Balancing a pension portfolio

sheilanick

Linton wrote: »

Splitting a portfolio over multiple providers can make rebalancing a hassle as you cant easily transfer cash between them. So you will end up having the same investments with multiple providers. And then you might as well use different investments.

I use 4 platforms, but each one supports logically different portfolios -

His and hers long term high risk ISAs which are run separately, because of the rebalancing problem, but happen to both be with the same provider - Fidelity.

High Yield Income Portfolio with iii

Her capped drawdown SIPP (in progress) with SIPPdeal

My flexible drawdown SIPP (in progress) with BestInvest

Yes that is one of the difficulties. I do have the same funds invested with different providers. I also have his/her ISA investments and I do have a more aggressive approach to fund selection for these investments.

So in total I am trying to track 6 different investment centres. Out of interest I recently put all the funds in to a single spreadsheet, which threw up numerous fund duplications, but also questions such as, why do we have twice as much in total invested in North America funds than in UK funds? This isn't something obvious when you look at one pension fund in isolation.

jamesd

jamesd wrote: »

For each of these sectors/regions please say whether you think they are a. underperforming and b. better to sell than buy at the moment:

Here's my answer:

1. Commercial property. Underperformed during drop in 2008 has seen some recovery and likely to do well in an economic recovery. A good fixed interest alternative to gilts and corporate bonds.

2. Gilts. Have been outperforming due to an inflating bubble driven among other things by quantitative easing. A good place to be underweight, selling out near probably highs.

3. Emerging markets. Have been suffering a bit recently and in some cases my be getting close to 2008/early 2009 values. May drop more but overall quite a good time to buy. Maybe better to do it gradually though, depending on how the Fed moves go.

4. United States. Well above average and cyclically adjusted P/E but nowhere near highs on those measures. Can rise more but overall not a great place to put a lot of new money and moving out a bit is more likely to be good. But be prepared for more rises.

5. Europe. Still dragged down by economic worries. Nice place to be overweight.

6. High grade corporate bonds. Similar issues as gilts, particularly the long-dated (longer maturity) ones.

7. Short-dated corporate bonds. Less sensitive to interest rates. Within the bond markets the closest thing there is to a safe haven.

8. Natural resources. Lots of selling off been happening, getting towards late 2008 early 2009 levels. Buying time rather than selling, though be prepared for more drops.

The point of the questions was in part that if you were to use recent past performance you'd mostly be selling what you should be buying more of and buying more of what you should be selling some of. Knowing the reasons for the price movement is important when you're trying to predict the future, as you are when trying to decide where to be under or over weight. But part of it isn't trying to predict the future, just trying to buy each area when it is near to its cheapest price and do some selling nearer the highs. Which is what rebalancing tries to do, though not as much as someone who's deliberately trying to do more than just rebalance.

So, how did your thoughts match mine?

jamesd

sheilanick wrote: »

SE Blackrock absolute alpha, ranked 378/408, returning -2.6% over the last year, compared with sector average over same period of 10.3%...... I have £53000 invested.

Assuming you mean BlackRock UK Absolute Alpha, this fund isn't now particularly good or bad for what it does - which is try to preserve value while trying to make money. Newton Real Return is one I'd consider if you want this specific type of investment.

sheilanick wrote: »

SE Blackrock Aquila over 5yr index gilt with £50000 invested.

That's an area where I would want to be heavily underweight. Long-dated gilts, the ones most sensitive to interest rate changes.

Ark_Welder

Do we have an idea of the timescale involved? i.e. the length of time to retirement? Also, how the fund is intended to eventually provide a retirement income (if known at this stage)?

jamesd wrote: »

Originally Posted by sheilanick
SE Blackrock Aquila over 5yr index gilt with £50000 invested.

That's an area where I would want to be heavily underweight. Long-dated gilts, the ones most sensitive to interest rate changes.

If the fund held conventional gilts, but this one holds index-linked gilts. Whilst these might also be expensive to buy into right now - and we don't know when the fund was bought - they do still offer a level of protection against future inflation.

dunstonh

and leave the balance in drawdown, one capped the other uncapped.

Why do that?

Our savings and investments are sufficient to fund us from 57 to 66 without needing to drawdown our pension

Although that may not be the most efficient method of doing it.

Instead of thinking of the pension as a product. Think of it as part of an overall large pot and start to look at the efficiency of the various methods that can supply you the income. It may well end up with the same answer but it may well be that a bit of phased drawdown and perhaps using some tax free cash as a form of income (which would then be tax free) along with some taxable income to supplement and use up personal allowances without drawing on as much personal savings could be the best option.

jamesd

Ark_Welder wrote: »

If the fund held conventional gilts, but this one holds index-linked gilts. Whilst these might also be expensive to buy into right now - and we don't know when the fund was bought - they do still offer a level of protection against future inflation.

True about the inflation protection. And maybe there are more price rises to see when inflation rises and people perceive a higher value. But perhaps too expensive to buy today.

I assume one in capped drawdown and one in flexible because only one of you will have a sufficient initial income to qualify for flexible drawdown.

On BTL, why one BTL instead of a few? Diversification in properties and areas is good so if you can manage it, two or three properties beats one. Mortgage ideally secured on your own residence if possible, just because that's cheaper.

I agree with dunstonh about overall planning but I'm not sure that phased drawdown would be the way to go, since that cuts income from the BTL property to achieve its tax benefit. Would require some calculations to see whether the potential tax gain is worth the loss of income. Depending on total investment values the BTL might be useful diversification of income as well, compared to the pension investments.

But it is worth wondering whether use of some TFC as income is a good idea, if say you want to maintain an even income between now and when the work pensions and then state pensions start. TFC for income can be efficient for that. Though I'd usually expect taking the pension income to be more efficient it'll depend on total income level. Might be more efficient for the one with the capped drawdown to do this while the one with flexible drawdown exploits that to take taxable income in excess of the GAD limit but only up to the higher rate tax threshold. Depends on the specific numbers.

kidmugsy

jamesd wrote: »

Might be more efficient for the one with the capped drawdown to do this while the one with flexible drawdown exploits that to take taxable income in excess of the GAD limit but only up to the higher rate tax threshold.

My strategy is to empty my pension in flexible withdrawal before the basic rate of income tax is increased, or merged with National Insurance. (There's also a case for getting the tax free lump sum out before someone reminds us why its name was changed to Pension Commencement Lump Sum.)

jamesd

That's a reasonable strategy to deal with both legislative risk and the future pressure on budgets that could cause an increase in tax rates. A shift from pension to non-pension tax wrappers could be good in such circumstances.

The PCLS name is distinct from other tax free lump sums, like the winding up lump sum that is also tax free. Sometimes people here confuse the winding up lump sum with the PCLS for that reason and because winding up lump sums are less commonly seen.

Reduction in legislative risk is one reason why I'll be taking a PCLS as soon as I'm able to.

Ark_Welder

jamesd wrote: »

True about the inflation protection. And maybe there are more price rises to see when inflation rises and people perceive a higher value. But perhaps too expensive to buy today.

Not necessarily too expensive to buy today: depends on the investor's timescale and their expectations or concerns about inflation. Linkers would be too expensive in the event of deflation, and likely to deliver a lower return than other assets in the event of benign inflation. But in the event of high inflation then they might provide a superior return to all other asset classes - even equities, which can deliver sub-inflationary returns if inflation is too high because of the impact on input costs. At the moment, linkers with 15+ years until maturity give a positive real return if held until maturity - slight, but positive. Those with less life remaining might be giving a negative real return at the moment, but do still have the potential to deliver a superior nominal return in the event of high inflation over the nearer term. If the rate of inflation does increase, then by the time the individual investor notices, linkers are likely to have become relatively more expensive rather than showing value due to institutional investors tending to be more ahead of the game in these matters.

If the intention was to go down the index-linked annuity route then there would also be the argument that gradually moving funds into index-linked gilts would be the way to go, just as moving towards conventional gilts would normally be desirable for a conventional annuity, just as moving more towards an equity-focussed balanced approach might make sense for a drawdown route (the approach that I am taking for myself - I hope...!). Hence, the first couple of questions in my previous post.

bigadaj

Going back to jamesd's original list I found myself wondering about commercial property. I can see the logic in terms of their reduction in value since the gfc, and that many forms of bonds are unattractive but I wonder about the future for much commerciall property, prime london looks good but much of the rest of the UK is struggling, be it office or retail. In which case I guess we're looking somewhere else in the world?