Is guaranteed retirement income a fixed interest asset?

jamesd

DairyQueen wrote: »

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?

Minimal for me but I have P2P and asset-backed VCTs as bond substitutes. While I can sell assets the income is nice... or would be if I wasn't reinvesting the P2P part inside its IFISA wrapper.

DairyQueen wrote: »

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.

Since a bad sequence can be 20-30 years I don't think that it's viable in most cases to eliminate sequence risk without greatly constraining income. Short duration equity market drop pound cost ravaging is easy to deal with. 10% inflation for the first five years or a great depression are more challenging. I do think that a lot of risk reduction is possible.

DairyQueen wrote: »

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).

Same here for the last few years.

DairyQueen wrote: »

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.

At low interest rates cash can be a substitute for bonds, since the bonds aren't paying much premium to cover the capital loss risk if rates rise.

Thrugelmir

Linton wrote: »

Yes but UK Government bonds cannot go up in value much more.

Not in negative territory yet. Though globally around a quarter of investment grade bonds already are. Seems as if Central Banks are intent on pushing investors out of the safety of holding "cash" and forcing them to buy and hold riskier assets. Though this is encouraging prices of some assets to rise into what some commentatators consider to be "bubble" valuations.

jamesd

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?

Maybe.

With in my case also doing VCT buying to get the basic rate tax bill to roughly nil while getting the risks and other features of VCTs. I have a long horizon and don't plan to have much net income tax bill ever again.

For those who can achieve it, rapid basic rate withdrawing to eliminate long term taxable DC drawing has the potential to get all income within the personal allowance, starting rate for savings, personal savings allowance and/or ISA and VCT reliefs.

But for you the DB bit means you can't eliminate all future basic rate tax. Can you actually save any LTA or income tax with rapid SIPP withdrawing? If you use VCTs yes on the income tax. If you don't and can't save LTA or benefit from the starting rate for savings it might not fit your situation.

I expect higher income tax in the future so do expect some benefit from moving money from pension to ISA.

jamesd

Deleted_User wrote: »

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

For me the mortgage and credit cards for stoozing are each a little over 10% of net worth plus value of both borrowings. Not tiny but pretty low.

bostonerimus wrote: »

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.

I don't have any inheritance motivation and think there's value in the interest rate vs returns margin and not leaving the property value tied up.

[Deleted User]

Linton wrote: »

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.

Like what?

DairyQueen

Triumph13 wrote: »

@
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?

I manage our assets as a combined portfolio for analysis of consolidated returns and asset allocations. However, different tax positions, and different levels of guaranteed income, dictate that we need different drawdown strategies. For example, OH needs to drawdown as much as possible at BRT between retirement and when last tranche of guaranteed income (SP) is online. After that he could reasonably suspend drawdown indefinitely and his tax position is such that he will pay HRT on anything more than a minimal drawdown amount each year. A high %age of equities could be useful to him if the market crashed just before he reached 75 and recovered a short time after his 75th birthday (LTA allowance applies).

I, OTOH, wish to drawdown up to max PA (+TFC) each year via UFPLS. Although my drawdown rate will drop significantly once SP is in payment, if I don't use each year's PA then I will lose it. I won't need this amount in income so (as has been mentioned upthread) it will be moved to ISA. OH will inherit the ISA tax free if he survives me (likely as I have reduced life expectancy.)

Once SP is in payment I will still have a PA balance to use up each year so will continue to drawdown regardless of market conditions. This is where bonds come in. My drawdown requirements up to 2025 (when SP comes online) are already in pension-wrapped cash or in (better) interest unwrapped cash. The latter will be added to my pension via annual £3,600 gross contributions and held in cash.

My need to drawdown annually (for tax reasons) after 2025, regardless of market conditions, suggests that bonds may be needed. Holding cash within the pension wrapper, at trivial rates, that won't be needed for 6+ years, seems a step too far....

Erm...:idea:...

Just has a thought....

Amount of drawdown from 2025 will be the diff between PA and SP. Both will likely increase with inflation (former from 2021). Although the max unearned pension contribution allowance has been languishing at £3,600 gross for years, it may still be sufficient to cover the diff between PA and inflation-linked max SP in 2025. If so, I can meet my tax free drawdown objective by recycling the same pension contribution each year. and retaining the tax uplift. Thus drawdown from other pension-wrapped assets would be zero to minimal and no need to hold more than a small amount in investment grade bonds (i.e. protected from pound cost ravaging) to cover the total I can drawdown TF using UFPLS.

Hope that makes sense.

DairyQueen

MarkCarnage wrote: »

.

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. .

Superficially, yes. Problem is that OH and I have very different tax positions and drawdown requirements. I am wondering whether holding wrapped cash, at paltry rates, for possible drawdown in 6+ years is a step too far. I am comfortable with the inflation risk on cash scheduled for drawdown within 5 years, less so on drawdown in 6+ years. Especially given that OH only has a small diff between HRT threshold and projected guaranteed income from 2025. He could reasonably suspend drawdown whilst I need to max my PA each year or lose it. I therefore need to maintain drawdown whilst he doesn't.

MarkCarnage wrote: »

.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..

I agree. OH's (private company) DB is so central to our retirement finances that I keep a close eye on the sponsoring company's financial wellbeing and ability to fund pension liabilities. It's my one concern about OH deferring passed NRA.

MarkCarnage wrote: »

. 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.

And exacerbated instead of resolved courtesy of QE post-financial crisis. It seems that developed countries consider debt-supported spending to be the short-term panacea of financial ills. I too fear the day of reckoning.

bostonerimus

jamesd wrote: »

I don't have any inheritance motivation and think there's value in the interest rate vs returns margin and not leaving the property value tied up.

You are right of course, but part of my diversification and income strategy was to lock some money up in a BTL. The capital gain has been around 4.5% a year and the money tied up in the place generates another 4% to 5% rental income each year depending on expenses and the latest rent and valuation; I tend to rent below market as my little protest against rent inflation. It's not very liquid, but I have other investments that I can easily tap if necessary.

Thrugelmir

DairyQueen wrote: »

I agree. OH's (private company) DB is so central to our retirement finances that I keep a close eye on the sponsoring company's financial wellbeing and ability to fund pension liabilities. It's my one concern about OH deferring passed NRA.

There should be a full triennial acturial review undertaken. The results of which should be circulated to all members of the scheme.

jamesd

bostonerimus wrote: »

part of my diversification and income strategy was to lock some money up in a BTL. The capital gain has been around 4.5% a year and the money tied up in the place generates another 4% to 5% rental income each year depending on expenses and the latest rent and valuation;

I may well do the same, potentially buying the ground floor flat below the upstairs one where I live. Somewhat like the US two family home and live in one approach.