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A (really quite long) question about how to structure investments ...

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Firstly, Merry Christmas and a happy New Year, and I hope the festive season is treating all you MSE-ers out there well. :beer:

Secondly, I have a question about investments, about which I’m hoping people can offer me their thoughts. :)

It might initially seem like a query about pensions or retirement planning, but it isn’t (though it involves both elements) – it’s really a query about how to structure my investments, which is why I have posted it here, rather than on the retirement thread.

The post is really rather looooooooonnngg, for which I apologise, and I’m also sorry if someone has asked these questions before, but I did a search on the forums and couldn’t find anything about it – my bad if I have missed it. :) It's a general question - I'm not seeking investment advice.

The purpose of the investments would be to save for retirement, which means the timeframe is about 15 years (less if I’m very lucky). I have a job I like and plan to stay with until I retire (if all goes well). I also like my house and don’t plan to move at any point. I have enough in emergency funds to last me six months and am debt-free, apart from the mortgage, which is on a low rate (around 2.9%). I am a higher rate taxpayer. I am not fazed by stock market volatility.

I am currently saving 8% of my income into the company pension (a defined contribution scheme). For every £1 I put in, the company “matches it” with £2. I could save a further 7% of my income into it if I wished, though this would not be matched.

I also want to start saving into a stocks and shares ISA, hopefully up to the full limit allowed per year. If I do this, and also raised my pension contributions to 15%, the amounts going in to the S&S Isa and the pension would be about a 45% Isa/55% pension split.

I don’t have a lot of time to research companies or watch over a portfolio and for that reason alone am happy to go the passive investing route.

My question is this (bolding it up so it’s easily seen in amidst the long explanation, hope this doesn't look weird): should I consider the pension and S&S Isa together as one portfolio, or would it be more sensible to see them as two separate portfolios?

To give a more detailed example of what I mean: the pension offers a choice of 13 funds, of which six are passively managed: a currency hedged global equity index; a UK equity index (which covers the FTSE All Share); a world ex-UK equity index; over-five-year index-linked gilts; over-15-year corporate bonds; and over-15-year UK gilts. It also offers a UK property fund (charge 0.95%)

Let’s say I wanted to use the following asset allocation: global 15%, UK equities 10, Europe ex UK 10, US 10, emerging markets 10, Asia-Pacific 5, property 5, global small caps 5, fixed income 30.

If I think of the pension and S&S Isa as one portfolio, then I invest as follows:
Pension: Global 15%, UK All-Share 10%, Bonds 30% (55% of portfolio)
S&S Isa: Europe ex UK 10%, US 10%, emerging markets 10%, Asia Pacific 5%, property 5%, global small caps 5% (45% of portfolio).

If I think of them as two separate portfolios, I invest as follows:
Pension: 65% equities (split across the global, world ex-UK and UK funds), property 5% (shame it’s UK only) and 30% bonds.
S&S Isa: The asset allocation described earlier (global 15%, UK equities 10, Europe ex UK 10, US 10, emerging markets 10, Asia-Pacific 5, property 5, global small caps 5, fixed income 30).

The disadvantage of thinking of them as one portfolio is that rebalancing might be tricky. Also, it becomes difficult to move into a higher proportion of fixed income as I get closer to retirement, though I suppose I could move everything in the pension into bonds in the last five years. But then I’d also have to gradually diversify more in the S&S Isa if I did that – so, if I dropped out of UK equities in the pension, I suppose I’d have to pick up a new fund covering them in the ISA, which would have to be seriously rebalanced as a consequence. Also, I guess there’s a chance my income might unexpectedly rocket, which would mean the funds in my pension will scoot away in value compared to the funds I can save into my Isa, thus knocking the allocations out of whack… but I don’t see that happening any time soon. :rotfl:

The disadvantage of thinking of them as two portfolios is obviously that in effect I duplicate my holdings, which is cumbersome and also presumably means more money spent in charges, since there would be a higher number of overall funds.

I should add that though I’ve given certain proportions for the Isa/pension split and for the allocations they’re still all somewhat up in the air – I might decide not to put extra income into the pension, for instance, or change my mind about the specific allocations - it’s more the question of whether I approach the pension and Isa as separate entities or not that counts.

I appreciate that bonds at the moment offer crap rates, but don't have a choice about them if I want a fixed income element in the pension holdings. I am hoping that I can also save some cash on top of the S&S Isa and pension - this would be ambitious, as things stand at the moment, but not over the long term impossible.

OK, there it is, and I hope I haven’t missed anything screamingly obvious, and I also hope that my question is not daft. Also, many thanks if you're still reading :)

Any thoughts? … 
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Comments

  • planteria
    planteria Posts: 5,322 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    whether your investments are held within your Pension or your ISA, they will still be investments you are holding for the long-term, and so if I were you I would consider them to be One Portfolio.

    that said, you can choose to divide things if you prefer.

    i use my SIPP for long-term themes, using funds that i intend to hold for several years.

    i use my ISA for some funds but also for individual companies. in theory, i will trade more often within this part of my portfolio.
  • cathybird
    cathybird Posts: 15,581 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    Planteria, thanks for your answer. :) I'm quite relieved someone did, it was such a monster question. :) It sounds as though you have different types of investments across your SIPP and Isa, therefore are possibly not concerned about rebalancing? Is that something you do? Do you worry about diversification across the two? ...
  • atush
    atush Posts: 18,731 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    I might think of them as two, if only because your pension funds/investments are limited to what is offered. but I would use them to gauge the appropriate risk on the ISA.

    As a side note, if you are STILL a HRTaxpayer after your 8% pension contribution, contribute more- even if unmatched. As every 100 in your pension only costs you 60. After that, i'd look at S&S isas too.
  • innovate
    innovate Posts: 16,217 Forumite
    10,000 Posts Combo Breaker
    cathybird, how did you migrate in the space of a couple of months from wanting to fall in love with saving to having to make a decision whether your pension and ISA account should be manged as one or may be not as one?

    http://forums.moneysavingexpert.com/showpost.php?p=63510774&postcount=1
  • cathybird
    cathybird Posts: 15,581 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    hi innovate - in case it sounds as though I'm asking this question because I have millions in the bank to invest, I don't :) I don't have a massive amount in the pension and I have nothing (currently) in the S&S Isa. That is exactly why I am asking - because I want to sort out how I should be going about it. I may as well get it right from the start (in fact I need to get it right, since there's not really that many years to go before I retire). I worked out quite quickly there was no point my saving much into a cash Isa because the rates are not high enough. I have been thinking and reading about these issues fairly intensively since starting the savings diary, and this query is the result. If you read the later entries in the savings diary, you'll see I've mentioned investing and setting up an S&S Isa quite a lot.

    I do have some assets, but they are not not the result of a disciplined savings habit - I've by and large been very scattered with money (which is why I set up the savings diary to start with). This query is part of trying to do it better.
  • cathybird
    cathybird Posts: 15,581 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    Also, the other thing is that my savings efforts over the past couple of months have shown me just how much I can squirrel away - which is fortunate, because over the next decade or so I will need to.

    Are you asking because a good many people, even those who save a lot, are nervous about investing? Or did I initially make it seem that because I have always tended to be undisciplined with money (entirely true), I must be completely unaware of financial issues in general? I did say I'd owned stocks and shares before, going back quite a few years now, and had sold them to finance travels overseas (not that those got me very far - I ended up in the UK pretty quickly, and stayed).

    Does that all make sense? Maybe I have come across as rather inconsistent, but I haven't meant to.
  • I treat as two. I'm predominantly passive in funds, which don't cost anything to purchase therefore costs aren't far off either way. The planned timescales will be different though (e.g. S&S proceeds funding early retirement pre pension), hence seperate allocations suit better.

    One thing you might need to consider if using funds is any minimum purchase, especially with the smaller proportions of the portfolio in the initial stages.
  • cathybird
    cathybird Posts: 15,581 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    Thanks, Alwayslearnin. I suppose there is a chance that the planned timescales might work out differently for me too ... though not a big chance.

    It occurs to me this morning that because I have a modest amount in the pension already I would probably struggle to catch up to it with the S&S Isa, certainly to start with, and that therefore if I consider it as one set of investments it would be very hard to get it to balance in any way for some years. So I should probably consider it as two until I have roughly equal savings in both ... if that ever happens.
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    edited 29 December 2013 at 11:29AM
    If I understand correctly something that I've read lately, it's possible to invest in US shares (and others?) in a pension while avoiding US (and others?) withholding tax. If I've got this right, it would encourage me to avoid 40% tax by contributing to a SIPP, and then to invest there in shares rather than collective investments. (Or perhaps in US (and other?) collective investments.) That's on the principle that a risk-free return is available only by avoiding tax.

    Having attended to that, I'd still view the whole thing as one portfolio, but constrained by the desire to reduce taxes.
    Free the dunston one next time too.
  • pip895
    pip895 Posts: 1,178 Forumite
    Tenth Anniversary 1,000 Posts Combo Breaker
    I would treat as two distinct but overlapping portfolios - have some core areas in both (uk equity, Global and bonds*) then split the others between the two.
    Personally I am not a fan of passive funds although they do work better in some areas than others. They are good for US stocks for example, however I wouldn't touch them for smaller companies.

    On the whole, charges are taken as a percentage so you aren't disadvantaged by having more smaller holdings. Take a close look at how your platform/supplier operates though - flat fees (eg. platform charges) can be a killer for small portfolios.

    *I would personally consider substituting some or all of the bonds/gilts with an absolute return fund in the short term - the great rotation may/probably wont happen, but they still look expensive.
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