37-year-old aims for £32,000 income via "semi-Sipp"

Richard K's portfolio

Justin Modray, director at Candid Financial Advice, says:

The key issues to consider regarding your Aviva pension are the cost and flexibility of the pension wrapper and the investments held within.

Unfortunately, insurance companies tend to have numerous different pension contracts, each with different charges, and Aviva is no exception. The current version of your pension available to individual investors charges 0.4 a cent a year for the pension wrapper for balances under £30,000. But your scheme looks a little older and, as it is set up via your employer, the charges will almost certainly be different. I would start by asking Aviva what charges apply to your policy.

Looking at the funds held within your pension, Aviva is using more expensive older style 'retail' funds; that is funds that build commissions into their charges. The same funds bought via a newer Aviva pension would typically cost around 0.5 per cent less a year (since commissions are removed), so it would definitely be worth asking your employer to investigate migrating the pension scheme to these 'clean' lower-cost fund versions. It could potentially save employees a significant amount provided Aviva doesn't push up the pension scheme charges as a result.

Given that employers seldom make pension contributions into schemes other than the one they set up, you are probably shackled to Aviva unless you want to lose your valuable 3 per cent employer contribution. However, if you can reduce your 7 per cent contribution without jeopardising the employer contribution then you might consider using a low-cost Sipp elsewhere to supplement the Aviva pension. Fidelity's Sipp is pretty good value with a 0.35 per cent 'all in' annual charge with low-cost 'clean' fund versions.

Given the prohibitive cost of getting your former pension out of South Africa, I think you have little practical option but to keep it in place. Just look at the underlying investments available and ensure your selection is appropriate to the level of risk you are comfortable taking.

I agree that using a shares Isa to supplement your pension is a sensible idea. While pensions tend to have the edge in the tax-efficiency stakes, primarily because you can have a quarter of the fund tax-free at retirement, Isas are far more flexible. Unlike pensions there are no restrictions on when and how you can take your money. Buying a shares Isa via a platform will provide access to a very wide range of funds, much like a Sipp. Low-cost options include Cavendish Online and Charles Stanley Direct, where you can expect to pay 0.25 per cent a year for the Isa 'wrapper' plus underlying 'clean' fund charges which typically range from around 0.1 per cent to 1 per cent.

As for your Aviva investment portfolio, I agree that using lower-cost tracker funds as a core holding is very sensible. Your bias towards Asia and emerging markets is also pragmatic given you are nearly 30 years away from retirement. I am a little concerned that nearly a quarter of your pension fund is in a cash deposit account, after the 0.6 per cent annual charge I suspect you are actually losing money. I appreciate this is a tactical play, but given calling markets is notoriously difficult you might consider staying fully invested and simply ride out the inevitable volatility along the way.

Introducing some commercial property exposure would help diversify your portfolio. Your key decision is whether to invest in physical property or shares in property companies. In either case, you can do so via a fund. Physical property, such as retail parks and offices, benefit from low correlation with many other asset types, especially stock markets. However, liquidity can be troublesome and underlying property stamp duty can represent an effective 4 per cent initial charge when buying funds. Property shares tend to be more correlated to stock markets, but are more liquid and convenient for overseas exposure.

Your Pacific Rim equity tracker approach makes sense; if you want a dedicated commodities fund then perhaps consider First State Global Resources (GB0033737874). Outside the constraints of your pension you might also take a look at the wide range of exchange traded commodities offered by ETF Securities.

Given your annual retirement income target of £32,000, you would realistically need a pension pot of around £650,000 in today's terms to likely achieve this. Or over £850,000 assuming you have taken your 25 per cent tax-free cash entitlement beforehand. This is a tall order, but potentially achievable provided you continue your approach of saving as much as you practically can.

Philip Haden, director and chartered financial planner at McCarthy Taylor, says:

There has been a lot of 'meddling' with pensions, but thankfully the announcements in March have increased the accessibility when taking benefits from your pension. While such changes could be dangerous, if managed in the right way, they can definitely work to your advantage.

As you have already highlighted, the contributions being made into your pension at present are insufficient to retire on £32,000 a year.

While a pension is one of the most tax-efficient forms of investment, there are many other ways to invest that could provide an income in future and you could also consider the state pension, which would reduce the additional amount you would need to save. While many assumptions are made when looking at projections, we calculated that you would need to increase the contribution by approximately £700 per month to try and achieve your required target, taking inflation into account.

Are you currently receiving the maximum employer contribution? You could also ask if they operate a salary sacrifice scheme. This could increase the amount being paid in to your pension while your net pay would remain the same.

Also, remember to claim back any higher-rate tax relief if necessary, as your pension will only receive 20 per cent tax relief, depending how your contributions are made.

Aviva offer a fairly competitive 'Pseudo-Sipp', although it depends on the level you have chosen.

There are three levels and each has differing charges and investment flexibility, but their 'flex' offering is expensive based upon the amount you have in your pension due to the fixed charge, in addition to the percentage charge. This equates to 1.6 per cent a year, excluding fund charges.

You hold all Aviva 'mirror' funds, but there is no reason why you should not buy such funds direct and if that is not possible through Aviva then an alternative provider should be considered.

Buying 'mirror funds' normally means higher charges and performance that does not necessarily reflect the actual fund performance had you bought it direct. Look at the initial fees and the total expense ratios (TER) - this may explain the high charges you currently experience.

Charges are an important factor but consideration of investment choice and fund charges are also critical. There are more competitive alternatives in the market that offer greater investment choice and access to funds at a lower cost.

There are various self-managed platforms that could be accessed, such as Bestinvest, Transact or Xafinity. I would consider those that charge on a percentage basis as opposed to a fixed fee due to your current value.

Holding investments in commodities would seem sensible. There is an ETFS Agriculture DJ-UBSCI ETF (AIGA) and iShares Global Water ETF (IH2O) that you could consider.

In terms of property exposure, Tritax Big Box REIT (BBOX) presents a good opportunity but consider the net asset value before purchasing.

In all cases, I cannot see that they are available through Aviva and hence I would review your current provider.

We are still keen on investing in equities and due to globalisation you can still expose yourself to international markets via UK funds but without the same degree of political and currency risk.

I would also consider exposure in infrastructure as a long-term hold as this is an asset class that less correlated to other asset classes, but be aware of potential liquidity issues. HICL Infrastructure (HICL) could be considered for the more conservative or 3i Infrastructure (3IN) for the more adventurous.

In relation to your overall position, it is good to see that you take such a keen interest in your future. The government will not maintain your standard of living in retirement and therefore diversification in terms of funds held and types of investments is advisable, utilising your various annual allowances such as Isas, while also looking to repay any debts as these tend to carry a high interest rate is a sensible strategy.