DC pension doesn't have short-term bond funds

leosayer

A large part of my retirement savings are held in a DC scheme with LifeSight and I can't transfer out of them because it's linked to a DB scheme.

I want to de-risk but I don't find any of the options suitable. For now I have used the cash fund but want something with a 5 year time horizon like I have done with other savings through AJ Bell and HL.

There are a lot of bond funds available but no short-term bond funds. Here are the options:

Fund	Underlying fund	Duration
Lifesight Cash	Legal & General Sterling Liquidity Fund	Mostly < 3 months
Lifesight Bonds	Legal & General Future World Inflation Sensitive Annuity Aware Fund	Mostly 5-20 years
UK Corporate Bond	Legal & General Investment Grade Corporate Bond - All Stocks - Index Fund	Mostly < 10 years
Annuity Matching	Legal & General Future World Annuity Aware Fund*	0-40 years
Inflation Linked Annuity Matching	Legal & General Future World Inflation Linked Annuity Aware Fund*	0-30 years
UK Fixed Interest Gilts	Legal & General Over 15 Year Gilts Index Fund	> 15 years
UK Index Linked Gilts	Legal & General Over 5 Year Index-Linked Gilts Index Fund	> 5 years

Is it reasonable of me to ask LifeSight to expand their list of fund choices? Would they do that?

QrizB

leosayer said:

A large part of my retirement savings are held in a DC scheme with LifeSight and I can't transfer out of them because it's linked to a DB scheme.
I want to de-risk but I don't find any of the options suitable. For now I have used the cash fund but want something with a 5 year time horizon like I have done with other savings through AJ Bell and HL.

If you have several schemes, it doesn't really matter whether any particular one offers 5-year bonds. Just adjust your holdings in the other scheme so the % of your total holdings meets your requirements.

(This does assume that the LifeSight scheme isn't the overwhelming majority of thr pension savings.)

OldScientist

Mixing funds of different durations will approximate the performance of a single fund with the appropriate duration.

For example, the cash fund essential has a duration of close to zero, while (according to morningstar) the corporate bond fund has a modified duration of just over 5 years (modified duration is not quite the same as duration, but will be close enough for this purpose). Mixing the cash and corporate bond funds in a 50/50 mix will therefore have a duration of approximately 2.5 years.

As @QrizB said, treating your portfolio as a single entity is not unreasonable (e.g., hold cash in this pot, if required, and longer duration funds in another).

Albermarle

If you have a decent amount of cash savings outside the pension, you can put these in fixed term savings accounts, to get a similar overall effect.

leosayer

Lifesight represents 64% of my investments so it is possible to get the overall allocation I want via the HL and AJ Bell pots. I don't have any meaningful savings outside of my pensions and ISA.

Using the a mix of the Corporate Bond fund and Cash fund is an interesting idea but not sure 42% UK exposure and 36% in BBB Corporate Bond is what I had in mind for low risk, but in combination it could work.

My main concern with LifeSight is that the pot is largely earmarked for taking the linked DB PCLS in as little as 2 years time. If equity markets drop significantly then there may not be enough in the LifeSight pot to make full use of this. Most of those funds will be reinvested back into a mix of bonds and equities via ISAs.

Maybe it's time for me to get another DB quotation to see how much PCLS I can get and see whether this is an issue or not. First world problem I guess.

Linton

leosayer said:

Lifesight represents 64% of my investments so it is possible to get the overall allocation I want via the HL and AJ Bell pots. I don't have any meaningful savings outside of my pensions and ISA.

Using the a mix of the Corporate Bond fund and Cash fund is an interesting idea but not sure 42% UK exposure and 36% in BBB Corporate Bond is what I had in mind for low risk, but in combination it could work.

My main concern with LifeSight is that the pot is largely earmarked for taking the linked DB PCLS in as little as 2 years time. If equity markets drop significantly then there may not be enough in the LifeSight pot to make full use of this. Most of those funds will be reinvested back into a mix of bonds and equities via ISAs.

Maybe it's time for me to get another DB quotation to see how much PCLS I can get and see whether this is an issue or not. First world problem I guess.

Corporate bond funds may not provide the level of risk reduction you require as their price can fall significantly in an equity crash.  Around 2008 UK corporate bond funds fell on average about 15% whereas gilt funds increased by 10% or more.

Albermarle

leosayer said:

Lifesight represents 64% of my investments so it is possible to get the overall allocation I want via the HL and AJ Bell pots. I don't have any meaningful savings outside of my pensions and ISA.

Using the a mix of the Corporate Bond fund and Cash fund is an interesting idea but not sure 42% UK exposure and 36% in BBB Corporate Bond is what I had in mind for low risk, but in combination it could work.

My main concern with LifeSight is that the pot is largely earmarked for taking the linked DB PCLS in as little as 2 years time. If equity markets drop significantly then there may not be enough in the LifeSight pot to make full use of this. Most of those funds will be reinvested back into a mix of bonds and equities via ISAs.

Maybe it's time for me to get another DB quotation to see how much PCLS I can get and see whether this is an issue or not. First world problem I guess.

I think if you need some stability in this pot, ( two years is relatively short term)you might be better with a significant amount in the cash fund.
Have you checked what the current rate is for it? Normally a very short dated gilt fund should be paying a reasonable return.

leosayer

Albermarle said:

leosayer said:

Lifesight represents 64% of my investments so it is possible to get the overall allocation I want via the HL and AJ Bell pots. I don't have any meaningful savings outside of my pensions and ISA.

Using the a mix of the Corporate Bond fund and Cash fund is an interesting idea but not sure 42% UK exposure and 36% in BBB Corporate Bond is what I had in mind for low risk, but in combination it could work.

My main concern with LifeSight is that the pot is largely earmarked for taking the linked DB PCLS in as little as 2 years time. If equity markets drop significantly then there may not be enough in the LifeSight pot to make full use of this. Most of those funds will be reinvested back into a mix of bonds and equities via ISAs.

Maybe it's time for me to get another DB quotation to see how much PCLS I can get and see whether this is an issue or not. First world problem I guess.

I think if you need some stability in this pot, ( two years is relatively short term)you might be better with a significant amount in the cash fund.
Have you checked what the current rate is for it? Normally a very short dated gilt fund should be paying a reasonable return.

It looks like the cash fund is returning 4.85% annualised based on my quick XIRR calc on the price over the past few weeks.

Holding 25% of my total assets in short-term (max 5 years duration) bonds is a long-term strategy for me both before and after taking the PCLS. I wasn't explicit earlier but after taking the PCLS it will be spent over the course of 3-4 years to supplement my DB income.

Is the cash fund a reasonable proxy for short-term (under 5 years duration) bond funds for the next 2 years? I'm not sure I quite understand the difference in return profile for the two. I guess it's a balance between locking in the PCLS amount and keeping to my strategy.

I've asked my DB admin for an up to date estimate of the PCLS so I can plan better. 

I also asked LifeSight whether they can make short and long term gilt funds available because their current offering seems almost entirely targeted on those taking annuities.

OldScientist

You can compare something like the ishares 0-5 year gilts fund (accumulating version, which doesn't have a very long history - there may be a better fund) and Royal London Money Market fund (e.g., https://markets.ft.com/data/etfs/tearsheet/summary?s=IGL5:LSE:GBP ) - the return profile is quite different because the gilt fund will vary in value as interest rates change, while the MMF (i.e. close to cash) increases at a relatively steady rate.

For the moment, cash-type funds have greater yields than longer duration bond funds (I don't know how long that will be the case for) so is definitely a good short-term fix given that there will not be any nominal capital losses. Once (if?) interest rates drop, the returns on the cash-like funds will drop with them, while bond funds (even those with relatively short durations) will rise in value.