SIPP - Most common fund choices?

Susy909

Thank you everyone for the reply

I did consider gilts but don't understand them as they have a price that goes up and down. A guaranteed return linked to inflation seems too good to be true

dunstonh

I did consider gilts but don't understand them as they have a price that goes up and down.

As do all conventional investments and especially some of the higher risk options mentioned on this thread.

A guaranteed return linked to inflation seems too good to be true

There are some guaranteed options still. Not as many as there used to be as the cost of supplying guarantees is expensive and that doesnt really make them that viable.

Susy909

Would the price of a gilt effect my return?

dunstonh

Susy909 wrote: »

Would the price of a gilt effect my return?

That is not a question that can be answered with one answer. If you buy a gilt at issue and intend to hold until redemption then the price will have no impact on the return. If you buy a gilt already issued then you have multiple things to consider. Not just the actual yield but the running yield and the redemption yield potentially.

You also have the option of using gilt funds.

However, you are looking at potential solutions without knowing the objectives. To go from a FTSE tracker to gilts is just one bad way of investing to another but at the opposite end of the risk scale.

If you are using multi-asset funds then you do not need to utilise single sector investment options. That is the point of multi-asset funds. However, if you do decide to make management decisions to break the multi-asset fund allocations by adding in more investments, then you need to have a good understanding of what you are doing and why. You shouldnt make random selections based on no sound reason. Otherwise you will just end up with lower returns over the long term.

A_T

BLB53 wrote: »

Yes this looks like a reasonable choice of multi asset index funds and should get the job done.

Yes looks ok to me too. The purists will frown on having more than one multi-asset fund but as long as you know what the overlap is I don't see a problem. The nature of the whole portfolio is what matters not how you get there.

bostonerimus

A_T wrote: »

Yes looks ok to me too. The purists will frown on having more than one multi-asset fund but as long as you know what the overlap is I don't see a problem. The nature of the whole portfolio is what matters not how you get there.

My main issue is with the thought process that brought the OP to the two multi-asset funds and the possibility of adding a FTSE tracker when they say that they don't want anything too risky and want to match inflation. I suggest that the OP do nothing for the moment except educate themselves about asset classes and understand the pretty simple concepts about building an appropriate portfolio with either multi-asset funds or individual funds.

dunstonh

The purists will frown on having more than one multi-asset fund but as long as you know what the overlap is I don't see a problem.

I have no issues with multiple multi-asset funds. Indeed, I frequently do that as a way to keep within the £50k FSCS limits.

However, the addition of single sector funds to break researched allocations without any real understanding is not a good idea. Just as bostonerimus says above.

jamesd

Susy909 wrote: »

Would the price of a gilt effect my return?

Yes, at the time you buy, and if you hold until the maturity (end) date of the gilt, the government will repay you exactly what they said they would pay you. So if you bought an inflation-linked gilt at a yield of -0.5% with 30 year term you'd really lose that 0.5% every year for the next 30 years, but have the inflation matching so that's all you lose. So a guaranteed inflation-linked return, even though it's a negative one.

During those years the price in the market will go up and down. Most likely down a lot compared to current prices. That's because higher interest rates cause the capital value to drop so a buyer can get the current interest rate. And we're near record low rates at the moment, so it's very likely that there will be big increases sometime during the next thirty years. But those capital value drops won't matter to you if you really hold to the end, because you will get back what you were promised. So the value as you track it over the years will go up and down but at the end you get back what you planned on.

That end price guarantee isn't there with equities, and there's more chance of a default and failure to repay with corporate (company) bonds so those aren't guaranteed either. In theory gilts aren't guaranteed but there's such a low chance of them not repaying that it's not usually thought of as a big deal for the UK government bonds - would be different if it was say Argentinian government bonds. But in exchange you get a very likely larger amount of money at the end. Something like three times as much. The way people have traditionally dealt with that is by reducing equity and bond holdings as they reach their planned end date, gradually moving into more bonds then more cash. Normally done over about ten years but it can be longer. So during those years where you gradually change the mixture you're locking in the gains, mostly. This is what "target date" funds do, build in varying as they approach the target year in the fund name. They can be a very good option for people who will want to buy an annuity on a specific date or who will have some other need for the money value to be close to guaranteed on a specific date.

These days, buying annuities has become much less popular and mixed solutions using "income drawdown" and perhaps also annuity buying are much more common than they used to be. With income drawdown you are gradually drawing out money to pay you an income. Because this is gradual the effect of short term drops doesn't have to affect your income much. There's lots of research to tell you how much income you can sensibly take depending on how willing you are to change your income or not if markets do unusually badly during your particular retirement years. And each person can vary that depending on how much fixed they want, as well as buying annuities over the years to lock things in. Annuities eventually become very good value for guaranteed income, as you get older or sicker, compared to income drawdown.

So as well as just the ups and downs that are just a fact of investing life, you can manage them because you know your likely time horizons and can adjust what you're invested in over the years to meet your objectives. Target date funds are the easy way to do that over the next thirty years, various other approaches can be used after the end date. If you were planning on income drawdown for part of your money that part would probably not be best placed in a target date fund, which is better suited to annuity buying, paying off a mortgage or paying a 25% tax free lump sum.

While you can get that guaranteed return from gilts, it's just not very good value for money compared to other things you could be doing.

Sadly we can't really give you a simple do this and yes you'll get a worthwhile inflation-linked income answer. So we're pretty much left with explaining how you can manage the ups and downs and get both higher likely value and reduced change to that value towards the end. There's no chance of it delivering a lack of ups and downs over the thirty years but if you want just one fund, pick a target date fund with 2047 or a bit earlier as the end date. With very high probability that will deliver you two or three times as much money as gilts at the end of the thirty years.

Susy909

Are there any inflation linked gilts with positive yields?

bowlhead99

Susy909 wrote: »

Are there any inflation linked gilts with positive yields?

No.

If you are willing to take an index linked bond from someone with a lower credit rating than the UK government, Tesco Personal Finance plc has an index linked bond launched December 2011 which matures December 2019 (ISIN: XS0710391532), and its projected yield to maturity recently went positive having been as low as -0.3% back in March.

Obviously Tesco bank is less creditworthy than the UK government who can print pounds if they need some to pay you back; this is not a 'gilt'.

Anyway if you bought in yesterday you would expect a yield to maturity of 0.015% a year. If inflation increases from current RPI of 3.6%, you'd get more. If it decreases, you'd get less.