Alternative To Holding Cash in SIPP?

dont_look_now

TCA said:

I'll dig deeper into the risk factor of these and check out some of the longer-term options while I'm at it.

Some longer-term options from iShares are SLXX and ISXF. (And no, I'm not a salesperson for iShares .)

dunroving

It's not as if when you hit 65 (or whatever), you'll take it all out, surely? In which case, moving it all to some sort of cash pot might not make sense.

You could have 10, 20, or more years to spend your pension pot. You only really need to secure however much you'll spend in the next few years. The rest can stay in investments with a 5-year, 10-year, etc., etc. perspective. Your annual evaluation of your holdings would be adjusted only in terms of moving enough into cash to maintain your 3-year, 5-year, whatever cash buffer.

TCA

It wouldn't all be taken out at once but the question is based on the premise that there is no requirement to take increased risk when further gains are not required.

dunroving

TCA said:

It wouldn't all be taken out at once but the question is based on the premise that there is no requirement to take increased risk when further gains are not required.

I did see that idea in your OP, but you don't know how your needs might change 5 or 10 years after retirement. Anyway, it's clear what you were asking but I thought I'd just raise the possibility that you wouldn't need to hold it all as "cash".

AnotherJoe

TCA said:

AnotherJoe said:

Take it out as part of the 25% TFLS and hold it elsewhere?

Thanks Joe. Let's assume that'll be done but what about the time period prior to being able to access the TFLS and the remaining 75% thereafter?

How many years? The fact is, if you want to beat inflation, you've got to invest.

If you are at where you want to be and worried about losing money, but say theres only say 2 years to go, well you wont really lose out much to inflation anyway.

But, if you are that worried about losing money on that %, are you cutting it too close to the bone to retire? If you will be retired for say 30+ years after retiring, do you want that much in cash you need to be concerned about inflation on it? Or should you remain mostly  invested for at least say 20 years after you retire ? eg in "the past" when peopel took out annuities the idea was to gradually switch into cash so at the point of retirement youw ere fully in cash. But now, when youw ill likely buy an annuity much later in life, if at all, then id say you shoudl be staying invested that much longer.

I've probably got too much cash, maybe 5 years living expenses, most peopel advocate 2-3, but i keep my SIPPs and ISA fully invested, give or take on the grounds that that then means i can invest fairly riskily (is that a word) since i can live off the cash if need be . I take cash out each month from my SIPP to match my tax allowance and if i dont need it goes into an ISA or a savings account with some sort of interest rate. (I am retired but below state pension age)

What % are you looking at and how many years?

TCA

Thanks for the reply but you're answering a question I didn't ask. I'm simply asking for suggestions for a low-risk, low-volatilty fund/ETF which provides a return to beat inflation.

We're assuming I've finished the accumulation phase of my investment journey, no longer want nor need to take on excessive additional risk, but also don't want to sit with pure cash in the pension wrapper.

Percentage = 100%, time period= indefinitely.

bowlhead99

TCA said:

Thanks for the reply but you're answering a question I didn't ask. I'm simply asking for suggestions for a low-risk, low-volatilty fund/ETF which provides a return to beat inflation.

We're assuming I've finished the accumulation phase of my investment journey, no longer want nor need to take on excessive additional risk, but also don't want to sit with pure cash in the pension wrapper.

Percentage = 100%, time period= indefinitely.

The question you asked was for something, "akin to cash within their pension wrapper, but with an element of inflation proofing or very low risk?"

Something 'akin to cash' has no chance of capital loss but very real chance of inflation loss, given the characteristics of cash are that you will definitely get your capital back without taking investment risk so the person taking your money has no opportunity to generate a return, and is unlikely to give you an interest rate that meets or exceeds inflation.

Interest rates on cash are very low for people investing via consumer bank deposits (which receive a boost from banks' marketing budgets in the hope they can cross-sell services), let alone pension-wrapped cash options.  The yield to maturity on UK gilts (the 'safest' non-cash financial instrument in terms of getting your capital back in pounds) are literally negative for any gilt maturing in the next 7.5 years, increasing a little for longer maturities - and only gets as high as 0.6% for the gilts maturing in December 2040 (20 years 5 months). While the government inflation target is 2% but it would be sensible to plan for higher.

So anything 'akin to' pension-wrapped cash or GBP government bonds is not going to work, as the rates on offer don't cover the inflation rate we've experienced over the last year, let alone any potential  higher future inflation rate we might experience in future. Index-linked gilts exist, but are all at negative yields of a couple of percent or more assuming inflation at 3%; the ones with short maturities are even greater negative and the ones with long maturities have significant chance of capital loss - you have to pay over £200 for a £100 bond which will pay an inflation-proofed 0.25% from now to 2050, meaning your yield will be significantly negative if you hold to maturity and if you don't hold to maturity you may find its market value is way less than £200 only a few years from now, so that's certainly not 'akin to cash' even though it has inflation protection.

Holding cash doesn't achieve your objective. Holding a 'cash' money-market fund doesn't achieve your objective. Holding low risk government bonds doesn't achieve your objective. Holding inflation-index linked government bonds doesn't achieve your objective. Therefore you have to look at 'riskier' products, which stop being 'akin to cash' because there is no certainty of getting your money back.

If you look at investment-grade corporate bonds from 'safe' issuers - something like Procter & Gamble 2033 bonds paying 5.25% coupon, would cost you £147 per £100 nominal so the yield to maturity over next 12.5 years is only 1.16%. There's no element of 'inflation protection' there and if you needed to cash it out in five years time, you might find it's trading at £110 and you've lost a quarter of the capital, despite receiving £26 of interest payments, so you have a small loss in cash terms and a larger loss in real terms because inflation was ticking up in the meantime. And the loss could be greater if market interest rates have improved and the bond has become relatively unattractive, because you would get less if you tried to sell it. Likewise National Grid sound pretty safe, their 2028 bonds have a 1.6% yield to maturity based on the current price, which is better than cash interest rates - but what if inflation is 3% or 4% or more? And they are not a government entity but a plc, with a BBB credit rating, so what if they default? 

So the 'safer' end of corporate bonds don't seem fit for purpose either because you're taking more risk than cash and still not really getting inflation protection,-as even a return of 1.2% or 1.6% may be less than inflation, and the return from a fixed interest bond is not linked to inflation but is contractual, and its price is driven by market forces.

If cash doesn't work, UK government bonds don't work, index-linked UK government bonds don't work (and foreign government bonds also don't work because in much of the world the rates are even lower, and where they are higher you are looking at default risk or substantial exchange rate risk or both), investment grade corporate bonds don't work... so you are looking at things like:

- non-investment grade ('junk') high yield bonds which have no built-in inflation protection but can pay a decent yield because they carry default risk and market risk; their prices may move like equities; 

- commodities such as gold (hope of long term inflation protection but no yield and various historic examples of losing significant percentages over multi-decade periods);

- commercial property (expectation of yield and capital value that rises with inflation but no certainty and market crashes possible);

- equities (long term growth potential likely to beat inflation, some with dividends some with capital growth some both, exchange rate risk on the international holdings required for portfolio diversity, market risk of 50% drops in any of the major indexes over multi-year periods);

- infrastructure/ utility projects which blend together a mix of bond-like attributes and equity-like attributes and property-like attributes so can sound attractive but will ultimately be similar to holding a portfolio of the above asset classes and are certainly not devoid of risk.

The bottom line to the above backdrop is that your ambition to get 'something akin to cash, but with an element of inflation protection, for as much money as I want to invest, and with an indefinite timescale' does not exist in a single product, because all the asset classes out there have some deficiency which mean they can't (on their own) meet your objective.

What that means is if you need to keep up with inflation you will need to construct a portfolio of multiple asset classes to achieve the objective - for example equities can beat inflation and if you blend them with property and infrastructure (which will lower the total returns potential, but reduce volatility) and bonds (which will lower the returns potential further because they can't beat inflation, but will also lower the volatility because they won't crash as hard), you may be able to end up with a porfolio you could tolerate.

Such a portfolio may be one whose potential is to 'not beat inflation by much over the long term, but also not crash too much'. Or a slightly more conservative one whose potential is 'not make quite as much money as inflation over the long term, but unlikely to suffer significant drawdowns of value from peak to trough over a market cycle'. There are endless possibilities in portfolio construction.

There are various mixed asset investment funds and investment trusts which position themselves for lower-volatility long term returns, and you could look at some of those for a portion of your capital while using non-returning cash for the rest. But the idea of finding a single product that's a bit like cash in terms of risk and volatility - but giving substantially better returns than cash - is hopeless. If it was obvious we would all be using it and you'd have hundreds of answers on this thread pointing it out.

Instead, you're getting people like AnotherJoe questioning whether you really have enough capital - whether you have really finished your investing journey - if you are worried that inflation will leave you without enough capital. And observing that you've simply got to 'invest', to achieve what you want, because nobody is going to hand you 'inflation linked returns for substantial amounts of money' on a silver platter. Your premise, that: "there is no requirement to take increased risk when further gains are not required" is fine, if gains are really not required. But you've confirmed that you do need gains, to allow you to withstand inflation, because the amount of money you have is not currently enough to hold out against the ravages of unknown inflation over "time period= indefinitely".

You say you don't want to take "excessive additional risk". Fine, don't take 'excessive' risk, but note that no-risk or low-risk doesn't product the outcome you want, so you are going to need to find some happy middle ground.

Traditional low risk options are simply not yielding enough for your objective in today's world, so to equal or beat inflation you need to accept moving up the risk scale, and due to the fact that long term outcomes are always uncertain, you might end up accidentally beating inflation, but also you might end up on the wrong end of capital losses. The fact that conventional low risk options are not yielding enough in today's markets, doesn't mean they will always not yield enough, but 'we are where we are' - and if you sit too heavily in cash while waiting for better things to emerge, you could lose out to inflation if you have chosen not to (fully or at least partially) participate in the markets.

Good luck with your retirement planning and if you find some product that the rest of us have missed, which keeps up with inflation while providing adequate downside protection, please come back and tell us. Generally I believe such a product would be an investment vehicle holding a mix of assets from various asset classes (as talked about from time to time on other threads). Alternatively it would be a contracts-based structured product relying on insurance or other financial counterparties with a really low potential return and offering some form of surprise losses or failure to meet the objective, if the underlying markets did not end up performing within the intended range of forecasts.

Sometimes over the years there are some needle-in-a-haystack structured products that give quite attractive offerings but they basically involve giving up upside potential to insure against downside losses and you could construct them yourself if you were happy to fill your pension with a load of derivative financial instruments. But as mentioned, market returns for safe investments are really low at the moment which is why contracts-based 'safe' financial products are not giving the sort of returns you want - as evidenced by the fact you find the concepts of being all in cash, or using an annuity for part of the money, unattractive.

AnotherJoe

TCA said:

Thanks for the reply but you're answering a question I didn't ask. I'm simply asking for suggestions for a low-risk, low-volatilty fund/ETF which provides a return to beat inflation.

We're assuming I've finished the accumulation phase of my investment journey, no longer want nor need to take on excessive additional risk, but also don't want to sit with pure cash in the pension wrapper.

Percentage = 100%, time period= indefinitely.

In which case, I'll tell you what that Is after I've caught you a unicorn and got you the moon ona stick.

What you're asking for doesn't exist, which BH above explains in his own inimitable way. 

Best you could is a mixed equity / bond fund heavy on the bonds  or there are capital preservation funds which aim to do the sort of stuff with derivatives BH mentions, but just so you don't have to. But they aren't risk free, nothing is. Funds like Ruffer have attempt this but they aren't infallible either https://citywire.co.uk/investment-trust-insider/news/ruffer-expresses-considerable-regret-at-5-capital-loss/a1207248

so," the answer", which might not be what you've asked for but is nevertheless the answer, is you either have an element of equities, DIY or via a fund, or you accumulate enough cash that inflation isn't an issue, or you buy an annuity with your cash. But you'll notice a considerable hit if you buy an annuity, which is simply reflecting the fact that there is, indeed, a risk long term and that risk is built into the low annuity payouts. 

csgohan4

sadly on reading this section, there isn't a one fund for all which will increase your investment without risk. 

You need to do some research and set goals and your own risk appetite against it. Some are more risk averse, some not so

Look at Woodford as a prime example where things can and will go wrong. 

Albermarle

There are various mixed asset investment funds and investment trusts which position themselves for lower-volatility long term returns

Such as this one has done what it says on the tin.

https://www.trustnet.com/factsheets/t/im46/personal-assets-trust-plc-ord

Although they do not all work so well

https://www.trustnet.com/factsheets/p/bpa3/stan-life-sli-global-absolute-return-strategies-pn-s3