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  • FIRST POST
    • Ian66
    • By Ian66 19th May 17, 5:16 PM
    • 10Posts
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    Ian66
    Bridging Fund to DB Pensions Invest or not?
    • #1
    • 19th May 17, 5:16 PM
    Bridging Fund to DB Pensions Invest or not? 19th May 17 at 5:16 PM
    Hi All,

    OH & I are nearing implementation of our plan to Retire early from April next year, essentially via depletion of funds to bridge gap to DB Pensions. We are mortgage and debt free.

    Equity realised from a property sale has been moved into SIPPs to secure tax relief benefits and currently held as cash. Work DC Pensions currently being maximised for Employer Contributions. Total SIPP / DC Pensions Value at April 2018 will be 120k.

    Additional to this we have 45k in Cash and 65k in S&S ISA.

    Main Drawdown Plan strategy is to utilise SIPPs below Personal Allowances, supplement with Cash where required and ISA held as Backup Fund. Target Spend is 25k pa.

    Driven by DB release dates, the Spend Profile is as follows:-
    • OH SIPP; 70k; Drawdown to depletion from April 18 to Dec 22 (4yrs 9months)
    • Cash; 35k; Drawdown to depletion from April 18 to Oct 21 (3yrs 6months)
    • Me SIPP; 50k; Drawdown to depletion from Oct 21 to Oct 26 (5yrs)
    OH DB Pension kicks in Dec 22 @11k pa (Plus 30k TFLS)
    My DB Pension kicks in Oct 26 @21k pa (Plus 50k TFLS)

    Considering the short time frame, Ive cautiously remained in cash for SIPPs. However, with the recent shift in interest rates, Im increasingly of the view that I need to invest a chunk of the SIPPs. My target is only to offset interest rate impacts as the Bridging Fund is depleted.

    Given the above, how would you go forward? Invest or not? And if Yes, what would be your approach?

    Thanks
Page 1
    • bostonerimus
    • By bostonerimus 19th May 17, 6:53 PM
    • 77 Posts
    • 44 Thanks
    bostonerimus
    • #2
    • 19th May 17, 6:53 PM
    • #2
    • 19th May 17, 6:53 PM
    I like your tax minimization strategy, but you might want to also consider that by withdrawing from the DC pensions you are giving up tax deferred growth so keep that as low as is convenient. I like that you are keeping the ISA as a backup.

    I'm a little confused about how much time gap between retirement and DB starting that you need to bridge, but I suggest that you keep an overall asset allocation that has at least 50% equities. With DB pensions you can take some risk. Do you actually have to deplete your DC to make it to DB start? Think about them as income generators rather than pots of money to spend.
    • Linton
    • By Linton 19th May 17, 8:14 PM
    • 7,632 Posts
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    Linton
    • #3
    • 19th May 17, 8:14 PM
    • #3
    • 19th May 17, 8:14 PM
    I share Bostonerimus's confusion as you dont seem to have allocated enough money to finance your 25K requirement, at least until OH's DB pension starts with its TFLS.

    You dont seem to have made any allowance for inflation.

    However, starting from your numbers.....
    I suggest that you keep your requirements for the period until Dec 2022 in cash. This is the period during which you are most tight for money and so you cant take major risks with satisfying your needs. Add in a bit of emergency cash, but anything beyond that can reasonably be held in equities.

    Then when the OH TFLS arrives you will have nearly sufficient cash to last you until the end of 2025 so you will only need to release a small part of your equity. Beyond 2026 you seem to have more than enough guaranteed income to meet your needs so you can keep a large % of your wealth in equity.

    When do your State Pensions become payable? They will make your position even more secure.
    Last edited by Linton; 19-05-2017 at 8:17 PM.
    • bostonerimus
    • By bostonerimus 19th May 17, 8:42 PM
    • 77 Posts
    • 44 Thanks
    bostonerimus
    • #4
    • 19th May 17, 8:42 PM
    • #4
    • 19th May 17, 8:42 PM
    Of course its Dec 2022 and Oct 2026....silly me
    • kidmugsy
    • By kidmugsy 19th May 17, 10:25 PM
    • 9,260 Posts
    • 6,075 Thanks
    kidmugsy
    • #5
    • 19th May 17, 10:25 PM
    • #5
    • 19th May 17, 10:25 PM
    Having paid off your mortgage makes things look rather tight. Might it not be wise to open a mortgage now while you both still have jobs and interest rates are low? You can pay it back in an accelerated way once your DB pensions and State Retirement Pensions are in payment.
    • bostonerimus
    • By bostonerimus 19th May 17, 10:33 PM
    • 77 Posts
    • 44 Thanks
    bostonerimus
    • #6
    • 19th May 17, 10:33 PM
    • #6
    • 19th May 17, 10:33 PM
    I've successfully done just what you are doing. I retired at 52 and my pension didn't start until age 55 and I lived off savings and investments fro 3 years.

    OK so it looks like you'll have 230k to draw from when you retire in 2018 and you need to generate an inflation adjusted 25k. Let's assume 2% inflation and a 5% return from a fairly conservative portfolio maybe (50/50). You haven't mentioned if the DB pensions are inflation adjusted or if you get state pension so I won't include either in the estimates......you'll be ok without either and rolling in it if you do get those benefits.

    in 2022 you should have 150k in your SIPP/ISA/Cash pot. Then you gat the first pension and a lump sum and so your SIPP/ISA/Cash pot will jump up a bit and end back at about 150k in 2026 when the next pension and lump sum will put you back into accumulation territory (assuming you are still drawing an inflation adjusted 25k) In 2047 with the numbers I assume the SIPP/ISA/Cash pot will be around 400k.

    If you get state pension too you will be even better off.....your 25k income requirement should be more than met by your savings and pensions. Even if you were really conservative and put everything into a savings bond ladder and you only got 2% annual return you'd still be ok.......that's assuming inflation stays at 2%......but it inflation were to go up so would the return from your savings bond ladder. You are in a good position.
    Last edited by bostonerimus; 19-05-2017 at 10:48 PM.
    • Ian66
    • By Ian66 20th May 17, 10:57 AM
    • 10 Posts
    • 0 Thanks
    Ian66
    • #7
    • 20th May 17, 10:57 AM
    • #7
    • 20th May 17, 10:57 AM
    I've successfully done just what you are doing. I retired at 52 and my pension didn't start until age 55 and I lived off savings and investments fro 3 years.

    OK so it looks like you'll have 230k to draw from when you retire in 2018 and you need to generate an inflation adjusted 25k. Let's assume 2% inflation and a 5% return from a fairly conservative portfolio maybe (50/50). You haven't mentioned if the DB pensions are inflation adjusted or if you get state pension so I won't include either in the estimates......you'll be ok without either and rolling in it if you do get those benefits.

    in 2022 you should have 150k in your SIPP/ISA/Cash pot. Then you gat the first pension and a lump sum and so your SIPP/ISA/Cash pot will jump up a bit and end back at about 150k in 2026 when the next pension and lump sum will put you back into accumulation territory (assuming you are still drawing an inflation adjusted 25k) In 2047 with the numbers I assume the SIPP/ISA/Cash pot will be around 400k.

    If you get state pension too you will be even better off.....your 25k income requirement should be more than met by your savings and pensions. Even if you were really conservative and put everything into a savings bond ladder and you only got 2% annual return you'd still be ok.......that's assuming inflation stays at 2%......but it inflation were to go up so would the return from your savings bond ladder. You are in a good position.
    Originally posted by bostonerimus

    Thanks Bostonerimus,

    Your figures align with mine, and in response to your queries both DB Pensions are inflation adjusted and SP's are @6.5k pa each with COPE reductions, so the position post Oct 26 when both DB Pensions are in payment is comfortable.

    My concern is how to balance investment risk for the overall Bridging Fund from April 18 to Oct 26 to offset inflationary erosion? You mention a 5% return from a 50/50 portfolio which would more than suffice, any pointers on your proposed composition of this? Also I'm interested in the "Savings Bond Ladder" you refer to - do you have any particular products you have used and is it available wrapped in SIPP or ISA?

    Post Dec 22 when OH DB Pension & TFLS is in payment, this will provide a platform for equity focussed investing, but I feel a more cautious decumulation strategy is required prior to this?

    Cheers
    • Ian66
    • By Ian66 20th May 17, 12:53 PM
    • 10 Posts
    • 0 Thanks
    Ian66
    • #8
    • 20th May 17, 12:53 PM
    • #8
    • 20th May 17, 12:53 PM
    I share Bostonerimus's confusion as you dont seem to have allocated enough money to finance your 25K requirement, at least until OH's DB pension starts with its TFLS.

    You dont seem to have made any allowance for inflation.

    However, starting from your numbers.....
    I suggest that you keep your requirements for the period until Dec 2022 in cash. This is the period during which you are most tight for money and so you cant take major risks with satisfying your needs. Add in a bit of emergency cash, but anything beyond that can reasonably be held in equities.

    Then when the OH TFLS arrives you will have nearly sufficient cash to last you until the end of 2025 so you will only need to release a small part of your equity. Beyond 2026 you seem to have more than enough guaranteed income to meet your needs so you can keep a large % of your wealth in equity.

    When do your State Pensions become payable? They will make your position even more secure.
    Originally posted by Linton

    Thanks Linton,

    Combining the 155k set out in my original post with 40k OH DB Pension & 20k OH TFLS provides the 215k required till Oct 26. This leaves 65k ISA and 10k Cash as backup, and whilst my DB TFLS of 50k landing Oct 26 falls just after the Drawdown period it does provide additional comfort.

    We are also considering downsizing sometime post Jan 19 which should release equity of @ 50k.

    To answer your query, SP's land Dec 28 & Oct 33, both @ 6.5k with COPE reductions.

    Your observation about a lack of allowance for inflation is key and capital value erosion is my main concern. I had previously planned to invest both SIPPs in a cautious mixed portfolio to offset inflation only, but given the short time frame for drawdown of OH SIPP in particular this now feels unrealistic. I'm not aware of any product available in a SIPP which effectively replicates a standard saving vehicle that protects capital and provides a fixed interest return?

    Your advice to hold funding required for the period until Dec 2022 in cash and supplement with a bit of emergency cash, then invest remainder therefore chimes with my current thoughts and is welcome reassurance. Next step is to develop a portfolio to suit - any thoughts on broad composition of this?

    Cheers
    • Ian66
    • By Ian66 20th May 17, 1:05 PM
    • 10 Posts
    • 0 Thanks
    Ian66
    • #9
    • 20th May 17, 1:05 PM
    • #9
    • 20th May 17, 1:05 PM
    Having paid off your mortgage makes things look rather tight. Might it not be wise to open a mortgage now while you both still have jobs and interest rates are low? You can pay it back in an accelerated way once your DB pensions and State Retirement Pensions are in payment.
    Originally posted by kidmugsy

    Thanks Kidsmugsy,

    This has previously been advised to us, but as the family home is too large for us now we intend to downsize sometime post Jan 19 which should release equity of @ 50k.

    Also, as our SP's don't land until Dec 28 & Oct 33 (both @ 6.5k with COPE reductions) this is probably too long a time frame to the make the proposal workable?

    Cheers
    • Linton
    • By Linton 20th May 17, 1:26 PM
    • 7,632 Posts
    • 7,398 Thanks
    Linton
    ....
    Also, as our SP's don't land until Dec 28 & Oct 33 (both @ 6.5k with COPE reductions) this is probably too long a time frame to the make the proposal workable?
    Originally posted by Ian66
    It would seem you should have plenty of time to bring your pensions up to the full amount with voluntary NI contributions.
    • bostonerimus
    • By bostonerimus 20th May 17, 2:28 PM
    • 77 Posts
    • 44 Thanks
    bostonerimus
    Thanks Bostonerimus,

    Your figures align with mine, and in response to your queries both DB Pensions are inflation adjusted and SP's are @6.5k pa each with COPE reductions, so the position post Oct 26 when both DB Pensions are in payment is comfortable.

    My concern is how to balance investment risk for the overall Bridging Fund from April 18 to Oct 26 to offset inflationary erosion? You mention a 5% return from a 50/50 portfolio which would more than suffice, any pointers on your proposed composition of this? Also I'm interested in the "Savings Bond Ladder" you refer to - do you have any particular products you have used and is it available wrapped in SIPP or ISA?

    Post Dec 22 when OH DB Pension & TFLS is in payment, this will provide a platform for equity focussed investing, but I feel a more cautious decumulation strategy is required prior to this?

    Cheers
    Originally posted by Ian66
    What I did when I retired 3 years before my pension started was to put 1 year of spending in a high interest immediate access savings account in addition to the 6 months of cash I keep in the bank in case the market tanked. The rest of my DC pension money and investments were in a roughly 60/40 mix (equity/bond) of index trackers....so something like VLS60. I'm in the US and my asset allocation was domestically focussed so I was around 40% US equity, 20% International equity, 40% US bond market. If you want to use a savings bond ladder along with your cash in place of a short term bond allocation....or in place of some equity if you are conservative...then just buy savings bonds of various durations (1,2,3,4,5 years) being aware of the insured limit.
    Last edited by bostonerimus; 20-05-2017 at 2:38 PM.
    • Triumph13
    • By Triumph13 21st May 17, 9:20 AM
    • 976 Posts
    • 1,121 Thanks
    Triumph13
    Whilst I'd agree that your numbers add up, I personally don't think they make sense. You are going to be really tight for money during the years you are young and healthy enough to have fun and travel, and then loaded when you are ancient and decrepit.


    Your plan has you living on 25k pa until 2026 then 30k until 2028, 35k to 2033 and 40k thereafter.
    You should be able to change that to 35k pa all the way from 2018 to 2033 and still have 40k thereafter. Without spending any of your ISA money. And never drop below 20k in your cash reserves.


    How is this miracle achieved? Simply a) take your own DB scheme at 56 instead of 60; and b) spend about 10k on voluntary NICs to get you both up to the full state pension. I've assumed a 20% reduction in your DB by taking it earlier - you'd need to check this with your scheme, but LGPS would be a 17% or 18% reduction so it shouldn't be much more than 20%.


    I know they normally say delay your DBs as much as you can, but in this case that's not what I'd be doing.
    Last edited by Triumph13; Yesterday at 2:54 PM.
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