Full Details of Fund holding and charges

Audaxer

Linton said:

Audaxer said:

Linton said:

JohnWinder said:

There are 2 main ways of matching inflation, an inflation linked annuity or long term equities.

1) I don’t think it’s right to overlook inflation linked government bonds when we’re considering the main ways of matching inflation, particularly as they match it every six months whereas we’ve gone more than a decade in the past when equities failed to match inflation.

‘If the drawdown rate is too low you would be better off buying the annuity.  I guess 3% could be around that figure.’

2) It might be worth elaborating on that, for clarity. ‘Too low’ for what? If the drawdown rate is around 3%, quite low I’d say, or let’s say 2% which is even lower and therefore bordering on the ‘too low’, then you don’t need an annuity. It is the case that if the drawdown rate is very low you don’t need an annuity, and if the drawdown rate has to be quite high because you don’t have a big fund, then you can’t afford an annuity. An annuity becomes a reasonable option when the drawdown rate is between those two levels.

VLS lacks flexibility as you say. But the 4% rule is based on a VLS-type portfolio that is rebalanced (as VLS is), and we’re read plenty to suggest that if you make it the 3% rule as specified above, then it will see you through 30 years with very little chance of failing (and none if you can do a bit of light touch flexibility in your drawdowns - G-K guard rails aren’t necessary).

‘I would rule out this on the basic principle that one should manage ones portfolio to support ones life style, not vice versa.’ 

3) Whether you have buckets, some arcane mix of funds, VLS or gold in the freezer section, if a sensibly managed portfolio is not big enough to meet your needs for 30 years you have to change your needs. To suggest you don’t change your needs, but you tweak the portfolio and all will be well can only mean you have enough in the funds, which could well be the case with a VLS only retirement fund. 

By the use of a more sophisticated portfolio I believe it should be possible to manage fluctuating asset values reducing their effect with incorporation of lower risk buffers and a strong focus on diversification into the strategy and secondly by adjustment of asset allocations should that really be necessary.’ 

4) No doubt, but why should it inherently give a bigger drawdown or last longer than an equal sized VLS? Let’s see the evidence.

5) And what are those ‘income objectives’ referred to?

Yes your pension pot must be large enough to pay for the income.  You do have the problem that you dont know future inflation  nor how long you will live  so you cant reliably calculate the right size.  Which implies  it would be prudent to make pretty pessimistic assumptions.  Furthermore even if you could calculate the right size you would need to add on an unknown extra to cope with volatility.

Thanks for your responses. 

If your pot is large enough and your drawdown rate low enough, then it should cope with inflation-adjusted withdrawals even from a VLS60. Nothing can be guaranteed but even if you increased your withdrawal amount by 10% for inflation this year on a very small initial withdrawal rate of say 2.5%, in my view you would need an extremely bad sequence of returns to run out of money.

Yes, but at that level of drawdwn would you be better off with an index linked annuity?  A single life RPI annuity at 65 is 4.15% according to HL.  So for a £400K pot 2.5% SWR would give you £10K/year.  Or spend £240K on a £10K annuity with zero risk or effort and retain £160K for one-off extravagences, the kids etc etc.

That does seem a good annuity rate, but I wouldn't buy even a joint life index-linked annuity as my wife would presumably only get 50% of the income if I go first. As well as that, as my investments are in S&S ISAs I think my choice of annuity type would be very limited.

I'd be interested to know with your 3 portfolio system, what percentage of your total pot did you start withdrawing for income when you retired, and have you managed to increase your income each year with inflation?

Linton

Audaxer said:

Linton said:

Audaxer said:

Linton said:

JohnWinder said:

There are 2 main ways of matching inflation, an inflation linked annuity or long term equities.

1) I don’t think it’s right to overlook inflation linked government bonds when we’re considering the main ways of matching inflation, particularly as they match it every six months whereas we’ve gone more than a decade in the past when equities failed to match inflation.

‘If the drawdown rate is too low you would be better off buying the annuity.  I guess 3% could be around that figure.’

2) It might be worth elaborating on that, for clarity. ‘Too low’ for what? If the drawdown rate is around 3%, quite low I’d say, or let’s say 2% which is even lower and therefore bordering on the ‘too low’, then you don’t need an annuity. It is the case that if the drawdown rate is very low you don’t need an annuity, and if the drawdown rate has to be quite high because you don’t have a big fund, then you can’t afford an annuity. An annuity becomes a reasonable option when the drawdown rate is between those two levels.

VLS lacks flexibility as you say. But the 4% rule is based on a VLS-type portfolio that is rebalanced (as VLS is), and we’re read plenty to suggest that if you make it the 3% rule as specified above, then it will see you through 30 years with very little chance of failing (and none if you can do a bit of light touch flexibility in your drawdowns - G-K guard rails aren’t necessary).

‘I would rule out this on the basic principle that one should manage ones portfolio to support ones life style, not vice versa.’ 

3) Whether you have buckets, some arcane mix of funds, VLS or gold in the freezer section, if a sensibly managed portfolio is not big enough to meet your needs for 30 years you have to change your needs. To suggest you don’t change your needs, but you tweak the portfolio and all will be well can only mean you have enough in the funds, which could well be the case with a VLS only retirement fund. 

By the use of a more sophisticated portfolio I believe it should be possible to manage fluctuating asset values reducing their effect with incorporation of lower risk buffers and a strong focus on diversification into the strategy and secondly by adjustment of asset allocations should that really be necessary.’ 

4) No doubt, but why should it inherently give a bigger drawdown or last longer than an equal sized VLS? Let’s see the evidence.

5) And what are those ‘income objectives’ referred to?

Yes your pension pot must be large enough to pay for the income.  You do have the problem that you dont know future inflation  nor how long you will live  so you cant reliably calculate the right size.  Which implies  it would be prudent to make pretty pessimistic assumptions.  Furthermore even if you could calculate the right size you would need to add on an unknown extra to cope with volatility.

Thanks for your responses. 

If your pot is large enough and your drawdown rate low enough, then it should cope with inflation-adjusted withdrawals even from a VLS60. Nothing can be guaranteed but even if you increased your withdrawal amount by 10% for inflation this year on a very small initial withdrawal rate of say 2.5%, in my view you would need an extremely bad sequence of returns to run out of money.

Yes, but at that level of drawdwn would you be better off with an index linked annuity?  A single life RPI annuity at 65 is 4.15% according to HL.  So for a £400K pot 2.5% SWR would give you £10K/year.  Or spend £240K on a £10K annuity with zero risk or effort and retain £160K for one-off extravagences, the kids etc etc.

That does seem a good annuity rate, but I wouldn't buy even a joint life index-linked annuity as my wife would presumably only get 50% of the income if I go first. As well as that, as my investments are in S&S ISAs I think my choice of annuity type would be very limited.

I'd be interested to know with your 3 portfolio system, what percentage of your total pot did you start withdrawing for income when you retired, and have you managed to increase your income each year with inflation?

When I retired in 2005 it was a very different world.  From memory: Limited online facilities with most tranactions carried out by post, annuities were the mainstream non DB option with fairly good rates, drawdown very niche and highly restricted etc.  My plan was to go for annuities around 2007/8 after depleting savings. One I took had a remarkably generous GAR and the other was arranged about a month before the markets fell.  Fortunately I was highly invested in bonds at the time in preparation for buying further annuities.

Apart from the income portfolio which had been running on an early share-only trading system (Stocktrade) since the late 1990's the 3 (or 4) pot system started around 2012.  It has been greatly extended and formalised since then having benefitted considerably from the post 2008 recovery.    So sadly I cant provide any experience of use in the early stages of retirement.

Since then the investments have been meeting all my income needs including expensive one-offs beyond SP and the annuities  and are actually increasing in value in £ terms over time.  This may change in the future since the annuities are fixed rather than index linked.

JohnWinder

‘The main value in an IL bond is the capital value at maturity not the interest which happens to be paid in the meantime.  Hence the interest from IL bonds is likely to be far too low to provide useful ongoing income.’

Yes, very much like a one year fixed term, ‘high interest’ savings account which you’re locked into for a year if you want the high interest. But that ignores the principal that’s available at the end of the term for both bonds and savings accounts.

‘Between launch and maturity the price of an IL bond can be very volatile so taking capital would not safely provide an inflation linked income’

Indeed, one must plan on having to hold each linker until it matures thus ensuring the return it promised when purchased. Thus, volatility becomes irrelevant.

‘You could in theory set up an IL bond ladder so you always get the capital benefits at maturity.’

Yes, and you can do it in practice.

‘ However the number of available UK IL bonds is limited so there are years in which no IL bonds mature. ‘

Indeed, but as always, how big is the problem? Covering the next 30 years there are 21 different linkers maturing in 21 of those 30 years, roughly equally spaced at 1.5 year intervals. So, worst case, one matures and it is consumed over the next 1.5 years thus exposing you to that much inflation. Not wonderful, certainly, when inflation is 10%/year.

Creating a ladder of maturing bonds would be difficult and the management effort significant. ’

Creation would be beyond a lot of people, unless a useful template was available, but subsequent management seems like ‘zero’: the coupons roll in during March, August and November without you lifting a finger; and the maturing bond principal is paid into your account every 1.5 years without you lifting a finger. I can’t see where the significant effort is.