Capital preservation options SIPP

roger8989

Hi, I wanted some advice on the best capital preservation options for my SIPP.
Having hit the lifetime allowance I am feeling it may be sensible to notch down the risk and preserve capital. With 10 years to go before age 60 I may need something lower risk to preserve capital accepting that returns will be much lower than equity. However, de-risking to manage if a market correction comes along seems a reasonable strategy.
Any thoughts would be very helpful. Thank you.

Linton

I think appropriate capital preservation is one of the more difficult aspects to investing at the moment.   You have 3 main options:

1) Cash
Downside: virtually no return and inflation., though inflation is low at the moment.  Depending on your platform you may not be able to hold cash in the same account as equity.
Upside: Very safe

2) Government bonds - gilts
Downside: I believe there is a good argument that "safe" bonds, the traditional alternative to equity, are no longer as effective as they were for wealth preservation because interest rates cannot fall much further.  When/if they rise bond prices will fall.  Inflation. Some bonds are at negative return in £ terms..
Upside:  No problems with holding bonds in a portfolio. They may lose value but they will never go bust. 

3) Wealth Preservation Funds
Main examples: Capital Gearing Trust, Personal Assets Trust, Troy Trojan fund all of which have an explicit remit to preserve real wealth at the cost of growth if needs be.
Downside: Very actively managed - you are reliant on the manager 
Upside:  A very good long term history of matching or exceding inflation and meeting their remit, in some cases over several decades. CGT started in 1973. Personal Assets Trust in 1983.

There is no perfect solution.  I use a mixture of WP funds and cash.

If you want to aim for lower risk rather than full wealth preservation you could consider something like infrastructure funds whose income is guaranteed by long term contracts either directly or by investment in infrastructure equity.

Albermarle

Lower risk does not mean normally getting out of equity altogether, but usually means reducing the % equity in one way or the other . Unless you move to cash/gilts but then your returns will be less than inflation.
A few posters on this site ( not many though) are keen on gold .
Probably be a good idea to indicate how the SIPP is invested now .

Cus

Why do you think it's sensible to notch down the risk and preserve capital?
I am in a similar position, (over 10 years away from being able to access mine and over the LTA) and I constantly hop between your thoughts and the 'its a good tax to have, could miss out on lots of growth, enough time to ride a correction etc'.  So I'm interested in your reasoning. Thanks.

michaels

Cus said:

Why do you think it's sensible to notch down the risk and preserve capital?
I am in a similar position, (over 10 years away from being able to access mine and over the LTA) and I constantly hop between your thoughts and the 'its a good tax to have, could miss out on lots of growth, enough time to ride a correction etc'.  So I'm interested in your reasoning. Thanks.

I guess you could model it as equally likely upside and downside performance without the tax. Factor in the tax and the upsifit is smaller than the downside risk in which case your decision making start to favour reduced volatility. 

Albermarle

michaels said:

Cus said:

Why do you think it's sensible to notch down the risk and preserve capital?
I am in a similar position, (over 10 years away from being able to access mine and over the LTA) and I constantly hop between your thoughts and the 'its a good tax to have, could miss out on lots of growth, enough time to ride a correction etc'.  So I'm interested in your reasoning. Thanks.

I guess you could model it as equally likely upside and downside performance without the tax. Factor in the tax and the upsifit is smaller than the downside risk in which case your decision making start to favour reduced volatility. 

My thoughts exactly . Reduce risk and volatility in this situation but not so much that growth disappears altogether . Not a big deal if some LTA has to be paid, but no point gunning for growth/taking high risk. 
Outside the pension , in a S&S ISA for example you can increase  the risk to compensate. 

roger8989

Cus said:

Why do you think it's sensible to notch down the risk and preserve capital?
I am in a similar position, (over 10 years away from being able to access mine and over the LTA) and I constantly hop between your thoughts and the 'its a good tax to have, could miss out on lots of growth, enough time to ride a correction etc'.  So I'm interested in your reasoning. Thanks.

It is so difficult isn't it! I could keep it in higher risk equity hoping for a return and hence get 45% of something rather than 100% of nothing over the LTA. However, I know I have reached the limit and I wonder how I will feel if I invest badly and then reach 60 with less than I have now. I guess I would prefer to sleep well at night if there is a market correction and just accept 1-2% increase in value each year to keep up with inflation.
Thanks for the Troy trojan mention- yes, I am actually in this already and I like the statement that they will aim to preserve capital. 
I guess the other option is the ultra-short bond market index trackers- anyone have any experience of these?

roger8989

Yes, I was thinking about lowering risk in the SIPP and staying in higher risk options for ISAs. I guess it sort of depends when one needs the money first- maybe the ISAs would be required before the SIPP so risk would need to be the other way around...!!

roger8989

SIPP allocation at present as follows:
43% cash (need somewhere for this!)
20% Global and strategic bond funds
37% equities (fund) with a US market slant but high quality liquid companies

Cus

roger8989 said:

Yes, I was thinking about lowering risk in the SIPP and staying in higher risk options for ISAs. I guess it sort of depends when one needs the money first- maybe the ISAs would be required before the SIPP so risk would need to be the other way around...!!

That's often how I think. Maybe reduce the risk in the ISA's and that is what I plan to use much sooner, and common advice is to reduce risk as you approach the time to usage.  Yet let the sipp go riskier as it's further away and can ride corrections. But as per above, there good advice as to why to reduce the sipp risk.  

roger8989

That's often how I think. Maybe reduce the risk in the ISA's and that is what I plan to use much sooner, and common advice is to reduce risk as you approach the time to usage.  Yet let the sipp go riskier as it's further away and can ride corrections. But as per above, there good advice as to why to reduce the sipp risk.  

Yes. Only concern is a long term depressed market or choosing investments poorly - why take risk when over the LTA and it will be taxed anyway??