DFM/FA Arrangement to DIY

Because_I_Can

ex-pat_scot said:

My general thoughts are:

- you are starting from a real position of strength
- using Vanguard lifestrategy #is# the investment strategy, rather than part of an investment strategy
- both options seem rather overcomplex. I would perhaps set out your broad investment principles and strategy eg what your broad appetite for equity, fixed interest and cash; geographical spread etc.
- in my approach, I have distilled this into a Vanguard fund approach, which helps on costs, transparency, auto rebalancing etc.

Thanks ex-pat scot.

I know what you mean about VLS #being# the investment strategy.  As my target is simplicity, I’d initially started off by saying I’d chuck all £1.5m into that - fire and forget. 

I don’t want to go too overboard on the principles and strategy side of things as I want it to be simple and self managing to a degree.  If I went all in VLS60, I may add a little extra to some of the underlying funds depending on the market outlooks but obviously not too much (otherwise I’m trying to do Vanguards work for them - I can’t do that for obvious reasons).

Because_I_Can

Albermarle said:

The SIPP is around £1.5 million 

Due to LTA ( even if you have some protection )  I would have a separate strategy for the SIPP and the ISA.

Any growth in the SIPP will be hit by LTA tax,  so seems unwise to pursue a relatively risky investment strategy in the SIPP. If markets tank your portfolio will drop significantly , if they go up you get hit by LTA. So a kind of lose/lose scenario.

So maybe more caution in the SIPP, partly counterbalanced by a more aggressive portfolio in the ISA.

Also usually with a pension this large it is recommended to take the full 25% tax free cash asap , again for LTA reasons .

Thanks Albermarle.  Yes, in terms of LTA, I’m going to continue with my FA for a period to see me through the next year or so as I start to move into drawdown (I pay him 0.35% for this so not too bad).

Interesting point you raise re taking all the 25% tax free cash asap as that doesn’t appear to be the FAs recommended strategy (I have no need for such a large sum of cash at the moment or the foreseeable).  Drawdown to be via UFPLS and crystalise enough tax-free cash and income for our yearly needs.  His view is all about using the SIPP element as last resort (better inheritance wise) and use the ISAs to supplement SIPP drawdown (plus eventually DB and SPs). 

I’m fairly relaxed about any LTA charges in the future - yes I want to minimise what I have to pay, but it still has to be paid and I’m aware I’m in a very fortunate position overall. 

Albermarle

Because_I_Can said:

Albermarle said:

The SIPP is around £1.5 million 

Due to LTA ( even if you have some protection )  I would have a separate strategy for the SIPP and the ISA.

Any growth in the SIPP will be hit by LTA tax,  so seems unwise to pursue a relatively risky investment strategy in the SIPP. If markets tank your portfolio will drop significantly , if they go up you get hit by LTA. So a kind of lose/lose scenario.

So maybe more caution in the SIPP, partly counterbalanced by a more aggressive portfolio in the ISA.

Also usually with a pension this large it is recommended to take the full 25% tax free cash asap , again for LTA reasons .

Thanks Albermarle.  Yes, in terms of LTA, I’m going to continue with my FA for a period to see me through the next year or so as I start to move into drawdown (I pay him 0.35% for this so not too bad).

Interesting point you raise re taking all the 25% tax free cash asap as that doesn’t appear to be the FAs recommended strategy (I have no need for such a large sum of cash at the moment or the foreseeable).  Drawdown to be via UFPLS and crystalise enough tax-free cash and income for our yearly needs.  His view is all about using the SIPP element as last resort (better inheritance wise) and use the ISAs to supplement SIPP drawdown (plus eventually DB and SPs). 

I’m fairly relaxed about any LTA charges in the future - yes I want to minimise what I have to pay, but it still has to be paid and I’m aware I’m in a very fortunate position overall. 

The reason to take the 25% tax free asap is so any future growth on that sum is protected from LTA. Then you invest it outside the pension .
On the other side it does bring that money into your estate and potentially subject to IHT . A kind of swings and roundabouts - pay 40% LTA or 40% IHT .
Same issue with only taking minimal income from the SIPP to protect against IHT , it exposes more of the SIPP to LTA. 

Audaxer

ian16527 said:

Audaxer said:

It's quite brave to move £1.8m to a DIY portfolio of mainly multi asset funds, but agree if going DIY, best to keep it fairly simple.

Do you mean it is brave to DIY because of the value or because the OP is using Multi asset funds?

Is there any problem using these funds with a high value pot?

I really just meant it is quite a large value to change to DIY. Not the wrong thing to do if OP is not satisfied with the previous arrangement and/or fees are too high. I like multi asset funds and also hold some of those funds. If I had £1.8m to invest I'm not sure I would want such a large amount of my portfolio (78% in Option 2) in the same fund house, even although Vanguard is probably one of the safest.

Audaxer

Because_I_Can said:

Mothman said:

You don't mention the income you require but with 1.8m in assets and a good DB pension & (assuming) 2 State pensions on the horizon, I would say you have already won the game and so in your position my primary objective would be wealth preservation in real terms. In your shoes I would probably go

Global Equity Index Tracker 20%
CGT 30%
PNL 30%
RICA 10%
Cash 10%

Your option 2 looks way to risky for me but like I say I don't know the income you are looking for.

Thanks Mothman.  Income between 50-70k per annum from the SIPP but obviously have the ISAs, OH’s DB pension and 2x SPs to contribute to that so if I want to spend more, hopefully I can - plan is to spend more before age 75 and then wind down and leave nothing. 

I’ve been tweaking option 1 above with an element of CGT so a timely sense check.

£70k pa from £1.5m is 4.67% which seems quite high when considering Safe Withdrawal Rates, and that's not taking into account tax. Whereas £50k per annum from £1.5m is 3.33% pa, which seems a lot safer to start with. You could top it up with withdrawals of up to £20k pa from your ISA to run down your ISA balance until the DB and SPs kick in.

gm0

The LTA planning crystallise/ISA recycle FAD or UFPLS decision is linked to inheritance and gifting objectives and to a degree pot size at/above LTA and it's linked to drawdown income vs HRB - above a certain level it's less critical and I guess just UFPLS minimally to need makes sense on current rules.  All nice problems to have based on earlier deferred gratification and the generosity of the pensions saving incentive back then

Not for the OP - but if you have an early gifting objective to children - bank of mom and dad and thus a pathway to clearing your IHT decks with consumption and IHT PET gifting - to heirs or other charitable giving directed by you rather than the government - or maybe you just don't care because you will be dead. For that - FAD works.

A narrow niche. FAD full crystallisation to LTA + ISA recycle for excess over consumption to same investments. LTA tax planning of the crystallised nominal growth is fine.  Pay up the 20% income tax element.

And later pay up dutifully for the uncrystallised residue at a time of your choosing because you want to access it or at age 75 regardless - 25% of residue value as grown.

Which is largely fine as a tax design limit albeit a retrospective change from when the savings decisions were made - pensions vs ISA.  I view the repeated cuts to the limit and mucking about with indexation as excessive and cynical but have protection which has its own issues but helps overall nonetheless.

It's the charge on both inflationary and real crystallised growth which grinds my gears and which I shall therefore avoid paying so far as possible given conditions and rules to 2040 as above.

Outside that limited use case above then the optimal strategy is to retain the pension IHT exemption and take the nibbles with UFPLS a piece at a time remaining relaxed about the latent 25% charge on all the uncrystallised pot for 75. 

I am unconvinced the rules will change in favour of large pot DC pensioners in the future but we will see over the next 20 years.   At some point the long mooted reforms to wealth taxation and IHT will show up and upend a lot of this but until then - that's about it

bostonerimus

Because_I_Can said:

ex-pat_scot said:

My general thoughts are:

- you are starting from a real position of strength
- using Vanguard lifestrategy #is# the investment strategy, rather than part of an investment strategy
- both options seem rather overcomplex. I would perhaps set out your broad investment principles and strategy eg what your broad appetite for equity, fixed interest and cash; geographical spread etc.
- in my approach, I have distilled this into a Vanguard fund approach, which helps on costs, transparency, auto rebalancing etc.

Thanks ex-pat scot.

I know what you mean about VLS #being# the investment strategy.  As my target is simplicity, I’d initially started off by saying I’d chuck all £1.5m into that - fire and forget. 

I don’t want to go too overboard on the principles and strategy side of things as I want it to be simple and self managing to a degree.  If I went all in VLS60, I may add a little extra to some of the underlying funds depending on the market outlooks but obviously not too much (otherwise I’m trying to do Vanguards work for them - I can’t do that for obvious reasons).

That was my thought too ie why not just use VLSxxx? after all one of those multi-asset funds will contain 15 or 20 individual funds. The DB pension and a cash buffer will allow you to have a high equity percentage as well. Have you also put a similar amount of effort into your budget? With a large pot it's natural to forget about budget a bit, but it can help when developing an asset allocation and deciding how much risk you want to take.

I'm in a similar situation to you and I approached in by covering my budget with a DB pension and rental income from a flat that I bought before retirement. I am entirely debt and mortgage free.  That then allowed me to invest my DC retirement and general account money aggressively in equities. I use a Vanguard US total equity fund and a Vanguard international equity index fund (I live in the US) and a small amount in a Vanguard income fund called Wellesley that is comparable to a VLS40. A also keep two years of spending in the bank for emergencies. The equity funds give me between 2% annual dividends and they are very much large cap biased. I'm not looking for anything spectacular and the dividends are a nice bit of income that I just reinvest. With my spending covered by DB pension and rental income I just don't bother with my invested money anymore, it goes up and down... However much money you have when you can stop worrying about it, then you are financially independent.

Because_I_Can

bostonerimus said:

That was my thought too ie why not just use VLSxxx? after all one of those multi-asset funds will contain 15 or 20 individual funds. The DB pension and a cash buffer will allow you to have a high equity percentage as well.  Have you also put a similar amount of effort into your budget? With a large pot it's natural to forget about budget a bit, but it can help when developing an asset allocation and deciding how much risk you want to take.

I'm in a similar situation to you and I approached in by covering my budget with a DB pension and rental income from a flat that I bought before retirement. I am entirely debt and mortgage free.  That then allowed me to invest my DC retirement and general account money aggressively in equities. I use a Vanguard US total equity fund and a Vanguard international equity index fund (I live in the US) and a small amount in a Vanguard income fund called Wellesley that is comparable to a VLS40. A also keep two years of spending in the bank for emergencies. The equity funds give me between 2% annual dividends and they are very much large cap biased. I'm not looking for anything spectacular and the dividends are a nice bit of income that I just reinvest. With my spending covered by DB pension and rental income I just don't bother with my invested money anymore, it goes up and down... However much money you have when you can stop worrying about it, then you are financially independent.

I think the biggest unknown at the moment in terms of budget is settling on what a normal year is going to look like.  We know what our annual budget is from a living expenses perspective but all the other plans like holidays, etc, are a little bit up in the air in the current climate (more about how being retired early will increase our holiday appetite, etc).  Same goes for drawing down an annual income from the SIPP (at the moment, just using savings to meet living expenses and staycations).  DB certainly will cover the majority of living expenses when it arrives in 5 years time (taken early at 55). The good thing is we’re fairly relaxed and can easily turn things up and down as needed. 

Albermarle

There are regular threads on the forum discussing early retirement , with regard to expenditure and activity levels .
This is a link to a study - of course its a one size fits all but can be interesting all the same .

Retirement living standards | Loughborough University (lboro.ac.uk)

bostonerimus

Because_I_Can said:

bostonerimus said:

That was my thought too ie why not just use VLSxxx? after all one of those multi-asset funds will contain 15 or 20 individual funds. The DB pension and a cash buffer will allow you to have a high equity percentage as well.  Have you also put a similar amount of effort into your budget? With a large pot it's natural to forget about budget a bit, but it can help when developing an asset allocation and deciding how much risk you want to take.

I'm in a similar situation to you and I approached in by covering my budget with a DB pension and rental income from a flat that I bought before retirement. I am entirely debt and mortgage free.  That then allowed me to invest my DC retirement and general account money aggressively in equities. I use a Vanguard US total equity fund and a Vanguard international equity index fund (I live in the US) and a small amount in a Vanguard income fund called Wellesley that is comparable to a VLS40. A also keep two years of spending in the bank for emergencies. The equity funds give me between 2% annual dividends and they are very much large cap biased. I'm not looking for anything spectacular and the dividends are a nice bit of income that I just reinvest. With my spending covered by DB pension and rental income I just don't bother with my invested money anymore, it goes up and down... However much money you have when you can stop worrying about it, then you are financially independent.

I think the biggest unknown at the moment in terms of budget is settling on what a normal year is going to look like.  We know what our annual budget is from a living expenses perspective but all the other plans like holidays, etc, are a little bit up in the air in the current climate (more about how being retired early will increase our holiday appetite, etc).  Same goes for drawing down an annual income from the SIPP (at the moment, just using savings to meet living expenses and staycations).  DB certainly will cover the majority of living expenses when it arrives in 5 years time (taken early at 55). The good thing is we’re fairly relaxed and can easily turn things up and down as needed. 

Stepping off the retirement cliff is scary as you don't have experience of your finances without that regular wage packet. But if you plan carefully you'll find that after a few months things will have settled down into a regular routine with outgoings, hopefully, being balanced by incomings from your retirement income sources.

I would split your expenses into some categories. The most basic would be housing, food, utilities etc that are necessities and use your DB to pay for those. Then have your luxuries like holidays and make a generous estimate for their annual budget and see how you might fund those from your SIPP. If you have a good year you might be going to Monaco, if it's bad then a guest house in Skegness might be the compromise playground.