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

cathybird

atush, thanks. I think you're right about the pension. I was mulling over whether to start up a SIPP on the savings diary and you rightly pointed out that they can cost quite a lot to run. The work pension would cost nothing extra, which makes it a no-brainer, really. )

cathybird

kidmugsy wrote: »

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.

Thanks, kidmugsy. So you would forget about the work pension and set up a SIPP instead? The only thing is I think the work pension works out a lot cheaper, despite the fact that it offers only a limited number of funds. I'm inclined to think of doing that first. But I will certainly look into what you have said.

cathybird

pip895 wrote: »

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.

Thanks pip895 I couldn't invest in a passive fund for smaller companies in the pension anyway, as it doesn't offer that. Also, I don't think it offers an absolute return fund (though I will check). I'm kind of stuck with what it offers, really. Thirteen funds is not when it comes down to it very many.

I like your idea of overlapping the two - I suspect that that might work very well, in fact.

kidmugsy

cathybird wrote: »

Thanks, kidmugsy. So you would forget about the work pension and set up a SIPP instead? The only thing is I think the work pension works out a lot cheaper, ... I'm inclined to think of doing that first.

It seems pretty wise to me to stick to your work pension for the time being. The only "free lunches" are keeping down taxes and costs.

I've googled around a bit more on SIPPS and (for instance) American taxes. It seems that the cost of currency exchange GBP/USD can reduce the benefits - suggesting that it's best to use a platform/broker that's cheap for that activity. I fear that it also means that it's not worth it for only a few years for my small SIPP. Once you're an experienced investor, though, it might be worth returning to the idea.

cathybird

Thanks kidsmugsy. Yes, I think those who have said to put more into the work pension are probably exactly right.

I have decided that I'm probably overcomplicating the whole issue anyway and that pip895 has suggested a good approach - two portfolios, but with overlap - so that simplifies both the potential duplication and the issue of exact rebalancing with each other, which I think is probably going to prove totally undoable in the short term, given that there's money in one and not in the other. I don't have to get the allocation "perfectly right" to start with anyway - as long as I've got rough diversification and try to aim for a broad 70% equities - 30% fixed income split for the first year or two, that is probably fine for now.

kidmugsy

cathybird wrote: »

I don't have to get the allocation "perfectly right" to start with anyway - as long as I've got rough diversification and try to aim for a broad 70% equities - 30% fixed income split for the first year or two, that is probably fine for now.

Yes: in that case a potentially important decision is whether to have your fixed interest as index-linked rather than conventional bonds.

For investments that we intend to hold for a long time we prefer index-linked.

cathybird

kidmugsy wrote: »

Yes: in that case a potentially important decision is whether to have your fixed interest as index-linked rather than conventional bonds.

For investments that we intend to hold for a long time we prefer index-linked.

I was thinking of keeping quite a sizeable proportion in cash at the mo, if only because the yield on bonds is very low. Where the pension is concerned I don't have a lot of choice about the fixed-income element, so it will have to be over-five year index-linked gilts, basically. The pension funds also include an over-15-year corporate bond fund and an over-15 year gilts fund but the rate of return is very miserable. I can always switch into them later, as I get closer towards retirement.

Porcupine

Those pension funds seem rather UK-heavy. The UK is, what, 4% of the world economy yet you only have a choice between 'UK' or 'world'.

What are the fees like, out of interest?

What I do is what I call 'seesawing'. I have a number of S&S ISAs, but of course I can only pay into the one from this year. Each ISA has advantages and disadvantages - perhaps better coverage of funds but higher charges, or able to hold shares and ETFs, and so on.

So let's say I buy £5K of US tracker in this year's ISA. I then sell £2.5K of US funds from last year's ISA, and I can use them to buy something else. That way I've increased my holding in US funds but also released cash to buy something not available in my current ISA. I also do a similar thing to reduce fees - sell a fund that's expensive to hold in last year's ISA and buy it back with lower costs in this year's ISA, meanwhile buying something that's cheap to hold in last year's ISA with the proceeds. No money transfers between ISAs but the holdings are just reshuffled.

Perhaps you could do something like this by rebalancing without moving money between wrappers?

Is the ISA strictly for retirement or are you planning to access it earlier? That may change your gameplan.

cathybird

Porcupine wrote: »

Those pension funds seem rather UK-heavy. The UK is, what, 4% of the world economy yet you only have a choice between 'UK' or 'world'.

They're really UK-heavy, in a way that is quite irritating. The UK is actually round about 8% of the world economy, if memory serves, so if about 10% of my overall holdings were UK, that would be about right to me, but it's almost impossible not to give it more weight than that, unless I go into the managed funds that are on offer, which I don't especially want to do.

What are the fees like, out of interest?

The passively managed trackers are about 0.28, 0.3. The UK property fund is .95, which I suppose is not too bad. The Blackrock Market Advantage Strategy fund (did I mention this before? can't remember) is 0.55 - it is part active, part passive. It covers a range of assets and regions and I'm quite interested in it because of that.

There's one managed fund, Jupiter Ecology, 1.2%, which invests in companies that show a commitment to the environment - it's relatively expensive but I like its aims and its focus is global rather than the UK so could be handy in order to diversify?

What I do is what I call 'seesawing'. I have a number of S&S ISAs, but of course I can only pay into the one from this year. Each ISA has advantages and disadvantages - perhaps better coverage of funds but higher charges, or able to hold shares and ETFs, and so on.

So let's say I buy £5K of US tracker in this year's ISA. I then sell £2.5K of US funds from last year's ISA, and I can use them to buy something else. That way I've increased my holding in US funds but also released cash to buy something not available in my current ISA. I also do a similar thing to reduce fees - sell a fund that's expensive to hold in last year's ISA and buy it back with lower costs in this year's ISA, meanwhile buying something that's cheap to hold in last year's ISA with the proceeds. No money transfers between ISAs but the holdings are just reshuffled.

Perhaps you could do something like this by rebalancing without moving money between wrappers?

That's really interesting, Porcupine - one of the things that has been slightly doing my head in is that it's very hard to choose a provider without disadvantaging yourself in some way - your approach sounds like a way round that - I'll give that some more thought, thanks

Is the ISA strictly for retirement or are you planning to access it earlier? That may change your gameplan.

Definitely for retirement. I don't have any other big goals in mind and I want to retire as early as is practical, so the vast bulk of my savings from now on are going to be focussed on that.

kidmugsy

Porcupine's idea is also a cheap way to effect rebalancing between, for instance, bonds and equities. When they have diverged from the proportions you favour, use your new subscription to your ISA and new contribution to a pension to rebalance the total without (usually) any need to sell existing investments.