Pension Advice Please

GTG

I have a SIPP with Alliance Trust made up of investments in a number of Global Growth Investment Trusts quoted on the LSE. I am 50 next year and therefore have the option to take 25% as a tax free lump sum and buy an annuity with the balance.

I may take the annuity option next year or postpone it until a few years time. I am concerned about a downturn in world stock markets decimating the value of my portfolio. I am able to sell and buy into a number of diffrent investment vehicles including UK Government Gilts, debentures, laon stocks and preference stocks.

Can anyone give me some general guidance as to the types of investment I should be considering?

TIA

dunstonh

Investments have a sliding scale of risk. Currently you say you are top heavy in global growth. That doesnt mean you have to go to the opposite extreme. There are plenty of cautious invesmtents although some of which you mention dont offer great potential right now. Whilst others do.

You also have other equity investments you could consider. Whilst these would be effected by a correction the amount they would be hit would be less than global growth. e.g. UK equity income. That sector dropped half what global growth did and took about year to recover in the worst stockmarket drop in recent history.

Buying an annuity at 50 when you dont need it is wasteful. It will cost you far more in the long run than a short term stockmarket crash. You would be better placed adjusting the portfolio to a better spread of investments which average out to match your risk profile rather than trying to second guess the performance of the markets.

EdInvestor

Since you are already in a SIPP, there exists a halfway house which you can easily adopt. You can take your 25% tax free cash and put the rest of the fund into "income drawdown" so it remains invested. Under new rules you don't have to talke any income at all from this fund - but if you want income, you can take any amount up to 120% of the annuity rate.

IMHO it is sensible to structure a drawdown fund so that it is invested in income producing assets, such as dividend paying shares and equity income funds,(seen as lower risk than growth shares/funds), commercial property funds (unit or investment trusts), bond funds and gilts.

Depending on attitude to risk, there may also be room for some growth type investment ( eg commodities funds or equity growth funds) for the long term, as they will increase the likelihood that you fund will grow long term and provide a rising income to beat inflation.

GTG

Thank you for two very interesting replies and in particular the advice about "drawdown". I was aware of this option but did n't quite know how it worked. I do now.

I am very concerned at this moment about a crash and would just like to get out of equities into "cash" while I formulate a new investment strategy. I understand that there is something in the pension rules which allows this but only for short period of time. Can someone elaborate on this and advise me what is the best cash investment vehicle and what would a typical rate of interest be.

Thanks

EdInvestor

GTG wrote: »

I am very concerned at this moment about a crash and would just like to get out of equities into "cash" while I formulate a new investment strategy. I understand that there is something in the pension rules which allows this but only for short period of time. Can someone elaborate on this and advise me what is the best cash investment vehicle and what would a typical rate of interest be.

Thanks

If you sell your investment trusts, the resulting cash will land in your SIPP cash account, where it will earn interest while awaiting your next move.

The rates are not great (though of course they attract no tax).

http://www.alliancetrust.co.uk/pdfs/interest_rates.pdf

Unfortunately there's not much choice of cash funds for pensions - the M&G sterling fund is one you could look at - it is "near cash". I believe Fidelity has one as well. But after dealing charges and fund charges I doubt you'll be much better off than just leaving it in the SIPP cash account.

jamesd

There's no need to take the lump sum or go completely into cash to protect yourself from the possibility of a crash.

Simply switch your investments within the SIPP to those with lower risk, like UK equity income, commercial property owning buildings, not property company shares, in Europe and the UK, UK corporate bonds and global corporate bonds. A mixture of those would keep your money growing, though at a slower rate, while also not being vulnerable to a fall of more than 10% or so, depending on the proportion of each you used. If the crash doesn't happen, depending on the mixture, this could end up 10% higher.

GTG

The interest rate on cash would n't maintain the value of the funds in real terms i.e taking into account the real rate of inflation (probably nearer the RPI than the CPI).

I've thought of another idea for protecting the funds from a cash, that is placing sell orders at a particular price level. Now that it's possible to deal online with alliance I'm off to see if this facility is available.

BTW james thanks also for your advice, it has been noted.

EdInvestor

Do you mean using "stop losses" GTG?Unfortunately these don't work in a very serious crash of a share or trust, the price will shoot straight through your level without stopping.

It's really better to reduce risk via asset allocation as james says. No need to get rid of all your existing stuff, just change some of it to lower risk investment so that the overall profile or your portfolio is at a more moderate level.

GTG

"Do you mean using "stop losses" GTG?Unfortunately these don't work in a very serious crash of a share or trust, the price will shoot straight through your level without stopping"

Yes Ed, that's what I mean.

I've always wondered what happens when the screens "go red" in a crash and how the price levels are established. I understand it is down to supply and demand but have never understand who would be buying in a crash situation. I presume the market goes into automatic mode whereby programs take over the buy sell function?

Oh well, looks like I'll just have to restructure my portfolio to reflect my new risk profile. Great info and advice here though, thanks again to all.

EdInvestor

GTG wrote: »

I've always wondered what happens when the screens "go red" in a crash and how the price levels are established. I understand it is down to supply and demand but have never understand who would be buying in a crash situation. I presume the market goes into automatic mode whereby programs take over the buy sell function?

Let's say a company puts out a seriously bad profit warning. The institutional sellers with large chunks of shares will start dumping them, and although the computer at your market maker will present your tranche to be sold, it's very likely that the torrent of sell orders from other much bigger players will push the price well below your designated level before your sale can get completed.

This has another danger, as what usually happens is that the institutions overreact at first and push the price down further than the bad news warrants: at this time point value orientated investors will see the share as cheap and will move in to buy it up. Thus the price may well bounce back up off the bottom by the end of the day. But if you are on stop loss, you risk having your deal done right at the bottom, after all the heavy hitters have already sold, thus missing the bounce back. A double whammy.

GTG

Thanks Ed, you're definately living up to your signature.

I should change mine to.....an enlightened investor.