a lot of dome and gloom about shares at the moment (Covid), so I can see why you are asking the question.

I used these guys:
https://www.tilney.co.uk/financial-planning/pensio...

As you can now have a discretionary manager for a low cost, and they monitor the pot on a daily basis...

[Baldinho]

Thanks all for replies so far.

In terms of retirement strategy/age not sure just yet as haven't properly thought it through/worked out what I need.

Standard Life portal shows their lowest risk funds are money market based funds with management charges of 1 to 1.05% and 12 month returns of -0.5% to -0.8%.

I'd take a hit in short term (and obviously lose any potential further gains in the current medium to high risk funds) but at least would ring fence gains to decent gains to date.

Am I straight in my thinking?

[anonymous-user]

It depend when you want to cash it in.

If it’s 6 months away then yes, 10 years I’d leave as is.

Have you thought about splitting it up, protect 50% and leave 50% (if a sub 2 year window).

[NickCQ]

Baldinho said:

Standard Life portal shows their lowest risk funds are money market based funds with management charges of 1 to 1.05% and 12 month returns of -0.5% to -0.8%. Am I straight in my thinking?

If that -0.5% is net, implying 0.5% gross then that's probably a good proxy for cash & should be low volatility. Painful for a few months but worth it to avoid tail risk.

Longer term you should be able to reduce fees by getting out of Standard Life (assuming you are happy to DIY & aren't restricted by employer scheme).

[LeoSayer]

IMO you should only de-risk the value that you want to drawdown from in the short-medium terms ie. up to 5 years.

The LTA tax is 25%. Better to get 75% of some gains than 100% of no gains.

[CarlosFandango11]

Baldinho said:

Hi,

I'm 54 and close to hitting the lifetime allowance for my pensions. The funds are currently invested in medium/high risk funds so am obviously keen to switch out of those asap to low/minimal risk funds until I get myself up to speed with options for future investment routes.

Currently my funds sit within Standard Life and I can switch online.

Any recommendations which funds I should switch to in the short term for a couple of months as I'm geting twitchy at losing a fair chunk if there are any market shocks etc. Don't mind a minimal negative return as just want to crystallise/protect decent gains to date.

Any thoughts warmly welcomed.

Why do you want to de-risk? Are you intending to draw on your pension in the near future?

By de-risking, you would be reducing the impact of market shocks, but also reducing the impact over market increases. And increasing the risk of negative real returns. Maybe this makes sense if you wish to use all of your pension to buy an annuity or draw down a significant amount in the near future, but if you’re intending to draw down over the long term, it may not make as much sense.

Im 99% sure you’re aware of this, but I’ll mention it anyway: you’re only taxed on your pension in excess of the lifetime allowance, so being over the allowance is more beneficial to you than be at or under it.

Edited by CarlosFandango11 on Wednesday 14th April 15:23

[Baldinho]

All good points again and thanks very much all. My knowledge of pensions is as good as zero - I've just had my head down working over the years and chucking contributions in when told to.

Not the best financial planning strategy as I'm starting to realise! Think I need to find a financial adviser and sit down with them.

[Mr Pointy]

Baldinho said:

All good points again and thanks very much all. My knowledge of pensions is as good as zero - I've just had my head down working over the years and chucking contributions in when told to.

Not the best financial planning strategy as I'm starting to realise! Think I need to find a financial adviser and sit down with them.

Read.The.Stickies

[anonymous-user]

Don't forget that relatively recent tax changes mean many people will choose to spend in the following order,

• First - spend general investments (no tax wrapper, so leave the wrappers to go on cumulating tax free)
• Next - spend ISAs (nice, tax free income and gains)
• Last - spend pension (potential to leave a "pot" to close relations with IHT avoidance)

Takes some careful chewing to get your head around it and the outcome may vary according to individual circumstances.

From these different categories you may be able to finesse annual income to avoid higher rate income tax while pulling a good income.

And, as Leo Sayer said, no point cutting off your nose to spite your face. Other benefits are so good that the "over LTA" tax charge may well be worth swallowing. Again, can vary with individual circumstances.

[supersport]

Am I right in thinking that the limit only applies on crystallised funds?

Until you hit 75 and then there is that tax event? So really it is cutting off your nose.

[DSLiverpool]

Are you taking the tax free 25% next year? No pockets in a shroud!

[anonymous-user]

supersport said:

Am I right in thinking that the limit only applies on crystallised funds?

Until you hit 75 and then there is that tax event?

Yes, there's a re-test at 75. Essentially you can "spend down" to get yourself within LTA at 75 if you want avoid the tax charge. You would "spend down" by drawing pension but probably won't want to leave that until the last minute. Pension drawn is taxed at your marginal income tax rate so if you try to pull out a big chunk at the last minute you're likely to hit the 40%, 60%, 45% tax bands - which might be somewhat counter-productive.

If someone's been going full tilt at ISA and SIPP they may have substantial investments in both. Imagine for a moment someone with a traditional 60:40 split between equities and bonds spread across their ISA and their SIPP. If their SIPP is nudging towards LTA it could make sense to restructure the investments so that lower risk/return bonds are in the SIPP and higher risk/return equities are in the ISA.

[Elderly]

DSLiverpool said:

No pockets in a shroud!

- Invest in a company making shrouds with pockets .

[B9]

Ignoring inflation and the LTA increase every year..

Let's say at 30 you've been contributing £30k pa to your pension, and you now have a pension pot of £250k. If at this point you stopped contributing, at 5% growth it'll be over £1m when you reach 55.

Is the consensus that the individual should start to reduce what they're paying into their pension now (or at least in the next few years)? Is the 'sweet spot' for a pension to be as near as damn it to the LTA? If so, why? I understand whatever is above the LTA will be taxed more heavily when it comes to drawing down, but then so would the salary you decide to start taking home rather than salary sacrifice into your pension?

[GT03ROB]

B9 said:

Ignoring inflation and the LTA increase every year..

Let's say at 30 you've been contributing £30k pa to your pension, and you now have a pension pot of £250k. If at this point you stopped contributing, at 5% growth it'll be over £1m when you reach 55.

Is the consensus that the individual should start to reduce what they're paying into their pension now (or at least in the next few years)? Is the 'sweet spot' for a pension to be as near as damn it to the LTA? If so, why? I understand whatever is above the LTA will be taxed more heavily when it comes to drawing down, but then so would the salary you decide to start taking home rather than salary sacrifice into your pension?

Well 5% above inflation every year is good going for a start!

I don't think there is an easy answer & each case will be different. I'm comfortably through the LTA but still pay in. Why? Because my employer says its all or nothing. Even after the tax penalty I'm better off than taking nothing.

For others where there is a choice the answer will not be the same. .

[TwigtheWonderkid]

B9 said:

I

Let's say at 30 you've been contributing £30k pa to your pension, and you now have a pension pot of £250k. If at this point you stopped contributing, at 5% growth it'll be over £1m when you reach 55.

No it won't.

[Mr Pointy]

TwigtheWonderkid said:

B9 said:

Let's say at 30 you've been contributing £30k pa to your pension, and you now have a pension pot of £250k. If at this point you stopped contributing, at 5% growth it'll be over £1m when you reach 55.

No it won't.

I make it about £846k