Is guaranteed retirement income a fixed interest asset?

Linton

shinytop wrote: »

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?

If there is any chance of you paying HRT sometime in your retirement it is worthwhile extracting money from your DC pension pot and putting it into ISAs at basic rate tax. The only downside is that it may not be not such a good idea if you have inheritance tax concerns as money left in pensions is transferred to beneficiaries outside the estate.


In my case I would be paying HRT if I took my SP. So I am deferring it to clear my SIPP at basic rate tax ASAP. This has the added benefit, as I reached SPA prior to April 2016, of an annual increase of 10.4% and the extra payment can be inherited.

MarkCarnage

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).

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

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Are these statements not rather contradictory? FWIW I agree with your first statement more than the second, as I think that cash is likely to do as good a job as bonds right now for a volatility buffer.

I also think that the hypothesis in the original post makes a lot of sense. I certainly view my DB pension a capped index linked bond proxy with longevity hedging. My only minor caveat is that sponsor covenant strength would need to considered - in other words your 'bond' isn't always an AAA rating....yes I know about the PPF and all that, but there are haircuts there too, and I wouldn't like to be too reliant on it in a worst case scenario.

Problem with most US pensions is that discount rates/ assumed return rates are still insanely optimistic. A real world rate would add trillions to the liabilities. Not so bad in UK, but I think that projected return rates are still too high, and hence 'safe' withdrawal rates may be too, particularly where there isn't a decent cash buffer maintained. I use 2.5-3%.

Interesting article by Ray Dalio of Bridgewater today (not public unless you get their daily newsletter). He thinks that we are now seriously in Alice in Wonderland territory for nearly all asset classes. How to best resolve the next big debt crunch is probably the key question. It's coming, and it won't be nice....can has been kicked down the road for too long.

Linton

DairyQueen wrote: »

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?
....

Corporate Bonds do behave more like equities but the evidence from the 2008/9 crash is that this is only partially true. Equity dropped by about 40% at that time whilst the average corporate bond fund dropped 15%. If you had invested just before the crash it would have taken 5 years for the FTSE World Index to beat the average corporate bond fund. In the .com boom/bust corporate bond funds were unaffected.



If you dont want regular income from your retirement pot what is its objective? The appropriate asset allocation for equity, bonds and anything else will depend on the objectives and your risk acceptance (as always).

Thrugelmir

DairyQueen wrote: »

The volatility of equities could be favourable (depending on the timing of a market crash),

Don't confuse volatility with risk. Easy to think of the markets as a mechanical roller coaster that rides up and down. Paying attention to fundamentals matters. The higher the level of risk taken the more outcomes one is potentially exposed to.

[Deleted User]

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?

Did you mean to say “junk bonds” in the first sentence? Many of the corporate bonds are investment grade.

I also question the value of corporate bonds. Government bonds do have a role to play, particularly those with relatively short duration. They tend to go up when stocks plunge so you can rebalance back into stocks. Tends to mean a much lower drawdown, a faster recovery and can even juice up returns.

Linton

Deleted_User wrote: »

...
Government bonds do have a role to play, particularly those with relatively short duration. They tend to go up when stocks plunge so you can rebalance back into stocks. Tends to mean a much lower drawdown, a faster recovery and can even juice up returns.

Yes but UK Government bonds cannot go up in value much more. So their role in moderating an equity crash is severely compromised. Therefore we need to look for other, perhaps historically not as effective, options.

Triumph13

@Dairyqueen I agree with you on bonds at the moment and avoid them as an asset class using cash (outside the pension) instead. With no scope for capital gain on long dated gilts (and lots of scope for capital loss) they do not look attractive to me. Cash for now and DB / SP for later gives me the floor to accept equity volatility on everything else.

What confused me with your post, unless you run completely separate finances, was why you would conclude that bonds had no place in your husband's portfolio, but they might in yours? Do you not consider everything as a combined portfolio?

bostonerimus

jamesd wrote: »

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.

This sort of retirement planning is a step too far for me. My approach was to go into retirement mortgage free to minimise the income I had to produce.

[Deleted User]

Leveraging in retirement does not appeal to me either unless it’s for a tiny fraction of net worth.

bostonerimus

Deleted_User wrote: »

Leveraging in retirement does not appeal to me either unless it’s for a tiny fraction of net worth.

Yeah, I know that paying off a low interest loan is probably not the optimal solution. But the most important word in the last sentence is “probably”. For me simplicity is a big factor in my retirement plan. Having paid off the mortgage I can now cover my expenses from my DB pension and rent income sources and don’t have to worry about generating consistent drawdown income.