Retirement Investing - Less Risky Bets

jim8888

For a variety of reasons I’m thinking of taking £100k cash out of my DC pension as a tax free lump sum. The trouble is, I can’t decide if I should keep it all in cash or reinvest it in something less “risky” than the Vanguard 80/20 Fund I had it invested in within my SIPP. Part of my thinking was that I’d like to have five year’s worth of living expenses in cash, or equivalent, and feel that the “20” part of the “80/20” fund covers some of this (although you can't sell up the “20” part of it if you need it!) 

However, with inflation heading toward maybe 5%, I feel that having £100k in cash, earning almost nothing in interest, is daft. Although this might be a more suitable question for the investments board, I wondered if people have some thoughts on what to do with this sum? I still have this year’s ISA limit to invest in, as does my wife, so we could sink £40k into that. But I’m still left with the question of what would be a good, flexible and relatively safe investment for a sum like this? Any suggestions on what I should be looking at?

MaxiRobriguez

Unless you've got a sizable pot there's no tax advantage to taking money out of a pension to push into an ISA. Most people who use the TFLS do so for a specific reason, typically to pay off a remaining mortgage.

There's nothing stopping you having a cash "investment" within the pension wrapper, if you want some years of living expenses not at risk. The benefit of that is if you change your mind after a year, maybe there's been a market crash and you want to buy the dip, then you have the money there ready to go. 

In terms of how to avoid the impact of inflation, it's a problem many of us have. Typical suggestions are defensive equity, REITs, BTL and commodities (although you're late to the party with the latter).

In terms of the 80/20 fund - it will categorically not protect your capital value in a market downturn as it's still dominate by equity. Also, that 20% bond allocation is probably doing nothing for you in an inflation scenario which is what you're worried about. Your upside is very restricted to small coupoun payments (that don't match inflation) and any interest rate rise pushed by central banks will cause bond prices to fall. There's different schools of thought on whether bonds deserve any place in a portfolio at the moment but I am on the side of if you've got an 80/20 fund you may as well go to 100% equity.

You said there's a reason for taking the TFLS. Do you want to extend on why?

JohnWinder

If you have known spending needs, and wish to ensure the purchasing power of the money you put aside to meet those needs will be there when you need it, then a good solution is to have a non-rolling bond ladder of inflation linked bonds. Yields on these are now negative, so you'd purchase £50K worth for example and it would give you ensured spending money of ?£47; I'm guessing as I haven't done the calculation (as if I knew how!). It's the most certain approach I think, so there may be better choices for you, with less certainty being acceptable.

tacpot12

I keep about £20K in cash as a buffer against having to sell assets during a market crash. This represents about 18 months of living expenses for me. This is based on my experience that most crashes seem to see the market recovering in about two years. (So I should probably keep a little more in cash). I keep my cash partly in a savings account and partly in premium bonds, so there is the chance of winning something substantial.  

My feeling is that £100K/5 years of living expenses in cash is too much, especially if interest rates might be rising. I would say that £30K is about the most you should have in cash. 

I would recommend that you keep your 'cash' as cash outside of the SIPP, and not in "Cash-like" assets in the SIPP. My observation is that such "Cash-like" assets have all the disadvantages of cash, and no advantages. Having some money outside of the SIPP also insulates you from any IT problems that your platform provider might have. 

DT2001

Can you work out your own inflation rate? If it much different from the headline rates it will affect your thinking.

Is your idea to always have 5 years of living expenses in cash or does it change as other income starts e.g. SP?

Do you have the option to move your whole pot towards income producing and then take the natural income allowing you to hold less cash?

Linton

jim8888 said:

For a variety of reasons I’m thinking of taking £100k cash out of my DC pension as a tax free lump sum. The trouble is, I can’t decide if I should keep it all in cash or reinvest it in something less “risky” than the Vanguard 80/20 Fund I had it invested in within my SIPP. Part of my thinking was that I’d like to have five year’s worth of living expenses in cash, or equivalent, and feel that the “20” part of the “80/20” fund covers some of this (although you can't sell up the “20” part of it if you need it!) 

However, with inflation heading toward maybe 5%, I feel that having £100k in cash, earning almost nothing in interest, is daft. Although this might be a more suitable question for the investments board, I wondered if people have some thoughts on what to do with this sum? I still have this year’s ISA limit to invest in, as does my wife, so we could sink £40k into that. But I’m still left with the question of what would be a good, flexible and relatively safe investment for a sum like this? Any suggestions on what I should be looking at?

I do not worry about having £100K in cash/PBs etc and think that the resultant equanimity towards possible equity crashes is worthwhile.  Yes you will lose value to inflation but on the other hand it may give you the confidence to go for a higher equity % for your main investments, perhaps up to 100%.  Regard the cash as a major part of the non equity slice of a say 80/20 portfolio rather than the 20% as part of the cash.

Sadly there is no safe inflation matching investment.  Cash wont do the job, neither will bonds. You could use Wealth Preservation funds to replace some of the £100K though they are really for the medium term and the jury is out on whether they will work sufficiently well under current bond conditions.

jim8888

You said there's a reason for taking the TFLS. Do you want to extend on why?

To be honest, I just want to have a totally tax free income for the next five years and stop worrying about the damn stock market potential ups and downs! 
My intention would be to have that expenditure available in "cash" (or less risky investments), and top it up annually by selling a part of equities in my SIPP.   
Of all the strategies about withdrawing and managing pension withdrawals that I've read, this one appeals to me most. I feel I have a lot of money sitting in the global stock markets and it's served me well so far, but now I'm in retirement I want to stop fretting about a thirty or forty percent collapse in the market. I reckon that having five years to recover from any such (or bigger) plunge when I can live off mostly cash is a good approach. If it's longer than five years then I think we'l have much bigger issues to worry about!

JohnWinder

Sadly there is no safe inflation matching investment.

'Index-linked gilts differ from conventional gilts in that coupon and principal payments are adjusted in line with movements in inflation.'   https://www.bankofengland.co.uk/statistics/articles/2018/index-linked-gilts

Of course, some might agree that the UK Treasury is not a safe body to lend your money to.

Albermarle

Normally the advice is to keep the cash as a buffer for the future .
So whilst markets remain relatively strong ( or flattish anyway ) take money from the investments /recent growth .
When the markets slump and your pot shrinks significantly , then stop withdrawing from the pot and start to use up the cash pile . This should give time for your investments to recover . The idea is not to sell investments if possible when their value is depressed.

Assuming that your current cash savings are low , I can see some sense in taking the tax free cash and putting it into savings accounts . However I would keep it in reserve rather than start using it straightaway.

Thrugelmir

All investments carry risk. The greater the risk level of the asset class the greater the level of volatility.  When global markets peaked in 2007, took investors 6 years to recover to the previous highs (excluding reinvested income).  A very different outcome to those that only started investing after 2008 and have enjoyed an extended bull run as a consequence. You can only play the hand you get dealt. Only with hindsight can you reflect. As the future carries only uncertainty. 

Langtang

jim8888 said:

You said there's a reason for taking the TFLS. Do you want to extend on why?

To be honest, I just want to have a totally tax free income for the next five years and stop worrying about the damn stock market potential ups and downs! 
My intention would be to have that expenditure available in "cash" (or less risky investments), and top it up annually by selling a part of equities in my SIPP.   
Of all the strategies about withdrawing and managing pension withdrawals that I've read, this one appeals to me most. I feel I have a lot of money sitting in the global stock markets and it's served me well so far, but now I'm in retirement I want to stop fretting about a thirty or forty percent collapse in the market. I reckon that having five years to recover from any such (or bigger) plunge when I can live off mostly cash is a good approach. If it's longer than five years then I think we'l have much bigger issues to worry about!

This is looking like our plan, also. Although the IFA we are speaking to may have other ideas.