Join our community of smart investors

'How big should my pension be if I want to retire in 20 years?'

This investor neglected his retirement planning and now needs to grow his pension pot
January 13, 2023 and Robert Ward
  • This investor should try to work out how much money he will need to retire
  • His time would probably be better spent on monitoring larger core holdings than very small ones
  • Cryptocurrencies should be regarded as a speculative punt rather than an investment
Reader Portfolio
Nathaniel 46
Description

Pensions, Isa and general investment account invested in funds and direct equities, cash, cryptocurrency, residential property

Objectives

Maximise investment growth and increase pension to a reasonable size, average annual return of 5% plus, retire in 20 years

Portfolio type
Investing for growth

Nathaniel is 46 and earns £70,000 a year. He and his wife have two children aged four and 13, for each of whom they have set up a trust worth around £75,000.

Nathaniel and his wife's home is worth about £625,000 and has an interest-only mortgage of £200,000.

"I have spent the past 20 years investing in houses – renovating and selling them, and then buying larger properties," says Nathaniel. "I have also been supporting my wife financially for the past four years following the birth of our second child. As a result, I have neglected retirement planning. But my wife has now returned to full-time work so I have more disposable income to invest and want to maximise the growth of my pensions so that they increase to a reasonable size.

"I plan to retire in 20 years and would like the pensions to grow by, on average, 5 per cent-plus a year. But I am not sure how much income I will need in retirement. I have plenty of equity in our home so could downsize and will receive a good inheritance by the time I reach pension age.

"I contribute around £800 a month to my workplace pension, which currently has a value of about £10,000. This is entirely invested in Aegon BlackRock 50/50 Global Equity Tracker (GB00B1G51136) and I will continue to invest in this as there are few other options. I have a further £800 a month to add to my self-invested personal pension (Sipp), which has a value of about £15,500. Recent additions to this include putting £500 into each of Baillie Gifford American (GB0006061963), Fundsmith Equity (GB00B41YBW71) and Lindsell Train Global Equity (IE00BJSPMJ28).

"I have already used up this tax year's individual savings account (Isa) allowance. I have £26,000 in cash, an asset in which I wish to have at least £20,000. 

"I have been investing for a few years and have a high risk appetite. I work in financial services, and have bought shares in NatWest (NWG) and Lloyds Banking (LLOY) as I thought their share prices were undervalued at the time. I first purchased Lloyds Banking at 33p per share following the outbreak of the Covid-19 pandemic. More recent trades include putting £250 into Amigo (AMGO) at 5p a share – a gamble, but this company is allowed to lend again following a difficult few years.

"I purchased Novo Nordisk (DK:NOVO B) and Taylor Maritime Investments (TMIP), and added VT Gravis Clean Energy Income (GB00BFN4H792) because I want to invest in a green fund. I have invested in the other funds for exposure to certain parts of the world.

"I plan to keep adding to the existing funds in my Sipp and start a small position in a Japan fund to which I will add each month."

 

Nathaniel's pension investments
HoldingValue (£)% of the pensions
Aegon BlackRock 50/50 Global Equity Tracker (GB00B1G51136)10,00039.2
NatWest (NWG)3,22312.6
Lindsell Train Global Equity (IE00BJSPMJ28)3,12012.2
Baillie Gifford American (GB0006061963)3,07812.1
Lloyds Banking (LLOY)2,97711.7
Fundsmith Equity (GB00B41YBW71)2,92411.5
Amigo (AMGO)1770.7
Total25,499 

 

Nathaniel's non pension investments
HoldingValue (£)% of the investments
NS&I Premium Bonds26,00036.3
Lloyds Banking (LLOY)13,24918.5
iShares 100 UK Equity Index (GB00B7W4GQ69)5,5217.7
Baillie Gifford American (GB0006061963)5,0457.1
Ethereum cryptocurrency4,0005.6
VT Gravis Clean Energy Income (GB00BFN4H792)3,3154.6
Novo Nordisk (DK:NOVO B)3,2094.5
Slater Growth (GB00B7T0G907)2,6033.6
NatWest (NWG)2,3573.3
Fidelity Emerging Markets (GB00B9SMK778)2,3283.3
Taylor Maritime Investments (TMIP)2,1683
International Consolidated Airlines (IAG)1,7782.5
Total71,573 

 

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.

 

James Batchelor, chartered financial planner at Progeny, says:

You have a fairly substantial mortgage on an interest-only basis and relying on an inheritance to repay this is a risky strategy. You could either move the loan onto a repayment basis, make regular overpayments or designate some of your surplus monthly income to a formal repayment vehicle such as a dedicated Isa. As with the timing of inheritances, you may not be able to downsize your house at the time you wish or for the amount you hope to get, depending on the state of the market at that point, so plan accordingly.

Although you are 46 and a relatively high earner, you have very little pension provision with funds of only about £25,500. If you retire in 20 years just before your state pension age of 67, you will not have particularly long to build up retirement funds. However, the resources you have to address this need are good.  

Your investment style appears to be quite speculative, based on your previous trades. This is ok as long as you have a solid plan in place to meet your goals and don't concentrate your risk too much. At the moment, you appear to be investing more on the basis of current trends rather than having a long-term strategy. Your appetite for risk and reasonably modest timeframe until retirement would be consistent with investing 100 per cent in equities.

The fund you have selected for your workplace pension is a decent choice and in keeping with your attitude to risk. If you continue to pay £800 gross a month into this workplace pension and also make a net personal contribution of £800 a month to your Sipp, you will contribute a total of £1,800 a month – £800 plus £800 and tax relief at source of £200. You would also be able to claim higher-rate income tax relief on your contributions via your tax return. If the pensions made an investment return of 6 per cent after costs, you would have funds worth approximately £900,000 in 20 years’ time. This makes no allowance for future increases in contributions but would result in a pot of a really good size and probably still within your pensions’ lifetime allowance.

The assets in your Sipp are very heavily concentrated, with two individual bank stocks making up a substantial proportion of it. It would be better to switch the Sipp into something simpler, cheaper and more appropriate for the long term. If you wish to remain equity-heavy, a low-cost MSCI World tracker fund could provide great long-term growth potential and huge diversification [see chart]. Or if environmental, social and governance considerations matter to you, instead opt for a fund that tracks the MSCI World ESG Leaders Index.

You Isa has a diverse number of holdings that do not appear to have any particular strategy. As with the Sipp, simplify these into a single, equity-rich, low-cost, global and highly diverse fund. 

Having £26,000 in NS&I Premium bonds is a reasonable choice as any prizes are tax-free. As you are a higher-rate taxpayer with a personal savings allowance of only a £500 a year and NS&I Premium Bonds pay an average return of 3 per cent, this saves you around £112 a year in tax.   

Cryptocurrencies have been extremely volatile over the past few years and should be regarded as a speculative punt rather than an investment. But given the size of your holding in these relative to your other wealth, this is not a problem for you.

 

Robert Ward, chartered wealth manager at Walker Crips, says:

As you are now focusing on retirement and longer-term investing, start by thinking about the amount of money you will need to retire. This involves forward forecasting and estimations, and when you know the amount needed you can work back to consider how big your retirement pot needs to be at your desired age. This has the added benefit of allowing you to continually review whether you are on course, behind or even ahead of schedule for the amount you require, and manage this with closer attention and the added benefit of being able to potentially retire earlier than you thought.

I would be cautious about your home given recent interest rate increases. Although you say that you could sell your property and downsize when you reach retirement, through experience I have found that this is the last thing people want to do. But if you have a clear retirement strategy you will be able to consider whether you are able to pay off at least part of your mortgage over the next 20 years.

I'm a big believer in having conviction in the investments you own and knowing why you own them. It's common for investors to invest in different shares because they look cheap or undervalued, which in itself is fine. But it is difficult to know when they are no longer cheap and need to be sold. Having price targets in mind enables you to keep a sell discipline within your investment strategy, and have a clear idea of why you own each investment and what you wish it to achieve. I suggest considering your investment strategy, and whether you hold funds, direct shareholdings or a mixture of both so that your portfolio does not become unbalanced or too widespread.

Baillie Gifford American and Fundsmith Equity are good examples of holdings you can buy, hold, add to and own for the long term. Adding money to existing core holdings such as these on a regular basis is a solid strategy that will carry you a long way towards your retirement objectives.

Investors often dedicate a disproportionate amount of time and thought to small holdings, such as Amigo in your portfolio, checking share prices regularly. But this time could be better spent on larger core holdings and ensuring that they are right for your portfolio.

Personally, I advise against considering cryptocurrencies as any sort of key contributor towards your retirement planning as their volatility is too great. Cryptocurrency should not be part of your long-term retirement plans just yet – rather consider it as money you would be prepared to put on red or black at the casino. It may be much wiser to invest this money in a higher-risk investment such as UK smaller companies, which are trading on historically cheap valuations and, at time of writing, appear to offer an attractive entry point. You also do not have much exposure to these in your portfolio.