Money market funds

Workerbee999

We’ve got SIPPs around 600k which are largely going to be spent between 55-60 (currently 53 and 54) as all our long term needs are covered by DBs and SPs each which come on line between 60-63 and then 67. About 150k of the SIPPs are needed to top up 60–67 until everything is in place. Of the remaining £450k, £150k will be TFLS within the next 2 years earmarked for house move, and the other £300k to be drawn between us over the 5 years (max 20% tax). 
 

Currently 60% of the total £600k is in STMM funds and the rest largely global trackers (no bonds currently, I don’t really understand them), so the TFLS and roughly the first 3 years are covered in STMMs.

i think the STMMs are ideal for this situation due to the current good rates for min risk and the short timeline that the SIPPs need to cover - but I must admit the last couple of days stock market gave me a little scare and has prompted me that I need to reassess my risk attitude now that I’m so close to the finish line - but at the same time trying to avoid the knee jerk reaction to transfer everything to STMM now and crystallise loses…..

any views of course welcome, I have managed the SIPPs myself with learnings from these forums and have benefited from the stock market growth in recent years, then funds have gradually been moved to STMM in the last couple of years as I have become more aware of risk levels approaching retirement (and trying to ignore the growth I could have had on them, reminding myself it could just as easily have been losses!)

Bostonerimus1

Workerbee999 said:

We’ve got SIPPs around 600k which are largely going to be spent between 55-60 (currently 53 and 54) as all our long term needs are covered by DBs and SPs each which come on line between 60-63 and then 67. About 150k of the SIPPs are needed to top up 60–67 until everything is in place. Of the remaining £450k, £150k will be TFLS within the next 2 years earmarked for house move, and the other £300k to be drawn between us over the 5 years (max 20% tax). 
 

Currently 60% of the total £600k is in STMM funds and the rest largely global trackers (no bonds currently, I don’t really understand them), so the TFLS and roughly the first 3 years are covered in STMMs.

i think the STMMs are ideal for this situation due to the current good rates for min risk and the short timeline that the SIPPs need to cover - but I must admit the last couple of days stock market gave me a little scare and has prompted me that I need to reassess my risk attitude now that I’m so close to the finish line - but at the same time trying to avoid the knee jerk reaction to transfer everything to STMM now and crystallise loses…..

any views of course welcome, I have managed the SIPPs myself with learnings from these forums and have benefited from the stock market growth in recent years, then funds have gradually been moved to STMM in the last couple of years as I have become more aware of risk levels approaching retirement (and trying to ignore the growth I could have had on them, reminding myself it could just as easily have been losses!)

You are in a similar situation to an 85 year old person looking to protect capital for inheritance, but in your case it's to fund a definite and relatively short time span. If your DB is index linked and your income needs are truly covered by the DB and SP then you have won 🎉🎉🎉. My one thought is what other capital will you have after age 67? and have you thought about the possibility of having to pay for nursing care. It's always useful to have capital on hand in SIPPS and ISAs being tax efficient and allowing you to pay for emergencies and big one off expenses like a new car. So while a MMF might be one solution for the short term, with a little more risk you might have some more spending money post 67 and also something to leave to charity and heirs. 

I was able to retire at 52 and put 3 years of spending into a MMF to see me to 55 when my DB pension started, but I kept my DC pension assets fully invested in equities and since I retired in 2014 I haven't touched them and their value has more than doubled...the annualized return is 10% per year. Now that might not happen over the next 10 years, but I would try to keep some ready capital as it's a nice warm blanket against the cold and with time and the historical growth of equites it might become a nice thick blanket...just don't put all your eggs in one basket, but make sure each basket has enough eggs to make an omelette...I apologize for that last bit.

Workerbee999

Bostonerimus1 said:

Workerbee999 said:

We’ve got SIPPs around 600k which are largely going to be spent between 55-60 (currently 53 and 54) as all our long term needs are covered by DBs and SPs each which come on line between 60-63 and then 67. About 150k of the SIPPs are needed to top up 60–67 until everything is in place. Of the remaining £450k, £150k will be TFLS within the next 2 years earmarked for house move, and the other £300k to be drawn between us over the 5 years (max 20% tax). 
 

Currently 60% of the total £600k is in STMM funds and the rest largely global trackers (no bonds currently, I don’t really understand them), so the TFLS and roughly the first 3 years are covered in STMMs.

i think the STMMs are ideal for this situation due to the current good rates for min risk and the short timeline that the SIPPs need to cover - but I must admit the last couple of days stock market gave me a little scare and has prompted me that I need to reassess my risk attitude now that I’m so close to the finish line - but at the same time trying to avoid the knee jerk reaction to transfer everything to STMM now and crystallise loses…..

any views of course welcome, I have managed the SIPPs myself with learnings from these forums and have benefited from the stock market growth in recent years, then funds have gradually been moved to STMM in the last couple of years as I have become more aware of risk levels approaching retirement (and trying to ignore the growth I could have had on them, reminding myself it could just as easily have been losses!)

You are in a similar situation to an 85 year old person looking to protect capital for inheritance, but in your case it's to fund a definite and relatively short time span. If your DB is index linked and your income needs are truly covered by the DB and SP then you have won 🎉🎉🎉. My one thought is what other capital will you have after age 67? and have you thought about the possibility of having to pay for nursing care. It's always useful to have capital on hand in SIPPS and ISAs being tax efficient and allowing you to pay for emergencies and big one off expenses like a new car. So while a MMF might be one solution for the short term, with a little more risk you might have some more spending money post 67 and also something to leave to charity and heirs. 

I was able to retire at 52 and put 3 years of spending into a MMF to see me to 55 when my DB pension started, but I kept my DC pension assets fully invested in equities and since I retired in 2014 I haven't touched them and their value has more than doubled...the annualized return is 10% per year. Now that might not happen over the next 10 years, but I would try to keep some ready capital as it's a nice warm blanket against the cold and with time and the historical growth of equites it might become a nice thick blanket...just don't put all your eggs in one basket, but make sure each basket has enough eggs to make an omelette...I apologize for that last bit.

Thanks Bostonerimus, the DBs are a mixed bag. We will both have around £35k each (plus SP). OH is RPI index-linked to max 5%. Mine is £20k fixed 2.5% (buy-out instead of PPF) plus 15k uncapped CPI - so some inflation risk there but starting from quite a high value. For long term capital we should have about £150k cash to fall back on, more than that currently but some big holidays, purchases, and house deposit to son planned in the early years of retirement. When there is only one survivor OH would get 50% of my DB whilst I would get 2/3rds of theirs. That would pay a big chunk towards any care costs for one of us without eating too much into any capital (although the survivor would be in 40% tax then). inheritance to our son should be our house (about £800k once we move) plus anything left over.  Plus potentially gifts from excess income if we don’t spend our pensions generally in retirement. We need to do some inheritance tax planning to try to protect his inheritance.

There other thing I need to watch out for is that £500k of the £600k SIPP is mine, and current planning suggests I can just about get it out from 55 without going into 40% tax, but won’t be able to if the tax thresholds don’t go up with inflation at some point in the future, or if growth is too high (nice problem but the growth level would then need to fund the extra tax too). Maybe once I’m 55 and know I can access it, I should flip the 150k cash contingency to be in the pension wrapper and invest outside the pension.

If LTA is reintroduced I might have to change plans and take all the DBs at 55 with reduction then keep the SIPP but I think my preference is guaranteed income for all our needs so we don’t have to worry about investment returns in old age - of course I could be missing a sweet spot balance as the DBs die with us, but the house gives a good inheritance. We will manage charity giving in retirement too. 

OH has just retired 2 months ago and I’ll go Dec 25, once I’m 55 and we can access the SIPP (and son finishes uni). I think the main thing I’m going to struggle with is starting to spend the SIPP instead of save, we have got where we are due to disciplined saving, (especially when my original DB closed and moved to DC), which my future self is very grateful for, but it’s going to be a new mindset even though I know that was the whole point of it…..and I have got to work out how to spend my time when not pouring over these spreadsheets all the time!

MK62

Bostonerimus1 said:

Workerbee999 said:

We’ve got SIPPs around 600k which are largely going to be spent between 55-60 (currently 53 and 54) as all our long term needs are covered by DBs and SPs each which come on line between 60-63 and then 67. About 150k of the SIPPs are needed to top up 60–67 until everything is in place. Of the remaining £450k, £150k will be TFLS within the next 2 years earmarked for house move, and the other £300k to be drawn between us over the 5 years (max 20% tax). 
 

Currently 60% of the total £600k is in STMM funds and the rest largely global trackers (no bonds currently, I don’t really understand them), so the TFLS and roughly the first 3 years are covered in STMMs.

i think the STMMs are ideal for this situation due to the current good rates for min risk and the short timeline that the SIPPs need to cover - but I must admit the last couple of days stock market gave me a little scare and has prompted me that I need to reassess my risk attitude now that I’m so close to the finish line - but at the same time trying to avoid the knee jerk reaction to transfer everything to STMM now and crystallise loses…..

any views of course welcome, I have managed the SIPPs myself with learnings from these forums and have benefited from the stock market growth in recent years, then funds have gradually been moved to STMM in the last couple of years as I have become more aware of risk levels approaching retirement (and trying to ignore the growth I could have had on them, reminding myself it could just as easily have been losses!)

I was able to retire at 52 and put 3 years of spending into a MMF to see me to 55 when my DB pension started, but I kept my DC pension assets fully invested in equities and since I retired in 2014 I haven't touched them and their value has more than doubled...the annualized return is 10% per year. Now that might not happen over the next 10 years, but I would try to keep some ready capital as it's a nice warm blanket against the cold and with time and the historical growth of equites it might become a nice thick blanket...just don't put all your eggs in one basket, but make sure each basket has enough eggs to make an omelette...I apologize for that last bit.

As an observation, you retired in a good year.......equity performance in the last 10 years has been stellar (esp US equities), and you don't need your DC pension assets anyway, so I suspect you can afford to be more bullish with them if you want......if it all goes to hell in a handcart, you won't feel the effects anything like as much as someone who is reliant on a DC pension pot.

Rewind your retirement 14 years, and perhaps keeping it all in equities wouldn't have worked out quite so well.......though again, as you don't need your DC pension assets anyway, you'd probably still have been OK......for someone reliant on those assets though, it would have been something of a disaster......

I get your point about equities driving growth.......with near zero interest rates for much of the last 10 years, coupled with the spectacular bond rout after interest rates eventually rose, they've really been the only game in town growth wise (for mainstream investors at least)......but we should all remember it hasn't always been so. For the first 10 years of this century, US equities lost about a third of their value in real terms IIRC.......and that's without any drawdowns - factor those in and it looked grim by any standard.

SouthCoastBoy

Personally, it is not about maximising returns, but ensuring I do not run out of money. I'm not keen on annuities for a number of reasons. We are constantly reminded that equities are for the long term (e.g. 5 to 10 years minimum investment) therefore if you need money before that imo it is best to keep it out of equities, hence I have at least 10 years of cash/STMMF. As I use my cash reserves I plan to top them up at opportune moments (so you could call that timing the market)

Bostonerimus1

MK62 said:

Bostonerimus1 said:

Workerbee999 said:

We’ve got SIPPs around 600k which are largely going to be spent between 55-60 (currently 53 and 54) as all our long term needs are covered by DBs and SPs each which come on line between 60-63 and then 67. About 150k of the SIPPs are needed to top up 60–67 until everything is in place. Of the remaining £450k, £150k will be TFLS within the next 2 years earmarked for house move, and the other £300k to be drawn between us over the 5 years (max 20% tax). 
 

Currently 60% of the total £600k is in STMM funds and the rest largely global trackers (no bonds currently, I don’t really understand them), so the TFLS and roughly the first 3 years are covered in STMMs.

i think the STMMs are ideal for this situation due to the current good rates for min risk and the short timeline that the SIPPs need to cover - but I must admit the last couple of days stock market gave me a little scare and has prompted me that I need to reassess my risk attitude now that I’m so close to the finish line - but at the same time trying to avoid the knee jerk reaction to transfer everything to STMM now and crystallise loses…..

any views of course welcome, I have managed the SIPPs myself with learnings from these forums and have benefited from the stock market growth in recent years, then funds have gradually been moved to STMM in the last couple of years as I have become more aware of risk levels approaching retirement (and trying to ignore the growth I could have had on them, reminding myself it could just as easily have been losses!)

I was able to retire at 52 and put 3 years of spending into a MMF to see me to 55 when my DB pension started, but I kept my DC pension assets fully invested in equities and since I retired in 2014 I haven't touched them and their value has more than doubled...the annualized return is 10% per year. Now that might not happen over the next 10 years, but I would try to keep some ready capital as it's a nice warm blanket against the cold and with time and the historical growth of equites it might become a nice thick blanket...just don't put all your eggs in one basket, but make sure each basket has enough eggs to make an omelette...I apologize for that last bit.

As an observation, you retired in a good year.......equity performance in the last 10 years has been stellar (esp US equities), and you don't need your DC pension assets anyway, so I suspect you can afford to be more bullish with them if you want......if it all goes to hell in a handcart, you won't feel the effects anything like as much as someone who is reliant on a DC pension pot.

Rewind your retirement 14 years, and perhaps keeping it all in equities wouldn't have worked out quite so well.......though again, as you don't need your DC pension assets anyway, you'd probably still have been OK......for someone reliant on those assets though, it would have been something of a disaster......

I get your point about equities driving growth.......with near zero interest rates for much of the last 10 years, coupled with the spectacular bond rout after interest rates eventually rose, they've really been the only game in town growth wise (for mainstream investors at least)......but we should all remember it hasn't always been so. For the first 10 years of this century, US equities lost about a third of their value in real terms IIRC.......and that's without any drawdowns - factor those in and it looked grim by any standard.

My DC pension has been through all the ups and downs since 1990. I was more 60/40 invested for most of that time, and saw some nasty down years, but I wasn't making withdrawals. You are right that because of my DB pension and also income from a rental I can be bullish and not really worry and you are right to point out there have been bad times for equities. The thing to take away is that all asset classes have good and bad times and that all the research done on safe withdrawal rates points to a mix of assets being the "best" approach and relying on just equities or just a MMF is probably a bad idea. So retirees who can live with the volatility of equities will probably have the most successful retirement portfolios. If they find risk difficult then the annuity is a good tool for guaranteeing a base of income and insuring against longevity risk. A viable solution also depends on personal circumstances, but it's important to have a retirement portfolio that isn't driven by short term factors...well at least until the "Grim Reaper" is in sight.

Bostonerimus1

SouthCoastBoy said:

Personally, it is not about maximising returns, but ensuring I do not run out of money. I'm not keen on annuities for a number of reasons. We are constantly reminded that equities are for the long term (e.g. 5 to 10 years minimum investment) therefore if you need money before that imo it is best to keep it out of equities, hence I have at least 10 years of cash/STMMF. As I use my cash reserves I plan to top them up at opportune moments (so you could call that timing the market)

I'm very much with you that maximizing possible returns is NOT the goal of a retirement portfolio. However, the research studies show that portfolios with a considerable equity allocation give the best chances of not running out of money. If you have the luxury of a large pension pot relative to your drawdown then you can ignore the growth potential of equites and concentrate on fixed income and maybe some dividends and still not run out of money, but most people will need the growth of equites to fund their retirement, especially with today's longer life expectancies. This study shows that using cash buffers and MMFs are possibly of only psychological value and taking money out of equities and a bond portfolio results in poorer outcomes, so 10 years in cash might be giving a false sense of security.

https://bpb-us-w2.wpmucdn.com/sites.udel.edu/dist/a/855/files/2020/08/Sustainable-Withdrawal-Rates.pdf

I keep a couple of years spending in my MMF and a year of spending in my bank account for liquidity and the 5% return of the MMF is a nice bonus, but it doesn't drive those allocations.

aldershot

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Index linked gilts do not provide protection against unexpected inflation. They are very complex beasts with lots of assumptions and moving parts. L&G index linked fund is down around 35% over the past 3 years, with the vast majority of that in the period when inflation took off. 

Pat38493

aldershot said:

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Index linked gilts do not provide protection against unexpected inflation. They are very complex beasts with lots of assumptions and moving parts. L&G index linked fund is down around 35% over the past 3 years, with the vast majority of that in the period when inflation took off. 

I would have thought that if you actually own the gilts and hold them to maturity (rather than owning a fund that buys and sells index linked gilts), you would not have that issue.  The issue is when you are buying a fund that holds existing gilts.

MK62

Pat38493 said:

aldershot said:

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Index linked gilts do not provide protection against unexpected inflation. They are very complex beasts with lots of assumptions and moving parts. L&G index linked fund is down around 35% over the past 3 years, with the vast majority of that in the period when inflation took off. 

I would have thought that if you actually own the gilts and hold them to maturity (rather than owning a fund that buys and sells index linked gilts), you would not have that issue.  The issue is when you are buying a fund that holds existing gilts.

That rather depends on the price you actually pay for the index linked gilts though.........