Best bonds for pension portfolio 2 February at 1:32AM in Savings & investments 13 replies 1K views

Sony_smartphone

Hi Guys, just looking a bit of advice, I’m a retired 63 year old . My sipp is sitting around 240k. I,ve already taken my 25% lump sum and now I’m thinking of starting to take a regular income, nothing major maybe taking around 7k pa. We are currently living off our savings and have enough cash to keep us going until state pension kicks in. Before I do I want to change some of the funds within my pension portfolio, My pension funds are are pretty diversified but I would like to reduce some of the equity leaning funds to something a bit less volatile. I’m at the stage of my life now that I don’t want to take any big risks with my pension. I’m prepared for the normal ups and downs of my portfolio but as I say I would just like a bit of advice on a govt bond or similar that isn’t going to make me a millionaire but just something that is pretty steady . Thanks in advance ….Martin.

JohnWinder

Well, you can have bonds and/or you can have a bond fund(s). What’s your penchant?

Linton

In making investment decisions you may find it helpful adopting a top-down approach based on what you want from your portfolio.

Applying this strategy to providing a steady income with minimal excitement could lead to an allocation something like:

£40K in cash to cover next 5 years income, more if you were planning for large one-off expenses in that time frame.

£60K in Wealth Preservation funds like Capital Gearing Trust or Troy Trojan with the aim of matching inflation in the medium term

£140K in broadly diversified 100% equity funds to provide long term inflation protection.

The net result could be about 60% equity but with the advantage over simply holding a single 60/40 fund of minimising short and medium term worries arising from market volatility without compromising long term growth.

Sony_smartphone

JohnWinder said:

Well, you can have bonds and/or you can have a bond fund(s). What’s your penchant?

Probably lean towards a reliable bond fund…..

Linton

Sony_smartphone said:

JohnWinder said:

Well, you can have bonds and/or you can have a bond fund(s). What’s your penchant?

Probably lean towards a reliable bond fund…..

Unlike shares, developed world government bonds are 100% "reliable".  Once you have bought one then you know with 100% certainty (barring end of world scenarios) what interest you will get and what its value will be at maturity.  So it would be difficult and perverse to have an "unreliable" government bond fund.

The problem with bonds is that between you buying the bond and maturity, depending on the bond and world economic circumstances, the price can be volatile. With a bond fund you will have a wide range of bond maturity dates and so most will be between purchase and maturity on the day you sell.

So in your case it may be sensible to look for a bond fund which specialises in "short dated", ie close to maturity, bonds.  Unfortunately most bond funds in the UK cover the full maturity range so you will need to look for one that meets your needs. Or you may get better returns if you simply buy the lowest charged full-range Gilt fund and accept the extra volatility.

Vortigern

Sony_smartphone said:

Hi Guys, just looking a bit of advice, I’m a retired 63 year old . My sipp is sitting around 240k. I,ve already taken my 25% lump sum and now I’m thinking of starting to take a regular income, nothing major maybe taking around 7k pa. We are currently living off our savings and have enough cash to keep us going until state pension kicks in.

If you've no other income you should perhaps be drawing more from your SIPP - to fully utilise your personal allowance before the state pension starts. If that's more income than you need, you can stash it in an ISA.

Albermarle

Vortigern said:

Sony_smartphone said:

Hi Guys, just looking a bit of advice, I’m a retired 63 year old . My sipp is sitting around 240k. I,ve already taken my 25% lump sum and now I’m thinking of starting to take a regular income, nothing major maybe taking around 7k pa. We are currently living off our savings and have enough cash to keep us going until state pension kicks in.

If you've no other income you should perhaps be drawing more from your SIPP - to fully utilise your personal allowance before the state pension starts. If that's more income than you need, you can stash it in an ISA.

To add to that it would not normally be a good idea from an investing point of view, to use up all cash reserves first, and then draw from your pension afterwards. The reason being is that if your investments turn downwards for a period it is better not sell them whilst they are down. So a more flexible approach, taking a different mix of income from cash and investments each year is probably better . Keeping in  mind as said above you do not want to waste any of your personal tax allowance each year.

Albermarle

Linton said:

In making investment decisions you may find it helpful adopting a top-down approach based on what you want from your portfolio.

Applying this strategy to providing a steady income with minimal excitement could lead to an allocation something like:

£40K in cash to cover next 5 years income, more if you were planning for large one-off expenses in that time frame.

£60K in Wealth Preservation funds like Capital Gearing Trust or Troy Trojan with the aim of matching inflation in the medium term

£140K in broadly diversified 100% equity funds to provide long term inflation protection.

The net result could be about 60% equity but with the advantage over simply holding a single 60/40 fund of minimising short and medium term worries arising from market volatility without compromising long term growth.

I think if you read the OP again, then 60 % equities might be a bit too racy for them. 
On the other hand putting it all in a bond fund does not seem a great idea either.
Maybe £40K in cash and the rest in a Wealth Preservation fund, like the ones you mention ( or split with Personal Assets trust maybe ) ?

Sony_smartphone

Thanks guys, some much appreciated opinions ,,,I’ll mull over everything. Ideally I’d like to hand it to a registered FA and let him/her rebalance it, but I’m having a trouble finding someone to do it as an execution only transaction. I did get  a quote from one registered FA of £5300 which I thought was a bit over the top or would that be the going rate,,,,,what you guys think ?

JohnWinder

I would just like a bit of advice on a govt bond or similar that isn’t going to make me a millionaire but just something that is pretty steady

You could choose a very ‘standard’ bond fund, or something that appeals to you particularly.
Four characteristics are relevant: credit risk (will the bond issuers default on their payments?); interest rate risk (when interest rates change, longer maturity funds’ values are affected more than shorter duration ones); inflation linked (you’re protected from unexpected inflation, but all bonds have protection from expected inflation); UK and/or foreign.
Since you’re looking for more stability than equities have, you want very safe bonds like UK or other developed country bonds or investment grade corporates. As to duration, if you’re going to hold cash which has zero duration, then you don’t need the protection against interest rate changes of very short duration bonds, so you can go to intermediate (~10 years) duration. Inflation is a big risk in retirement since you don’t have a salary that goes up with inflation. There’s a strong case for inflation linked bonds, but they’re hard to get in a shortish bond fund in UK, but some funds will have some linkers probably. Some foreign bonds will protect you against the UK defaulting but that seems a low risk since it can print money. An active or passive fund? Get the cheaper probably.
U.K. Investment Grade Bond Index Fund from Vanguard which is non-government bonds of intermediate duration might be suitable. And there are shorter and longer term similar funds. The shorter the maturity of the fund's bonds, the more 'pretty steady' it will be. You could compare the performances of several funds over the last few years to get a feel for that.
You don’t need to make it complicated.

JohnWinder

Ideally I’d like to hand it to a registered FA and let him/her rebalance it,

What did you have in mind with that ‘rebalancing’?