Drawdown Portfolio - Which Bond Fund?

coyrls

shinytop wrote: »

So am I choosing between a guaranteed 0.5% below inflation (cash ladders) or a possible 0.5% above with a bit of risk (bonds) to smooth out my equities investments?

BTW not trying to be clever (I can't be on this subject!); this is a genuine question for me.

One factor will be what is possible to hold in your SIPP wrapper. In many SIPPs a cash ladder will not be possible (or Premium Bonds for that matter).

DairyQueen

Thanks to all for the replies. westv: we were also intending drawing down from bonds throughput retirement but, given the comments here, I am having second thoughts.

I am confused because I had relied on the historic function of bonds to meet my drawdown requirement. Having read the replies, I am now of the view that bonds are not a good fit. I was hoping to allocate sufficient funds to bonds to meet our max possible drawdown requirement over the next 5/10 years, and then replenish as/when equities do well. Problem is that we have no idea exactly how much we will want to drawdown each year. Thus a bond ladder would be a finger-in-the-air job.

UFPLS would suit us better tax-wise rather than taking the whole 25% TFC up-front. However, investing in unwrapped cash may be more flexible and provide a couple of % return as cash held in a SIPP returns practically 0. It seems that, at the moment, bonds have no advantage over cash to guard against a market crash, and bonds are unlikely to safeguard even partially against inflation either.

If bonds no longer meet any of their historic functions is there any point in holding them in any portfolio? Would we all be better off replacing the bond allocation with cash?

OH and I have other wrapped/unwrapped assets, including a cash buffer, We were planning to use the latter to suspend drawdown should market conditions dictate.

Linton: I will take a look at strategic bond funds (thank you). However, in our circumstances, would we be better off just taking the max TFC and investing that in a savings bond ladder? It is guaranteed to lose value in real terms over the next 5/10 years but it seems that the same is true if invested in bonds.

Perhaps a better strategy would be:

- take max 25% TFC - invest in cash bond ladder (equal amounts maturing in 2/3/4/5... up to (say) 8 years.
- invest another 15% in a (strategic?) bond fund with an average bond duration of 8 years. Aim to draw on that in retirement years 8-11.
- invest the remaining 60% in equities and plan to sell chunks, and transfer to bonds, when profits on equities hit (say) 20% of the original amount invested.

I expect I am missing the wood for the trees.

DairyQueen

shinytop wrote: »

So am I choosing between a guaranteed 0.5% below inflation (cash ladders) or a possible 0.5% above with a bit of risk (bonds) to smooth out my equities investments?

BTW not trying to be clever (I can't be on this subject!); this is a genuine question for me.

My thought exactly,

DairyQueen

coyrls wrote: »

One factor will be what is possible to hold in your SIPP wrapper. In many SIPPs a cash ladder will not be possible (or Premium Bonds for that matter).

Exactly so. We would need to take the max TFC in order to achieve a cash ladder I am not a fan of PBs).

shinytop

coyrls wrote: »

One factor will be what is possible to hold in your SIPP wrapper. In many SIPPs a cash ladder will not be possible (or Premium Bonds for that matter).

Yes you're right of course and it only works well in drawdown outside the SIPP.

bostonerimus

Setting up a savings bond ladder seems to be difficult inside a pension wrapper. So the flexibility of having savings outside of pensions is really useful. You should own financial products across the risk spectrum; cash to savings bonds to bond funds and equity funds. Use cash and savings bonds for immediate and emergency funds and global bond and equity index funds for long term investing taking a total return approach for income when you can.

shinytop

DairyQueen wrote: »

My thought exactly,

The other option I was playing around with was aiming for 60% equities but using a multi-asset fund (eg VLS 80 or HSBC Global Balanced) to provide a non-equities component.

gm0

One category not discussed yet on this interesting thread is the validity / role of index linked gilt funds vs regular gilts or corporates in the bond mix.

DairyQueen

shinytop wrote: »

The other option I was playing around with was aiming for 60% equities but using a multi-asset fund (eg VLS 80 or HSBC Global Balanced) to provide a non-equities component.

My SIPP is invested in VLS. It is split across 60/80/100 equities (3 investment timescales). We are adopting a different approach with my SIPP as my situation is very different from that of OH. My pension will not be accessed for at least 6 years, and most will remain invested for 10+ years. It is therefore still in the accumulation phase.

Multi-asset funds are problematic for OH as he plans to begin drawdown in 2/3 years. To guard against a market crash within that short period we wish to hold enough funds in low risk investments now to meet our drawdown requirements from that SIPP for up to the next 8 years.

We wish to ring fence the low risk from the high risk, thus the desire to split the SIPP between equities and fixed interest/cash now.

So, should we simply bite the bullet and split 60/15/25 equities/bonds/cash rather than 60/40 equities/bonds?

We have sufficient emergency cash and will continue adding to our 'suspend drawdown, unwrapped cash fund' until OH retires. That part of our portfolio is already ring-fenced for that function and won't impact on how we use OH's SIPP.

OldMusicGuy

Personally I am just holding cash in my SIPP to guard against pound-cost ravaging over the next 4 years before SP kicks in. It costs me nothing in HL and as I am UFPLSing I have the cash readily available for that plus plenty in reserve (it's about 20% of my SIPP, probably more than most would want but it suits me).

I do also have a bond ladder in savings outside the SIPP, which is where the equity from our house downsize will go (plus some S&S ISAs).