Case Study #5
Robin, via e-mail (contact details supplied):
“I have five pensions currently totaling approximately £250,000. Two of these are fairly large pools of around £75,000 each and the other three are smaller pools of two x £30,000 and one x £40,000. Four of these were amassed during various employments and as such are invested in corporate default funds (equities & fixed income). The fifth, one of the larger £75,000 pensions, is a SIPP that I set up on receiving inheritance 10 years ago. This SIPP is invested 25% in UK equities, 25% in US equities, 25% in European equities and 25% in Asian equities. I used to have a fairly high risk appetite but recent economic/market events have brought this down to a more moderate level, particularly as my pensions have lost c.20% in value over the past two years.
"What I would like to know is, firstly, whether I should consolidate these pensions and how I can go about this; secondly, whether I can afford to retire at age 60 (I am currently 50) rather than 65; and thirdly, whether I can afford to blow a chunk of my retirement money on six months of travelling solo once I have retired, before returning to sell my London property (worth £350,000) and settle in a small cottage in a sleepy village somewhere where life is simple, quiet and relatively frugal? I would appreciate any guidance you can give.”
The Answer
Francis Klonowski, Certified Financial Planner, Klonowski
& Co:
"Financial Planners regularly encounter this kind of scenario. People often focus on specific issues such as whether they have the right pension plan or the right investment funds. Usually, though, this is part of the solution rather than the question. The Planner’s first job is often to help the person quantify and qualify their financial goals i.e. how much, and when?
"In your case, you would need to do this before an action plan can be devised. Once you have defined your goals you will find it much easier to work out exactly what else you would need to save in order to achieve your desired lifestyle.
"We often find people in this kind of situation, working towards a vague goal and worrying that they may never achieve it. Very often, thanks to some careful financial planning--preferably with the help of a Certified Financial Planner--they are relieved to discover that they are almost on track, and may only need to make small adjustments. Occasionally the conclusion is that the goals as originally stated are not achievable, and financial planning helps to show what compromises may be required--perhaps a lower income, or later retirement.
"At this stage I couldn’t advise you here on whether or not to consolidate each one. It is always tempting to do so in order to 'tidy' your pension arrangements and be able to see all your pensions in one place. It can also make it so much easier to monitor the investments, and especially to ensure the investments meet your risk profile.
"But it is not necessarily the best course of action. First, we would need to obtain much more detail about each one--not just the investments, but any penalties for transferring and any guaranteed annuity rates which may still apply on older plans. Secondly, we would need to consider the charges currently applied to each one.
"If consolidation still seems to be a good idea, I would normally use a SIPP rather than an insurance company. Even then, we would have to examine your present SIPP to see if it isthe most appropriate one for your present and future requirements.
"Before any of this, however, we should carry out a full financial planning exercise to include the following:
1. What size “chunk” would you like to “blow” for travelling? (In today’s terms of course, we can adjust for inflation)
2. How much would you propose to spend on the cottage--would it leave a surplus from your London house proceeds?
3. How much would your simple and frugal lifestyle cost you per annum--again in today’s values?
4. We would also include your projected state pension
"From this we could estimate the size of fund you would need at retirement in order to achieve your goals. We can then work out what return you need on your funds, and what future contributions would be required. Only then can we assess properly whether your existing arrangements are likely to provide that return--and how the investments should be structured to give them the best chance of doing so.
"So as you can see, “consolidation” is only part of the question--and indeed, the last part of the solution."
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Disclaimer: The financial adviser was provided by the Institute of Financial Planning. Morningstar is not responsible for the selection of the financial adviser nor will it be liable in any way for any advice or information provided by the financial adviser.
