Partial Drawdown - investment flexibility for remaining funds

DaveO

As I research my pension options with partial drawdown as the intended option to provide an income I was wondering about how the funds that remain are invested in terms of how flexible this is if you went the packaged product route.

If you have a SIPP and DIY then this is up to you and I presume periodically you sell some of the units to provide the income and monitor the investment of the rest. 

A common alternative seems to be to pick some sort of lifestyle or packaged product that usually offers diversification and let the provider manage it all.

The question is, how reactive are the providers to changes in the market?    Most packaged solutions I have seen have at least some exposure to bonds and currently bond values all seem to be heading south (probably due to rising interest rates).    If you were adopting the DIY approach you could move out of bonds completely if you wanted to but would a packaged solution from a provider ever do this?

For example Vanguards fully managed personal pension says it invests in 13 funds but will react to market conditions but would they ever ditch bonds completely over the short to medium term in the face of a falling bond market?

This question doesn't matter so much if you are 21 and starting out investing into a pension as long term the bond market would probably recover but when you come close to drawing your pension it seems counter initiative to buy a product that has a substantial component within it that is rapidly depreciating at the current time.

If already invested and you did the DIY approach presumably you could sell equity based assets and leave the bonds alone so you are not selling at a loss with the expectation the value would recover but can you do that sort of thing in any packaged solution or would a packaged solution do something similar automatically for you? 

Linton

Ditching funds in the short/medium term is generally a bad thing to do because the chances are that you wont buy back in until after the price rebounds higher than when you sold.  And of course the predicted fall may never happen in the first place.  Much better to keep a constant %.  It is difficult to see how any well-diversified mainstream fund can fail to rebound at some time.

Some multi asset funds do keep a bond allocation but use different types of bonds depending on the situation.  For example UK Gilts are bad news at the moment but  US bonds may be more stable.  Others keep the underlying investments the same.

In order not to get spooked by short/medium term volatility I and many other retirees keep a buffer of cash and very cautious funds sufficient for 5-10 years to cover the times when prices of the core fund(s) have fallen and so should not be sold depleting the investments you need for longer term growth.  Doing this means that you can largely ignore volatility.

I do not believe there are any automated products to do this for you.  However I think it is probably something that will happen in the future as increasing numbers of people start drawdown.

Albermarle

For example Vanguards fully managed personal pension says it invests in 13 funds but will react to market conditions but would they ever ditch bonds completely over the short to medium term in the face of a falling bond market?

Equity markets have fallen as much as bond markets , more so in the US. So presumably equities should be ditched as well?

 but when you come close to drawing your pension it seems counter initiative to buy a product that has a substantial component within it that is rapidly depreciating at the current time.

It is just as likely that equities will have a big crash, and then everybody who held on to their bonds would be thanking their lucky stars.

By ditching any investment in favour of another, you are taking a bet on future markets, which are unpredictable. In any case probably if you were going to reduce your bond exposure, then the time to do it was 12 months ago, as most of any potential drops has probably happened. 

DaveO

Albermarle said:

iFor example Vanguards fully managed personal pension says it invests in 13 funds but will react to market conditions but would they ever ditch bonds completely over the short to medium term in the face of a falling bond market?

Equity markets have fallen as much as bond markets , more so in the US. So presumably equities should be ditched as well?

 but when you come close to drawing your pension it seems counter initiative to buy a product that has a substantial component within it that is rapidly depreciating at the current time.

It is just as likely that equities will have a big crash, and then everybody who held on to their bonds would be thanking their lucky stars.

By ditching any investment in favour of another, you are taking a bet on future markets, which are unpredictable. In any case probably if you were going to reduce your bond exposure, then the time to do it was 12 months ago, as most of any potential drops has probably happened. 

My understanding is as a general rule bond prices fall as interest rates rise so the reason I chose that example is interest rates are, I thought, predicted to rise for some time.  

I take it as read equities could experience a sudden crash but currently there doesn’t seem to be a good reason to invest in bonds.  By “invest” I mean my particular circumstances which is consolidating pensions that don’t allow drawdown into one that does and choosing funds or some sort of lifestyle plan.  So it’s not so much about ditching one form of investment but choosing what to invest at this time.  

Just because it’s easy to do as they have a limited number of funds I looked at the different bond based funds Vanguard have and the trend on all of them is down.   So with no reason to think this won’t carry on with interest rates on the rise, if I transferred my pension tomorrow into something with substantial exposure to bonds I doubt it would maintain its value let alone increase over the short to medium term. 

This got me thinking as to what fund providers do in such circumstances.  Do they rigidly stick to the same proposition of bonds in their offerings or, if they think bond prices will fall, invest in something else?  I mean isn’t this the sort of decisions those managing an actively managed fund would be making?  

There may be some funds that don’t allow much choice e.g. those with a “lifestyle” strategy that automatically switch finds as you near retirement but I wasn’t thinking about those.

DaveO

Linton said:

In order not to get spooked by short/medium term volatility I and many other retirees keep a buffer of cash and very cautious funds sufficient for 5-10 years to cover the times when prices of the core fund(s) have fallen and so should not be sold depleting the investments you need for longer term growth.  Doing this means that you can largely ignore volatility.

I do not believe there are any automated products to do this for you.  However I think it is probably something that will happen in the future as increasing numbers of people start drawdown.

That buffer idea looks like a sound strategy to me and yes, I was wondering if a similar sort of strategy existed in a product or if they just sold an equal proportion of every asset class a fund held as you cash a bit in for drawing down.

Albermarle

My understanding is as a general rule bond prices fall as interest rates rise so the reason I chose that example is interest rates are, I thought, predicted to rise for some time

The way financial markets work, then expected interest rates rises are already priced into bonds, which has caused the drops so far.  The markets for bonds and equities are always looking ahead. Which is why often equity markets will drop in anticipation of a worsening economy, and then when the economy is actually in recession, they often rise in anticipation of a recovery.

If it seems interest rates will rise further than currently expected, then bonds could drop further and vice versa.

Audaxer

DaveO said:

Linton said:

In order not to get spooked by short/medium term volatility I and many other retirees keep a buffer of cash and very cautious funds sufficient for 5-10 years to cover the times when prices of the core fund(s) have fallen and so should not be sold depleting the investments you need for longer term growth.  Doing this means that you can largely ignore volatility.

I do not believe there are any automated products to do this for you.  However I think it is probably something that will happen in the future as increasing numbers of people start drawdown.

That buffer idea looks like a sound strategy to me and yes, I was wondering if a similar sort of strategy existed in a product or if they just sold an equal proportion of every asset class a fund held as you cash a bit in for drawing down.

It's usually best to keep your cash buffer outside your pension, as I don't think you can get much, if any, interest on cash within a pension.

If you ditch bonds completely, then you are 100% equities within the pension unless you select some alternatives like infrastructure, but they could be volatile as well. Would hold your nerve and sleep soundly at night if your 100% equity portfolio fell 50% in an equity crash? Bonds may fall at the same time, but unlikely to fall by as much as equity.

Lifematters

It's usually best to keep your cash buffer outside your pension, as I don't think you can get much, if any, interest on cash within a pension.

Would keeping a cash buffer inside a pension not be advantageous if you had no other income - so as to make use of your personal allowance for example when you come to draw on it? 

Audaxer

Lifematters said:

It's usually best to keep your cash buffer outside your pension, as I don't think you can get much, if any, interest on cash within a pension.

Would keeping a cash buffer inside a pension not be advantageous if you had no other income - so as to make use of your personal allowance for example when you come to draw on it? 

You could still drawdown up to your personal tax allowance by selling funds in your pension, and immediately reinvesting in an S&S ISA if you just wanted to move the funds out of the SIPP to use up your allowance. You could then withdraw from the cash outside of the SIPP for spending.

Albermarle

Lifematters said:

It's usually best to keep your cash buffer outside your pension, as I don't think you can get much, if any, interest on cash within a pension.

Would keeping a cash buffer inside a pension not be advantageous if you had no other income - so as to make use of your personal allowance for example when you come to draw on it? 

It probably largely depends on your personal position and history of saving/investing/pensions.
So for example if your pension pot was the large majority of your financial assets ( excluding your home ) then it would make sense to do what you say .
However most people with significant financial assets will probably have a mixture of pension pot, cash savings and other investments. In this case the cash savings outside the pension can earn some interest.

Notepad_Phil

Lifematters said:

It's usually best to keep your cash buffer outside your pension, as I don't think you can get much, if any, interest on cash within a pension.

Would keeping a cash buffer inside a pension not be advantageous if you had no other income - so as to make use of your personal allowance for example when you come to draw on it? 

Depends on how big a cash buffer you're talking about and how it got there. Putting £40k in there in your last year of working to gain the cash buffer with tax-relief on it is very different to keeping back £4k per year over a 10 year period. Personally, I keep my cash (apart from dividends that come in) outside my pension - and if I have any personal allowance left then I would use it to switch some pension funds into an S&S ISA (i.e. sell from within the pension and repurchase them in a S&S ISA.