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Preparing For Retirement - Managing Portfolio Cash
DairyQueen
Posts: 1,865 Forumite
I think I’m overanalysing and need some help seeing wood-thru-trees. Apologies for the long post but our finances are quite complicated and I am probably missing something major as I’m so close to the detail.
Advice very, very welcome.
Problem
How best to allocate/manage the fixed assets/cash %age of our portfolio in the lead-up to retirement and in the early retirement years.
Circumstances
OH - Age 62 and planning to retire in just under 2 years at age 64, He is a director and shareholder of our limited company and his income is taken as a small salary plus dividends. His total income is under the HRT threshold. By retirement he will qualify for the full nSP. He has taken 2016 LTA protection (£1.25m with 9.3% crystallised) and can no longer make pension contributions. OH is the recipient of part of my (transferred under married person's rule) personal allowance.
Me – Age 60 and retired. No current income other than from investments (income reinvested) but likely to receive a small salary from the company later this year. I already qualify for the full nSP. In recent years I have added the full £2880 net allowed for non-earners to my SIPP. All of my salary will be contributed to my SIPP for the next two tax years. I will then revert to paying the non-earner max until I reach 75.
No debt, no mortgage. We intend to retain our current property equity (approx. £500k). No plans for equity release/downsize. The equity is earmarked for care home fees should either of us require it.
No plans to ear-mark capital for inheritance. Anything left will be a bonus for our beneficiaries.
Retirement Finances
We are life-long savers and have built-up decent pensions. However, our cash reserve has been hit by a series of unexpected events in the last, few years and we wish to add substantially to that reserve, and finance some large expenses, before OH retires.
We are looking for a net £55kp.a. income in retirement at today’s value. All of our non-discretionary expenses will be covered by OH’s guaranteed income.
Guaranteed Income:
£32k – OH DB (projected value at age 64 and currently deferred past NRD). 2/3rds widows. Index-linked up to 5%.
£3k – OH Section 32 (GMP guarantee and payable from age 63 – Harris case applies). No indexation once in payment.
2 x full nSP (both at age 66).
SIPPs:
OH - £315k (uncrystallised) plus £89k (crystallised and net of max TFC - already taken)
Me: £242k (all uncrystallised).
Current Cash:
£130k (wrapped in OH’s uncrystallised SIPP and included in above figure)
£4k (wrapped in other SIPPs)
£53k (unwrapped).
Additional Capital Within Next 2 years:
a) There are likely to be retained dividends in the company after OH retires in the region of £50k. Not guaranteed
b) We have recently won a high court case in which we have been awarded our costs. Amount not yet calculated but likely to be in the region of £50k. It will be several months before we receive any of this cash.
Income Plan:
All figures exclude inflation, but I have assumed that purchasing power will be maintained by investment growth over the long-term, and by using cash to suspend drawdown as necessary:
2021-22 = £3k (S32) plus <drawdown from whichever is the most tax efficient source – unwrapped cash/retained dividends/SIPPs - in order to meet that £55k target>.
2022-23 - £3k (S32) plus £32k (DB) plus <ditto>.
2023-24 - £3k (S32) plus £32k (DB) plus £8.7k (OH SP) plus <ditto>.
2024-25 – Ditto.
2025+ - £3k (S32) plus 32k (DB) plus £8.7k (OH SP) plus £8.7k (my SP) plus
drawdown between 2 and 2.5% of remaining portfolio annually. Suspend if markets crash.
Aims
1) Have sufficient cash to bridge income requirement from 2021 until all our guaranteed income is in payment in 2025.
2) Maintain sufficient additional cash for emergency fund (at least £50k)
3) Have sufficient cash by 2025 to suspend drawdown if necessary. Say another £50k.
4) Replace OH’s car asap (budget £30k).
5) Move home next year. Ideally we would like to increase our budget by £20k-£70k above our current equity (plus moving expenses of around £30k). However, this is just a nice to have.
Current Portfolio
Cash 29% (SIPP-wrapped plus unwrapped)
Equities 64%
Bonds 7%
I am happy with the equity allocation but have been reluctant to invest more in bonds given the impact of QE on their current price and behaviour. Also, given our cash requirement over the next two years, plus the income bridge needed within 2 to 6 years, it seems sensible to accept the cash drag. However, the return on cash held within the SIPP is pathetic.
Should OH crystallise the remainder of his SIPP now in order to invest the TFC at a better rate? If so, it would use another 25.2% of his LTA.
That will still leave over £50k in cash in the crystallised SIPP. It can’t be drawn down for at least 2 years without OH paying HRT so would it be better invested in, say, short-term, investment-grade bonds? Or some other low-risk asset that would return more than cash? Query what?
Plan
How best to access the cash required to meet our big expenses of the next two years, plus bridge the income requirement from 2021-2025?
Current unwrapped cash: £53k (emergency fund).
TFC from OH’s SIPP: £78.5k (of which £30k = car purchase with balance used for house move)
Return of legal costs: £50k (put toward income bridge of approx. £110k required from 2021-2025?)
Retained dividends: £50k (use for balance of income bridge required from 2021-2025?).
I was intending to use UFPLS to drawdown my SIPP up to the max PA from 2021. Not necessarily required for income in the year taken but use-it-or-lose-it.
I can also become a shareholder in our company to optimise tax on withdrawal of the dividends.
There is also the option for OH to defer taking SP. He has a normal life expectancy whilst mine is reduced. I am unlikely to reach 80.
We each have the full £20k ISA allowance unused so far this tax year.
I realise that this is a very first world problem. We are lucky but, having endured some tough times recently, we would like to indulge ourselves in our early retirement years. If we can safely exceed that £55kp.a., or realise more cash just to spend on indulgences, then we’ll grab it.
Thanks for reading.
Advice very, very welcome.
Problem
How best to allocate/manage the fixed assets/cash %age of our portfolio in the lead-up to retirement and in the early retirement years.
Circumstances
OH - Age 62 and planning to retire in just under 2 years at age 64, He is a director and shareholder of our limited company and his income is taken as a small salary plus dividends. His total income is under the HRT threshold. By retirement he will qualify for the full nSP. He has taken 2016 LTA protection (£1.25m with 9.3% crystallised) and can no longer make pension contributions. OH is the recipient of part of my (transferred under married person's rule) personal allowance.
Me – Age 60 and retired. No current income other than from investments (income reinvested) but likely to receive a small salary from the company later this year. I already qualify for the full nSP. In recent years I have added the full £2880 net allowed for non-earners to my SIPP. All of my salary will be contributed to my SIPP for the next two tax years. I will then revert to paying the non-earner max until I reach 75.
No debt, no mortgage. We intend to retain our current property equity (approx. £500k). No plans for equity release/downsize. The equity is earmarked for care home fees should either of us require it.
No plans to ear-mark capital for inheritance. Anything left will be a bonus for our beneficiaries.
Retirement Finances
We are life-long savers and have built-up decent pensions. However, our cash reserve has been hit by a series of unexpected events in the last, few years and we wish to add substantially to that reserve, and finance some large expenses, before OH retires.
We are looking for a net £55kp.a. income in retirement at today’s value. All of our non-discretionary expenses will be covered by OH’s guaranteed income.
Guaranteed Income:
£32k – OH DB (projected value at age 64 and currently deferred past NRD). 2/3rds widows. Index-linked up to 5%.
£3k – OH Section 32 (GMP guarantee and payable from age 63 – Harris case applies). No indexation once in payment.
2 x full nSP (both at age 66).
SIPPs:
OH - £315k (uncrystallised) plus £89k (crystallised and net of max TFC - already taken)
Me: £242k (all uncrystallised).
Current Cash:
£130k (wrapped in OH’s uncrystallised SIPP and included in above figure)
£4k (wrapped in other SIPPs)
£53k (unwrapped).
Additional Capital Within Next 2 years:
a) There are likely to be retained dividends in the company after OH retires in the region of £50k. Not guaranteed
b) We have recently won a high court case in which we have been awarded our costs. Amount not yet calculated but likely to be in the region of £50k. It will be several months before we receive any of this cash.
Income Plan:
All figures exclude inflation, but I have assumed that purchasing power will be maintained by investment growth over the long-term, and by using cash to suspend drawdown as necessary:
2021-22 = £3k (S32) plus <drawdown from whichever is the most tax efficient source – unwrapped cash/retained dividends/SIPPs - in order to meet that £55k target>.
2022-23 - £3k (S32) plus £32k (DB) plus <ditto>.
2023-24 - £3k (S32) plus £32k (DB) plus £8.7k (OH SP) plus <ditto>.
2024-25 – Ditto.
2025+ - £3k (S32) plus 32k (DB) plus £8.7k (OH SP) plus £8.7k (my SP) plus
drawdown between 2 and 2.5% of remaining portfolio annually. Suspend if markets crash.
Aims
1) Have sufficient cash to bridge income requirement from 2021 until all our guaranteed income is in payment in 2025.
2) Maintain sufficient additional cash for emergency fund (at least £50k)
3) Have sufficient cash by 2025 to suspend drawdown if necessary. Say another £50k.
4) Replace OH’s car asap (budget £30k).
5) Move home next year. Ideally we would like to increase our budget by £20k-£70k above our current equity (plus moving expenses of around £30k). However, this is just a nice to have.
Current Portfolio
Cash 29% (SIPP-wrapped plus unwrapped)
Equities 64%
Bonds 7%
I am happy with the equity allocation but have been reluctant to invest more in bonds given the impact of QE on their current price and behaviour. Also, given our cash requirement over the next two years, plus the income bridge needed within 2 to 6 years, it seems sensible to accept the cash drag. However, the return on cash held within the SIPP is pathetic.
Should OH crystallise the remainder of his SIPP now in order to invest the TFC at a better rate? If so, it would use another 25.2% of his LTA.
That will still leave over £50k in cash in the crystallised SIPP. It can’t be drawn down for at least 2 years without OH paying HRT so would it be better invested in, say, short-term, investment-grade bonds? Or some other low-risk asset that would return more than cash? Query what?
Plan
How best to access the cash required to meet our big expenses of the next two years, plus bridge the income requirement from 2021-2025?
Current unwrapped cash: £53k (emergency fund).
TFC from OH’s SIPP: £78.5k (of which £30k = car purchase with balance used for house move)
Return of legal costs: £50k (put toward income bridge of approx. £110k required from 2021-2025?)
Retained dividends: £50k (use for balance of income bridge required from 2021-2025?).
I was intending to use UFPLS to drawdown my SIPP up to the max PA from 2021. Not necessarily required for income in the year taken but use-it-or-lose-it.
I can also become a shareholder in our company to optimise tax on withdrawal of the dividends.
There is also the option for OH to defer taking SP. He has a normal life expectancy whilst mine is reduced. I am unlikely to reach 80.
We each have the full £20k ISA allowance unused so far this tax year.
I realise that this is a very first world problem. We are lucky but, having endured some tough times recently, we would like to indulge ourselves in our early retirement years. If we can safely exceed that £55kp.a., or realise more cash just to spend on indulgences, then we’ll grab it.
Thanks for reading.
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Comments
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I may be wrong, but I suspect you may struggle to get a decent response here, simply because you have put a LOT of detail in there!
As you say, you have very much a first world problem.
The fact that you are only talking of drawing down 2-2.5% on one pot suggests to me you have enough wiggle room there alone to relax and crack on with enjoying your retirement...the bigger question might be whether you have persuaded OH to properly wind down!
Feels to me like it might actually be worthwhile hunting down a respected and capable IFA to get to properly delve into this with you. I am sure it would cost a few thousand for some one-off advice if you don’t want an on-going relationship, but given the scale of money you are describing, surely worth a look?
& I speak as someone who has generally avoided IFA usage due to our situation being somewhat simpler!Plan for tomorrow, enjoy today!0 -
Hi DQ
I'm usually a consumer of your comments on these boards :beer:
Perhaps you could just expand on what you are trying to accommodate with the cash 'problem'?DairyQueen wrote: »Problem
How best to allocate/manage the fixed assets/cash %age of our portfolio in the lead-up to retirement and in the early retirement years.
Is it looking at different vehicles to hold the cash for phased access?
Over 63% of your retirement income will be coming from secure sources (DB/S32) and this will only increase with the inclusion of SPs so, is management of the cash, or the need for significant cash (other than the near term expenses you mentioned) a significant issue?
If you are thinking of cash in terms of setting aside certain amounts ready for withdrawal etc then how about ZDP shares (they are worth considering if assessed appropriately).Personal Responsibility - Sad but True
Sometimes.... I am like a dog with a bone0 -
Cash bond/savings ladder?0
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Thanks for the reply.I may be wrong, but I suspect you may struggle to get a decent response here, simply because you have put a LOT of detail in there!
As you say, you have very much a first world problem.
The fact that you are only talking of drawing down 2-2.5% on one pot suggests to me you have enough wiggle room there alone to relax and crack on with enjoying your retirement...the bigger question might be whether you have persuaded OH to properly wind down!
Feels to me like it might actually be worthwhile hunting down a respected and capable IFA to get to properly delve into this with you. I am sure it would cost a few thousand for some one-off advice if you don’t want an on-going relationship, but given the scale of money you are describing, surely worth a look?
& I speak as someone who has generally avoided IFA usage due to our situation being somewhat simpler!
I knew that I was at risk of burbling but I have been scratching my head for weeks about the cash.
I considered engaging an IFA but he didn't get back to me, as promised, after his extended Xmas break. I was a little dubious during our initial conversation as he asked why OH had taken LTA protection. Err..... I would have thought that was obvious given the valuation of OH's DB and size of SIPP.
I scarpered back to my spreadsheets.
OH now takes (most) Fridays off and we have agreed that he will retire on his 64th birthday. He has committed to working no more than one day each week once retired. This is definitely progress.
I need to overcome the psychological obstacle of drawing the TFC on our pensions sooner than we anticipated. We both planned to use UFPLS but the unexpected call on a shed-load of our unwrapped cash has scuppered that. Our cash reserves have been reduced to the point where we need to take TFC in order to meet our short-term spending plans or delay those for at least another year.
If I knew when we would receive payment of the court costs, and also how much will be retained in deferred dividends, then it would be easier to take the TFC and happily spend it.
The best laid plans.... etc.0 -
LikewiseI'm usually a consumer of your comments on these boards :beer:
Thanks for the reply
I'm trying to work out whether we can still proceed with our short-term spending plans, and still maintain our target retirement income, despite the hit to our unwrapped cash, and despite the uncertainty of the repayment of court costs and value of deferred dividends.Perhaps you could just expand on what you are trying to accommodate with the cash 'problem'?
OH's income is such that we could be hammered on tax if he takes too much in divis. from the company, or any taxable income from his pension fund at the wrong time. The 'wrong time' being between now and when he retires.
So, the most we can take from his SIPP over the next 2 years is the TFC from his uncrystallised SIPP. That's about £78k on current valuations.
If he takes the £78k TFC now then there will still be over £50k cash in his SIPP that we don't want to invest in equities and which would be used for phased access post retirement. That £50k would ideally be invested in bonds but bonds aren't behaving normally. Cash in the SIPP returns next to nothing. So, where could it be invested for a couple of years inside the SIPP?Is it looking at different vehicles to hold the cash for phased access?
If we don't spend all of the TFC then it looks like a savings bond ladder or cash ISA is the best fit?
The need for cash diminishes once all guaranteed income kicks-in. Two reasons: firstly, we need a sizeable chunk to bridge up to that point. Secondly, we had planned to spend about £100k on moving house/a replacement car/ a few decent hols over the next few years.Over 63% of your retirement income will be coming from secure sources (DB/S32) and this will only increase with the inclusion of SPs so, is management of the cash, or the need for significant cash (other than the near term expenses you mentioned) a significant issue?
I learn something new on here every day. Thank you for the tip :beer:If you are thinking of cash in terms of setting aside certain amounts ready for withdrawal etc then how about ZDP shares (they are worth considering if assessed appropriately).
(scurries off to do a little research)0 -
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I would not worry about a return from your cash. If you want a return dont invest in cash. Cash serves other objectives. Or another way to look at things, perhaps the best way to get a return from cash is to put a % of it in equity.
We keep most of our cash in Premium Bonds. Not a great return but a bit of excitement at the start of every month. Our other strategy is to use Wealth Preservation funds, though I have yet to really convince myself that the same effect could not be eqully well achieved by a split of cash and equity.
For your unwrapped cash a fixed term ladder is probably most appropriate releasng a lump sum every year to help fund your early retirement. Doing this in a SIPP is more difficult.0 -
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I would be taking professional advice, with the amounts you have paying a couple of grand to a decent chartered financial planner would likely be a good investment. Have a look on unbiased,co.uk website find a few in your area, the initial meeting is free you can try a few and find someone you can work with.0
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I tried a (very local) one - see above. Not the greatest of experiences. Yes, I could try a few others. It's not the cost, it's the difficulty of locating an IFA with the right experience when you live in the middle of rural nowhere.I would be taking professional advice, with the amounts you have paying a couple of grand to a decent chartered financial planner would likely be a good investment. Have a look on unbiased,co.uk website find a few in your area, the initial meeting is free you can try a few and find someone you can work with.0
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