Rory Dillon-Brown takes saving for his retirement more seriously then most.
The 37-year-old factory worker earns £1,427 a month gross and contributes
£500 a month – nearly a third of his wage – to a Scottish Equitable group
personal pension administered by his employer.
Single with no children, Rory lives in shared accommodation in Southhampton,
where he pays £300 a month rent, including bills.
The main motivation behind such massive pension contributions is Rory’s desire
to reap maximum benefit from the tax relief available on pension savings.
That is, for every £78 contributed to a personal pension, the Government
will add a further £22, taking the gross contribution to the pension fund to
£100.
Rory says: “It is also important to me that I do not squander my earnings.
This way my pension contributions are taken directly from my wages. I was
brought up in Mexico, where people are so poor that any money you get you
make sure that you do not squander it. Now I try to save everything I can.”
He adds: “I can’t afford to buy a house in this area. I did try to get a
mortgage and someone explained how much it would cost a month. I realised
that I would have £20 a week to live off if I made that commitment. So my
primary invetsment is my pension.”
Because Rory has much of his savings tied up in his pension, he is anxious to
get the most from his investment and has requested online access to monitor
the performance of his funds, which include Invesco Perpetual Income, the
Schroeder UK Alpha Plus fund and a cash fund. He also has 20 per cent of his
portfolio tied up in commerical property funds.
Rory has noticed that the property fund is performing poorly but is unsure
whether to move his money. He says: “I want minimal risk and maximum growth.
According to the paperwork, the portfolio is ‘cautious’, but I am not
convinced. This is my way of putting away from my retirement so I don’t want
to get conned.”
He adds: “In addition to tracking the progress of the fund online, I would be
keen to know if there is anything I can do to ensure that I spot downturns
and do something about them. I have also contacted the Pensions Ombudsman
and an adviser told me that there may be advantages to income drawdown when
I retire. I am eager to learn more about this option.”
Rory has no debts and no credit cards. His largest expense is his bicycle,
which costs about £20 a week, and about £30 a week on entertainment. In
addition to the pension, his savings comprise £9,000 in index-linked
certificates from National Savings & Investments, plus an instant-access
account with Nationwide, in which he currently has £100.
Rory says: “I have no plans to travel, just to save. The more I can save, the
happier I will be.”
After seeking advice on lifetime annuities providers from the Pensions
Advisory Service, he is hoping for some more tips on guaranteed annuity
rates. “I understand that I am unable to swap annuity providers once I have
purchased an annuity,” he says. “ I would be grateful for some more advice
regarding any potential pitfalls.”
Financial CV
Earnings: £17,124 a year before tax and national insurance.
Savings: £9,000 in NS&I index-linked certificates, £100 in
Nationwide Cash Builder account.
Pension: £500 a month for past four years into a group personal pension
with Scottish Equitable administered for his employer.
Objectives: To save as much as possible for retirement income and
maximise pension contributions by monitoring fund performance.
Rory Dillon-Brown: what the experts say
PENSIONS & SAVINGS
Lee Smythe, Associate director, Killik & Co
“Rory seems to be singularly focused on his pension provision at present.
While this is no bad thing, he is paying a very high proportion of his
income to his pension and could be storing up problems for the future.
“Rory will not be able to access his pension funds for at least 18 years
because the minimum pension age is rising to 55. As there is every chance
that his circumstances will change in the meantime, it may be better to have
accessible savings.
“I would recommend that Rory keeps the NS&I savings as emergency
cash reserves. I would also suggest that he considers an Isa as a supplement
to his pension planning, rather than focusing solely on the pension fund.
Although there will be no tax relief, the fund will grow largely tax-free
and some or all of the fund could be withdrawn at any time, also free of
tax. By using an equity Isa, Rory will also open up access to a wider range
of potentially better investment funds.
“As for income drawdown and annuities, Rory is correct that once you have
purchased an annuity it generally cannot be altered or transferred to a new
provider. However, pension providers in recent years have been working on
new plans that offer greater flexibility. It is unlikely that any
Government, present or future, would be able to resist the temptation to
tinker with the rules some more and therefore I cannot say exactly what
options will be available to Rory when he retires.”
Action plan
Consider an equity Isa
Retain NS&I certificates
Discuss options for annuities or drawdown plans closer to retirement
PENSIONS, SAVINGS & INVESTMENT
Mark Dampier, Head of research, Hargreaves Lansdown
“As Rory has a long period of time to invest, he should be far more aggressive
with his strategy. It isn’t until you are in your mid-fifties that you
should start to consider reducing risk in the portfolio.
“I would keep the Invesco Perpetual Income and Schroder UK Alpha Plus funds
because they are excellent. However, I would replace the cash and most of
the property fund with equities, looking to Asia and emerging markets for at
least 20 per cent of the portofolio.
“My ideal portfolio for Rory would be approximately 40 per cent to 50 per cent
in UK equities, at least 20 per cent in emerging markets and Asia, 15 per
cent in Europe and a good global fund such as Artemis Global Growth or
Neptune Global Equity.
“Rory should also consider diversifying his savings strategy with an
instant-access cash Isa.”
Action plan
Replace cash and property with some exposure to emerging markets
Consider the Kent Reliance Direct cash mini-Isa, which pays 6.21 per cent on a
minimum investment of £1 and has no notice period
PENSION & SALARY SACRIFICE
Jerry Mcloughlin, Director, Punter Southall
“The outlook for commercial property over the next three to five years does
not look good and I would recommend that Rory does not contribute more money
to this fund until the market looks a little healthier. Property fund
managers are imposing some penalties on policyholders who wish to switch out
of existing funds, so I would advise Rory not to move the money already
invested.
“Rory could also consider salary sacrifice. This is where some salary is
sacrificed by the employee and the employer makes a contribution to the
pension scheme out of these pretax earnings. By doing this, Rory will not
pay tax or national insurance on the sacrificed salary and it can be added
to the employer’s pension contribution. This has the effect of increasing
how much is contributed to the pension and is particularly advantageous for
low-to-mid-earners as national insurance contributions on earnings between
£5,200 and £34,840 are 11 per cent.
“This would increase Rory’s pension funding without affecting his take-home
pay and there is no additional cost to the employer. In fact, the employer
will also make national insurance savings of 12.8 per cent and Rory may be
able to negotiate splitting some of this saving with the employer to
increase his pension funding further.
“One other point to raise is provider diversification. Rory could consider
contributing to an alternative personal pension to spread risk and provide
access to funds that may be better than those with Aegon Scottish Equitable.”
Action plan
Retain but not increase investment in property fund
Look at salary sacrifice
Consider additional pension
LINKS
Killik & Co: 020-7337 0529, www.killik.com;
Hargreaves Lansdown: 0117 900 9000, www.h-l.co.uk;
Punter Southall: 020-7839 8600, www.puntersouthall.com.
Rory’s response
“I have been looking for precise information about how my funds perform for
many months and was beginning to get disillusioned. However, the advice I
have received here is excellent.
“The financial consultants agree that I need to remove my money from the cash
fund. This is something concrete that I can act on now. All the experts say
that I have 18 years to retirement and this is more important than the level
of risk at the moment. I had not previously realised this.
“As for the downturn in property, I had noticed the problem in monthly
statistics but did not have the confidence to act on it. I will now look at
specific funds from Scottish Equitable’s list, choosing some that agree with
the financial advice I have received.
“I am considering taking out an Isa as I can do this relatively easily.”
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