Investment advice

Albermarle

Lastly they/we are considering perhaps starting with the 20% equities in case shares suffer another big Covid-related fall and then maybe moving some or all into a higher one as and when that happens. Then, perhaps after a few years as they get older they could move back down again to a less risky one. Does that seem reasonable?

The problem with this approach is that you are trying to predict the future and second guess global financial markets .

It is just as likely that the markets will stay steady/ go up and then crash in three years due to some as yet unknown reason.

Better to just pick you risk level and go for it . If it makes them feel better they could add the money in stages .

2_4

bowlhead99 said:

2_4 said:

OK, they are both under 75 but taking their pensions already. 

For the state pension, the fact that they have started to take it already doesn't prevent them from saying they want to stop taking it for a while, unless they have already stopped at some point in the past and then decided to restart again. 

You can only stop and restart once, but state pension deferral is about the most lucrative investment that someone who has surplus cash and is looking for a low-risk return can make.  That is, for someone who reached state pension age before 6/4/2016 (which they did, if they are around 70 now).   

The terms for deferring if you hit pension age after that date (5.8% increase for every year deferred, instead of 10.4% for every year deferred) are far less lucrative because the government realised they couldn't afford to keep offering the same tremendous rate of return, and they also stopped allowing the additional pension 'earned' in that way from being inheritable by a spouse.

https://www.gov.uk/deferring-state-pension/what-you-get

Ah, I had no idea about that and don't think they did either. That's very interesting and we'll look into it more. 

2_4

Albermarle said:

Lastly they/we are considering perhaps starting with the 20% equities in case shares suffer another big Covid-related fall and then maybe moving some or all into a higher one as and when that happens. Then, perhaps after a few years as they get older they could move back down again to a less risky one. Does that seem reasonable?

The problem with this approach is that you are trying to predict the future and second guess global financial markets .

It is just as likely that the markets will stay steady/ go up and then crash in three years due to some as yet unknown reason.

Better to just pick you risk level and go for it . If it makes them feel better they could add the money in stages .

I'm not sure it's "just as likely" but I appreciate your point. Some of the funds I'm looking at are more or less at their pre-covid highs and with the situation far from over and a vaccine not seeming a realistic possibility any time soon and the real economic impact not yet kicking in, the chances of prices going up seem lower than them going down. I do appreciate your point about it being impossible to predict the future but it seems hard to think that now is a great time to pile into equities when the prices are high yet there is a very big, known, cloud lurking.

bowlhead99

2_4 said:

Albermarle said:

Lastly they/we are considering perhaps starting with the 20% equities in case shares suffer another big Covid-related fall and then maybe moving some or all into a higher one as and when that happens. Then, perhaps after a few years as they get older they could move back down again to a less risky one. Does that seem reasonable?

The problem with this approach is that you are trying to predict the future and second guess global financial markets .

It is just as likely that the markets will stay steady/ go up and then crash in three years due to some as yet unknown reason.

Better to just pick you risk level and go for it . If it makes them feel better they could add the money in stages .

I'm not sure it's "just as likely" but I appreciate your point. Some of the funds I'm looking at are more or less at their pre-covid highs and with the situation far from over and a vaccine not seeming a realistic possibility any time soon and the real economic impact not yet kicking in, the chances of prices going up seem lower than them going down. I do appreciate your point about it being impossible to predict the future but it seems hard to think that now is a great time to pile into equities when the prices are high yet there is a very big, known, cloud lurking.

The prices are not necessarily too high. Airlines and oil companies and hotels and pubs and restaurants and banks and some clothes or sportswear firms are much lower than they were a year ago. A number of large tech firms and some pharma or healthcare companies are higher, along with some retailers, while other retailers are not, and there is plenty of free government money or cheap lending flying around to bail people out.

It's certainly not clear that the next move for prices is up. It may be down. But if you leave it until confidence is restored and prices rise, the next move may still be down. There is always something on the horizon for global markets whether it is world trade wars, oil prices, political instability, currency movements, demographic shifts etc etc.

So, the fact that the future is unknown is the reason you are thinking to use 60 or 40% equities rather than 100% equities. You have already said that you think 20% equities is too low because they can handle more risk than that in pursuit of longer term gains. So it would be strange to say, ok I'm going to invest only 40% in equities instead of 100% because the future is unknown AND I'm not going to actually put that 40% into equities yet because the future is unknown, so I should instead wait until it's not possible for equities to fall in value, and then I should buy the equities. You could be waiting forever with that approach because there will always be some other potential downside on the horizon.

You (and they) won't know where the top or bottom of the market is except with hindsight, and you don't want extreme value shifts, so you are going to go with no more than about 50% equity. Having decided that, there is no reason to overlay it with "oh, and it needs to fall to a low point before I start".

Personally I am quite a bit less than 100% equities despite being a couple of decades before retirement. We all have our personal views. However, did your friend ask you for advice on timing the market, or advice on what sort of investments can be made with lowish to medium volatility? They are different questions and I would not want to tell a friend what is a perfect or imperfect moment to invest their life savings, as it will be embarrassing to get it wrong. Most times it would be an imperfect moment, because it would have been better to have invested five years ago. But they didn't, and that's not your fault, but being asked for some assistance today you are not expected to have a crystal ball.

bowlhead99

2_4 said:

bowlhead99 said:

2_4 said:

OK, they are both under 75 but taking their pensions already. 

For the state pension, the fact that they have started to take it already doesn't prevent them from saying they want to stop taking it for a while, unless they have already stopped at some point in the past and then decided to restart again. 

You can only stop and restart once, but state pension deferral is about the most lucrative investment that someone who has surplus cash and is looking for a low-risk return can make.  That is, for someone who reached state pension age before 6/4/2016 (which they did, if they are around 70 now).   

The terms for deferring if you hit pension age after that date (5.8% increase for every year deferred, instead of 10.4% for every year deferred) are far less lucrative because the government realised they couldn't afford to keep offering the same tremendous rate of return, and they also stopped allowing the additional pension 'earned' in that way from being inheritable by a spouse.

https://www.gov.uk/deferring-state-pension/what-you-get

Ah, I had no idea about that and don't think they did either. That's very interesting and we'll look into it more. 

A simple example would be if they are getting £5000 a year now age 70, and defer for five years increasing their entilement by10.4% a year, they are going to get a 52% boost when they restart.

So when when are 75 they will start up again with whatever amount their £5000 has inflated to (for inflation / earnings / triple lock as applicable) multiplied x 1.52, which would be £7600 if there had been no inflation at all but in reality will be a bigger number than that because state pension rises annually. In a little less than the next ten years after that of earning 52% more than they would have otherwise earned, they will 'get back' the five years of missed payments, with inflation protection built in.

By then they will be 85.  The life expectancy of a man or woman age 70 now is 86 or 88, but half the people will live longer, with a 1-in-10 chance of a 70 year old woman today making it to 98.  After they have got the 'payback' by age 85 it will be very nice for them to get 52% more state pension week in week out forever (especially as if one of them dies while in receipt of additional pension, the other spouse gets to have it each week until they eventually pass away too).  

If they die while deferring, their estate can just claim all the weeks unclaimed pension money with interest, and similarly if they have been deferring for a few years and decide they would really rather just restart their normal pension and collect the pile of cash they missed with some interest on top (lump sum option instead of the excellent pension boost), they can. The only downside of leaving it until now before investigating it, is that really it would have been better to have deferred from (e.g.) 65 to 70 rather than 70 to 75, because they would have been able to take advantage of even more years of pension boost for the same life expectancy.

Even a token one or two years of deferral can be useful. With a 'normal' annuity at current rates of return, a 70-y/o wanting inflation linking and a spouse benefit would be getting less than 4% p.a. for an investment made today with a typical life or pensions company. Whereas if they made an 'investment' of giving up a year's worth of state pension today, they would get 10.4% of it, rising by inflation, for every year that they or their spouse were alive, which could be three decades. So it's much more than the 'market rate', while being secure and government backed.

2_4

Perhaps true. It's actually my dad (and mum), I didn't say initially as I wasn't sure what username I was logged in as (I have a few!) and one could potentially give my ID loosely away and being uber-careful (AKA incredibly paranoid!) I thought i'd not give anything away. Silly.

Anyway, the point is that my parents wouldn't be angry at me or whatever. I discussed the theory of being a bit more cautious now with him and he seemed to approve but yeah, I suppose you're right. I guess straight in with 40% perhaps seems the way to go, as well as using this pension thing.

Cheers!

2_4

bowlhead99 said:

2_4 said:

bowlhead99 said:

2_4 said:

OK, they are both under 75 but taking their pensions already. 

For the state pension, the fact that they have started to take it already doesn't prevent them from saying they want to stop taking it for a while, unless they have already stopped at some point in the past and then decided to restart again. 

You can only stop and restart once, but state pension deferral is about the most lucrative investment that someone who has surplus cash and is looking for a low-risk return can make.  That is, for someone who reached state pension age before 6/4/2016 (which they did, if they are around 70 now).   

The terms for deferring if you hit pension age after that date (5.8% increase for every year deferred, instead of 10.4% for every year deferred) are far less lucrative because the government realised they couldn't afford to keep offering the same tremendous rate of return, and they also stopped allowing the additional pension 'earned' in that way from being inheritable by a spouse.

https://www.gov.uk/deferring-state-pension/what-you-get

Ah, I had no idea about that and don't think they did either. That's very interesting and we'll look into it more. 

A simple example would be if they are getting £5000 a year now age 70, and defer for five years increasing their entilement by10.4% a year, they are going to get a 52% boost when they restart.

So when when are 75 they will start up again with whatever amount their £5000 has inflated to (for inflation / earnings / triple lock as applicable) multiplied x 1.52, which would be £7600 if there had been no inflation at all but in reality will be a bigger number than that because state pension rises annually. In a little less than the next ten years after that of earning 52% more than they would have otherwise earned, they will 'get back' the five years of missed payments, with inflation protection built in.

By then they will be 85.  The life expectancy of a man or woman age 70 now is 86 or 88, but half the people will live longer, with a 1-in-10 chance of a 70 year old woman today making it to 98.  After they have got the 'payback' by age 85 it will be very nice for them to get 52% more state pension week in week out forever (especially as if one of them dies while in receipt of additional pension, the other spouse gets to have it each week until they eventually pass away too).  

If they die while deferring, their estate can just claim all the weeks unclaimed pension money with interest, and similarly if they have been deferring for a few years and decide they would really rather just restart their normal pension and collect the pile of cash they missed with some interest on top (lump sum option instead of the excellent pension boost), they can. The only downside of leaving it until now before investigating it, is that really it would have been better to have deferred from (e.g.) 65 to 70 rather than 70 to 75, because they would have been able to take advantage of even more years of pension boost for the same life expectancy.

Even a token one or two years of deferral can be useful. With a 'normal' annuity at current rates of return, a 70-y/o wanting inflation linking and a spouse benefit would be getting less than 4% p.a. for an investment made today with a typical life or pensions company. Whereas if they made an 'investment' of giving up a year's worth of state pension today, they would get 10.4% of it, rising by inflation, for every year that they or their spouse were alive, which could be three decades. So it's much more than the 'market rate', while being secure and government backed.

bon be useful. With a 'normal' annuity at current rates of return, a 70-y/o wanting inflation linking and a spouse benefit would be getting less than 4% p.a. for an investment made today with a typical life or pensions company. Whereas if they made an 'investment' of giving up a year's worth of state pension today, they would get 10.4% of it, rising by inflation, for every year that they or their spouse were alive, which could be three decades. So it's much more than the 'market rate', while being secure and government backed.

Thanks for the detailed response. I saw a calculator that suggested based on life expectancy they (well my dad) should defer for 20 months but guess depends on various things, chiefly how optimistic he's feeling. 

bowlhead99

2_4 said:
I saw a calculator that suggested based on life expectancy they (well my dad) should defer for 20 months but guess depends on various things, chiefly how optimistic he's feeling. 

 People like your parents who have accumulated tens of thousands by retirement tend to live longer and more comfortably than those that haven't, so it can be good to be 'optimistic' about how long you might live. Some would call it 'pessimistic'... needing to fund life's comforts for more and more years rather than being able to shuffle off this mortal coil once you've done everything fun that you wanted! 

The calculators don't always take into account personal circumstances (e.g. he might have a spouse that might outlive him and make use of the extra income even if he doesn't live to claim much of it personally) and of course they can only work off 'expected' life expectancy which will vary around the country and based on all sorts of personal circumstances and health conditions.  Also, the calculators sometimes underestimate the value of deferring  - e.g. if your private pension income is lower than annual personal allowance for a few years you will have capacity to get money in and out of another private pension ('the 2880 -> 3600 trick') more efficiently, as less of the free tax relief is getting taxed on the way back out, so that can be worth a few hundred pound a year in itself.

Even if they're not in danger of 'running out' of money, in later life some extra income for a cleaner or gardener or carers or tarting up the house or being able to pay over the odds for things without feeling you're blowing the kids' inheritance, would probably be welcome. One of my grandparents is 100+ so is a constant reminder that I should plan for up to four decades of retirement even if I only 'hope' to need to fund two or three of them. So growing your guaranteed state pension benefit by deferring it in a scheme with built-in inflation protection - rather than saving it in a rainy day cash account with paltry interest, or having to take investment risk and suffer the vagaries of the market in some Vanguard fund or other - can be really useful. 

Anyway enough posts from me on that topic, it's just a useful option available to people of a certain age who don't always know it's available to them.

masonic

2_4 said:

Albermarle said:

Lastly they/we are considering perhaps starting with the 20% equities in case shares suffer another big Covid-related fall and then maybe moving some or all into a higher one as and when that happens. Then, perhaps after a few years as they get older they could move back down again to a less risky one. Does that seem reasonable?

The problem with this approach is that you are trying to predict the future and second guess global financial markets .

It is just as likely that the markets will stay steady/ go up and then crash in three years due to some as yet unknown reason.

Better to just pick you risk level and go for it . If it makes them feel better they could add the money in stages .

I'm not sure it's "just as likely" but I appreciate your point. Some of the funds I'm looking at are more or less at their pre-covid highs and with the situation far from over and a vaccine not seeming a realistic possibility any time soon and the real economic impact not yet kicking in, the chances of prices going up seem lower than them going down. I do appreciate your point about it being impossible to predict the future but it seems hard to think that now is a great time to pile into equities when the prices are high yet there is a very big, known, cloud lurking.

That is the Dunning-Kruger effect kicking in. In March it was obvious to a lot of people that markets were going to continue falling and stay down until the Covid crisis had been resolved. Over much of the last 10 years, various people have proclaimed how markets are overvalued and at all time highs and it was not a good time to invest. Yet in those 10 years, investing in a global index tracker would have generated average returns of over 10% per year.

You can be absolutely certain that there is another market crash around the corner, but nobody has a clue if it will happen next week, next month, next year or in 5 years.

2_4

masonic said:

2_4 said:

Albermarle said:

Lastly they/we are considering perhaps starting with the 20% equities in case shares suffer another big Covid-related fall and then maybe moving some or all into a higher one as and when that happens. Then, perhaps after a few years as they get older they could move back down again to a less risky one. Does that seem reasonable?

The problem with this approach is that you are trying to predict the future and second guess global financial markets .

It is just as likely that the markets will stay steady/ go up and then crash in three years due to some as yet unknown reason.

Better to just pick you risk level and go for it . If it makes them feel better they could add the money in stages .

I'm not sure it's "just as likely" but I appreciate your point. Some of the funds I'm looking at are more or less at their pre-covid highs and with the situation far from over and a vaccine not seeming a realistic possibility any time soon and the real economic impact not yet kicking in, the chances of prices going up seem lower than them going down. I do appreciate your point about it being impossible to predict the future but it seems hard to think that now is a great time to pile into equities when the prices are high yet there is a very big, known, cloud lurking.

That is the Dunning-Kruger effect kicking in. In March it was obvious to a lot of people that markets were going to continue falling and stay down until the Covid crisis had been resolved. Over much of the last 10 years, various people have proclaimed how markets are overvalued and at all time highs and it was not a good time to invest. Yet in those 10 years, investing in a global index tracker would have generated average returns of over 10% per year.

You can be absolutely certain that there is another market crash around the corner, but nobody has a clue if it will happen next week, next month, next year or in 5 years.

Not sure how you can say it's DK when everything I've offered is couched in uncertainty and it is you claiming great knowledge. 

Also, seems strange to say "You can be absolutely certain that there is another market crash around the corner, but nobody has a clue if it will happen next week, next month, next year or in 5 years." Not sure we could say "around the corner" is in five years (and of course the next big dip COULD be 10 years away or more in theory).