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  • FIRST POST
    • smjxm09
    • By smjxm09 20th Mar 17, 8:53 PM
    • 494Posts
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    smjxm09
    Lump sum dilemma- should I avoid bond type investments?
    • #1
    • 20th Mar 17, 8:53 PM
    Lump sum dilemma- should I avoid bond type investments? 20th Mar 17 at 8:53 PM
    I will be getting around £83,000 lump sum from my pension next month. I would like to earn an income from this money but I don't want to risk losing it.

    I was looking at investing in a multi asset income fund with Fidelity
    https://www.fidelity.co.uk/investor/funds/multi-asset-income.page?utm_source=amobee&utm_medium=display&u tm_campaign=wholesale_b2c_h1_2017&utm_content=b2c_ mai_160x600
    or a Pru Cautious fund which are both bond heavy so are a lower risk but I have been spooked by a BBC story about a potential bond market bloodbath.
    http://www.bbc.co.uk/news/business-39325794

    Now I am thinking about just keeping the money in cash so am I mad?
    Last edited by smjxm09; 20-03-2017 at 8:56 PM.
Page 1
    • dunstonh
    • By dunstonh 20th Mar 17, 10:38 PM
    • 89,851 Posts
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    dunstonh
    • #2
    • 20th Mar 17, 10:38 PM
    • #2
    • 20th Mar 17, 10:38 PM
    but I have been spooked by a BBC story about a potential bond market bloodbath.
    A bond crash is typically in single digit range. Next time around it may be a little more. A stockmarket crash is 20%+ and the last two big ones have been over 40%. So, if you are spooked by a potential bond crash, how are you going to be during a stockmarket crash?
    • AnotherJoe
    • By AnotherJoe 20th Mar 17, 11:16 PM
    • 7,397 Posts
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    AnotherJoe
    • #3
    • 20th Mar 17, 11:16 PM
    • #3
    • 20th Mar 17, 11:16 PM
    I will be getting around £83,000 lump sum from my pension next month. I would like to earn an income from this money but I don't want to risk losing it.

    All of it? Or just some of it?

    I was looking at investing in a multi asset income fund with Fidelity
    https://www.fidelity.co.uk/investor/funds/multi-asset-income.page?utm_source=amobee&utm_medium=display&u tm_campaign=wholesale_b2c_h1_2017&utm_content=b2c_ mai_160x600
    or a Pru Cautious fund which are both bond heavy so are a lower risk but I have been spooked by a BBC story about a potential bond market bloodbath.
    http://www.bbc.co.uk/news/business-39325794

    Now I am thinking about just keeping the money in cash so am I mad?
    Originally posted by smjxm09
    Well, that is certainly a guaranteed way of losing some of it so it doesn't fix your issue. Say, 1-2% a year loss maybe. Adds up over time. And gives the square root of no income.

    Perhaps start from a different POV, everything you do is risky, so whats the appropriate risk/reward trade off for you?

    To help with that people would need to know your total financial income and outgoings*, why you need an income from this, why indeed you are getting an £83k lump sum. Was that a choice or does it go with your pension?

    * because if your expenditure per year was £25k and you had an income of £30k a year, plus you had this lump sum, you'd get different advice (because you could take more risk) than if you had an income of £15k a year.
    • kidmugsy
    • By kidmugsy 21st Mar 17, 12:17 AM
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    kidmugsy
    • #4
    • 21st Mar 17, 12:17 AM
    • #4
    • 21st Mar 17, 12:17 AM
    How old are you?
    • smjxm09
    • By smjxm09 21st Mar 17, 9:57 AM
    • 494 Posts
    • 144 Thanks
    smjxm09
    • #5
    • 21st Mar 17, 9:57 AM
    • #5
    • 21st Mar 17, 9:57 AM
    I will be 60 next month and the £83,000 is the pension lump sum.

    I need to put the £83,000 to work and would like it to generate a monthly income to supplement my pension.

    I was thinking of splitting the lump sum so not to put all my lump sum into a single fund and need a fairly low risk investment thus the idea of funds that generate an income based on fix assets with a small exposure to the stock market.

    While I can live with the yearly ups and downs of markets I don't want to jump in at the start of a long decline due to rising interest rates when keeping the money in cash might have been the better option.

    I have to take into account that I am turning 60 and not 40 so while an investment might do well over 20 years I might not be around in 20 years time. Also what happens to a monthly income on a failing market? Does the income stop or does it eat into the original sum invested?

    I can drip the money in over 25 months so all of the money goes in via ISA's for both the wife and I
    • Eco Miser
    • By Eco Miser 21st Mar 17, 10:30 AM
    • 3,091 Posts
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    Eco Miser
    • #6
    • 21st Mar 17, 10:30 AM
    • #6
    • 21st Mar 17, 10:30 AM
    I have to take into account that I am turning 60 and not 40 so while an investment might do well over 20 years I might not be around in 20 years time.
    Originally posted by smjxm09
    Or you may still be around in 40 years. Equally a 40 year old may not be around next year.
    Also what happens to a monthly income on a failing market? Does the income stop or does it eat into the original sum invested?
    Originally posted by smjxm09
    Depends how you've got things arranged.

    You could buy an annuity - guaranteed income for the rest of your life but the capital is gone forever, and likely to be expensive at your age (too young).

    You could buy a fund or funds and just take the natural income - dividends vary much less than prices - and let the capital grow.

    You could buy a fund or funds and sell a fixed or rising amount each year - if that amount is greater than the growth your capital will diminish.

    You could buy one or more Investment Trusts - some of these have increased their dividend every year, even in market crashes, for the last 40 years or more.

    You could do several of these things.

    You could read these articles on Monevator (earliest at bottom of page) and other articles on Monevator for ideas and explanations.

    BTW, while monthly income is nice, it's not necessary. So long as you've a cash buffer, quarterly, six-monthly or even annual payments will suffice. You've also got your pension(s) coming in to cover the basic expenditure.
    Eco Miser
    Saving money for well over half a century
    • Linton
    • By Linton 21st Mar 17, 10:52 AM
    • 8,367 Posts
    • 8,258 Thanks
    Linton
    • #7
    • 21st Mar 17, 10:52 AM
    • #7
    • 21st Mar 17, 10:52 AM
    According to ONS data the average age at death of someone aged 60 now is expected to be 87/88. The chance of dying by 80 is similar to that of living beyond 96. As you dont want to base your plan on a date of death with a fair chance of being exceeded I suggest you use 95 at least. This would imply that half your money wont be accessed for 15-20 years, plenty of time to justify (or even require) a portfolio with a significant % of equity.

    The danger of taking a fixed inflation-linked amount during a period of low prices is that you could eat into the core investments needed to ensure future income. There are several ways around that. You could maintain several years cash buffer and use that when prices are low, replenishing the buffer during better times. There are other options based on varying your drawdown depending on economic circumstances. Jamesd has written at length about such techniques.

    Personally I have a large cash or near to cash buffer, a portfolio of higher dividend/interest generating investments which deliver natural income, and a largely equity based portfolio from which I drawdown lump sums once a year to use my basic rate tax allowance. Excess drawdown is re-invested in S&S ISAs. Also there are a couple of annuities. You do need to look at diversification of income sources.
    • kidmugsy
    • By kidmugsy 21st Mar 17, 11:36 AM
    • 9,679 Posts
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    kidmugsy
    • #8
    • 21st Mar 17, 11:36 AM
    • #8
    • 21st Mar 17, 11:36 AM
    (i) Is it possible to give up some or all of the lump sum and take more pension instead? What is the "reverse commutation" rate on offer i.e. for each hundred pounds of lump sum you give up how much extra annual pension would you get?

    (ii) Anyway, assume the £83k. I'd want to split it up; in principle I'd want a bit in index-linked gilts but they are rotten value so I wouldn't touch them. In fact I wouldn't touch any long-dated bonds. So I'd look to split the money between cash (including foreign currencies), gold, and equities, though I might hold back buying the equities for a bit while Wall St is so high and the slow-motion coup against Trump continues.

    Much of the cash would be best put into high-interest current accounts and regular savers - you can make far more interest on cash than any professional money manager can and you can exploit your £1k p.a. interest allowance against income tax. I'm not sure of the best way to hold foreign currencies: would anyone like to suggest a good way to hold Swiss Francs and Singapore dollars, say?

    I'd be sympathetic to the case that you might just want to spend some of your lump sum to bridge the gap until your State Pension begins. Indeed you might want to spend most of it before your SRP begins, for all I know. If so, your desired equity fraction might be quite modest.
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