Is This a good time to switch?

Arkers

I have posted before on the pensions board with a similar question. I have a stakeholder which I have had since 2001 it now has approximately £58000 in it. I have known for sometime that it is a less attractive platform for saving into a pension.


So, enter the SIPP route, but why is it that I have the jitters? Is this because I am worried about the gamble? Well frankly yes a bit, then maybe I should leave it where it is? however, I know that with a little forethought and planning I could maximise this money.


I have read myself in circles and in the tradition of pinning the tale on the donkey I have finally settled on the following, but is it balanced? Does it spread the risk? Is it going to outperform the SH? Well lots of what and ifs, but who knows?


So, would you more knowledgeable types just comment in a non-advisory capacity about what you think about the following?


Threadneedle UK Equity Income 25%
Invesco Perpetual tactical bond17%
M&G Optimal Income 14%
CF Woodford Equity Income Fund ACC 14%
Kames Property Income Feeder 10%
Standard Life Global Absolute Returns Strategy 10%
Newton Asian Income Institutional W 10%


I have looked at the ratings of the funds from various providers, but sometimes I feel like a dog chasing its tail, quite frustrated and feel that maybe I should get on with it.


I do have other investments 2 BTL and a mid sized FS pension. So this will not be my sole investment. So considered thoughts would be appreciated.


Arkers

Jsscmm

A couple of initial thoughts. The bond, property and absolute return vs equity ratio is determined by you attitude to risk and investment timeline, neither of which you have mentioned. You have a lot of UK in there... Is that a deliberate allocation or a result of picking commonly mentioned funds?

Arkers

Hi JSScmm,


Attitude to risk, is moderately cautious, I am mid forties, so investment timeline 10-15 years. I have to admit, I have looked at the recommended funds, I think your comment re UK only is very valid. What is the average number of funds that investors have? It seems the mean is about six for this size of pot. Would it be better to have 7/8 or do you think the charges would be too high?


Thanks for your thoughts.

bowlhead99

A few comments:
1) If a stakeholder is the simplest end of the spectrum, offering non-complex choices for an annual percentage charge which could become relatively large for the quality of what you get, on a £50k plus pot... then a Self-Invested Personal Pension is the exact opposite end of the scale. Forget simplicity, you are buying a tax wrapper around a full DIY investment platform with 10000 choices from individual shares in tiny companies to thousands of branded fund choices.

With a SIPP you pay for platform access explicitly and then you go and buy all the funds. By contrast, with a "normal" traditional personal pension you go to the provider and pay a standard and affordable all in fee for a range of in-house funds, and then you can choose some externally-managed ones from SL or Newton or whatever at a extra fee level if you feel you need to.

The available choices usually cover all bases with a smaller, less bewildering set of options than a SIPP (although a wider set of choices than the limited range allowed in a Stakeholder), and your overall fees will be lower unless you want to splash out on some big name superstar managers.

Generally if you are not an expert and do not absolutely think you "must have" a specific fund, personal pensions are quite sensible alternative to a SIPP and can be had for lower cost. Certainly a more natural step up from a stakeholder unless you really really want a specific investment only available via SIPP.

2) 50% equities and 50% not-equities is a personal choice but not crazy, if you are doing it with a 10-15 year view. In the longer term, equities would be anticipated to deliver greater gains. If you start living off your pension in 15 years but do not intend to finish living off it for 45 years, there is no harm in some more equity but it would be reckless of me to suggest a bit more and have you curse me in ten years time. So, no comment on that ratio.

3) It was mentioned above that your equities are extremely heavily weighted to those companies which happen to be listed in the UK. The UK stockmarket is under 10% (by value) of the world's investible equity market. It has no equivalent of Google or IBM or Microsoft or Amazon or Apple or Samsung or Sony or Tencent or Alibaba or Ford or GM or Toyota or Volkswagen etc etc. So, putting four fifths of your equities in Woodford and Threadneedle UK is a bold move IMHO, although some home bias is natural.

4) For your entire international equity component, you are investing in developed Asia ex-Japan. Is there something wrong with Japan, the whole of Europe, US and Canada and (for a relatively small component of your equities) emerging markets such as China, India, Latin America, Russia, Eastern Europe? You asked "is it balanced?". Not sure if that really needs an answer

5) All of your equity investments are concentrated in companies that three fund managers think will produce a good stream of dividends (and which, as a consequence, huge numbers of people have been probably been ploughing money into in recent years due to chasing an income yield while interest rates have been low).

A tracker of global companies weighted to the largest ones in the world will probably produce a dividend yield of 1-1.5%. If all your equity exposure is via funds targeting a yield of 3%+, you are necessarily eliminating half the companies on the planet. Up and down across economic cycles, equity income usually does OK. But it can't be the best at all times. At some points of the cycle it will be better to be invested in companies focussed on growth rather than dividend payouts. So, a strategy investing exclusively for income, when you can't take an income from your pension for a decade or two, seems flawed and not "balanced" even though the specific fund chosen have good reputations.

6) The property fund you mention calls itself a "feeder". Without looking it up: isn't that because it is a special purpose vehicle designed to provide access to the "main" Kames fund for those investors who can't invest tax free via ISA or pension? As such, it would be foolish to use the feeder rather than the main fund if you're going in with your pension, because you will pay an unnecessary amount of tax via the feeder and turn a 5% income stream into a 4% one. I may have the wrong end of the stick here, but someone will no doubt correct me if I'm wrong.

7) How many funds is "about right"? Well, depends on approach.

For £50k - one or two mixed asset funds in a personal pension or cheap SIPP could work fine really. A lot of people in employer / group personal pension schemes will just put all their money in the default choice.

Or one or two bond funds, a property fund, domestic equities and international equities is five.

Or a government bond fund, investment-grade corporate bonds fund, higher yield bond fund, emerging markets bond fund, domestic and international real estate, UK, Europe, Japan, other developed Asia, North America equities funds, emerging market equities, couple of smaller companies funds, alternatives (hedge/ private equity) is fifteen. That assumes the government bond fund includes regular and index linked, short dated and long dated, UK and overseas...

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So, not quite "7 deadly sins" but maybe something to think on.

Arkers

BH99,


Many thanks for your VERY informative critique of the points raised. I think I took the answer when you mentioned a personal pension. I did look at this a while ago as an appropriate alternative, and having read your thoughts I will look again.


I think I will still start investing in a SIPP, but with my annual ISA allowance instead, and with this pot, I will spread the risk try and take a 360 degree approach.


I guess the bottom line is that I feel better with BTL, and although the yield has dropped in recent years, it still returns over 8%, although the market I'm in is not for the faint hearted, and it is not the easiest money gained, I guess it's because it's a tangible asset which I intend to keep for the very long term.


To reiterate I'll look again, but I do feel like an amateur jockey in the Grand National! I suspect I'm not alone, so thanks for taking the time to reply.

bowlhead99

Arkers wrote: »

I think I will still start investing in a SIPP, but with my annual ISA allowance instead, and with this pot, I will spread the risk try and take a 360 degree approach.

I don't know what you mean by that. You mean you will start investing in a SIPP instead of putting the £15k into an annual ISA allowance? Or you will invest in a self-invested style within your ISA?

SIPPs and ISAs have the same investment options so you can be flexible in where you put your assets. Obviously, the tax situation is different.

I guess the bottom line is that I feel better with BTL, and although the yield has dropped in recent years, it still returns over 8%, although the market I'm in is not for the faint hearted, and it is not the easiest money gained, I guess it's because it's a tangible asset which I intend to keep for the very long term.

8% after expenses is a good rate (presuming it is being calculated on what the property is worth now rather than what it cost when you bought it). I know people who are struggling to get 5% before their tax bills. And ISAs and SIPPs have advantages when it comes to capital gains tax.

I guess if you are in a riskier part of the BTL market, you will get potentially higher yields, though less reliable or more headaches with the tenants to sustain it.

To reiterate I'll look again, but I do feel like an amateur jockey in the Grand National! I suspect I'm not alone, so thanks for taking the time to reply.

Most people start investing by not knowing what they are doing, and gradually learning. The best way to do that is while investing in something simple and very diversified. If they don't do it that way, and instead concentrate all their eggs in one basket (e.g. UK equity income and Asia ex-Japan equity income and no other types of equities) they could get a nasty shock. Which would serve as a great learning experience but quite an expensive education.

sometimes I feel like a dog chasing its tail, quite frustrated and feel that maybe I should get on with it.

'just getting on with it' by jumping into something without proper planning, rather than first learning how to DIY before you start, is probably a shortcut to the 'expensive education'.

The cheaper education is to buy some books and do lots of reading. An annualized 6% a year on £50,000 for 15 years gets you £120,000. An annualized 7% a year on £50,000 gets you £138,000. So, if you are looking to try to make a 1% improvement to your returns, or avoid losing 1% a year from your returns through poor choices, we are talking £18k in the year 2020, which with inflation at 2.5% is something like £12k in today's money.

For £12k you should probably spend £20 on books (whether from a shop or in late fees at your local library), read the various 'critique my portfolio' threads on here and spend some time digesting, before jumping in. Your stakeholder pension is not going anywhere (well, perhaps it will only be worth £40k by next year, but if that happens then presumably whatever you would have bought in a SIPP would also have tanked to the same, or much greater, extent.

Arkers

Good morning BH99,


Thank you again for your reply. Just to clarify re my BTL, yes I do make 8% now, however, I haven't had my properties valued for a couple of years, so this has probably dropped. I guess, a bit like shares I just bought at the right time and as I rent to students the returns are very good, but I wouldn't recommend this as an easy option. These young people pay good money, and I provide very good properties, not a bit like "The young ones." I have obviously thought about increasing this portfolio, but I am very happy with what I've got, and I think that there is further regulation to come. I hate to admit it, I secretly enjoy it, I guess it's because I have similar age children so I'm used to dealing with this age group. My husband however, just lets me get on with it!


I think that because my husband and I have a final salary pension, that we have been very apathetic with regards to learning how to invest. It is only really now that we have any spare cash (on a very small scale) to look further afield.


I appreciate all that you've said, I will act upon it and try and digest all you say. I guess the "pot" of money could and probably will drop, but over the next 15 years or so, hopefully it will bounce back and then some? The contradiction is that you advise research, but with the best will in the world you don't really know what's going to happen either here or abroad, but at least it would have been an informed judgement.


I will be using my ISA wrapper in a self invested style, but I want to sort out this stakeholder and in view of your comments, I will transfer to a personal pension, I guess it's just a case of who and how.


Thank you again for taking time to reply.


Arkers




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bowlhead99

Arkers wrote: »

Good morning BH99,
I appreciate all that you've said, I will act upon it and try and digest all you say. I guess the "pot" of money could and probably will drop, but over the next 15 years or so, hopefully it will bounce back and then some? The contradiction is that you advise research, but with the best will in the world you don't really know what's going to happen either here or abroad, but at least it would have been an informed judgement.

I don't mean 'research' into what is going to go up next. You can't know that. I mean research into what investment is about ; how to allocate your assets across different types of investment (by sector, by geography etc) and periodically rebalance; see what criticism or guidance people are given when talking about their portfolios on here; get some books and do some internet reading.

You are right, markets will go down and go up. If you put all your eggs in one basket and it goes down heavily (say £1000 becomes £400) then you will be looking at needing to make a 150% return on that investment to recover back to where you were. This can take a long long time. Especially if you get frustrated with that investment which has lost money and then you sell out at the low point and buy something else which you hope will go up faster, and instead now lose 50% of that... Then you need to increase your £200 by 5x just to get back to where you started.

So, asset allocation is quite key, so that you are taking on a manageable level of risk and volatility with suitable diversification. A lot of people with 'only' £50k would feel it too expensive to get the professional advice of an IFA. But if you don't, you have to make decisions on portfolio allocations yourself, and therefore it is worth reading around some theory.