Any point in a Cash buffer in Pension Drawdown Account?

Linton

bearshare wrote: »

..........
I have significant cash buffer, which I have held for many years. This has certainly significantly reduced my overall returns, so i would have been better off having no cash pile and just selling as normal in a down market.

In this universe you are almost certainly right. In an alternative universe when we have still not recovered from the great crash of 2012 perhaps not. Unfortunately we dont know which universe we are living in until after the event.

peterg1965

My plan is that I will be running with 100% 'cash' in my drawdown pot when I begin to take it in 4/5 years time. There is a sensible reason behind this, from my perspective. I do not want to be exposed to the vagaries of the markets, and I want absolute certainty in my income. It will also meet my objectives.

To put it in context, my drawdown will be c 40% of my income in retirement at the initial stages, with this % reducing over time, the rest will be from a DB pension. The aim is to continue to invest in fixed rate deposit accounts via my MINERVA SIPP. I am currently getting around 2% pa in fixed rate 2 year bonds, and I will be able to get higher if I commit for a long term, which I will when these bonds mature.

Having made some modest assumptions about the future of interest rates (ie not really moving that much higher), and working on my desired withdrawal rate, I have determined that a 30 year decumulation of my drawdown funds to zero is possible. This is looking at an initial 5% withdrawal taking a fixed amount for 10 years, then once the SP starts, reducing the fixed amount by x £ks.

No doubt there will be some legitimate criticism from the experts, but it works for me. I can share a bit more detail if anyone is interested.

atush

So the old school wisdom seems to be that it’s sensible to carry a cash sum within your investments so that in the event of a crash you can draw on this sum and allow for the market to recover before you sell anymore investments. Seems sensible but these sums seem to be specified as 2-3 years of typical drawdown withdrawal,

I think that 2-3 years in cash, doesnt mean in your pension during the accumulation phase. It means during drawdown. This cash can be inside or outside the pension. It can consist in part of some of your TFLS if you want.

It is sensible to have cash or cash like assets like gilts etc in your pension, but the amount/% depends on your portfolio allocations.
It can be for diersificatio or it can be to invest during periods of lower valuations

bostonerimus

green_man wrote: »

Bostonerimus - points out that a cash sum to allow for emergencies is a factor, certainly in his case of BTL upkeep etc this seems sensible, my particular thoughts though are on using it just to de risk pension income return which is a slightly different topic.


So for those running a buffer how and when is it used? What level of drop from a peak means you will take income from Cash? Of course this is going to introduce a whole level of complexity to your portfolio that wouldn't be there otherwise, when draw cash?, when topup cash? Clearly a level of "calling the market" is required here. For the novice investor two oft quoted rules seem to be: Don't try to guess the market; Maximise time in the market. Running a cash buffer pretty much runs against these doesn't it? Is a cash buffer for advanced investors only?

The last 30 years definitely shows that 100% equity will get you the largest return, but living in retirement is very different from when you are working and accumulating. The balance of risk vs reward shifts and the small number of scenarios where 100% equities dramatically fail weigh heavily on the mind. So just go back to asset allocation and look at the efficient frontier.

Of course if you have a pot that is far larger than you need to produce sufficient income you can afford to take the extra risk of 100% equities. You cash buffer is an insurance policy and will help you to sleep at night and also as a practical matter you need cash to live so make sure you have enough to pay for unexpected expenses.

I have set things up so that I don't have to sell anything to provide income and as I'm on a rising equity glide path from 70/30 I don't bother to rebalance under the assumption that the percentage of equities will gradually increase over the next 30 years. When I spend from my cash buffer for big expenses I will then control spending so that it gets topped up and if necessary I'll deposit some dividends rather than reinvesting them.

zagfles

goRt wrote: »

I'm close to the FP14 LTA so have to withdraw crystalised funds from my SIPP every year.
you need to be aware that cash held within a SIPP is pooled with all other cash held by that provider so you get a %age of one lot of 85k FSCS compensation.

That's not what HL say - https://www.hl.co.uk/security-centre/how-safe-is-your-investment

In addition, if one of the banks which we use for depositing cash balances is declared in default, each individual is entitled to 100% of the first £85,000 in total in compensation for losses across all their deposits with that institution.

So AIUI if a bank they use goes bust you are individually entitled to £85k but that would include any deposits you have with that bank outside HL. And since they spread their deposits over a panel of banks, only a portion of your cash holding should be with the one that failed. That's my understanding of it anyway... I presume other SIPP providers operate in a similar way?

Linton

peterg1965 wrote: »

My plan is that I will be running with 100% 'cash' in my drawdown pot when I begin to take it in 4/5 years time. There is a sensible reason behind this, from my perspective. I do not want to be exposed to the vagaries of the markets, and I want absolute certainty in my income. It will also meet my objectives.

To put it in context, my drawdown will be c 40% of my income in retirement at the initial stages, with this % reducing over time, the rest will be from a DB pension. The aim is to continue to invest in fixed rate deposit accounts via my MINERVA SIPP. I am currently getting around 2% pa in fixed rate 2 year bonds, and I will be able to get higher if I commit for a long term, which I will when these bonds mature.

Having made some modest assumptions about the future of interest rates (ie not really moving that much higher), and working on my desired withdrawal rate, I have determined that a 30 year decumulation of my drawdown funds to zero is possible. This is looking at an initial 5% withdrawal taking a fixed amount for 10 years, then once the SP starts, reducing the fixed amount by x £ks.

No doubt there will be some legitimate criticism from the experts, but it works for me. I can share a bit more detail if anyone is interested.

What about inflation? There is both the steady decrease of the real value of cash of say 2% annually, if the BoE get things right, and the occasional major falls. For example in the 10 years 1975-1985 the real value of a £ dropped by 2/3rds. It seems to me that a pension pot 100% in cash intended to last for 30 years or so is very high risk.

coyrls

It is not clear from the article what return metric was used for cash. The paper referred to in the article used U.S. Treasury Bills. None of the studies I have seen have used the best available retail interest rates for cash as their metric for cash. This is not surprising, as these rates aren’t available to investment portfolio managers, they are however available to individual retirees who hold cash outside a pension wrapper. The 25% PCLS, gives a tax free wodge of cash that can be held outside a pension wrapper.

I think that OldMusicGuy has followed a similar strategy to me. I have a number of years' income held in a ladder of retail fixed term accounts, with interest rates ranging from 2.4 to 3%, while these rates could be below inflation, they are far in excess of the rates used for cash in studies. In addition I have paid no income tax since retiring 4 years ago as the majority of my income is from the capital in the accounts. Each year I withdraw as much tax free money as I can from my SIPP and put it in a S&S ISA. Apart from the difference in rates of return, studies also don’t deal with tax planning.

As others have said, pension planning doesn’t have to be a fire and forget strategy. Once my fixed interest ladder has been exhausted, I will review where I am and put in place a strategy for the next ten years, which may or may not include other options not dealt with in retirement studies, such as postponing my state pension and balancing my withdrawals from my SIPP and ISA to minimise taxation.

Audaxer

Linton wrote: »

It seems to me that a pension pot 100% in cash intended to last for 30 years or so is very high risk.

It is unless after he gets his DB pension he still has a significant amount of cash to cover his remaining income needs allowing for likely inflation for over 30 years .

bostonerimus

peterg1965 wrote: »

My plan is that I will be running with 100% 'cash' in my drawdown pot when I begin to take it in 4/5 years time. There is a sensible reason behind this, from my perspective. I do not want to be exposed to the vagaries of the markets, and I want absolute certainty in my income. It will also meet my objectives.

To put it in context, my drawdown will be c 40% of my income in retirement at the initial stages, with this % reducing over time, the rest will be from a DB pension. The aim is to continue to invest in fixed rate deposit accounts via my MINERVA SIPP. I am currently getting around 2% pa in fixed rate 2 year bonds, and I will be able to get higher if I commit for a long term, which I will when these bonds mature.

Having made some modest assumptions about the future of interest rates (ie not really moving that much higher), and working on my desired withdrawal rate, I have determined that a 30 year decumulation of my drawdown funds to zero is possible. This is looking at an initial 5% withdrawal taking a fixed amount for 10 years, then once the SP starts, reducing the fixed amount by x £ks.

No doubt there will be some legitimate criticism from the experts, but it works for me. I can share a bit more detail if anyone is interested.

100% cash is not necessarily the least risk approach because of inflation and interest rates and with a DB pension you could argue that you can afford to that some risk in equities. Also you plan might fail because of inflation or longevity so maybe you should compare it with a lifetime annuity strategy as at least that removes some of the longevity risk.

peterg1965

Linton wrote: »

What about inflation? There is both the steady decrease of the real value of cash of say 2% annually, if the BoE get things right, and the occasional major falls. For example in the 10 years 1975-1985 the real value of a £ dropped by 2/3rds. It seems to me that a pension pot 100% in cash intended to last for 30 years or so is very high risk.

My DB pension and my wife’s DB pension are both CPI linked, then at SP age those will also be index linked. My DB will be £38k when I retire from work and my wife’s will be c£7K, with 2x SP we are well covered to protect from inflation. My Drawdown pot will be c£320k and I will initially take £16k reducing to £10k when my SP kicks in. So inflation risk is not really an issue for me.