Near retirement & moving to cash, but how?

secondincometrader

I'm 54 and probably a year off retirement. I have a combination of a DB pension that starts at age 60, a SIPP and ISAs. I've recently been increasing the cash in the SIPP and ISAs in preparation for need to draw down on them, plus the recent market jitters.

Previously the advice has been to invest in bonds, but I keep reading that bonds could fall badly and they no longer seem to move counter to shares. Any suggestions? Are index-linked bonds a valid alternative to the 0% interest I'm currently getting on the cash?

Many thanks.

Linton

Moving all or a significant part of a pension pot to cash coming up to retirement is old fashioned advice that only makes sense if you are planning to spend it all as soon as you retire, for example on an annuity. If you are planning to use long term drawdown some of your pot may not be touched for 25 years or more which is plenty of time for a 100% equity portfolio.

So I suggest that you plan on having say a 5 year buffer of cash and very cautious investments so that you can withstand a major crash without touching your main investments. The majority of your pot can continue to be held at a similar level of risk/return as you have been happy with up until now.

Your cash reserves could well be held outside your pension at higher interest rates.

MaxiRobriguez

The idea of moving some of your portfolio to cash when nearing retirement is not to re-invest it in 'less riskier' assets, it's to keep it as cash because A) you're going to need to use some of your portfolio to replace your outgoing salary and cash is stable, so you can allocate 3-5 years worth of your current spending in order to not have to sell other assets at the height of a bear market.

Index-linked bonds aren't a validate alternative to cash because they are more volatile than cash and you need stability. You'll also find you'e a bit late to the I-L bonds train as plenty of people have purchased them in expectation of inflation kicking in.

You're only real choice is where you hold the cash, and agree with Linton your best choice is likely to be outside the pension at higher interest rates.

Audaxer

secondincometrader wrote: »

I'm 54 and probably a year off retirement. I have a combination of a DB pension that starts at age 60, a SIPP and ISAs.

If you have a good DB pension it may be better to take a tax free cash lump sum from that on retirement and remain fully invested within your SIPP and ISA. If you have another half with little on no pension provision, it may also be to his/her benefit if you take a lump sum as in most cases the survivorship clauses are that they are still entitled to half of the full pension irrespective of how much lump sum you take.

AnotherJoe

secondincometrader wrote: »

I'm 54 and probably a year off retirement. I have a combination of a DB pension that starts at age 60, a SIPP and ISAs. I've recently been increasing the cash in the SIPP and ISAs in preparation for need to draw down on them, plus the recent market jitters.

Previously the advice has been to invest in bonds, but I keep reading that bonds could fall badly and they no longer seem to move counter to shares. Any suggestions? Are index-linked bonds a valid alternative to the 0% interest I'm currently getting on the cash?

Many thanks.

Which of the two is your real reason? Draw down? Or market jitters?

How much will you be drawing down over the 5 years from SIPP and ISAs?

Either in numbers, or %.

Bravepants

If you intend to drawdown your SIPP until empty over the 5 years from 55 to 60, say taking the maximum tax free allowance each year, then cash is best and perhaps think about transferring to a SIPP provider that allows cash deposit accounts...for example the InvestACC MINERVA SIPP, or SIPP Lite.


If you intend to drawdown from the SIPP over 25 to 30 years, say at the 3.5% per year level then you need to stay invested at least in something with balance risk like HSBC Global Strategy Balanced, or Vanguard LS 60, or similar.


Some would say that over a 25 to 30 year timeframe staying invested wholly in equities (e.g. Vanguard FTSE Global All Cap) would be better.


So all depends on your timeframe really.

Iain_For

I had to look at my combination of a DB and DC pension earlier this year. Took a while to get the necessary quotes from the pension scheme. When I did, it became evident that in my case it was best to take the maximum pension from the DB component, topped up with around 25% of the value of the DC pot to provide a guaranteed minimum income. In my case, the balance of my income above this will come from ISAs that are invested in VLS60.

The balance of the DC pot I then transferred to a cash fund within the pension scheme as I had another year of contributions to make, maximising the annual allowance. Did this to preserve the capital plus the fact that the tax boost of maxing out contributions would easily outstrip any investment return over a year. This pot will be drawn as a lump sum from the DC pot when I retire next April so that I will have a healthy cash buffer and have some left over to top up the ISAs.

Thrugelmir

secondincometrader wrote: »

Previously the advice has been to invest in bonds, but I keep reading that bonds could fall badly and they no longer seem to move counter to shares.

Bonds is a very broad generalisation. While there are inherent dangers. It is possible to at least positive return, however small.

bostonerimus

Unless you are going to immediately buy an annuity moving to cash could be an expensive mistake. If you are doing drawdown then you will probably need some growth to fund your retirement income needs. Using cash to fund retirement is certainly going to be low risk, but you will lose money to inflation and the amount of interest you get will probably be far lower than the long term return you'll get on a diversified portfolio of equities and bonds. So going to cash needs careful planning; what is the size of your SIPP and ISA and general accounts that will be used for pension income, how much income do you need, are you make or female and how old are you?

enthusiasticsaver

We kept 50% of the tax free lump sums from our DB pensions in cash as our drawdown buffer. Rest was invested. So far we have left the SIPPs and DC pots untouched.

kidmugsy

secondincometrader wrote: »

I'm 54 and probably a year off retirement. I have a combination of a DB pension that starts at age 60, a SIPP and ISAs. I've recently been increasing the cash in the SIPP and ISAs in preparation for need to draw down on them, plus the recent market jitters.

Previously the advice has been to invest in bonds, but I keep reading that bonds could fall badly and they no longer seem to move counter to shares. Any suggestions? Are index-linked bonds a valid alternative to the 0% interest I'm currently getting on the cash?

Index-linked Gilts are poor value: their "real" return is negative i.e. it's below the RPI inflation rate.

If you want to try bonds your best bet might be a fund or ETF invested in short-dated corporate bonds. "Short-dated" means they will mature in, say 0 - 3 years, or 1 - 5 years, or that sort of thing. As they mature the fund managers re-invest the money in more bonds in that category. Because their maturity is so close these bonds are less likely to jump about in value than longer-dated bonds.

As for cash in your ISAs; on the whole you can get better interest rates on cash outside ISAs than inside. Indeed, you can get a better effective interest rate on Premium Bonds than on many Cash ISAs as long as you buy plenty of PBs (say £30k - £50k).

Perhaps if you move enough of your ISA capital into cash there will be no need to move much of the SIPP into cash. How about moving only the rough amount you'll need to let you withdraw the 25% TFLS?