Bonds in a Pension Fund

David.s_2

Does anyone invest in Bonds? (In the pension wrapper.)
Is that a good way to stabilise a pension fund in the short term? Anything better to suggest?

I have started a SIPP at age 71 for the first time (no other pension apart from UK state pension). I am interested in very low risk as I don't want to be stuck with a drop out that takes years to recover from. (Cash holding considered) I am still working, but income will be low next year onwards. I have £40K to look after. Perhaps the same again next year from my company as I have 4 years left to reach 75.

Why did I leave it so late, well I don't have much to pay in fees and the tax relief is somewhere between corporation tax and higher rate income tax. At least 20% return. It would take many years in a fund to match that. I wanted to do other things with my money along the way, including buy to let.

dunstonh

Does anyone invest in Bonds? (In the pension wrapper.)

Investing in directly invested bonds is not a mainstream activity. Most consumers would invest in bonds within collectives.

Is that a good way to stabilise a pension fund in the short term? Anything better to suggest?

A bond can actually be high risk or low risk. However, holding a single bond will also have increased risk as its eggs all in one basket.

I am interested in very low risk as I don't want to be stuck with a drop out that takes years to recover from.

Bonds can also lose money and take years to recover.

princeofpounds

Whether a bond is high risk or low risk largely depends on two things.


1) Credit. Lending money to a risky company is obviously riskier.


2) 'Duration'. Lending money for a long time period is also riskier (not just because more can surprise you over a longer period of time, but importantly because general financial conditions can change over time, making the 'original' fixed income deal struck better or worse by comparison).


Short duration, high credit bonds are not all that different to cash savings. Long duration, lower credit bonds behave more similarly to investing in stocks. Quite a spectrum.


If you are looking at modest risk investments, then bonds are definitely a reasonable place to look as part of your portfolio, perhaps even the majority.


But as Dunstonh says, you are probably best off looking at a diversified bond fund with the right exposure for you (in terms of geography, credit risk, duration etc.). Individual bonds - with a few exceptions - come in large ticket sizes (e.g. £100k minimum) and can go to zero if they fail, so are not for ordinary retail investors.

kidmugsy

David.s wrote: »

Does anyone invest in Bonds? (In the pension wrapper.) Is that a good way to stabilise a pension fund in the short term? Anything better to suggest?

By far the best bond-like investment you can make is to defer your state pension. You'll get an extra 10.4% for every year you defer. An exception would be if you expect to live off "benefits"; another would be if you have objective reason to expect a short lifespan.

David.s wrote: »

I have started a SIPP at age 71 for the first time (no other pension apart from UK state pension). I am interested in very low risk as I don't want to be stuck with a drop out that takes years to recover from

In your shoes I might well prefer to leave the money in cash within the SIPP, and then start withdrawing money to cover my expenses while my state pension is deferred and my other income is low.

My reason would be that bonds, like other financial assets, are expensive at the moment, and might even fall in price when equities next fall. In other words, the hoped-for advantages of diversification might not apply in the Alice-in-Wonderland world our central banks have created.

woolly_wombat

Vanguard UK government bond funds might be of interest:

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=FPFD7&univ=O&typeCode=FFPD7

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=MEFC5&univ=O

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=MEFC7&univ=O

David.s_2

Thank you for advice given. My research is now focusing on short duration high credit Bonds and I'll be leaving the money as cash in the fund till I decide which one(s) to use. I noticed that general advice offered by the Pension company offering my SIPP pointed out that some people are content to leave the lump sum as cash just to benefit from the tax relief. My aim is to make sure the money is still there in 2 years time.
I have delayed my state pension for 5 years up to age 70 already. I started to take it even though paying tax at 40% as the time to break even on that deal is at least 10 years if paying no income tax, longer if paying tax, perhaps much longer. It's a complicated calculation with many angles to consider including being institutionalised at which time the state pension is taken away. Although healthy with family history of longevity, I don't think I will actually live long enough to benefit because of the age I will need to reach to get there. Also, I don't trust the government of any party to leave it alone for long enough. A bird in the hand...

lifecanbetough4

Most banks/provders do allow the SIPP to be invested in a 1/2/3 year bond.

Just need to check with the provider. Should get a similar rate to a non SIPP bond.


NS&I (the governments bank) also accept SIPP deposits.

princeofpounds

Note in these low interest rate environments you need to be a little bit careful with bonds. Fees on funds can swallow up a lot of the return available on safer bonds, as both are rather small numbers.


Typically though the tax relief from using the pension vehicle is more attractive than trying to play high interest bonus savings accounts outside of a pension, but it depends on when you have cash flowing in and out and your general income.

greenglide

being institutionalised at which time the state pension is taken away

If by "institutionalised" you mean living in residential care, either self funding or paid by the local authority, this has no impact on State Pension.

Means tested benefits such as Pension Credit is another matter.

kidmugsy

David.s wrote: »

I have delayed my state pension for 5 years up to age 70 already. I started to take it even though paying tax at 40% as the time to break even on that deal is at least 10 years if paying no income tax, longer if paying tax, perhaps much longer..

No; the break-even is ten years if you assume zero inflation. Since much of the attraction of deferral is the inflation-protection you buy, that's an odd assumption to make.

Break-even will also comes sooner if your deferral keeps you out of 40% tax, and if the extra pension pays 20% tax.

Still, while you are avoiding 40% tax by making pension contributions, that last effect doesn't matter.

David.s_2

Inflation has nothing to do with it. The pension is protected by the triple lock, ie cost of living, inflation, or a fixed percentage whichever is greater. Index linked. So if you give up a year's pension for 10.4% more next year onwards (index linked roughly) then tax is what makes the calculation tricky. If no income tax then it's about 9 and a half years to the break even point. If the year given up avoids 40% tax and later years are less heavily taxed then I agree it will be less time to the break even point. For 40% and 20% tax before and after the year given up, the break even point would be a little under 8 years. If you live long enough to collect.