Pensions - Contributions VS Growth

[neil1jnr]

This question is more for those who have already retired or have retirement on the horizon - how have build your pot, mainly through growth or large regular contributions - or just a combination of both?

I am nearing mid-thirties and have a good handle on my personal finances, including my pension.

I have been playing around with spreadsheets and was suprised at how much of a difference 2% growth makes (I know it is the joys of compounding).

My contributions go 100% to a a glibal equities fund and I have seen a 6.6% increase since April (when I changed funds - moved my entire pot off of the standard 'lifestyle' fund).

I currently contribute 10%, employer 8%. I have assumed a growth of 4% with personal contributions increasing annually by 1% until a I am contributing a max of 30%. For reference I also contribute between 5-10k per year on long term savings and stocks and shares ISA.

After looking into it a bit more, 6% seems to be realistic in the long term, thus I can raise my contributions to 12% and keep them there and on that basis the pot is in front of the other scenario until I am 55/56, where then the higher contribution model overtakes it.

Is 6% realistic? Should I contribute more if I can afford to? What is your pension strategy? Any advice?

Cheers

[2 GKC]

Pay in more and throttle it back if returns are higher than expected.

[PistonHead007]

2 GKC said:

Pay in more and throttle it back if returns are higher than expected.

Don't do this.

Make hay whilst the sun shines, you never know what could stop you saving in the way you had planned to. Loss of job or poor health for example. Only throttle back when you've got where you want to be.

Your contributions are pretty good and well ahead of average Joe. Carry on as you are and hope for higher growth from all equities but don't bank on 6%pa.

[Longy00000]

My retirement pot has come from both highest contributions I could afford and also investment returns..
Given your age you can afford to be quite speculative with investment risk profile provided your happy with it.
Over the last 10 years I've seen my portfolio sit at the same level for 2 or maybe 3 years, but then suddenly grow by 40% then stagnate again before jumping up once more.
I remember watching it collapse by 6 figures when lockdown arrived but a year later it had fully recovered.
My point is its very difficult to get nice steady year on year returns if you go high risk high reward but if you don't panic and with time on your side it can pay dividends and help get you to where you want to be earlier than you might think.
If volatility isn't your thing then maybe a lower risk profile offering more sedate returns could be attractive.
Being comfortable with risk is only something you can judge

[Somebody]

As you are in your mid-30s you have 20+ years before you can access your pension. So if I were you I would continue to adopt a higher risk profile and just keep topping up the global equities fund.

[okgo]

I’d be questioning the fund you’ve chosen if you have seen 6% since April? I’d have thought you’d most have done a lot more?

[2 GKC]

PistonHead007 said:

Don't do this.

Make hay whilst the sun shines, you never know what could stop you saving in the way you had planned to. Loss of job or poor health for example. Only throttle back when you've got where you want to be.

Your contributions are pretty good and well ahead of average Joe. Carry on as you are and hope for higher growth from all equities but don't bank on 6%pa.

Same thing no? I didn’t mean throttle back in year 2 if returns are high

[PistonHead007]

2 GKC said:

Same thing no? I didn’t mean throttle back in year 2 if returns are high

It sort of read like you'd suggested throttling back whilst still in the accumulation phase if returns are higher than expected. I'd simply take that as a bonus and carry on as is until my total pot was where I wanted it to end up. A period of high performance is often followed by one of low performance which averages things back down again.

[Puzzles]

I read it as keep paying in high contributions now and throttle it back later if it does well.

I’ll be doing a similar thing, front loading my contributions and let them compound and if needed top up. If all goes to plan I’ll stop contributing 15 years before I start taking it.

[Wololo]

neil1jnr said:

This question is more for those who have already retired or have retirement on the horizon - how have build your pot, mainly through growth or large regular contributions - or just a combination of both?

I am nearing mid-thirties and have a good handle on my personal finances, including my pension.

I have been playing around with spreadsheets and was suprised at how much of a difference 2% growth makes (I know it is the joys of compounding).

My contributions go 100% to a a glibal equities fund and I have seen a 6.6% increase since April (when I changed funds - moved my entire pot off of the standard 'lifestyle' fund).

I currently contribute 10%, employer 8%. I have assumed a growth of 4% with personal contributions increasing annually by 1% until a I am contributing a max of 30%. For reference I also contribute between 5-10k per year on long term savings and stocks and shares ISA.

After looking into it a bit more, 6% seems to be realistic in the long term, thus I can raise my contributions to 12% and keep them there and on that basis the pot is in front of the other scenario until I am 55/56, where then the higher contribution model overtakes it.

Is 6% realistic? Should I contribute more if I can afford to? What is your pension strategy? Any advice?

Cheers

Just a few comments on your modelling:

Have you factored a pay rise assumption in? Or are you assuming you'll be able to just keep increasing the percentage until you hit 30% of your current base? The way I read your model it sounds like your contribution will max out in terms of the number of pounds after a while, when in reality it shouldn't because it will follow your inflationary payrises.

6% is entirely realistic with decent funds. Hopefully conservative. Mine has averaged 9.9% over just over 5 years, but a good or bad couple of days on the market can swing that by a few percent in the space of a week.

If you can contribute more, go for it. The tax benefits are clear, especially if you're a 40% or 45% tax payer. I also feel there's an element of "make hay while the sun shines" here; I fully expect labour to come along and take this away and introduce a flat 20% or 30%. But extra contributions might not make sense based on all your personal circumstances.

My strategy depends on strong contributions and conservative growth. I built a model in 2018 when I started my new job at 35. I wanted to be able to build enough wealth to be able to just take a chilled out job that I love at 55. I am currently fourteen months ahead of schedule in my pension savings goals due to both contributions in excess of plan, and the funds doing better than the 6% I modelled. I should also add, a fully paid-for property is critical to my planning.

Edited by Wololo on Saturday 30th December 07:41

[neil1jnr]

PistonHead007 said:

2 GKC said:

Pay in more and throttle it back if returns are higher than expected.

Don't do this.

Make hay whilst the sun shines, you never know what could stop you saving in the way you had planned to. Loss of job or poor health for example. Only throttle back when you've got where you want to be.

Your contributions are pretty good and well ahead of average Joe. Carry on as you are and hope for higher growth from all equities but don't bank on 6%pa.

Thanks both. I understand taking the foot of the gas if necessary and if I reach my goal earlier than anticipated.

My first model with 4% growth, I feel I have no choice but to continue to increase my contributions to reach the figure I want. But if 6% is achievable then capping at 12% personally for now works better (second child on the way and house move in 2/3 years).

[neil1jnr]

Longy00000 said:

My retirement pot has come from both highest contributions I could afford and also investment returns..
Given your age you can afford to be quite speculative with investment risk profile provided your happy with it.
Over the last 10 years I've seen my portfolio sit at the same level for 2 or maybe 3 years, but then suddenly grow by 40% then stagnate again before jumping up once more.
I remember watching it collapse by 6 figures when lockdown arrived but a year later it had fully recovered.
My point is its very difficult to get nice steady year on year returns if you go high risk high reward but if you don't panic and with time on your side it can pay dividends and help get you to where you want to be earlier than you might think.
If volatility isn't your thing then maybe a lower risk profile offering more sedate returns could be attractive.
Being comfortable with risk is only something you can judge

Thanks for the perspective.

[neil1jnr]

Somebody said:

As you are in your mid-30s you have 20+ years before you can access your pension. So if I were you I would continue to adopt a higher risk profile and just keep topping up the global equities fund.

Thanks. That is the plan, I am hoping it works out generally in the 20/25 year mark.

[neil1jnr]

okgo said:

I’d be questioning the fund you’ve chosen if you have seen 6% since April? I’d have thought you’d most have done a lot more?

I don't follow the market properly so I don't know. It is a FTSE 70/30 fund through L&G.

Although my ISA Vanguard FTSE 100 Index has seen just over 12%, although I had been putting into that a lot longer.

There are a couple other funds I have too in ISA, Baillie Gifford global growth and a China fund.

Any suggestion for me to contemplate and review for my pension is appreciated.

[bitchstewie]

Check what fund you're in.

Most pensions will default to a "lifestyling" fund which won't shoot the lights out but which also won't make you poor if you leave it alone and assuming you do nothing other than keep paying into it the risk profile will usually change automatically as you approach retirement.

70/30 is probably about right.

Have a really good think about your appetite for risk.

Everyone loves making money and 100% equities is amazing when it's making you money.

Less so if you're down 40% and never fully considered how you'd react if or when it happens

[PistonHead007]

bhstewie said:

Check what fund you're in.
70/30 is probably about right.

That probably doesn't mean 70% equities and 30% fixed interest, more likely 70% UK equities and 30% rest of the world equities. In which case I'd swap it for something with less heavy bias to the UK.

[bitchstewie]

Probably. Pension funds seem to often have some very odd names v what they actually do and I never quite know why.

I think from how I'm following the thread Neil has swapped out of the default fund into a truly global fund though?

[Mazinbrum]

The 30% bonds explains the drag on your fund performance this year, its been an unusual period for bonds. Should be good going forward though as bonds are on the up.

Edit, my bad assuming 30% bonds. Maybe the UK portion caused the drag.

Edited by Mazinbrum on Saturday 30th December 10:08

[PistonHead007]

bhstewie said:

Probably. Pension funds seem to often have some very odd names v what they actually do and I never quite know why.

I think from how I'm following the thread Neil has swapped out of the default fund into a truly global fund though?

They usually just about say what they do in the name if you know what to look for. It is a 'global' fund but with an artificial bias to the UK.

[xeny]

bhstewie said:

Probably. Pension funds seem to often have some very odd names v what they actually do and I never quite know why.

To discourage clients from looking too hard/trying to understand.

With regard to paying more early and potentially easing off later if you're looking as if you will have "enough", keep in mind your likely future income tax liabilities. It may make more sense to pay more in slightly later in a career when you're a 40% tax payer than earlier when you're only paying ~20%.

No perfect answers except in retrospect, but making reasonable projections does at least give you some advance notice if it is all going terribly wrong.