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Gilts: risk-assessment complacency
Comments
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designengineerj said:Do you agree?
N. Hampshire, he/him. Octopus Intelligent Go elec & Tracker gas / Vodafone BB / iD mobile. Ripple Kirk Hill Coop member.Ofgem cap table, Ofgem cap explainer. Economy 7 cap explainer. Gas vs E7 vs peak elec heating costs, Best kettle!
2.72kWp PV facing SSW installed Jan 2012. 11 x 247w panels, 3.6kw inverter. 34 MWh generated, long-term average 2.6 Os.0 -
I have absolutely no knowledge or interest in investments (apart from the equine kind!), try as I might the subject just doesn't float my boat. But the "dear Martin here is the latest scandal" threads do tend to pique my interest somewhat.
So I decided to have a closer look at my small DC pot; before I started drawdown back in April there was only about £36k in there. It is a Civil Service Partnership pension started in 2015, the purpose being to supplement my DB pension until SPA. When I started all I requested was low risk aimed at drawdown. Pretty sure there was a 3rd question but I can't for the life of me remember what it was. Ideally I suppose I would have wanted something aimed at drawdown over a fixed period but that wasn't an option and presumably isn't feasible anyway. It was put into a Lifestyle fund.
I have struggled to find much information, there certainly seemed to be more available before drawdown. But I have found a line graph of performance for the last 5 years, and a pie chart showing fund allocation, although only current and future, no historic. And even if I hover over there are no actual values, so unfortunately all my figures are estimations.
Performance: All % figures are comparative to starting point in June 18; the graph shows - 2% by end 18/beginning 19; +10% by early 20; virtually even by mid 20 (presumably Covid); +18% a couple of times during 21/22; gradual drop to +5% by end 22; gradual rise to +11% by June 23, latest figure available.
Fund Allocation current, 50% investment grade corporate bonds, 10% overseas equities, 10% cash, 5% inflation linked bonds, 5% fixed interest govt bonds, 10% high yield bonds and emerging market debt. Bits and pieces in a few other things. Breakdown is shown until 2043 (mine will be spent long before then) and everything stays pretty much the same although cash gradually reduces to about 5% and inflation linked bonds gradually rises to about 10%
Not sure exactly what "gilts" are, google tells me bonds issued by UK government, so only seems a small % in my fund. So as far as my uneducated mind can see my request for a low risk investment aimed at drawdown is exactly what I got. Presumably if I had requested annuity there would have been more gilts. And of course whilst I would have liked more growth, circumstances have dictated otherwise.
Blimey, that's an hour of my life I won't be getting back!!0 -
Unlike the 70s and 80s very few people will be buying annuities so that argument is woefully out of date. Most people will be going for drawdown. The pension companies have known this for 20 years but they have failed to update the risk-assessment that the effect an inevitable rise in interest rates would cause. Equities are known to be volatile but at least the risk is well publicised and they have the benefit that investors can benefit from a rebound if it arises. There was no such possibility when pensions were locked into 15 year gilts. That's mis-management of funds arising from companies too arrogant to revisit their risk assessments.0
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designengineerj said:Unlike the 70s and 80s very few people will be buying annuities so that argument is woefully out of date. Most people will be going for drawdown. The pension companies have known this for 20 years but they have failed to update the risk-assessment that the effect an inevitable rise in interest rates would cause. Equities are known to be volatile but at least the risk is well publicised and they have the benefit that investors can benefit from a rebound if it arises. There was no such possibility when pensions were locked into 15 year gilts. That's mis-management of funds arising from companies too arrogant to revisit their risk assessments.
15 years is too long a duration to be "safe" when approaching retirement...IMO. Even when I was many years from retirement I kept my bond fund average duration around 7 years to reduce interest rate risk.And so we beat on, boats against the current, borne back ceaselessly into the past.0 -
designengineerj said:Unlike the 70s and 80s very few people will be buying annuities so that argument is woefully out of date. Most people will be going for drawdown.That's quite a bold claim. Do you have any evidence for it?Today, RPI-linked annuities are paying a higher rate than the "4% SWR" for drawdown.designengineerj said:The pension companies have known this for 20 years ...N. Hampshire, he/him. Octopus Intelligent Go elec & Tracker gas / Vodafone BB / iD mobile. Ripple Kirk Hill Coop member.Ofgem cap table, Ofgem cap explainer. Economy 7 cap explainer. Gas vs E7 vs peak elec heating costs, Best kettle!
2.72kWp PV facing SSW installed Jan 2012. 11 x 247w panels, 3.6kw inverter. 34 MWh generated, long-term average 2.6 Os.1 -
QrizB said:designengineerj said:Unlike the 70s and 80s very few people will be buying annuities so that argument is woefully out of date. Most people will be going for drawdown.That's quite a bold claim. Do you have any evidence for it?Today, RPI-linked annuities are paying a higher rate than the "4% SWR" for drawdown.designengineerj said:The pension companies have known this for 20 years ...0
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Pat38493 said:QrizB said:designengineerj said:Unlike the 70s and 80s very few people will be buying annuities so that argument is woefully out of date. Most people will be going for drawdown.That's quite a bold claim. Do you have any evidence for it?Today, RPI-linked annuities are paying a higher rate than the "4% SWR" for drawdown.designengineerj said:The pension companies have known this for 20 years ...It's on the current Hargreaves Lansdown best-buy table. Third line. Almost 4.8% at age 65. 3.9% at age 60. They don't quote for joint life but that could be over 4% too.
N. Hampshire, he/him. Octopus Intelligent Go elec & Tracker gas / Vodafone BB / iD mobile. Ripple Kirk Hill Coop member.Ofgem cap table, Ofgem cap explainer. Economy 7 cap explainer. Gas vs E7 vs peak elec heating costs, Best kettle!
2.72kWp PV facing SSW installed Jan 2012. 11 x 247w panels, 3.6kw inverter. 34 MWh generated, long-term average 2.6 Os.0 -
Pat38493 said:QrizB said:designengineerj said:Unlike the 70s and 80s very few people will be buying annuities so that argument is woefully out of date. Most people will be going for drawdown.That's quite a bold claim. Do you have any evidence for it?Today, RPI-linked annuities are paying a higher rate than the "4% SWR" for drawdown.designengineerj said:The pension companies have known this for 20 years ...
A single life RPI linked annuity at 65 now pays 4.777%.1 -
Lifestyling was introduced to solve a problem - equity crashes close to DC annuity purchase. Which it does.
Drawdown variants were added which are not as aggressive in moving but generate tax free cash at the required age.
I opted out of lifestyling switches to gilts (long ago). This left me invested in equities running into the Covid slump and having to decide when my derisking/generation of tax free cash should occur. But my pot, my decision etc.
Under the current system - we all need to take responsibility for our own choices of investment. Even if that choice is to not think about it and accept a default. Choice and consequence. Nobody is doing it for us.
When I joined my DC scheme long ago - I accepted the default which at the time was 100% UK FTSE All Share - low cost tracker. Nobody would say that was an optimal choice or default fund now but passive global index tracking investing had yet to come into fashion. It was changed later with fashion and regulation to something else. And they added lifestyling when the industry moved to that guided by the regulator.
Within that context - i.e. reality - not an invented one of grievance based on misunderstanding - the clear area of deficiency is financial education around this.
More fundamentally though - it *does not* have to be this way with each person (outside the legacy DB public sector universe) responsible for their own investment management, drawdown arrangements etc. Alternative national pooled private DC pension models are possible. Which combine the "known inputs at the time for the employer" aspect of DC but put back death pooling and some sequence smoothing features. And drive out investment management costs with scale. And drive out a lot of complexity for the individual member.
With the current system retreating to the margins for the internationally mobile and wealthy. The advice gap disappears as the masses don't need it. It has many advantages. But won't happen. Too hard. Not politicially attractive to garner votes.
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Linton said:Pat38493 said:QrizB said:designengineerj said:Unlike the 70s and 80s very few people will be buying annuities so that argument is woefully out of date. Most people will be going for drawdown.That's quite a bold claim. Do you have any evidence for it?Today, RPI-linked annuities are paying a higher rate than the "4% SWR" for drawdown.designengineerj said:The pension companies have known this for 20 years ...
A single life RPI linked annuity at 65 now pays 4.777%.
If I plug that information into Timeline with 100K in a global tracker fund from age 55 with £3391 annual withdrawal
Chance of lasting 30 years 100% with £91K left over in the worst case.
Chance of lasting to age 98 still 100%
Chance of lasting to age 110 still 100%.
Minimum sustainable spend over 30 years £3800.
Looking at the Age 65 £4777 number, probability of success over 30 years 94% so if you are 65 it's a better deal but still on the minimum end of historical withdrawal rates.
Looks to me like annuities are worth considering in the later years but not during early retirement (at least right now).
In fact I think the Bogleheads / VPW advice was to take out an annuity at around age 80.
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