The Daily Telegraph - Saturday - Money
‘I have three years to double my pension to £1m’
Steven Cody has big ambitions for retirement but an unconventional approach to investing. Jessica Beard reports
Most savers gradually grow more cautious as they close in on retirement, but adventurous investor Steven Cody, 52, from Scotland, has cranked up the risk dial to reach his goals.
Mr Cody, a contractor, plans to grow his self- invested personal pension from £590,000 to £1m within the next three years, paying in £2,000 a month. He will retire as soon as he crosses the £1m mark and has even planned how to withdraw the cash. This would all ideally take place at age 55, when he and his wife, Denise, will have paid off the mortgage on their home.
A big focus for Mr Cody is limiting his tax bill in retirement. He wants to avoid paying 40pc tax and will “do every thing possible” to draw £1 less than the higher-rate tax threshold, currently £43,663 in Scotland.
He said: “I can withdraw £57,426 a year and not pay 40pc. I’ll take out my annual income at the start of the tax year, so 25pc is tax-free as it’s from my pension. The next £12,750 will be taxfree as it’s my personal allowance and I’ll pay 20pc tax on the rest.” He also hopes to reinvest £4,000 each year into his Sipp after retirement, to make use of tax relief.
Mr Cody said he was not concerned about running out of money beyond the age of 85. “Your quality of life is so poor by then that I can live on the state pension. It isn’t a great disaster if I run out of money.” There is also no plan to leave an inheritance for his children. “I can’t control how long I live. There may or may not be money left,” he said.
The keen DIY investor grew his pot by more than 15pc last year and checks his investments weekly. He said: “I pick a fund and if it’s not up by 1pc in a month I dump it and get one that is.” However, Mr Cody is not sure if this is the right way to reach his target.
Funds that invest in smaller British stocks make up most of Mr Cody’s pension, as the market “seemed cheap and well placed to grow over the next five years”. He has also heavily invested in metals and commodities such as gold, platinum and palladium, via BlackRock Gold & General and exchangetraded funds. There are also some Asian stocks via M&G Japan Smaller Companies. The £590,000 pension is held in just 11 funds.
Is Mr Cody being reckless with his investment approach and is his drawdown plan realistic? Money asks the experts.
Arlene Ewing
Investment manager at Brewin Dolphin, the wealth firm Even with Mr Cody saving £72,000 in the next three years, to reach £ 1m is incredibly ambitious. He would need returns of more than 50pc.
A common mistake is checking a portfolio too frequently. This can be stressful as markets are volatile and over-monitoring can lead to emotional reactions such as selling too soon or buying at the wrong time. Mr Cody is an active investor and trades more than is normal. He is certainly adventurous, but I am not sure this is right for retirement savings.
Managing one’s own investments can be tricky. Timing the market, ensuring your portfolio is diversified and fully understanding the risks attached to different types of investment is complex. He is taking a lot of risk with a large proportion of his wealth.
If he wants to retire soon, the current balance of assets does not make sense. If the London stock market experienced another drop like the one seen in 2020, his pension would fall considerably and his plan would be set back years.
The 15pc return last year was good. However, he tweaks his holdings every week, which adds costs and reduces returns. A “buy and hold” strategy would have returned more. He is also trying to time markets but could be selling at the wrong time or buying funds that have already outperformed.
Speculative investments are acceptable when done in small quantities, but not with a large proportion of your pension. The portfolio is not diversified. There are no bonds to act as the buffer when stock markets fall, and no property. He has only 11 funds, three of which own commodities. The bulk is a bet on a UK stock market recovery and, while gold and precious metals should be part of a diversified portfolio, Mr Cody’s enthusiasm is too much. I do not anticipate him having £1m in three years.
Tax-wise, the maximum anyone can save into a pension tax-free, known as the lifetime allowance, is £1,073,100. This has been frozen until 2025- 26. If Mr Cody does have £1m at age 55 (tax year 2024- 25), the fund will need to grow only by 6.8pc before it hits the limit. He should be aware of this.
Alex Hatfield
Chartered financial planner at The Private Office Mr Cody can expect to live another 34 years based on average longevity and has a 10pc chance of reaching 100. He should care about running out of money.
He plans to save £24,000 a year, but even if he put in £40,000 ( the limit on tax-free contributions to a pension each year), he would still need the pot to grow by 7pc a year to reach £1m by age 55. A tall order.
If he did this, retired, grew his income by 2pc a year and managed to grow his remaining investments by 6pc a year, he would still run out of money by age 85. This strategy is not sustainable, particularly as 6pc a year is already at the optimistic end of forecast investment returns.
He would also face a sizeable lifetime allowance charge at age 75, when any growth in drawdown pensions is tested against the upper pensions limit. Any pension that has been left untouched, other than the 25pc tax-free cash, is also tested against the lifetime allowance at this age. Therefore, Mr Cody needs to focus more on the overall tax efficiency of the withdrawals and less on income tax. By focusing on income tax you risk ending up with a worse outcome.
He would be better off withdrawing 25pc of his pension tax-free and investing it outside a pension. This would greatly reduce his lifetime allowance charge at age 75. If he put the lump sum into a stocks and shares Isa and used this for income, his pension could last until he was 91.
A successful retirement plan includes taking income from a variety of sources, using all the tax allowances on savings, dividends, Isas and so on. Ultimately, a sustainable income should factor in the risks you need to take, those you are prepared to take, and the returns you might be expected to receive.
Mr Cody suggested reinvesting £4,000 each year into his Sipp from his drawdowns to make use of tax relief. He would be better off investing that elsewhere to avoid adding to his lifetime allowance tax bill.