Investor Views: "Should I Cash in my £850,000 Pension?"

Private investor Andrew Knight fears falling foul of lifetime pension contribution limits if he accesses a scheme from a previous employer

Emma Simon 15 September, 2017 | 1:02PM
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Golden eggs

Pension freedom rules have created new investment opportunities for people like Andrew Knight. Knight currently runs his own marketing business after taking redundancy a year ago. He now faces a decision about what to do with a former final salary pension.

He says: “I worked for a bank for around 20 years earlier on in my career, and during this time contributed to their final salary scheme. This pension is on track to start paying me an income at the age of 65.”

The latest projection indicated that this pension would pay him an income of around £22,000 a year at retirement. But pension freedoms mean that he has now has option of transferring this pension into a defined contribution (DC) scheme. He was “gob-smacked” to learn that the transfer value of this pension was in the region of £850,000.

Knight says: “This seems like a significant sum of money. Until now I’d just assumed that it would stay paying out a pension when I reached retirement age – but now I’m wondering if this is the best option.”

As his mortgage is “virtually paid off” he doesn’t need the capital to repay debts. He does have other investments: these include a DC pension with a more recent employer – an American investment bank, Additional Voluntary Contribution (AVC) plans, plus a couple of ISA investments.

He says: “I’ve taken these out on quite an ad hoc basis over the past decade or so. Usually it’s just when I’ve had a decent bonus, and have decided to put a bit of money aside.

"Generally, though when I was younger I didn’t have much in the way of spare savings — and in the last decade any spare savings have gone into my DC pension, so they benefited from tax relief."

Knight has sought professional advice about his pensions options. “I was quite lucky, before I left my last employment there was the opportunity to receive financial advice on a range of issues, including pension options. This was offered to all at a discount rate.”

Although the adviser did not specifically recommend a course of action, the information given suggested that “on the balance of probabilities” Knight would be better off leaving his final salary pension where it was.

What to Consider Before Transferring

There were two key factors: if he transferred his pension, and consolidated this with his DC pension, he ran the risk of exceeding the lifetime allowance – currently set at £1 million. “This would seriously limit my ability to save anything else into a pension, and I could end up with a large tax bill – depending on future growth, and whether I applied for the relevant protection,” he said.

He discussed taking money out of his pension to pay for a holiday, or invest in a buy-to-let property, but this would leave him with income tax to pay, and could mean there are insufficient funds to fund his retirement.

His priority is using this money to provide an income when he stops working. By transferring the pension he runs the risk that these savings will run out.

However, Knight adds: “Even with a fairly conservative investment strategy, a pension fund of this size should be able to support myself, and my wife, well into my 90s.”

Knight arranged this meeting primarily to discuss his pension options, but it allowed him to review other investments.

“I had taken a more piecemeal approach to investing in the past, so this was an opportunity to try to rebalance the portfolio a bit, and ensure it reflected the kind of risk I want to take with my money.”

For now Knight has left his DC pension where it is. This is invested in a range of low-cost passive portfolios. He says: “The charges on this pension are relatively low, but once I want to take an income from it I will have to switch it into a SIPP. I am not sure what the most cost-effective option will be. I will try to research this myself – as I don’t really want to pay a further £1,000 to an adviser to sort this out.”

Restructuring ISA Investments

Elsewhere though he has rejigged his “eclectic” ISA portfolio, which included AXA Framlington Biotech fund, AXA Framlington Select Opportunities, and Neptune Russia & Greater Russia fund, among others.

Knight says: “I’ve had this Neptune fund for quite a few years. I bought it on the back of some excellent performance, and it continued to do well for a bit. But it has been far more volatile of late. Looking at more portfolio as whole I am not sure if I am happy with this level of risk.”

The fund has a four-star rating from Morningstar, reflecting above average performance against peers, as well as a Bronze Rating. In performance terms, the fund lost value during 2013 and 2014, and made gains in 2016.

Lena Tsymbaluk, an analyst at Morningstar shares some of Knight’s concerns.

She says: “This fund benefits from a seasoned investor in Robin Geffen, who has 20 years’ experience in Russian equities.

"However, the analyst team has seen high turnover in the past few years. This turnover and the fund’s risk profile means our conviction for future outperformance has waned.”

The fund takes an unconstrained approach, meaning it takes significant bets against its benchmark. This can lead to “lumpy performance” according to Morningstar. For example the manager is significantly underweight in energy.

Tsymbaluk says: “Although the rationale for avoiding big energy companies like Gazprom is clear this is a huge relative call to take in the country, which is dominated by the oil and gas sector.”

Knight is considering selling his holding and investing in other assets. “I don’t really have any exposure to bonds in my portfolio. I’d rather concentrate on investments into UK companies or larger global fund.”

But he has been pleased with the two ISAs that are invested in AXA Framlington funds.

Gold Rated Fund for Domestic Exposure

AXA Framlington UK Select Opportunities has a coveted Gold Rating from Morningstar. This multi-cap fund has an emphasis on smaller-and-medium sized companies, but at least a third of the portfolio is in larger companies that make up the FTSE 100.

Morningstar says: “AXA Framlington UK Select Opportunities features a consistency of management and approach that, in our opinion, makes it a strong offering in its sector.” The fund has been  run by Nigel Thomas since he joined Framlington in 2002.

Knight also invests in AXA Framlington Biotech, which has a three-star rating from Morningstar, reflecting average performance against peers. This was another investment made on the back of strong performance.

He says: “Again this fund has seen strong gains and periods where its value has fallen. But while I am considering selling my Russia fund, this is the type of investment which I think has long-term potential.

“I only have a very small holding in this fund. But it’s the kind of specialist sector that I think could outperform. I want to build a more balanced portfolio as a whole, but I think it’s worth having one or two investments that are a little more high risk.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
AXA Framlington Biotech GBP Z Acc434.42 GBP0.72Rating
AXA Framlington UK Select Opps R Acc3,809.10 GBP-0.52Rating
Liontrust Russia A Acc GBP2.30 GBP3.06

About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for