What funds to invest in? - £130,000 Vanguard Drawdown Pension

VXman

My wife has recently withdrawn her Prudential teachers AVC's and we've put them in a Vanguard drawdown pension. We are retired and living off teachers pension and other investment/savings so there is no specific purpose for the drawdown funds. We are not sure when we will use them and for what. It may be a random holiday/car purchase/house work who knows.

So it's difficult to know how to invest them. We will take out a sum each financial year to make use of the remaining 20% tax allowance, Wouldn't want to put too much in a longer term fund just in case. Also don't want to have anything to complex, that's why we chose Vanguard.

So we were thinking maybe some in Life Strategy 20 and some in 40.  Or are there any other Vanguard funds we should look into?

Appreciate thoughts/suggestions/ideas/views  (No advice though!)

Albermarle

We will take out a sum each financial year to make use of the remaining 20% tax allowance, 

Are you aware that you can take 25% of the pension tax free? In fact you have to take some tax free cash before you can take any taxable income.

So we were thinking maybe some in Life Strategy 20 and some in 40.  Or are there any other Vanguard funds we should look into?

LS 20 is so 'cautious' it is hardly like investing at all. Normally a minimum of 40% equities is recommended to give the funds a chance of at least beating inflation, so that would indicate 100 % VLS40 as a better bet, but that is just an opinion.

gm0

Fund selection from their list isn't the question that needs addressing first.  You can do equities and bonds cheaper on vanguard than VLS.  But you have to balance it yourself.  So that may fail your simple test.  And an equities and bond fund pair lets you sell preferred assets not a pre-determined mix of both. Or one of the VLS will self-manage more and you pay a premium for it.

Mixing 20 and 40 for some 30% ish hybrid doesn't especially tally with your statements

- Unknown investment horizon but long - but with a desire (in conflict) for capital access at any point
- Want but don't need to draw along the way (tax optimisation)
- Simple
- Loss averse
- Not especially investment growth focused - or you would not be diluting VLS40

Nothing said but probably not keen to see the capital inflated away

Mixing these two implies that you have understood that VLS20 may be underinvested for you. 
And yet your caution level is such you are considering VLS40 diluted down -  not anything with more growth assets.  So pretty cautious.

And yet - if you had done what you propose to do around 12 months ago you would have lost more in the "lower" risk VLS fund than the higher.  And be waiting for unit prices to recover.  Exceptional yes - for bonds to underperform equities.  But it just happened.  And can happen.  Equities / Bonds correlation is not fixed albeit follows a common pattern most of the time

So the strength of requirement for capital access at any point is the hinge upon which what is sensible to do will be determined.  Regardless of whether you are prepared to take more or less speculative risk with equities and other growth assets.

There are things you could do without the speculative risk of more equities or a sharp bond move due to unexpected interest rate rises.  Bond ladders held to term and rolled over or drawn as they mature - and such like.  Disconnects prices in markets from your cashflow.  But it's not a simple fund. And not at Vanguard UK.  So it fails other requirements. 
And would likely lag inflation but with known up front yields and a cashflow to release funds each year (and/or roll over).

There is no single magical investment aimed at the small investor that ensures capital and existing returns can be snatched in any given year along the way.  And yet offers the upside benefits of a more speculative long term investment with the volatility removed. 

If you are prepared for it to be down in value for a time and just leave it then you can look through market volatility and be more driven by long term asset classe returns.  In which case you can dial up the risk and VLS% as you choose.  To whatever level best meets your goals of hedging off inflation eating it away (too little risk and potential return) and the risk of losses and wild swings.

Nobody can tell you the right balance for you

Pat38493

If you already have sufficient income to cover all your normal needs from other sources, and you will generally only be taking out a relatively small portion of the money each year, if it was me I would probably go much higher on equities - 60% or even 80% equities mainly in tracker funds. 

If you think the money will all be used up within a few years, there is a rick you will end up worse of by sequence of returns.  

Just my opinion anyway and depends on whether you are able to tolerate the risk of short term losses.

Linton

Another way of managing your moneys would be to keep a portion safe, eg £30K  in your 20% fund or even cash, which you can access to fund a major holiday or some other one-off expences whenever you want.  The rest you could hold and ignore at a higher risk for use in say 10-20 years time.   That way you combine the low volatility needed for the short/medium term and the higher return but more volatile investments needed for long term inflation matching.  After all you are never going to spend £130K  in one go.

dunstonh

Appreciate thoughts/suggestions/ideas/views  (No advice though!)

You need to think through your future plans before you start picking investments.   Maybe bucket the money between short term, medium term and long term and use different investments for each timescale.   There is no point putting your long term money in investments that are better for the short term or vice versa.

VXman

dunstonh said:

Appreciate thoughts/suggestions/ideas/views  (No advice though!)

You need to think through your future plans before you start picking investments.   Maybe bucket the money between short term, medium term and long term and use different investments for each timescale.   There is no point putting your long term money in investments that are better for the short term or vice versa.

That was the question. The problem is we have no plans so it probably all needs to be short/medium term. At 60 years old we could say we have 20 years to spend but in 7 years time even more income will be coming in terms of state pension. So I guess I feel we need to be looking at spending it in the next 5-10 years to make good use of it.

VXman

Albermarle said:

We will take out a sum each financial year to make use of the remaining 20% tax allowance, 

Are you aware that you can take 25% of the pension tax free? In fact you have to take some tax free cash before you can take any taxable income.

So we were thinking maybe some in Life Strategy 20 and some in 40.  Or are there any other Vanguard funds we should look into?

LS 20 is so 'cautious' it is hardly like investing at all. Normally a minimum of 40% equities is recommended to give the funds a chance of at least beating inflation, so that would indicate 100 % VLS40 as a better bet, but that is just an opinion.

Yes. 25% tax free already taken and will be put into a ISA of some kind.

Interesting point on the LS 20. Both LS20 and 40 are classed as 4 on a risk scale of 1-7 so are classed as medium risk. To get any 1-3 risk funds in Vanguard it seems to be 100% bonds.

Albermarle

Yes. 25% tax free already taken and will be put into a ISA of some kind.

Probably would have been better to just leave it in the pension, if you did not really need it. Just simpler like that.

Interesting point on the LS 20. Both LS20 and 40 are classed as 4 on a risk scale of 1-7 so are classed as medium risk. To get any 1-3 risk funds in Vanguard it seems to be 100% bonds.

Classifying risk levels is not an exact science, and another provider of similar funds could well give a different rating.
As mentioned in a previous post, VLS 20 lost more than VLS 80 in 2022, although it was an unusually bad year for bonds/gilts. In fact 100% bond funds got hammered even more last year, so.....

Pat38493

If you really don't care about investment growth, you could just leave the money as cash in your Vanguard wrapper - wasn't there a thread last week that Vanguard pays 3% interest on cash or was that a different provider?

Bonds are considered pretty safe in most years, but last year 2022 even bonds lost money as mentioned above.

From what I've seen, a lot of providers will classify any find with any level of Equities in it as above average "risk" - the word risk is doing a lot of heavy lifting in these discussions because as far as I understand, in the context of these kind of huge global tracker funds, "High risk" really means "high volatility".  In practice this means you will very likely make money over long periods (say 10 years or more), but you might see large drops in your fund and have to wait 1 or more years for it to recover.  If you are taking out significant withdrawals at the times when the fund had a big drop, that is where you are eroding your capital a lot..

My employer pension scheme default fund is classified as high risk but I am ok with it at the moment.- it's about 80% equities.  However I also like you have some significant DB pension provisions as a safeguard so I can afford to take more risk.