Bridging Fund to DB Pensions – Invest or not?

jamesd

Thanks for the correction!

Linton

bostonerimus wrote: »

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

Why is the answer always one or two out of a few funds from one supplier? There are many other options. If I was plugging particular shares like you are plugging particular funds I would have been banned long ago.

As to junk bonds - why not as a small part of a diversified portfolio, even if they arent included in VLSxxx?

jamesd

bostonerimus wrote: »

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 P2P that I typically suggest isn't close to what junk bonds would normally be taken to mean (high risk unsecured bonds). It's loans that are seldom worth more than 80% of the first charge security. As a fixed charge that's very close to the top of the preference order for payment in insolvency. A fair number of the loans I do will also have a guarantee or first loss agreement from another company, unrelated to the borrowing one, a floating charge over assets, a personal guarantee (not particularly valuable) and charges over ongoing income.

Peer to peer in the UK is not unregulated. At a minimum every firm operating in the P2P lending space in the UK must have interim permission from their regulator, the Financial Conduct Authority. The two I suggest most have full rather than interim permission.

Mandatory requirements include a fully funded or insured loan runoff plan being in place so that borrowers continue to be chased as required and assorted requirements for segregated client funds.

The earliest P2P firm, Zopa, started out with unsecured lending to consumers but calling that unsecured high risk lending wouldn't have been very accurate either, since over 90% of applicants were rejected and there were and are limits on the total debt of borrowers, though there are now grades available with less strict criteria. The two leading companies for unsecured lending to consumers both largely issue loans backed by a borrower-funded protection fund that covers losses, though Zopa just announced their intent to stop this and go back to their initial unprotected model. Default rates on those are something around 5% total across all credit grades combined and recoveries tend to be substantial. Good enough so that both Prosper and Lending Club customers should be jealous. Default rates were lower in the past because markets for riskier loans have been added over time.

bostonerimus wrote: »

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

Interesting that the early responses weren't describing the capital as generous but rather as insufficient. Regardless, having the capital doesn't make it prudent management to deplete it unnecessarily.

VLS40 and Target Retirement 2015 (did you mean 2025?) have significantly higher risk from both volatility and returns that may be insufficient to meet a target income need, depending on where that's set. Rather than having capital loss only if things go substantially worse than can be expected, they would mean planning in a capital loss or taking an income significantly lower than is readily available.

jamesd

Ian66 wrote: »

Final theme is your suggestion to utilise a mortgage arrangement for a credit facility. I’m repeating some of my reply to Triumph13 here but my main issue with this for us is we plan to follow up downsizing with a long term move to Spain, renting our “new” downsized home in UK out to effectively fund rental on accommodation in Spain. (We like the comfort of retaining a place to return to in the UK along with this being a safer place to hold our main property asset than Spain – Any different opinions on this?)
From limited research I have done renting out our property with a mortgage appears to be problematic, main issues being Lenders Permission and a hike in borrowing interest rate as it is viewed as transition to a BTL loan, although I need to make specific enquiries with Providers to check this.

One thing you should investigate is the effect of the Statutory Residence Test on where you're taxed. Provided it's rented out it's not a home available to you so it doesn't point in the direction of UK tax residence. If it was vacant and available it would.

While you mentioned Spain, it's worth being aware of the Portuguese tax scheme. This provides a zero income tax rate for foreign pension income. The 75% taxable portion of a UK personal pension is income so can be taken free of income tax in a single lump if desired. You don't have to remain in Portugal long term to exploit this, you could rent there for a tax year then relocate. You do need to avoid spending much time in the UK for several years after doing that, there's a test to tax at UK rates if you return within a few years. But there is a hundred thousand pounds threshold for that UK return treatment and it appears that you would each be below that level.

BTL property with a mortgage is a high risk and illiquid leveraged investment. One many people are familiar with so they don't necessarily realise that a 25% downturn could cost them all of their 25% deposit capital if they had to sell. It's not problematic to get a BTL mortgage, in general.

bostonerimus

Linton wrote: »

Why is the answer always one or two out of a few funds from one supplier? There are many other options. If I was plugging particular shares like you are plugging particular funds I would have been banned long ago.

As to junk bonds - why not as a small part of a diversified portfolio, even if they arent included in VLSxxx?

Whatever low cost fund you like is ok. I mention Vanguard because it seems familiar to many on here and I've been a happy customer in the US for over 20 years. Now UK Vanguard is not US Vanguard, but it is run on Bogleish principles and so I think it would be a good choice for many people.

There are many funds and you can come up with almost infinite combinations which can lead to investor paralysis and uncertainty. Most investors just don't need complicated portfolios and keeping things simple will keep costs down and allow them to focus on their ultimate goal rather than the minutia of asset allocation.

bostonerimus

jamesd wrote: »

The P2P that I typically suggest isn't close to what junk bonds would normally be taken to mean (high risk unsecured bonds). It's loans that are seldom worth more than 80% of the first charge security. As a fixed charge that's very close to the

VLS40 and Target Retirement 2015 (did you mean 2025?) have significantly higher risk from both volatility and returns that may be insufficient to meet a target income need, depending on where that's set. Rather than having capital loss only if things go substantially worse than can be expected, they would mean planning in a capital loss or taking an income significantly lower than is readily available.

Well, the high bond fund allocation does open you up to interest rate risk, but it would take the worst collapse in history for VLS40 or Target 2015 (I used it because it's around 40% equity too) not to fund the gap. There is plenty of history for the equity and bond markets which is why I'd be happier using them rather than P2P. I'd like data for P2P through a couple of down turns and rises in rates and also to be able buy and sell on an open market before relying on it in a major way.

jamesd

Lots of history and you're right that the gap can be funded, but at substantially higher capital drain.

I may have an advantage in P2P because I was invested during the 2008-9 downturn and following recession so I've experienced the non-dire consequence. For the loans I was in it was around a doubling of actual vs projected default losses but that was still below 6% when I'd been using a minimum interest rate threshold of 16% or so, meaning I was still fairly happy.

I don't see any prospect of something other than platforms operating their own markets for quite a while, there are lots of differences in loan agreements between them. They do deliver sufficient selling liquidity for me so it's not a worry, though it is possible that the market on a platform might cease to operate if the platform went out of business. In that case the loans would have to be held to maturity. Lots of different maturities available to manage that risk, as well as some amortising loans on some platforms, even for business lending.

The biggest potential upset for much of what I mention would be a substantial property market slump. Many of the loans are for property development and a slump would mean slower exits and/or lower selling prices. So it's worth ensuring that you don't have too much in that type of loan and that what you do have has decent exit strategy. Different loan terms so there's not an excessive concentration of properties entering the market at the same time is also worth considering. Though in reality if you expected this or even during it you'd have a pretty decent prospect of just selling at the issue price anyway.

kidmugsy

Ian66 wrote: »

To clarify my OH Pension proposal, this was not to take early but exchange part of her DB for an enhanced TFLS ... TFLS increased by 12 times the value of Pension exchanged... Seems a poor deal on reflection

It is a poor deal.

There's something else to consider: not all countries recognise the tax-free lump sum from a pension as tax-free. Will Spain tax it as income in future? I don't know. But do you know whether would tax it as income now? That may be the best guide available.

bostonerimus

jamesd wrote: »

Lots of history and you're right that the gap can be funded, but at substantially higher capital drain.

Rising rates and a stock market collapse would hit a multi-asset fund and the risk is magnified because of the short time frame and the effect of needing to spend capital early on in a bad market. So a one year cash buffer could help and even a little P2P for some "spicy income", but I'd still have most in equity and bond funds that will produce some reliable dividends and yields and if the capital value takes a hit I'd spend some cash and trim my expenses to minimize having to sell at a loss, otherwise I'd be doing total return and cashing in capital gains.