DIY plan review on the eve of crystallisation

Dead_keen

Some comments:
1. There's a lot of thought gone into this.  I've got no extra magic.
2. In terms of playing at the edges, you could crystallise post-April 5 to get an extra LTA uplift at the risk of changes to PCLS in the Budget.  There's also the small pot idea but I feel it's a bit abusive.
3. I don't understand bonds when yields are very low because of risk of capital losses.  But that's a lack of thinking on my part.
4. Pre-2013, I focused on ensuring my spouse had income to use PA.  Depending what you do with PCLS, that might be relevant (it won't all fit into ISAs).
5. You seem very IHT focused.  If so gifts out of income are more helpful than PETs where the amounts can fit.
6. I like the CAF as a way of being generous.  At the moment a set amount goes in there each month and I gift as I feel like.
7. It may be easier to draw money towards end of the tax year so that you have a good handle so that you don't go into higher rate band.  With two drawdown platforms, you have to manage nominal growth towards LTA separately (which should be just admin). 
8. I would update my numbers each year as with higher nominal growth (e.g. higher inflation) and reduction in drawndown (because of SP) can make it worth paying some higher rate tax (albeit offset by charitable contributions if you want) to prevent 25% (or 55%) tax at 75 that can't be offset by charitable contributions. 
9. I don't see that active funds suit me.  It seems to mean too much thinking and too much coin tossing.

Thrugelmir

shinytop said:

I don't know what your 'number' is nor how much you have.  But if a variable WR of 2.5-3.5% needs another Plan B then we're all in trouble!  You can't plan for everything; there comes a point when you have to accept that s&*t happens and you just have to roll with it;  Plan B becomes simply "spend less money".  What's your Plan C if your investments return significantly more that 3.5%?   


  

In the midsts of a global pandemic the level of optimism is quite surprising. As if all the woes are going to be washed away on a wave of free printed money and paper assets that exchange hands at ever increasing prices. 

cfw1994

Thrugelmir said:

shinytop said:

I don't know what your 'number' is nor how much you have.  But if a variable WR of 2.5-3.5% needs another Plan B then we're all in trouble!  You can't plan for everything; there comes a point when you have to accept that s&*t happens and you just have to roll with it;  Plan B becomes simply "spend less money".  What's your Plan C if your investments return significantly more that 3.5%?   

In the midsts of a global pandemic the level of optimism is quite surprising. As if all the woes are going to be washed away on a wave of free printed money and paper assets that exchange hands at ever increasing prices. 

I’m with Shinytop on this.  

Thrugelmir, I get the distinct impression you don’t feel the future is too bright.  You are clearly welcome to that view: I’ll continue to be more optimistic......once the vaccines spread (& around the world, into 2022), I can foresee things picking up like they did in the Roaring Twenties!

Days away from my notice going in, we had (yet another!) look at our numbers this evening.....it is always going to the feel of a slightly ‘unknown decision’ for the DIYer - not many have retired once already, eh - but I look forward to figuring things out away from the Corporate World I have inhabited!
Sure, there are things none of us can foresee, but once you’ve done the thinking gm0 clearly has, I suspect you’re reasonably well set.
As mentioned, deferring crystallisation would gain some LTA space.   Other than that: crack on!  

JohnWinder

Dead_keen said:

Some comments:
3. I don't understand bonds when yields are very low because of risk of capital losses.  But that's a lack of thinking on my part.

gm0 knows all this, so just a gratuitous offering:

Bond holders can lose capital when yields are high, if the issuer defaults or interest rates go higher, and additionally lose buying power if inflation goes beyond the expected. But high or very low yielding, government bonds always have the same prospect of price stability during equity or real property market crises. And if you choose inflation protected bonds you get inflation protection - full strength (at the risk of some loss if inflation is less than expected).

Not sure it needs to be much more complicated than that.

Linton

JohnWinder said:

Dead_keen said:

Some comments:
3. I don't understand bonds when yields are very low because of risk of capital losses.  But that's a lack of thinking on my part.

gm0 knows all this, so just a gratuitous offering:

Bond holders can lose capital when yields are high, if the issuer defaults or interest rates go higher, and additionally lose buying power if inflation goes beyond the expected. But high or very low yielding, government bonds always have the same prospect of price stability during equity or real property market crises. And if you choose inflation protected bonds you get inflation protection - full strength (at the risk of some loss if inflation is less than expected).

Not sure it needs to be much more complicated than that.

Yes government bonds will normally provide short term price stability.  The risk is the medium/long term.  Over the past 40 years  gilt interest rates have fallen fairly steadily from around 15% to around 0%.  This has led to gilt prices rising to very high values leading to good capital gains from bond funds.  Now one of 3 things can happen
1) The trend continues with interest rates going significantly negative and gilt prices continuing to rise.
2) Gilt prices now stay constant with close to zero interest.
3) Interest rates rise leading to a fall in gilt prices.
If you believe in (1) you will stay with gilts, in both other cases cash looks like a no worse option than gilts and possibly better.

Inflation linked bonds do not provide "full strength" inflation protection.  Currently UK inflation linked bonds have a yield of around -3%.  As I understand things, published Yield To Maturity's for UK inflation linked bonds are relative to an assumed rate of inflation of 3%.  So if inflation is less than 3% per year buying an inflation linked bond will give you a negative return in £ terms, never mind matching inflation.  The best that IL bonds will do is to partially protect you against extend periods of very high inflation .

SavinNewbie

I'm interested that you are splitting your pot into 2 new platforms one with 100% guarantee versus only £85K. Will the charges overall be higher? Is the £85k per institution eg if you hold passive mutual funds from different institutions can you achieve 100% guarantee effectively?

Is it worth a tactical divorce to transfer funds to your wife and get under the LTA and then remarry?

Very useful post and plan that i'll feed into my own plans

JohnWinder

Linton said:

Yes government bonds will normally provide short term price stability.  The risk is the medium/long term.  Over the past 40 years  gilt interest rates have fallen fairly steadily from around 15% to around 0%.  This has led to gilt prices rising to very high values leading to good capital gains from bond funds.  Now one of 3 things can happen

1) The trend continues with interest rates going significantly negative and gilt prices continuing to rise.
2) Gilt prices now stay constant with close to zero interest.
3) Interest rates rise leading to a fall in gilt prices.
If you believe in (1) you will stay with gilts, in both other cases cash looks like a no worse option than gilts and possibly better.
Inflation linked bonds do not provide "full strength" inflation protection.  Currently UK inflation linked bonds have a yield of around -3%.  As I understand things, published Yield To Maturity's for UK inflation linked bonds are relative to an assumed rate of inflation of 3%.  So if inflation is less than 3% per year buying an inflation linked bond will give you a negative return in £ terms, never mind matching inflation.  The best that IL bonds will do is to partially protect you against extend periods of very high inflation .

I think I know what you're saying, but I'll offer a correction you can pull me up on because I think what we've written risks confusing some folk, and we don't want that with a tricky subject.

I think inflation linked bonds DO provide 'full strength' inflation protection because with each ? half-yearly inflation figure published the government promises to increase the coupon that's paid and the value of the bond you will get at maturity, increases that are on top of all previous increases with each ?half-yearly CPI (or whatever measure they use). Yes, any deflation will see those fall.

That said, the future spending power of the money from those bonds may be less than it is now or was previously because when you bought the bond it had a negative real yield. By 'thinking' in terms of spending power, but writing in terms of inflation we risk confusing people. ILB protect against inflation, any/all/tiny/big/whatever inflation (unless the government plays dirty or defaults), but they do not maintain your spending power if they are paying negative interest - it's pretty clear that a negative interest 'payment' would do that. In the same way a savings account paying negative interest during a period of zero inflation would reduce your spending power in the future, but inflation (there was none) would not have had any effect.

Your three point list is useful. 2) and 3) make cash look a no worse option, but firstly we don't know when 2) and 3) are going to occur. Market timing can be very difficult. Secondly, cash doesn't have the protection from inflation that ILB do, so the choice between cash, nominal government bonds and ILB isn't easy even when personal circumstances are taken into account, so perhaps all three have a place for some.

Linton

JohnWinder said:

Linton said:

Yes government bonds will normally provide short term price stability.  The risk is the medium/long term.  Over the past 40 years  gilt interest rates have fallen fairly steadily from around 15% to around 0%.  This has led to gilt prices rising to very high values leading to good capital gains from bond funds.  Now one of 3 things can happen

1) The trend continues with interest rates going significantly negative and gilt prices continuing to rise.
2) Gilt prices now stay constant with close to zero interest.
3) Interest rates rise leading to a fall in gilt prices.
If you believe in (1) you will stay with gilts, in both other cases cash looks like a no worse option than gilts and possibly better.
Inflation linked bonds do not provide "full strength" inflation protection.  Currently UK inflation linked bonds have a yield of around -3%.  As I understand things, published Yield To Maturity's for UK inflation linked bonds are relative to an assumed rate of inflation of 3%.  So if inflation is less than 3% per year buying an inflation linked bond will give you a negative return in £ terms, never mind matching inflation.  The best that IL bonds will do is to partially protect you against extend periods of very high inflation .

I think I know what you're saying, but I'll offer a correction you can pull me up on because I think what we've written risks confusing some folk, and we don't want that with a tricky subject.

I think inflation linked bonds DO provide 'full strength' inflation protection because with each ? half-yearly inflation figure published the government promises to increase the coupon that's paid and the value of the bond you will get at maturity, increases that are on top of all previous increases with each ?half-yearly CPI (or whatever measure they use). Yes, any deflation will see those fall.

That said, the future spending power of the money from those bonds may be less than it is now or was previously because when you bought the bond it had a negative real yield. By 'thinking' in terms of spending power, but writing in terms of inflation we risk confusing people. ILB protect against inflation, any/all/tiny/big/whatever inflation (unless the government plays dirty or defaults), but they do not maintain your spending power if they are paying negative interest - it's pretty clear that a negative interest 'payment' would do that. In the same way a savings account paying negative interest during a period of zero inflation would reduce your spending power in the future, but inflation (there was none) would not have had any effect.

Your three point list is useful. 2) and 3) make cash look a no worse option, but firstly we don't know when 2) and 3) are going to occur. Market timing can be very difficult. Secondly, cash doesn't have the protection from inflation that ILB do, so the choice between cash, nominal government bonds and ILB isn't easy even when personal circumstances are taken into account, so perhaps all three have a place for some.

The problem is that the current market price of safe bonds in general and IL bonds in particular is way above their face value.  So, using numbers picked out of the air,  a IL bond that is based on say a face value of £100 with maturity in 10 years could increase to £120 after 10 years of relatively low inflation.  But it may cost you £150 to buy.  So in 10 years time you will suffer a capital loss of £30. That will be partially mitigated by the coupon.  But my reading of the current figures suggest that inflation has to be at 3% for you to break even in £ terns.

gm0

SavinNewbie. 

Using a SIPP and using the Master Trust in my example are much the same cost. But using them together for half each costs a shade over £200 more each year or £9k/40 years retirement.

1) So SIPP = range, 85k protection

2) My MT trust = insured funds = 100% protection but reduced range of 20 funds across asset classes in my example
Most basic things can be done to a level but you get one/two of each essentially and some categories are missing

3) Both (half) = 50% value in 100% protection, range access, IT access hedging+Counterparty hedging
Cost is ~£200/pa more platform and wrapper fees

This is worth it or not at all depending upon your view on "known" and "speculative risk" - around companies, regulator, traded asset custody, company administration law, settlement records and the lawsuits that fly when it goes wrong corporately in a novel fashion and serious money is at stake.  The parliamentary briefing packs on defined ambition pensions reform acknowledge this exact point that a lot of this structure - regulatory, insurance, historic trusts and protection is "untested" and not even the life companies really know who wins the who pays lawsuits if it all triggered on a serious pool of money across a sprawl of historic trust paperwork

So protection is in fact political and legally may be a paper tiger as Equitable customers in an earlier era found

If it's cheap - why not have it.  But in reality I am more interested to have my money split across different institutions than by the theoretical FSCS backstop.  Each of us can decide if the cost premium is excessive or not.  This is MSE after all

JohnWinder

That's pretty much how I see it. But I might have written 'you WOULD suffer a capital loss' rather than 'WILL suffer a capital loss' if we were to speculate on future inflation. Not sure you break even (assuming that means retain buying power) with ILB if inflation is 3%/year though; real yields for ILB are negative now, so regardless of future inflation you will lose the real yield % every year if held to maturity.  It's more costly than holding nominal bonds, but that's the price for inflation protection.