A sense check on de-risking approach please

Workerbee999

I’m 50, planning to retire at 55. OH same age. I have a DC pot currently at approx 400k in a previous employer’s DC default plan, which assumes drawdown from 65 and is in a multi asset fund. So far I haven’t changed the retirement date to 55 so it won’t have started de-risking, and if I do change this I have to move out of the default. I wanted it to recover from the recent downturn first, which it more or less has done now, I think the proportion in the UK was reasonably high so it has taken a while.

We are in the very fortunate position of having a number of DB pensions between us that come into effect between 60-63, and we will get full state pensions (forecasts already checked despite contracted out periods). Between these, and associated lump sums to fill the gaps, we will have enough guaranteed  pension income, mainly with inflation protection up to 5% pa to meet our needs from 60+. 

So the plan is to take the 100k/25% TFLS of the DC to spend on some big things (forever home, big holidays) and then draw 50k pa (up to limit before 40% tax) for 5 years planning to fully deplete the fund other than maybe 50k contingency and whatever growth there is above inflation, if any. We don’t need to provide an inheritance as we only have one son who would get the house which is worth 500-600k. Our DBs are split evenly between us, and at approx 30k each and state pension there would be a healthy contribution towards any care costs and whomever of us is left on our own will have a decent income. We should also have approx £100k ISA cash fund, and OH will have enough of a DC in his own name to fund 5 years personal allowance and the 25% tax free. The 400k fund could increase by £100k above inflation before I expect to hit the lifetime allowance.

My request is for any guidance on how I should look to manage this 400k DC fund over the coming 5 years, in the knowledge that I will be wanting to deplete nearly all of it over the following 5 years - so over a 5-10 year timeframe. I want to guard against the impact of big downturns in the coming 5 years, but converting it all to cash now also feels a bit extreme?

Thanks in advance 

Albermarle

Probably to get some sensible comments you will need to post details of the current pension default fund .
They can vary a lot between providers,

[Deleted User]

Thats a short timeline. I would keep 20% in a balanced stock/bond portfolio and put the rest into a cash-like investments. Like short term government bonds. 

Workerbee999

Albermarle said:

Probably to get some sensible comments you will need to post details of the current pension default fund .
They can vary a lot between providers,

It’s called Aviva Pension MyM TC Growth (the Thomas Cook DC). Looking at the recent fund sheet (there wasn’t one previously as it was newly with Aviva, and still too early for any performance history) for the top 10 it says:
 49.6% Mercer Diversified Growth M - 2£
42.3% Blackrock Aquila Connect World Ex-UK Equity S2 (HP) 
 5.1% Blackrock Aquila Connect Emerging Markets S2 (HP)
 2.9% Blackrock Aquila UK Equity Index S2 (HP) 
Overall it says circa 70% International Equities, 15% International bonds , 5% Managed funds, 3.4% UK equities. Risk rating 5. I don’t know which of the funds provides which of these proportions, and also looks like l gave duff info when I said it was a high % of UK.

 I assume I would have access to other Aviva funds, or could keep some in these but with a different % if I move out of the default and make my own choices. When I said I had 400k here, it’s actually 340k here and 60k in a SIPP in higher risk funds that I thought I would keep as the contingency pot for 60k+

Thanks

Audaxer

Workerbee999 said:

My request is for any guidance on how I should look to manage this 400k DC fund over the coming 5 years, in the knowledge that I will be wanting to deplete nearly all of it over the following 5 years - so over a 5-10 year timeframe. I want to guard against the impact of big downturns in the coming 5 years, but converting it all to cash now also feels a bit extreme?

Thanks in advance 

If you want to spend £400k over 5 years in 5 years time, it's not enough time to guarantee some growth, so I would be keeping it all or mostly in cash. 

garmeg

Audaxer said:

Workerbee999 said:

My request is for any guidance on how I should look to manage this 400k DC fund over the coming 5 years, in the knowledge that I will be wanting to deplete nearly all of it over the following 5 years - so over a 5-10 year timeframe. I want to guard against the impact of big downturns in the coming 5 years, but converting it all to cash now also feels a bit extreme?

Thanks in advance 

If you want to spend £400k over 5 years in 5 years time, it's not enough time to guarantee some growth, so I would be keeping it all or mostly in cash. 

Average spend duration is 7.5 years so I would keep it in cash as well, or short dated gilts (5 year maturity) assuming available with a positive redemption yield.

mark55man

Although it does feel over conservative I agree, if you literally had to meet that 5 year time line, then you have to do what the posters above suggest

However, if your plans were more flexible you could take a little more risk, but the impact might be you would have to wait for recovery or downsize you ambitions - the upside is more growth (even conservative).

You have a great set up, with a good chunk of it defined benefit - so if you want to use the DC pot to purchase your planned retirement then you need to be in cash or cash like, whereas if you can live with variation from your plan you might end up with more  

Workerbee999

Well, we will have £100k cash so that gives 2 years of 50k to fall back on if performance was poor, or covers the 25% TFLS plan. I would still take the 50k pa of the pension for tax efficiency but could always put it into the same sort of funds outside the pension.

 I had a look at the individual funds performance and whilst the Blackrock exUK grew by by 7.6%, the Mercer Diversified Growth fell by 4.98%. I can’t find anything that shows why as I’m not sure that I can find the right fund on Trustnet etc and the Aviva website just shows the numbers but not what is in it. It feels a bit against the grain to convert this into cash and lock in the losses and maybe there is greater potential for it to come back (same as buy low concept) . On the other hand if the relative performance indicates it’s not a very good fund then maybe  I’m best out of it, I don’t know which...

i have had a look at the alternatives with Aviva and there is
Av MyM Blackrock Sterling Liquidity (+0.54% last 12 months)
Av MyM Legal & General (PMC) Pre-retirement (+6.14% risk 4), maybe not appropriate but as it’s called pre-retirement I thought it might be
Av MyM Blackrock Aq Connect All Stocks UK Gilts Index (+4.16 risk 3)
would any of these be appropriate if I didn’t want to put 100% of it in cash now and split it into which parts I would access first? (25% pre retirement, 25% UK gilts, 25% Sterling liquidity, 25% straight cash for example?)

Or if I did move everything to just cash, should I move it to a different provider if there are any that do not charge for holding cash? My SIPP is with Hargreaves, but I would need to look into it as well as understanding Aviva charges.

Albermarle

You are right about Mercer diversified growth not performing very well recently . Its portfolio is not very clear as there is a significant % of 'other' so difficult to say if it is likely to recover or not .
In any case the default fund is on the riskier side for default funds with 75% equities , so you definitely want to reduce that .
With your time scale I personally would not go 100% cash in the pension but you do need to derisk significantly by reducing the % equities by at least half. Whether you want to go safer than that ( but risk losing out on some growth ) as suggested by other posters would be up to you. Personal preference plays a large part in investing.

[Deleted User]

Blackrock Sterling Liquidity = money market fund. Your principle is pretty safe. Basically you own debt from large companies, the kind of companies which are very unlikely to go bankrupt. Your main risk is inflation. You will lose some purchasing power but unless inflation jumps it does not matter too much over a relatively short period of time. 

MyM L&G pre-retirement is an international bond fund. Looks like 30% is in guilts (UK government) and the rest in foreign corporate or government bonds. You will be exposed to currency risk. I wouldn’t choose this fund. 

MyM Blackrock Aq Connect All Stocks UK Gilts Index is a gilt fund (uk government bonds). No currency risk. However you would carry the risk of inflation. If the interest rates jump you could lose money, even some of the principle. 

Of these three, I would pick the first one for 80% of the portfolio.  For the rest I would pick a balanced fund (60% stocks, 40% bonds).  Under most scenarios you would then get your money back in real terms with the balanced fund protecting you from inflation. 

 If things go really bad, you get roughly the value of original investment in sterling. Thats if the balanced fund drops in value over your investment horizon (very rare) but the interest on your money market fund would offset the losses. 

The worst case you experience major losses. That would happen if major banks were allowed to go bankrupt. I dont think it would happen. 

Keep in mind that I spent 5 min researching the make-up of these funds and you need to do your own research as its your livelihood.

And you should stop paying attention to 12 months returns. A meaningless number if you are building a portfolio. 

wjr4

Where will you be putting the £400k once it is out of the pension?