Retirement Investing - Less Risky Bets

NannaH

If (when) interest rates rise, will Sipp providers start paying interest on cash held?
 I imagine that if they do,  they won’t pay anything like the prevailing rate?  
If that’s the case then what are the pros and cons of putting the TFLS in a fixed term savings account or two?
If IHT isn’t an issue then I can’t think of any other reason not to. 

Also,  if you will become a tax payer at SPA,  it’s presumably a good idea to make full use of your tax free allowance during the Gap years,  even if the income isn’t required,  putting it into an ISA in readiness? 

Audaxer

Linton said:

Alexland said:

It's worth remembering that even during a prolonged crash diversified investments should still be producing some dividend income and while it might be missing a trick not reinvesting while prices are low it might mean you only need to hold around 4 years cash to sail through a 6 year recovery.
Another option might be to hold the equities and bonds in separate funds such that even if you did need to sell while your investment account is low you can choose to sell the bonds first as they will likely have dropped less (or may even have gone up) which gives the equities more time to recover.
Finally consider holding your cash in an offset mortgage account depending on how you feel about borrowing against the value of your house while your investments are down...

A cash buffer is also useful for emergencies and major one-off expenditure.  It means one can take a relatively expensive holiday or buy a new car without having to worry about rebalancing and whether it would jeopardise the retirement plan.   So adding that to the buffer of 4-5 years cover for crashes could give a total of 5-10 years expenditure.

I'd certainly agree with having 5 to 10 years worth of cash for emergencies and major one-off expenditure for those that can afford it. For example, for those retirees that have other sources of income such as DB and State pensions that covers most of their expenditure, and they just need to withdraw relatively small percentages from their investments as a top-up. In these circumstances, their investment pot is probably going to continue to grow significantly over the long term anyway, so they don't need to plough more cash into their investments unless they want to increase their pot for inheritance.  

Malthusian

NannaH said:

If (when) interest rates rise, will Sipp providers start paying interest on cash held?
 I imagine that if they do,  they won’t pay anything like the prevailing rate? 

It depends on the SIPP provider. I have seen some which peg interest in their cash account to the bank base rate minus something like 0.5% - 1%pa with a floor of nil (which has meant nil since the credit crunch). Others say simply that they don't pay interest.

People don't usually choose their SIPP provider based on how much interest they pay on the client account, so I think SIPP providers in general will be far slower to raise the interest rate on cash than they were to cut it. If interest rates rise to say 3%, I would not be at all surprised if most SIPP providers kept interest at nil and justified it on the basis that not many people keep large amounts of cash and it helps keep their charges down.

If someone has a SIPP (an actual SIPP) there's nothing stopping them opening an interest-paying bank account if they want interest. Simpler personal pensions may be able to switch into a money market fund, which could start yielding more than nil if interest rates go up.

If that’s the case then what are the pros and cons of putting the TFLS in a fixed term savings account or two?

The pro is a trickle of interest. The cons are the faff of setting it up, and the loss of flexibility. If the fixed term is longer than a year, you are running the risk that you can't change your plans if tax rules and rates change.

Langtang

cfw1994 said:

Langtang said:

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.

What makes you think your IFA would have different ideas to yours?   Is that something you have 'clashed' about in the past?

Not at all. in fact, we've never had an IFA before - never had the need. I just assume that he'd prefer to invest more of our money than have us keep.

Albermarle

Malthusian said:

NannaH said:

If (when) interest rates rise, will Sipp providers start paying interest on cash held?
 I imagine that if they do,  they won’t pay anything like the prevailing rate? 

It depends on the SIPP provider. I have seen some which peg interest in their cash account to the bank base rate minus something like 0.5% - 1%pa with a floor of nil (which has meant nil since the credit crunch). Others say simply that they don't pay interest.

People don't usually choose their SIPP provider based on how much interest they pay on the client account, so I think SIPP providers in general will be far slower to raise the interest rate on cash than they were to cut it. If interest rates rise to say 3%, I would not be at all surprised if most SIPP providers kept interest at nil and justified it on the basis that not many people keep large amounts of cash and it helps keep their charges down.

If someone has a SIPP (an actual SIPP) there's nothing stopping them opening an interest-paying bank account if they want interest. Simpler personal pensions may be able to switch into a money market fund, which could start yielding more than nil if interest rates go up.

If that’s the case then what are the pros and cons of putting the TFLS in a fixed term savings account or two?

The pro is a trickle of interest. The cons are the faff of setting it up, and the loss of flexibility. If the fixed term is longer than a year, you are running the risk that you can't change your plans if tax rules and rates change.

I think there are some smaller /non mainstream SIPP providers where you can keep money in a savings account , but inside the SIPP. Can not remember any names though .

Thrugelmir

NannaH said:

If (when) interest rates rise, will Sipp providers start paying interest on cash held?

Never have done historically. That's how platforms generate income. At best they put clients cash balance on overnight deposit. Not rates which are comparable with those for retail deposits. 

NedS

Thrugelmir said:

NannaH said:

If (when) interest rates rise, will Sipp providers start paying interest on cash held?

Never have done historically. That's how platforms generate income. At best they put clients cash balance on overnight deposit. Not rates which are comparable with those for retail deposits. 

Hargreaves Lansdown used to pay me interest on money held as cash in my SIPP, and have stated they intend to do so again once interest rates have risen sufficiently. My recently opened Fidelity SIPP also states they intend to resume interest payments on cash once interest rates permit. They clearly have a percentage in mind they want to top slice and then anything above that are happy to pass onto customers.

DT2001

Audaxer said:

Linton 

A cash buffer is also useful for emergencies and major one-off expenditure.  It means one can take a relatively expensive holiday or buy a new car without having to worry about rebalancing and whether it would jeopardise the retirement plan.   So adding that to the buffer of 4-5 years cover for crashes could give a total of 5-10 years expenditure.

I'd certainly agree with having 5 to 10 years worth of cash for emergencies and major one-off expenditure for those that can afford it. For example, for those retirees that have other sources of income such as DB and State pensions that covers most of their expenditure, and they just need to withdraw relatively small percentages from their investments as a top-up. In these circumstances, their investment pot is probably going to continue to grow significantly over the long term anyway, so they don't need to plough more cash into their investments unless they want to increase their pot for inheritance.  

How do you work out the amount if they are one off/emergencies?

If, as in your example, people have most of their expenditure covered by DB and/or SP and are only normally withdrawing a small % of their pot is there not a case for keeping less in cash?

NedS

DT2001 said:

Audaxer said:

Linton 

A cash buffer is also useful for emergencies and major one-off expenditure.  It means one can take a relatively expensive holiday or buy a new car without having to worry about rebalancing and whether it would jeopardise the retirement plan.   So adding that to the buffer of 4-5 years cover for crashes could give a total of 5-10 years expenditure.

I'd certainly agree with having 5 to 10 years worth of cash for emergencies and major one-off expenditure for those that can afford it. For example, for those retirees that have other sources of income such as DB and State pensions that covers most of their expenditure, and they just need to withdraw relatively small percentages from their investments as a top-up. In these circumstances, their investment pot is probably going to continue to grow significantly over the long term anyway, so they don't need to plough more cash into their investments unless they want to increase their pot for inheritance.  

How do you work out the amount if they are one off/emergencies?

If, as in your example, people have most of their expenditure covered by DB and/or SP and are only normally withdrawing a small % of their pot is there not a case for keeping less in cash?

Yes, especially if drawdown could be reduced or stopped completely in a market crash, relying on DB/SP only. Under those circumstances there seems little need for a pensions cash buffer (assuming the existence of a cash emergencies fund).

I'll be in a similar position when I retire, and I've gone for an income fund approach to supplement DB/SP pensions, so I'm never planning to sell investments, only ever draw the natural yield. In a market crash I could tighten belts a little and reinvest dividends to take advantage of lower asset prices, or just keep taking the dividend and ignore the crash completely.

DT2001

Langtang said:

cfw1994 said:

Langtang said:

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

What makes you think your IFA would have different ideas to yours?   Is that something you have 'clashed' about in the past?

Not at all. in fact, we've never had an IFA before - never had the need. I just assume that he'd prefer to invest more of our money than have us keep.

Interesting! We are still accumulating and I tell our IFA what money we have spare to invest. As we’re both self employed we tend to do this once or twice a year. Our cash pot is decided by us, originally about 6 months income but now more as post Lockdown 1 we have a debtor book rather than cash sales.

When we come to decumulation it will be interesting to see what he recommends. I wouldn’t be surprised if it was different to my figure as the posters on here have shown there is no concensus.
I believe we will, with his help, formulate a plan to balance peace of mind and an investment strategy to meet our goals. Our IFA advises and explains why but we have the final say. I know he is more cautious than me so maybe he’ll suggest a bigger buffer.