Close to retirement. Investing a modest pot.

DairyQueen

I would very much appreciate ideas from the forum. Apologies for the long-ish post but too much info. is better than too little.

I am no expert but I know more than the relative who I am trying to help with retirement planning. He has modest pension arrangements - insufficient to pay for an IFA. He is also highly unlikely to seek free information from e.g Pension Wise.

He is 65 this year but will continue working until age 68 when his youngest reaches age 18. He has a mixture of pension arrangements and will defer SP for 2 years. Any DBs in payment will be reinvested in a low cost SIPP as no late retirement factor available.

He has several pension plans but none are high value. He is divorced. No rent or mortgage. Very little savings (just a couple of thousand in a company savings plan plus a few shares).

He is (self-confessed) hopeless with money. If he has it, he spends it.  Having said that, he is now becoming a little more conscious of the need to forward plan. However, he would be best-served if his DC pots could be annuitised. Given the current climate this isn’t really an option so I am trying to find the best way to consolidate and invest the DC elements such that his pot provides both the cash he needs and also provides drawdown income.

 

So far (all at today’s values)….

I have analysed his spending now and in retirement. All pension providers have been contacted and, although some benefits still require clarification, I have a reasonable handle on his benefits.

Income Requirement

£13,000 (although I suspect this is an under-estimate as I am using, I believe, an over-optimistic estimates of expenses).

 

Capital Purchases 

-       Replace car at age 68 (budget = £10-£12k)

-       Provide HE support for 2 x children (estimate £10k).

 

Emergency Fund

£10k.

 

Guaranteed Retirement Income:

-       SP (Pre-2022 indexation increase) = £185.00 pw (he was contracted in for a significant period). He will defer for two years from 2023 until 2025.

-       DB 1 income in payment £1748 gross p.a (this is currently taxed at 20% and will be invested in a SIPP with his DC pot for the next 3 years so tax will be recovered).

-       DB 2 income. NRA 65 (so may be taken this year) = £2300p.a. No late retirement factor. Only indexation increases if deferred but he and his employer can’t make any more contributions to the scheme once these benefits are in payment. He works for the Royal Mail so pension contributions may/may not be permitted under the terms of the new ‘collective DC scheme’ if these DB benefits are in payment (they don't know yet). If contributions to the new scheme are permitted then he will take the DB this year and make corresponding contributions to a SIPP.

-       Up to £13k tax free cash (a benefit linked to the above DB scheme). Must be taken as cash and at the same time as the DB.

 

Other pensions (all legacy)

-       Deferred Annuity (with bonuses). Current value = £4,109. Guaranteed annuity at age 70 = £315p.a. plus £946 cash. Looks like this may be a ‘keeper’.

-       Unit Linked DC with protected TFC. NRA = 65. Waiting a reply re: what %age of TFC applies. Have been told (by Aviva – very reluctant to disclose these benefits) that it could be ‘anywhere between 25 and 100%) Current value = £111,000

-       Unit linked AVC (same policy number as above) = £8,355

-       Unit Linked DC = £4115.

There is one additional ancient pension whose benefits are unknown (awaiting reply) but are unlikely to amount to more than £10k.

So, the DC pot (excluding the deferred annuity) looks to be in the ballpark of £130k. In addition, he will be adding a minimum of £1,750 (gross) for the next three years plus (possibly) another £2,300p.a (gross) if the second DB scheme benefits are taken.

 He needs approx. £30k in cash. So, an additional £17k in addition to the £13k cash available from the DB scheme. If he takes this from the DC then there will be a balance of around £113,000 left in drawdown plus whatever is saved over the next 3 years (say another £12k).

The DB + SP will theoretically cover all of his expenses but I think he is spending around £5kp.a. more than he realises (as this is the gap between his current income and current claimed spends). At a SWR of 3.5% on approx. £125k at age 68 (allowing for a small return twixt now and then) this will provide around another £4.400p.a (gross).

The conundrum is where he should invest the DC pot plus additional contributions leading up to drawdown (3 years) and going forward from then. Even if the lion’s share must stay with Aviva for the moment (to protect that extra guaranteed TFC) there will be a chunk that needs to be transferred as he is incurring 1%+ in charges and no drawdown available.

I have no experience of low risk investing as OH and I apply a total return strategy and are risk tolerant. Relative needs to preserve what he has. Just inflation-proofing would be good for the next 3 years. He has reduced life expectancy but he may be invested for 20+ years once retired.

Current thinking….

Retain cash sufficient to meet his first 2 years of drawdown and perhaps Ruffer, PNL or RIT for the balance as bonds unlikely to produce a +ve return? Or perhaps a lower risk mixed equity/bond fund (something like VLS20 or 40) so the equity component can do the lifting to maintain longer term value despite the drag from the high %age of bonds.

Note that I don’t want to manage his portfolio so I need to set up a simple fund structure with an equally simple set of drawdown rules. Ideas very welcome.

TIA.

cfw1994

Morning DQ!
A complex situation, which is perhaps why you haven’t had any replies….I know you say you don’t want to manage it, but you also say he is hopeless with money….bit of a dichotomy there 🧐

There is no “zero risk” option to investing, unless you have cash ISAs or PBs, & with inflation on the rise, that has it’s own risks.
Maybe some research into Vanguard LS20 or 40 might suit him 🤷‍♂️

itsmeagain

I personally think that alleged 'Low risk' LS20 schemes are actually highest risk when it comes to keeping up with inflation.
With LS20, you may lose less in a crash short term, but almost guaranteed to be worse off than an LS60-100 mid-long term.

Audaxer

It is a very difficult one to answer.

Although I agree 3.5% should be a fairly SWR, I think of that withdrawal rate being safe with a medium risk portfolio containing approximately 60% equities, so maybe something like VLS20 could be a bit too cautious. It's good that you are helping him organize his retirement finances, however if it was me I'd be reluctant to go as far as actually choosing the investments for a relative or friend's portfolio.    

DairyQueen

cfw1994 said:

Morning DQ!
A complex situation, which is perhaps why you haven’t had any replies….I know you say you don’t want to manage it, but you also say he is hopeless with money….bit of a dichotomy there 🧐

Thank you; I appreciate the reply.

Yep, nothing straightforward about relative's situation although the 'how to manage the modest pot' dilemma must be increasingly common. (Open for contributions) private sector DB schemes are now rarer than hen's teeth so what's to become of those with zero investment knowledge/interest, nothing but SP and DC, and a pot too small to employ an IFA?

cfw1994 said:

There is no “zero risk” option to investing, unless you have cash ISAs or PBs, & with inflation on the rise, that has it’s own risks.
Maybe some research into Vanguard LS20 or 40 might suit him 🤷‍♂️

Every generation has it's challenges but I think those approaching/in retirement are particularly vulnerable at the moment as there are a dearth of 'simple' strategies that address the common financial objectives of older age groups (immediate income from investments, lower risk, inflation-matching, etc.). 

Bonds no longer offer protection against equity falls and inflation. Indeed, bonds are either risky or low/negative returns. Many popular drawdown strategies rely on a bond/equity pricing relationship that no longer exists.

It's impossible to match inflation with cash. Diversifying via gold, REITs. etc. requires knowledge and management.

Annuity rates are in the toilet.

Equities appear to be the only asset group likely to beat inflation - at least over a 10+ year period. Not particularly helpful for those who have an immediate requirement to draw on investments to provide income.

Someone like my relative needs an IFA but he can't afford one. There must be millions like him.

Sorry to waffle. I guess that I am thinking aloud.

I think that a lower risk VLS may be the way to go. Low charges, (relatively) simple to understand, easy to access. An annuity may look more attractive once he reaches 70+.

DairyQueen

itsmeagain said:

I personally think that alleged 'Low risk' LS20 schemes are actually highest risk when it comes to keeping up with inflation.
With LS20, you may lose less in a crash short term, but almost guaranteed to be worse off than an LS60-100 mid-long term.

Agreed.... except a reasonable %age of the pot can't be invested for the long term. He will need to begin drawdown in 3 years. I would go 100% equities for a 100% 10+ year investment but this isn't a 10+ year investment.

He needs a simple drawdown strategy that doesn't involve him managing/rebalancing. He needs to preserve his pot. Matching inflation without taking too much risk is probably the best that can be achieved.

I could split the pot across different buckets but that would require DIY rebalancing and see above.

It's a real dilemma.

Albermarle

so what's to become of those with zero investment knowledge/interest, nothing but SP and DC, and a pot too small to employ an IFA?

It has been in the news this week that there are plans being discussed to increase the number of people accessing Pension Wise significantly .

As from June 1st 2022, pension providers will have to prod their customers harder to access this service and even offer to book them an appointment . Plus other measures are being discussed for later .

He needs a simple drawdown strategy that doesn't involve him managing/rebalancing. He needs to preserve his pot. Matching inflation without taking too much risk is probably the best that can be achieved.

All providers ( I think ) are now offering simple 'retirement /investment pathways ' to help with drawdown for inexperienced customers not taking advice.They are all broadly similar but here is one example.

Investment Pathways (fidelity.co.uk)

DairyQueen

Audaxer said:

It is a very difficult one to answer.

Although I agree 3.5% should be a fairly SWR, I think of that withdrawal rate being safe with a medium risk portfolio containing approximately 60% equities, so maybe something like VLS20 could be a bit too cautious. It's good that you are helping him organize his retirement finances, however if it was me I'd be reluctant to go as far as actually choosing the investments for a relative or friend's portfolio.    

Believe me, I am very reluctant to become involved.

This is the lesser of the evils as his pensions are in a complete mess.

Imagine every piece of correspondence on several pension policies cast aside unread for almost five decades. No addresses updated. No idea of policy terms/benefits/costs/investments. No knowledge of current administrator - policies have exchanged hands several times.

The good news is that he has kept most correspondence received in the last decade, and some companies have traced him. Did he reply to the tracing letters? Nope. I doubt he is exceptional.

I mention this to illustrate why someone needs to take control of this situation and, in the absence of anyone else, that's me. If I don't help then he will simply take the line of least resistance. Along with 90% of the UK population, he doesn't understand investments or pensions.

It is better that I choose the investments than to leave things 'as is'. Anything is better than leaving 'as is'. If he could afford an IFA then that's the solution, but he can't. So, I am stuck between a rock and a hard place.

One option is to split the pot between 3 buckets cash/high bond fund/high equity fund) to match investment periods <5/5-10/10+ years. Relative will not take any notice of market conditions. Nor will he rebalance. It would require an occasional rebalance from me but not much intervention.

Not ideal but better than all in cash, or taking the risk of selling a high equity fund after a drop. 

DairyQueen

Albermarle said:

so what's to become of those with zero investment knowledge/interest, nothing but SP and DC, and a pot too small to employ an IFA?

It has been in the news this week that there are plans being discussed to increase the number of people accessing Pension Wise significantly .

As from June 1st 2022, pension providers will have to prod their customers harder to access this service and even offer to book them an appointment . Plus other measures are being discussed for later .

He needs a simple drawdown strategy that doesn't involve him managing/rebalancing. He needs to preserve his pot. Matching inflation without taking too much risk is probably the best that can be achieved.

All providers ( I think ) are now offering simple 'retirement /investment pathways ' to help with drawdown for inexperienced customers not taking advice.They are all broadly similar but here is one example.

Investment Pathways (fidelity.co.uk)

Thanks for that link. I had forgotten about the pathways. This may be the answer.

Audaxer

DairyQueen said:

Audaxer said:

It is a very difficult one to answer.

Although I agree 3.5% should be a fairly SWR, I think of that withdrawal rate being safe with a medium risk portfolio containing approximately 60% equities, so maybe something like VLS20 could be a bit too cautious. It's good that you are helping him organize his retirement finances, however if it was me I'd be reluctant to go as far as actually choosing the investments for a relative or friend's portfolio.    

Believe me, I am very reluctant to become involved.

This is the lesser of the evils as his pensions are in a complete mess.

Imagine every piece of correspondence on several pension policies cast aside unread for almost five decades. No addresses updated. No idea of policy terms/benefits/costs/investments. No knowledge of current administrator - policies have exchanged hands several times.

The good news is that he has kept most correspondence received in the last decade, and some companies have traced him. Did he reply to the tracing letters? Nope. I doubt he is exceptional.

I mention this to illustrate why someone needs to take control of this situation and, in the absence of anyone else, that's me. If I don't help then he will simply take the line of least resistance. Along with 90% of the UK population, he doesn't understand investments or pensions.

It is better that I choose the investments than to leave things 'as is'. Anything is better than leaving 'as is'. If he could afford an IFA then that's the solution, but he can't. So, I am stuck between a rock and a hard place.

One option is to split the pot between 3 buckets cash/high bond fund/high equity fund) to match investment periods <5/5-10/10+ years. Relative will not take any notice of market conditions. Nor will he rebalance. It would require an occasional rebalance from me but not much intervention.

Not ideal but better than all in cash, or taking the risk of selling a high equity fund after a drop. 

For simplicity I also like the look of Fidelity Investment Pathways option linked by @Albermarle. I wasn't aware of that solution previously, but it looks a decent solution for someone in your relative's position. Investment Pathway 3 invests in the following fund:
Fidelity Investment Funds IV - Fidelity Multi Asset Balanced Income Fund W Incomeome Dividends | GB00BFPC0725 | Fidelity
It has 40% equities and a dividend yield of 3.29%. I think it would be much simpler solution to manage than a 3 bucket solution, as it provides monthly dividends. 

The only thing that would concern me a bit about that solution is putting the whole amount in the one managed fund, so if you thought the same, you could look for one or two other similar funds to split the portfolio if you wanted to pursue that solution.

ian16527

What about the Target funds from Vanguard -  if you picked the 2025 or 2020 ones