Retired - Future Investment Strategy

Afternooner

Hello Knowledgeable Members,

My wife and I retired recently and we’re trying to decide where to effectively invest our “portfolio”, details are as follows:

• My uncrystallised DC pension pot is £600k invested 30% US, 30% Islamic, 40% cash residing with my former employer’s DC provider, Aon. This pot increased by 25% last year and I recently adjusted to it maintain the 60/40 split adding £30k to the cash portion. 

• By 2031, my wife and my DB pensions will provide us with £25k per year.

• We recently sold our previously tenanted second home and have £400k in cash earning circa 4.5% interest at the moment. We’re slowly spreading this around other savings accounts to try to get below £80k at a decent interest rate – not as easy as I thought.

• We have around £80k in S&S global, US and cash ISAs and will be moving £40k cash into global S&S ISAs in April. We will probably continue with this strategy for as long as we can.

Now we’re retired and have built up the above portfolio, our attitude to risk is minimising.

I’m 58, my wife is 55. We have no debt, own our house with no mortgage and no kids around. Our typical annual expenditure is £40k.

The present plan is to live off cash, the DB pensions as they gradually arrive until around state pension age for minimal tax reasons and drawdown minimal amounts from the DC pension for minimal tax reasons and to maximise DC pension growth.

We’re considering moving the DC pension from Aon to a SIPP to increase fund choices and minimise charges. I know there is a like of diversity in the portfolio but my previous investments in other regions and in bonds have been far less successful than the present US/Islamic strategy with cash as the safe haven. 

My questions are does this sound reasonable? Is our investment strategy too simplistic? Are we missing anything obvious? When cash savings interest rates fall, where should we invest?  

I appreciate we should maybe seek advice from an IFA but I have an inherent mistrust of their advice. I may have initial discussions with some locally to get their headline view.

Probably like many of you I have multiple spreadsheets, have ran a Monte Carlo risk analysis, put the figures into numerous pension website models, etc but this reviewing never seems to be enough...

Thank you.

Bostonerimus1

Your plan sounds reasonable to me. But if it was me I wouldn't have quite so much cash, although 4.5% interest is a nice return on your cash, and I would have a higher equity allocation as you will be getting most, if not all, of your required retirement income from DBs and SPs. With the retirement income problem solved you can invest for growth and use that for spending on luxuries or giving to beneficiaries and charity. If your investments go down it won't impact your income sources and you can just wait for the rebound.

HedgehogRulez

I’d be 100% equities 

jimjames

You currently have over £1 million across pension and savings but only £360k is invested? That sounds a very low percentage when you say you're aiming for 60/40 split

AlanP_2

Just for clarity - you say "no kids around".

Does this mean you don't have children or that you do but they are not at home? If the latter then what about the likelihood of having to help out with house deposits etc., and consideration for any inheritance / IHT aspects would become more relevant.

Minimal DC withdrawal makes sense but to minimise tax make the level sufficient that you utilise your personal allowances in the years prior to DB / SP.

When do DBs start by the way and what is the inflation linking for them?

It looks on the surface that you are one of the winners in this game and that you can follow through with your plan and any suggestions are likely to be tweaks rather pulling it apart.

OldScientist

Afternooner said:

Hello Knowledgeable Members,

My wife and I retired recently and we’re trying to decide where to effectively invest our “portfolio”, details are as follows:

• My uncrystallised DC pension pot is £600k invested 30% US, 30% Islamic, 40% cash residing with my former employer’s DC provider, Aon. This pot increased by 25% last year and I recently adjusted to it maintain the 60/40 split adding £30k to the cash portion. 

• By 2031, my wife and my DB pensions will provide us with £25k per year.

• We recently sold our previously tenanted second home and have £400k in cash earning circa 4.5% interest at the moment. We’re slowly spreading this around other savings accounts to try to get below £80k at a decent interest rate – not as easy as I thought.

• We have around £80k in S&S global, US and cash ISAs and will be moving £40k cash into global S&S ISAs in April. We will probably continue with this strategy for as long as we can.

Now we’re retired and have built up the above portfolio, our attitude to risk is minimising.

I’m 58, my wife is 55. We have no debt, own our house with no mortgage and no kids around. Our typical annual expenditure is £40k.

The present plan is to live off cash, the DB pensions as they gradually arrive until around state pension age for minimal tax reasons and drawdown minimal amounts from the DC pension for minimal tax reasons and to maximise DC pension growth.

We’re considering moving the DC pension from Aon to a SIPP to increase fund choices and minimise charges. I know there is a like of diversity in the portfolio but my previous investments in other regions and in bonds have been far less successful than the present US/Islamic strategy with cash as the safe haven. 

My questions are does this sound reasonable? Is our investment strategy too simplistic? Are we missing anything obvious? When cash savings interest rates fall, where should we invest?  

I appreciate we should maybe seek advice from an IFA but I have an inherent mistrust of their advice. I may have initial discussions with some locally to get their headline view.

Probably like many of you I have multiple spreadsheets, have ran a Monte Carlo risk analysis, put the figures into numerous pension website models, etc but this reviewing never seems to be enough...

Thank you.

Ignoring tax, it looks very roughly (I might have some details wrong the the back of my envelope*) like you have to fund four periods out of your investments/savings

1) 6 years of £40k per year (i.e., before DB pensions)
2) 4 years of £15k per year (i.e. after DB pensions, but before SP)
3) 3 years of £4k per year (after your SP kicks in)
4) Rest of lifetime of covering £40k expenditure with DB pensions, assuming these are inflation linked, and SP, so no requirement for withdrawal from portfolio.

Assuming 0% real growth
The first period will cost roughly £240k
The second period £60k
The third period £12k

For a total of about £312k. Your cash savings will probably cover this (there is the possibility of negative real growth in cash where interest rates fall below inflation - I note a short-term collapsing inflation linked gilt ladder would currently guarantee a real yield of about 0.3%). The remaining part of the portfolio can pretty well be invested at whatever asset allocation you can stand since, on this basis, it will not really be needed in the long-term (except for legacy?).

However, if the DB pensions have inflation capping (typically to 2.5% or 5%), then the assumption that these, together with your SP, will cover your long-term expenses will not necessarily be the case, so portfolio withdrawals may be needed.

You might want to redo the calculations assuming the unfortunate event that one or other of you die early (particularly if the DB pensions are very lopsided and only pay out 50% to the beneficiary).

* I think back-of-the envelope calculations like this are a useful sense check of any detailed modelling and allow a logical, liability matching, approach to determine asset allocation.

Afternooner

Hi All,

Thank you very much for your responses and general positivity around our position. All comments are very much appreciated.

Regarding the DB pensions, there are 4 as follows:

DB1 - £2.5k pa from now, increasing by RPI capped at 6%.

DB2 - £1.7k pa @ today’s value starting end of 2027, increasing by CPI, no cap stated.

DB3 - £12.2k pa @ today’s value starting end of 2029, increasing by CPI, no cap stated.

DB4 - £6.8k pa @ today’s value starting end of 2031, increasing by RPI, capped at 5%.

There is a lump sum of around £35k associated with DB3 and £5k with DB4. 

We have no kids so no need to help out with house deposits, etc.

I agree about increasing our equity allocation as most have commented. A cash ISA fund has matured today and is being transferred into an existing S&S ISA. That and £40k into S&S ISAs in April will make a total S&S investment of around 40% of our total funds. As mentioned in my initial post, our attitude to risk is minimising, so that 40% is likely to be enough investment for now depending upon where the markets are going and interest rates in the next few months. 

OldScientist, your advice regarding calculating costs when one or other of us die early is something I hadn't considered. You’re correct that all DBs would reduce by 50%.

Thank you everyone once again.

Bostonerimus1

OP, you're in a great situation because your pot is far larger than required to generate the income you need, so what you do with it is largely irrelevant to your retirement income "success". However, for most people, having an allocation that is too conservative...ie bond and cash heavy is a risky retirement income strategy as it has a higher failure probability than an equity heavy allocation. The critical parameter is really how much income you need to generate relative to the size of the pot, for you that's close to zero so no need to worry. As you get up to 3% or 4% the equity biased portfolios have excellent success probabilities (95% using historical data in Monte Carlo simulations), but more than 4% becomes problematic. Studies have shown that if you have a base of income from annuities, DB and SP, then the best way to make up any required income is with an equity portfolio.

In your situation you've "won" already so you could stick it all in fixed income and cash and mop up the interest with zero risk to capital other than from inflation or you could put it in equities for the greater dividends and long term capital gains - hopefully. The only common point between those scenarios should be Margaritas on a sun lounger.