Is guaranteed retirement income a fixed interest asset?

Audaxer

Triumph13 wrote: »

DB pensions are excellent for the latter - if DB gives 80% of your income, with the rest from drawdown, then a 50% fall in your portfolio only translates to a 10% fall in your income.

I think how much your income would fall depends on the size of your portfolio. If for example you need £30k income and get £24k (80%) from DB and SPs, a 50% fall on a £100k portfolio could have a big effect on the income you can take, whereas with a 50% fall on much bigger portfolio of say £300k should result in no loss of income.

Thrugelmir

DairyQueen wrote: »

How did you gauge how much to increase your equity allocation? Is there a formula/strategy?

For myself in isolation. Always held a high proportion of equities. With a plan, made some time ago, to annuitise part. Though events of the last decade or so caused obviously caused me to rethink this. Though I was fortunate enough to end my working career accumulating further good DB provision. I took the opportunity to buy added pension while I could.

Equities is a very generic term. Companies, ie. their activity, comes in many different forms. If one is prepared to play the long game. Then opportunties do exist for the private investor. Requires patience though. As buying what others shun, will naturally result in disparity to benchmarks over shorter time frames. Not so much about the money but challenging oneself.

Having said the above. I've had no hesitation recently in winterising part of the portfolio. Sometimes there's a dearth of decent opportunities. Or the ability to build a decent stake before the price has moved significantly upwards.

[Deleted User]

How did you gauge how much to increase your equity allocation? Is there a formula/strategy?

For me, DB income is still some time away, starting at various points between 2024 and 2037. So, I keep a bucket with 5 years worth of minimal expenses in safe types of fixed income (government bonds). I keep this in easily accessible wrappers. it’s not percentage based; portfolio goes up but FI absolute value stays the same. Right now I am 16 FI and 84% equity.

jamesd

DairyQueen wrote: »

The paper suggests that guaranteed income is a fixed interest component of a portfolio. The authors include US state pension in this definition: ‘Once social security benefits have been optimized, the analyses can justify significant allocation of remaining savings to equities’....

The suggestion is that the more guaranteed income available as a proportion of income required, the lower the bond allocation within the drawdown portfolio. Or, expressed another way, a higher allocation to equities can be justified. This makes sense given dependency on drawdown reduces in proportion to the availability of other income streams sufficient to meet needs.

It seems reasonable to me.

You might also find Blanchett's work that combines guaranteed income with income flexibility to produce a target success rate for drawdown of interest. That perhaps approaches it better by looking from the income need end where bonds are just a source of income.

This nicely describes part of how I approach state pension deferral:

"Risk-averse retirees who would otherwise consider purchasing low performing annuities and fixed income investments should consider first using their savings to enable delaying the start of Social Security benefits. The increase in Social Security benefits that is achieved by delaying benefits can be viewed as 'purchasing an annuity from Social Security' at a very favorable rate. (Social Security income forgone during the delay is akin to the annuity purchase price, and additional income received is analogous to annuity income.)"

I go beyond it by using the Blanchett approach.

Following Wade Pfau's earlier work on reverse mortgages I moved my view on my own interest only offset mortgage to replacing it and never repaying the borrowing.

jamesd

Deleted_User wrote: »

Also, surely delaying state pension actually means drawing more investment earlier and hence reduces the risk of breaching LTA.

No, because crystallising and withdrawing taxable money from a pension are tax optimising decisions that you do even if the amount you're taking as income is lower. Drawings above income just get reinvested, probably within an ISA.

jamesd

DairyQueen wrote: »

UK deferral of SP incurs 5.9% each year but it's much less generous now than under the oSP. I'm not sure of the payback in years but I'm sure someone more knowledgable can advise.

I was surprised that some types of US pensions dictate the min withdrawal rate each year after age 70. Any idea why?

5.8% and some return tools are here. One critical thing to recognise is that state pension deferring is buying longevity insurance. It's not just about whether you get the money back before population life expectancy is reached.

The first UK pension freedoms - A-day - that eliminated the requirement to buy an annuity also had required minimum distributions, Alternatively Secured Pensions from 2006: "A minimum income of 55% of the amount allowable under Unsecured Pension must be taken". There was a 40% inheritance tax charge on leftover ASP money.

The general principle is that the tax advantage is provided for the purpose of providing an income while alive, not a tax perk for inheritors.

jamesd

westv wrote: »

The only problem with state pension deferral is that it's not possible to get surviving spouse benefits.

While literally true, state pension deferral pays about twice as much as an annuity, so doing it for a couple can be viewed as twice the annuity income with 50% spousal pension.

DairyQueen

jamesd wrote: »

5.8% and some return tools are here. One critical thing to recognise is that state pension deferring is buying longevity insurance. It's not just about whether you get the money back before population life expectancy is reached.

The first UK pension freedoms - A-day - that eliminated the requirement to buy an annuity also had required minimum distributions, Alternatively Secured Pensions from 2006: "A minimum income of 55% of the amount allowable under Unsecured Pension must be taken". There was a 40% inheritance tax charge on leftover ASP money.

The general principle is that the tax advantage is provided for the purpose of providing an income while alive, not a tax perk for inheritors.

Very helpful posts and links. Thanks James.

DairyQueen

Triumph13 wrote: »

DBs have a similar impact to bonds, but in a quite different way.
Two key strategies for making your drawdown sustainable are a)having an asset allocation that lets you avoid selling too many equities in the middle of a crash and b) having flexibility in spending that lets you avoid selling too many equities in a crash. Bonds / Fixed Interest can be good for the former. DB pensions are excellent for the latter - if DB gives 80% of your income, with the rest from drawdown, then a 50% fall in your portfolio only translates to a 10% fall in your income.

Or a cash buffer.

In the current climate (QE) investment grade bonds return plonk (and could go lower) and corporate bonds are behaving more like equities. I am asking myself the question: Is there currently a place for bonds for those who are able to accept high volatility or don't require regular income-generation from their portfolios?

I believe the double whammies of pound cost ravaging and sequence of returns risk can be removed completely on a high equity portfolio if there is sufficient cash buffer to suspend drawdown and/or the income is not required to maintain lifestyle.

I am not a fan of bonds at the moment. I would rather own equities (predictably volatile) than corporate bonds (unpredictably volatile) and cash (low but predictable return) than investment grade bonds (low and unpredictable return).

Removing a whole asset class from a portfolio reduces diversification but I am struggling to see the function of bonds in OH's circumstances. When his DBs and SP are online he will be pushing toward the HRT threshold. He has already taken max TFC cash from his SIPPs to reduce the risk of breaching the (2016 protected) LTA. He has deferred his DB as the revaluation rate is higher than if he deferred the SP (and 2/3rds widows). The problem for him (nice problem to have) is avoiding HRT and the LTA penalty at age 75.

He will front load drawdown to bridge between retirement (in 18 months) and DB (2.5 years) and SP (3.5 years). Those income needs are already in pension-wrapped cash at paltry returns. Inflation being the lesser risk.

He will then drawdown up to HRT threshold before age 75 but only if the risk of LTA breach increases. With a high equity allocation a market correction/crash would reduce this risk and provide another reason for suspending drawdown.

The volatility of equities could be favourable (depending on the timing of a market crash), or it could leave him vulnerable to a high tax charge at age 75. Again, nice problem.

Drawdown for me will be more conventional. I will drawdown up to the tax-free max using UFPLS beginning in 18 months. Once my SP is online (5.5 years) I will reduce my drawdown rate to below 2%. My 6 year drawdown requirement will be in cash as I am adding the annual non-earner allowance of 3600 gross each year to existing pension-wrapped cash. The tax uplift goes some way to reducing the impact of inflation.

I believe that my portfolio has a place for bonds as I will drawdown up to the max tax free whether I need to or not. I am considering a 25% bond allocation for me and 10% for OH but I am open to advice/suggestions.

shinytop

jamesd wrote: »

No, because crystallising and withdrawing taxable money from a pension are tax optimising decisions that you do even if the amount you're taking as income is lower. Drawings above income just get reinvested, probably within an ISA.

So if (TFLS excepted), because of DB income, I'm always going to be paying at least BR tax on SIPP pension income, are you saying get everything out under HR limit and re-invested in ISAs as quickly as possible - even if I don't need the income?