Risk of funds

Linton

foreversummer wrote: »

Thank you economic.

The plan will be to draw down small amounts to keep him under the tax threshold once his state pension starts in 6 years time. We will have a cash buffer of approximately £15000 and I will be working still although I only work part time and bring home approx £840 per month. I am 6 years younger than him.

I guess what I am saying is that there will not be a need to withdraw the cash lump sum necessarily as we have cash, so potentially his whole pot could remain invested for some time, but not sure what risk to take with it I guess sums it up.

If he plans to drawdown and then reinvest the money the drawdown is irrelevent as he could simply reinvest in the same or equivalent funds in an S&S ISA. The key issue is the plan for spending the money, we need some measure of "for some time" in order to suggest appropriate risk mitigation and investments.

By investing cautiously you would be significantly reducing the amount you could safely drawdown and spend continuously especially if you are hoping for some level of inflation indexing. One option perhaps could be to invest at a high % equity and only drawdown to spend or put money in the cash buffer when conditions are right.

foreversummer

dunstonh wrote: »

Old Allied Dunbar plans come in different versions over time but the most common one has heavy charges whilst you are paying into it but if made paid up, the charges drop significantly. One version dropped the AMC to zero if made paid up as the bulk of the charges were on the contributions.

Thank you dunstonh. I have asked Zurich for a full breakdown of costs. I'm still trying to fully understand the paperwork. From what I can gather, there is an expense deduction of £6.97 per month. There is an annual management charge of 3/4% of the capital unit fund which I believe, now that he has passed his SPA, that this does not apply as all the capital units should have been converted to accummulation units?

No where that I can see does it tell him what the cost of is the Managed AP fund actually is. On the fund charges and expenses sheet that came with it and shows the funds that he can switch to the Managed AP fund as 0.17. But it also says on the front of that sheet that these figures are "based on what each fund's charge and expenses have been in the past and they are not fixed and could be more or less". So am I any the wiser?

Foreversummer

foreversummer

Malthusian wrote: »

Zurich Managed dropped 20% in the last crash. Vanguard Lifestrategy wasn't around then, but funds in the "Mixed Investment 0-35% Shares" category, which is the best comparator I can think of without doing a lot of work, fell by 15% on average.

Past performance is not a guide to the future. This is largely guesswork, but in the event of a 2007-crash, I would be prepared for falls in the region of 30-40% for the Zurich fund, and 20-30% for both the 20/80 and 40/60 Vanguard LifeStrategy funds. Remember that in a real crash, all assets become correlated downwards. And that markets are higher than they were in 2007 so we have further to fall.

Are you planning to cash in the whole pension and buy an annuity in six years' time?

Thank you Malthusian. This is very useful to me to have an idea of the percentage drops. So not such a huge difference as I had in mind. I understand this is a guide only and I appreciate that.

An annuity does not look appealing at present. Probably about £20 a week from my calculation. Can't really see the point unless I'm missing something.

dunstonh

Thank you dunstonh. I have asked Zurich for a full breakdown of costs. I'm still trying to fully understand the paperwork. From what I can gather, there is an expense deduction of £6.97 per month. There is an annual management charge of 3/4% of the capital unit fund which I believe, now that he has passed his SPA, that this does not apply as all the capital units should have been converted to accummulation units?

It may not be that helpful when they provide it as they are usually multi-charge plans. i.e. a charge here, a rebate there, another charge there in that scenario, a discount in another scenario. I have always had to resort to software to cost compare as there is no easy way to do it on paper.

I haven't done one since the cap on transfer charges after 55. However, the ones I did before that should a near 0.1% Reduction in yield due to charges if made paid up.

foreversummer

dunstonh wrote: »

It may not be that helpful when they provide it as they are usually multi-charge plans. i.e. a charge here, a rebate there, another charge there in that scenario, a discount in another scenario. I have always had to resort to software to cost compare as there is no easy way to do it on paper.

I haven't done one since the cap on transfer charges after 55. However, the ones I did before that should a near 0.1% Reduction in yield due to charges if made paid up.

So is it looking pretty cheap compared with a SIPP? My SIPP is with HL 0.45 platform fee and 0.22 for the Vanguard LS 60. I know you cannot give advice but might it be a good idea to stick with the Managed AP or move to one of the other funds they offer to ex-Allied Dunbar. They do not offer the Vanguard Funds at all. There are some HSBC ones but not the multi-asset ones I've read about. I just wonder if there are any you can suggest I take a look at?

Forersummer

foreversummer

Linton wrote: »

If he plans to drawdown and then reinvest the money the drawdown is irrelevent as he could simply reinvest in the same or equivalent funds in an S&S ISA. The key issue is the plan for spending the money, we need some measure of "for some time" in order to suggest appropriate risk mitigation and investments.

By investing cautiously you would be significantly reducing the amount you could safely drawdown and spend continuously especially if you are hoping for some level of inflation indexing. One option perhaps could be to invest at a high % equity and only drawdown to spend or put money in the cash buffer when conditions are right.

Thank you Linton.

Yes I think my thinking has been a bit muddled. The idea will be to keep the pension invested and draw down annually (to spend), albeit a small amount to keep him under the tax threshold and keep the pension invested. Therefore I believe we do need to take some risk with the money for hopefully give some growth and at least keep pace with inflation.

I don't think there will be able to need to take the 25% as we will have cash savings of around £15000 (hopefully more by then) which we can use as a buffer if the markets are down.

It's the level of risk to take with the equities that is confusing me at present. And of course the choice of fund - a rather limited choice with Zurich, and more choice with a SIPP.

bowlhead99

foreversummer wrote: »

The old pension plan he has with Zurich is an Allied Dunbar one and drawdown is not allowed only UPFLS.

So options would include taking a UFPLS amount each year rather than tax free lump sum up front and then drawdown each year?

Takng the whole tax free amount right at the start to give you a bit more cashflow might be useful but if he is trying to make it last he would then just be sticking it into an ISA and investing in similar stuff anyway.

Either way, if he isn't retiring for 6 years there may be no real need to discard the product and transfer into a SIPP unless it's going to save costs or allow access to superior funds

Yes the second one, keep it invested and make it last. I will eventually retire with my state pension at 67 and I am paying into a SIPP and a Nest pension at present so hopefully in 12 years time I will be able to do similar with mine.

So really you are barking up the wrong tree with "is it going to be too risky investing in X or Y with state pension age only 6 years away". He is trying to create and grow a pot of money that will last the rest of his life. Not preserve a specific amount of money to spend in six years time. He will only draw out a few percent of it in year 6 from now or year 7 from now or year 8 from now etc.

And if he has an untimely death in 15 years time when only a decade or so into his post-retirement investing plan, then presumably you will inherit the money and will be investing it to last potentially a multi decade period so will keep it in the same type of assets.

Obviously it's not great if the investments fall in value and he needs to spend some of them when they're at a low point. However, there is some silver lining because if the total pension value falls to only, say, 75% of its pre-crash value, then drawing down the same fraction of the pot will only use up 75% of his annual income allowance that it would have done when markets were higher, so he can move it out of pension and into ISA faster (ie fewer annual chunks) than would otherwise have been the case.

foreversummer

bowlhead99 wrote: »

Obviously it's not great if the investments fall in value and he needs to spend some of them when they're at a low point. However, there is some silver lining because if the total pension value falls to only, say, 75% of its pre-crash value, then drawing down the same fraction of the pot will only use up 75% of his annual income allowance that it would have done when markets were higher, so he can move it out of pension and into ISA faster (ie fewer annual chunks) than would otherwise have been the case.

Yes, thank you, you are helping me to clarify in my mind what we are trying to achieve.

Sorry, I don't understand what the advantage of taking the money out of the pension and putting it into an ISA. Are you talking about a stocks and shares ISA? If so why not just leave it in the pension. Sorry to be dim.

Foreversummer

bowlhead99

foreversummer wrote: »

It's the level of risk to take with the equities that is confusing me at present.

He will basically be using the money between 6 years time and about two decades beyond that, if he targets average life expectancy. If you are cautious, as you seem to be, you should probably assume you need cash for longer than that because there's no saying he'll be done with living by then. He might be doing less active pursuits but still not wanting to live on just the state pension; being able to pull out some money from the private pension for some luxuries or treats is something that you don't stop doing entirely just because you get to your 80s. My grandmother is 100+ and happy she didn't blow all her savings and investments before her 80s. She can afford home care visits rather than be stuck in a nursing home, and buy some things for the great grandchildren rather than be struggling to keep the heating on.

So you are talking about a long timeframe for generating a retirement drawdown pot through investment growth. If you choose the super-low risk, low growth option, you won't do amazingly well against inflation. Little chance of making the pot bigger in real terms. Whereas, when you know that some of the money won't be planned to be spent (either by him or his descendents) until over a decade beyond state pension age, you can afford a good proportion to be in 'growth' or at least 'medium risk, balanced investments' rather than super-cautious investments. Nothing to stop you keeping a buffer in cash and a second buffer of cautiously invested pension investment within the overall pension provision.

And of course the choice of fund - a rather limited choice with Zurich, and more choice with a SIPP.

If you need the extra choice of a SIPP because the only investments available via Zurich deliver really bad performance after costs and the SIPP will let you have much better investment at materially lower costs, then, fair enough. Sounds like time to switch.

If you need to move to a SIPP because you need drawdown instead of UFPLS and you need it now, rather than in six years time. Sounds like time to switch.

If you need the extra choice of a SIPP because for some reason your retirement can't be achieved if you continue to invest in the best Zurich product available and you instead need more complex things like shares in individual companies, or specific funds for some reason, and you know how to choose them, then fair enough. Sounds like time to switch.

At the moment I don't think you need to "jump ship" to a SIPP until you have convinced us (well, yourself and husband, at least) that Zurich doesn't have what you need.

Don't confuse "hearing about LS20 on a forum" with "needing to dump Zurich and get a SIPP".

IMHO, LS20 is not suitable for a three decade investment period but it - or some other bond-dominated funds - might be ok for part of your portfolio if you're breaking up the portfolio into different holdings for different objectives. That might be needlessly complicated if Zurich already offers low, medium and high risk funds with several grades in between, and the costs of his pension at Zurich are not excessive overall when compared to SIPP costs.

bowlhead99

foreversummer wrote: »

Sorry, I don't understand what the advantage of taking the money out of the pension and putting it into an ISA. Are you talking about a stocks and shares ISA? If so why not just leave it in the pension. Sorry to be dim.

A stocks and shares ISA can hold basically all the same investments that a pension can hold. There is never any tax on what you get from an S&S ISA.

With a pension you have had tax relief when you contribute to it, so a portion of it will be taxable unless you can always fit as much of it as you ever want to take during a tax year into the gap between your state pension and your annual income tax personal allowance. If you draw it out of the pension into an ISA it will still grow tax free but you don't need to worry about what amount you want or need to access in a specific tax year.

At the moment the amount is pretty modest and he probably doesn't expect to draw more than a couple of thousand a year when in retirement, which might fit into his personal allowance easily. However, what if tax rules change. Or what if he inherits your pension age 80 and then wants to draw out more than a couple of thousand one year. Or what if he wants to make small ongoing pension contributions once past state pension age, to keep recycling the income to get the tax relief? Then he has less capacity to draw real income from his existing pension tax free. It makes sense to draw it out and stuff it into ISAs and not worry about any further tax.

Of course, if the money is accessible in an ISA it might be recognised by creditors and people assessing him for means tested benefits, rather than if it were hidden away in a pension. But generally an ISA as a completely tax free environment is better than pension which is *potentially* taxable each time you draw some out. So once he has no other income (eg employment income) he should consider taking it out of the pension wrapper [subject to considering impact on benefits etc].