David is a 38-year-old civil servant and has been investing for five years but is now pondering three different ways to save additional money for retirement.
He says: "I would like the option of retiring at 55 or as close to that as possible on - at today's prices - an income of £20,000 a year from secure pensions; and a further income of £15,000 a year from other sources. These other sources could be from a Sipp or other personal pension, my existing civil service pension or from other investments such as via my equity Isa or rental property."
"My question is simple (but probably difficult to answer): I have the option of increasing the income I save by about a further £1,000 to £1,500 per calender month to reach my goal. However, where should I put this money? My options are:
1 Invest more in a stocks and shares Isa;
2 Invest in a personal pension such as Sipp;
3 Invest more in my civil service pension.
"I am in the civil service pension scheme called Nuvos, which is not final salary but average salary - ie, the scheme all civil servants joining after 2007 are entitled to join. The recent changes to all public sector pensions will mean that they will be now uprated by consumer prices index inflation and not retail prices index inflation, which has usually been the lower of the two and I believe commentators calculate that this combined with other changes (higher contributions and removal of final salary calculation) means the value of my final pension is likely to be around 25-35 per cent less.
"My current gross salary is £50,000, which I expect will rise to £60,000 soon and stagnate there for the next few years, but I anticipate will accelerate when I am around 42 years old. I am not married and do not have children."
Individual savings account
Retirement savings
DAVID'S STOCKS AND SHARES ISA PORTFOLIO
| Name of share or fund | Number of shares/units held | Price | Value |
| Alliance Trust (ATST) | 607 | 432.4p | £2,624 |
| BP (BP.) | 196 | 440.05p | £862 |
| Invesco Perpetual High Income Fund No Trail Acc (GB00B1W7HH10) | 1,921 | 142.35p | £2,734 |
| Caledonia Investments (CLDN) | 93 | 1796p | £1,670 |
| City Of London Investment Trust (CTY) | 1,101 | 365.9p | £4,028 |
| GlaxoSmithKline (GSK) | 53 | 1602.5p | £849 |
| Invesco Perpetual UK Smaller Companies Investment Trust (IPU) | 911 | 307p | £2,796 |
| Artemis Strategic Assets Fund I Acc (GB00B3VDD431) | 4,056 | 77.69p | £3,151 |
| Invesco Perpetual High Income Acc (GB0033031484) | 431 | 672.88p | £2,900 |
| Royal Dutch Shell 'B' (RDSB) | 130 | 2138.5p | £2,780 |
| Newton Real Return 'A' Inc (GB0001642635) | 1,967 | 116.82p | £2,297 |
| Vodafone (VOD) | 1,178 | 216.9p | £2,555 |
| Deposit account | £12,000 | ||
| TOTAL | £41,246 |
Price and value as at 25 September 2013
Source: Investors Chronicle
LAST THREE TRADES:
Invesco Perpetual UK Smaller Companies Investment Trust, BP, Caledonia Investment Trust
WATCHLIST:
HICL Infrastructure. Newton Emerging Income, iShares Latin America, Witan Investment Trust, Fidelity SE Asia
DAVID'S OTHER ASSETS:
House worth £700,000 (mortgage of £270,000)
Buy-to-let property worth £250,000 (mortgage of £175,000) providing £1,000 monthly income
Local government pension: £3,600 income in retirement (today's prices), plus lump sum of £8,600
Civil service pension: £1,600 a year at age 65.
£10,000 in cash Isas
Colin Low, a chartered financial planner with Kingsfleet Wealth, says:
"It is indicative of the times in which we live that members of Civil Service arrangements need to be aware of their expectation of retirement income and the sources from where it will originate.
It is important that you continue to focus on the purchasing power of your arrangements in today's terms rather than just the nominal benefits as inflation has the unfortunate effect of upsetting plans.
Your three alternative scenarios are a good summary of the choices available to you. Options one and two carry a greater level of risk to you as the potential benefits offered through additional investments in the Civil Service scheme would give a greater degree of certainty.
Pension arrangements have significant tax benefits on the way in, but are liable to tax on the income in payment at retirement, whereas Isa arrangements have no initial tax advantage, but do allow the withdrawal of income and capital without any tax liability.
One further consideration would be the use of flexible drawdown. Present rules state that if an individual can demonstrate secure pension income exceeding £20,000 a year then there are no annual limits applied on the withdrawal of their personal pension arrangements through a drawdown plan (although it would be taxable). This may be a helpful middle way to consider looking at in conjunction with your existing arrangements. I would argue that funding both a Sipp and an Isa would be the most suitable way forward.
In terms of fund selection, you have time on your side, and the adoption of an adventurous risk profile is totally appropriate. Although neither Newton Real Return (GB0006780323) or Artemis Strategic Bond (GB00B09DML43) funds fit within this category, they could be useful diversifiers should markets increase their volatility.
It may be a consideration to simply look for trackers or index funds as part of your overall investment solution as this will reduce the cost and, over a long term, it is less likely that an individual manager can beat the index. However, you appear to be prepared to 'take the plunge' by purchasing individual stocks and this may be a good way of retaining your interest in the portfolio but it also increases both the risk and the volatility significantly.
You need to look closely at the cost of ownership of any active funds that you include to ensure that the managers are outperforming their benchmarks. Actively managed funds that we have used for clients with an adventurous outlook and long time frame, such as you, include the Sarasin AgriSar (GB00B7137722) fund accessing global agricultural commodities as a means of accessing changing tastes in developing countries.
We have also been very impressed with the performance of the Matterley Undervalued Assets (GB00B3BSKG91) fund, which is in the UK All Companies sector and focuses on thorough analysis of company balance sheets. It is more volatile than many funds in its sector but this type of fund may be more acceptable for those with a longer period until the funds are required.
You are considering emerging markets opportunities and if you are happy to entertain the roller-coaster ride that will come with this then now may prove to be a great time to invest. For more diversity and, hopefully, a smoother ride, we tend to prefer 'bottom-up' global investments such as the Artemis Global Income Fund (GB00B5V2MP86) and Scottish Mortgage Investment Trust (SMT)."
Lee Robertson, chief executive officer at Investment Quorum, says:
You say that you would ideally like to retire at 55 but are not sure if this will be possible or not, particularly as you would like to achieve a pension income of £20,000 in today's money as well as £15,000 from other sources.
You have surplus income of £1,500 a month that you can put towards your retirement planning and naturally want to know how this can best be put to use. The simple truth is there isn't one answer, what I would say, however, is that you should maximise your stocks and shares Isa allowance every year. Although your contributions do not attract tax relief the long-term tax benefits of the Isa are more favourable for producing a tax-free income for the future, something you will need to rely on. They are also less subject to continual political interference and diminishing value.
If you maximised your annual Isa allowance, this would leave you with a surplus of £6,480 a year that could be used to fund your pension. I also think you should consider transferring your cash Isas into stocks and shares Isas, my rationale being that with interest rates so low, you are losing the purchasing power of your capital. A stocks and shares Isa better suits your attitude to risk and will likely give you a much better long-term return.
With the remaining surplus capital I would make pension contributions to take advantage of tax relief. Whether this be purchasing 'added years' in the civil service scheme or within a Sipp will need to be investigated further.
On the face of it, the purchase of £5,500 annual pension benefit from a £43,000 lump sum seems attractive. The Civil Service Nuvos scheme offers excellent benefits and it is possible to retire early, albeit with a reduction in pension benefits by 5 per cent for each year before scheme pension age. Rather than making a lump-sum payment and disinvesting your Isas, which I would advise against, I would suggest that you make a monthly contribution. The Nuvos pension calculator indicates that £282 per month gross over 17 years would provide an annual additional pension of £5,500, although you will have to allow for the reduction for early retirement. Retiring 10 years early would therefore halve this income, so if we were to add this to the £5,200 you would receive from your existing local government and civil service pension (reduced to reflect the earlier retirement date), this means you would be entitled to a secured pension of £5,350 at age 55. £5,500 is the maximum additional benefit that you can purchase from the Nuvos pension.
By utilising this monthly payment, you will be using up £2,707 (net) of the £6,480 surplus that we identified, which leaves you with £3,773 a year to fund a Sipp. You are naturally entitled to tax relief at source, which will uplift this to £4,716 a year. If we were to assume a 5 per cent real rate of return over 17 years, we could expect this fund to grow to a size of £82,900, which could provide you with an income of around £3,316 a year. This would secure total pension income of £8,666 gross at age 55, leaving you somewhat short of your £20,000 target.
If we then switch our attention to your Isas, we could assume that your current Isa fund of £53,000 would have grown to £121,476 (including the cash Isas) assuming a 5 per cent annual real rate of return. If you then funded your annual Isas to the full, we could expect a fund size of £202,506, which added to the previous figure, could realistically provide you with a tax free income of £16,199 a year assuming a 5 per cent rate of return.
A well invested Sipp fund should beat CPI and provide much more flexibility for the future; however, it does not provide the guarantees of the Civil Service Scheme. If your £282 a month gross is redirected to the Sipp along with the other payment rather than invested into the Civil Service scheme, you could expect the fund to grow to £142,387, which could provide a pension income of £5,695 at age 55. As you can see even with a reduction for early payment, the civil service scheme plus the surplus invested in a Sipp, offers better value for money than redirecting the whole amount into a Sipp.
You could look at your investment property to provide the shortfall in income. This could provide an additional £12,000 a year gross. However, the mortgage on the buy-to-let is on interest-only basis, which will need to be redeemed if you are to take full value of the income. There is an excess rental income of £450, can this be used to reduce the capital outstanding? If you combine this with your shares and your pension lump sums and possibly your Isas when you reach age 55, this debt could be redeemed and you could enjoy the full rental income.
One final thing I would say regarding your existing investment holdings is just to check that they in line with your risk profile and that they are well enough diversified.
