Bridging Fund to DB Pensions – Invest or not?

Thrugelmir

bostonerimus wrote: »

Let's assume 2% inflation and a 5% return from a fairly conservative portfolio maybe (50/50).

Latest BOE quarterly inflation report (May 2017) forecasts CPI to remain above the targeted 2% level. As the effects of sterling's devaluation feed through into prices.

bostonerimus

Thrugelmir wrote: »

Latest BOE quarterly inflation report (May 2017) forecasts CPI to remain above the targeted 2% level. As the effects of sterling's devaluation feed through into prices.

Even with 4% inflation and 2% return from a saving bond ladder the OP will have over $50k left when the final pension starts. So there's a big safety margin.

Ian66

Triumph13 wrote: »

Ouch!
The plans re Spain sound great, but add one hell of a lot more risk into the picture and thus increase the need for a goodly-sized buffer in the budget. If the UK property ends up without a tenant for any length of time then you'll be carrying the costs of that plus the rental on the Spanish place. There is also the possibility of large maintenance bills as you won't be there to do things yourself. As you say, it also makes the mortgage option trickier, but not impossible.
You could explore James's world of P2P and VCTs, but in the interests of a low-stress life I might be inclined to plan on dialling back the spending over the period until your DB kicks in to more like £32k rather than £35k pa and then take it back up if you do manage to realise a reasonable amount on the downsizing and/or make a net profit on the rental arrangements.

Thanks Triumph13,

My wandering into ponderings about the Pro’s & Con’s of moving abroad and renting is probably outside of this Forum’s remit, but you are indeed correct that this adds a double-whammy element of cashflow and expense risk to our retirement planning (as well as hindering the use of an offset mortgage as a backup credit facility).
In an attempt to mitigate this, our research has indicated that the cost of long term renting what we require in Spain would equate to @ 70% of the market value rent of our property in the UK. To reduce Vacancy Risk of our property in the UK we would pitch it at 10% below the local market rental levels, leaving @ 20% to cover Management Fees and sinking fund for ongoing maintenance. I’m fortunate to have a friend who owns a local Estates & Lettings agency and these figures and rental pricing strategy to avoid vacancy periods are his advice. Also I’m hoping to get a “Mates Rates” Discount on the Management Fee

Cheers

Ian66

edinburgher wrote: »

I also concur that expecting 5% real return over your stated timescale from a 50/50 portfolio seems ambitious considering recent valuations. I will be overjoyed if I'm wrong

Thanks Edinburgher,
Agreed and this was one of the key reasons for my initial post. As I'm effectively depleting funds over a period of @ 8.5 years till both DB pensions kick in and considering recent valuations, my main query is where and how to invest. My aim is only to offset inflationary erosion but along with this protect capital as much as possible. Jamesd and others on this thread have proposed alternatives to equities such as P2P investments and this is something I'm considering as part of the portfolio.
Cheers

jamesd

Ian66 wrote: »

my initial main query would relate to the use of P2P lending and the comparative risk / return. 10% return tax wrapped in an ISA would be more than satisfactory and I would be happy to divert existing & new ISA contributions and SIPP TFLS into same on this basis. Current opinion elsewhere advises against portfolios investing heavily into P2P, but your experience appears to provide a reassurance in taking a different view. Ultimately I suppose this is for my personal risk tolerance to lead.

Many people aren't very familiar with P2P lending, so misunderstand its risk properties. I've done unsecured P2P lending to consumers in the UK starting in 2008 and Estonia as well as secured on buildings, land and/ or equipment in the UK. The about 12.7% current average rate I mention is for secured lending to UK businesses, before bad debt. Ablrate say they anticipate 1% bad debt, MoneyThing won't say but are probably similar, I use 10% after bad debt so there's not much chance that those who are decently diversified will be unhappy with their results, though there will be variation between individuals depending on which loans they happen to be in.

Options in the US in this area are less good than in the UK, I haven't heard of any US provider coming close to the UK's secured lending potential.

I suggest that you read a few pages of the posts starting with this one where I walk some sceptics through aspects of how the UK P2P market works, with a focus on risk management.

There are less good P2P options around in the UK but I either don't recommend those or recommend against them. Also quite a few that I just don't mention much because the rates don't seem interesting. Exploiting work that I've already done should improve your results compared to just picking places while not familiar with what's out there. In my discussion I assume that you do this.

Aside from the DB being present for you I haven't described anything in the way of investments that I'm not already doing and happy to do myself, with a substantial part of my own wealth. But then, I've had years to become familiar with what's around and pick some of the better options.

One aspect of risk to consider is that your original plan called for 100% capital loss. Don't let the certainty that you will see some bad debt distract you from what I've described having 100% capital preservation or close to it as the likely result instead. There's a huge amount of safety margin before what I've described would cause as much capital loss as the original plan.

jamesd

bostonerimus wrote: »

I'd be careful with the P2P. 10% comes with risk and I've never liked the restrictive market

There's certainly risk and I've allowed about twice what the P2P platforms expect for the secured on property and often cash flow ones I describe.

The markets in the UK are available only at the original platform.

For sound reasons I had cause to sell something like £40,000 of investments at MoneyThing recently and also invest about £60,000. Typical time from making an offer to selling is a few minutes to an hour or so during the day and typical time from initiating a withdrawal to money in checking bank account is under thirty minutes. Not guaranteed, of course, and at times recently selling has taken a few days because of a couple of big loans being offered. Still, a typical time of under an hour from giving sell trade instruction to money in the bank is pretty liquid.

A fair bit slower at Ablrate but someone recently there had a change of circumstances and wanted out of a loan paying 12% interest. They sold perhaps £50,000 in a couple or three days at a capital discount of as much as 4%. Quite possibly more than that sold, I took around £12,000 at around 96% of issue price. The rest is being sold on a less hurried timescale at discounts of around 1% to nil. I expect to resell at a premium of about 1% eventually, being happy to take the 12% interest on about 96% purchase cost until then. With less of a hurry selling is quite rapid at issue price most of the time, ample for the sort of amounts being considered here.

jamesd

Ian66 wrote: »

Our DB Pensions are both deferred and therefore no longer being actively contributed to. Re; your query on current work DC contributions and SIPP contributions; DC contributions are being maximised for Employer matched contributions only (5% us = 10% Employer) and additional SIPP contributions to a level that will enable drawing to depletion within Personal Allowance levels for our respective periods prior to DB Pensions kicking in, so not currently 100% of Gross Pay. Main thinking here is any unused DC & SIPP held after DB’s kick in would be taxed at 20% once drawn, hence negating benefit of placing funds there initially.

Oops, you're missing something important there. Yes, it's taxed at 20% but only 75% of it. The other 25% is tax free.

That's part of why I'm making salary sacrifice contribution down to minimum wage, the lowest my employer is allowed to go. That also saves me some employee NI at 12% and half of the employer NI at 6.8% further gain. Without salary sacrifice you won't save the NI but saving the income tax on 25% of your pay is worthwhile.

Ignoring NI, assuming 20% income tax rate a gross £100 into the pension would be £80 after tax now. Put it into the pension and it's £25 tax free and £75 taxed at 20%, £60 after tax, so net £85 out via the pension route.

Of course I'll be eliminating most of the income tax using VCT contributions so it'll be tax relief on the way in and no tax on the way out. Can do that without using the pension but without the salary sacrifice NI saving.

jamesd

Ian66 wrote: »

I’ve not considered VCT investments at all before.

You'll read a lot of material saying that they are high risk, with the key words "on average" not mentioned. The UK stock market is also high risk, just to give some context for that.

There's a lot of range of risk in the VCT world. At one end are new knowledge-intensive startups with effectively no physical assets and unproven market. At the other end you find later stage businesses and those making asset-backed investments. Doesn't matter how badly a school or hotel does, the building still has value that restricts the loss potential.

Here I generally avoid mentioning the asset-free early stage businesses and stick to the VCTs that are largely asset backed or late stage. The boring end.

Triumph13

jamesd wrote: »

Ignoring NI, assuming 20% income tax rate a gross £100 into the pension would be £80 after tax now. Put it into the pension and it's £25 tax free and £75 taxed at 20%, £60 after tax, so net £85 out via the pension route.

Oops. Blooper corrected.

bostonerimus

P2P is certainly interesting, but I put it in the same category as junk bonds and I wouldn't want to fund retirement on those. There is also the unregulated and restrictive market to consider.

The OP has a generous amount of capital and guaranteed income streams and so a cash buffer and a conventional equity/bond portfolio is an easy way to bridge the gap. Why not just use something like VLS40 or Target Retirement 2015