De-risking

GazzaBloom

SteveBLFC64 said:

Does anyone use funds similar to below as part of their method of de-risking - on the surface it almost appears to be too good to be true - yield of 7.58, low risk and fairly consistent growth over the past few years. I'm sure I'm missing something..... ?

I came across this fund the other day, current returns do look too good to be true, it's a perfect gradient upwards!

It dropped hard in the covid crash, over 18% down, but recovered quickly as equities did, so the year on year figures are deceiving. For me, as a risk-off element, the fact it crashed when covid hit, shows that it's still risky, cash would have held it's ground while it felt like the world was falling apart.

Not sure how happy I would have been to see my risk-on and risk off portfolio assets drop together, not a good place to be, especially if governments hadn't pumped money in and the recovery took 5-10 years not just a few months.

For me, risk-off has to be out of the market completely (or a guaranteed return like a gilt held to maturity) yes inflation will erode it over time but market shocks won't.

Roger175

Bimbly said:

I have a DC pension pot in addition to two smaller defined benefit pensions and so I decided going all equities was fine. Recently, however, I've realised I'll need to rely on this pot heavily for the early years of retirement and I don't have same the same appetite for risk anymore. I'm likely to be retiring in 3 to 4 years. I'll then be taking it all out over as few years as possible, with an eye on tax efficiency.

It's an Aviva workplace pension which pays interest at the BoE base rate on the cash account. I'm struggling to see why I would move it out of that if I want relatively safe options. The select funds I have access to are a Sterling Liquidity (money markets) fund with 0.18% charge, the usual bond fund options, or I could go multi-asset low risk where they pick the percentages for you (but I'd rather not).

Neither bond funds nor money markets look attractive to me. I know recent performance can't be relied on, but I can't see I'd be gaining much potential return if I went into bonds/money markets. Bond funds also had that large dip a couple of years ago, which shows they're not risk free.

I'll be retiring at 60, unless redundancy happens before then (reasonable possibility). DB1 pays out from 60, DB2 at 65, and full state pension at 67. The pot is to fill in the gap. A mortgage up until age 75 is a large part of my expenditure (but I love my home; I'm not moving) and although inflation is a factor, mortgage costs should remain steady. 

I'm finding it harder and harder to keep going at work and my original thought of, well I can just work a bit longer if the markets aren't favourable, is not something I want to contemplate. So I need to be able to rely on this money being there.

There have been quite a few 'de-risking' posts on here lately and these resonate with me.

Having recently retired myself with my wife having retired two years ago, both currently 60ish, I have been re-evaluating things and one thing is abundantly clear - that is that we have plenty of money to live a long and comfortable retirement and don't really need to be taking too much risk to maintain that situation.

I get those who point out that we are going to be invested for a very long time (could be 30+ years), but having run a cash-flow forecast for the next 30 years, factoring in my wife's modest DB, 2 x full state pensions etc, we would appear to have a factor of safety of about 100%. Therefore all I am looking to do is make sure the overall pot (combined SIPP/ISAs/cash savings etc), keeps pace with inflation.  We are in the very fortunate position right now where even very low risk savings accounts, STMMs etc are all out-pacing inflation. I know this is unusual historically and is unlikely to last, but in the short term it's a good place to be, so whilst I may buy a few guilts, I am happy in the short/medium term to maintain an over position whereby we have about 40% in cash (or cash-like investments) about 10% in bond funds and about 50% in well diversified equities. 

I would admit that one of the reasons we have such a high level of cash is that we sold a buy-to-let property in 2023 and can only get the cash into ISAs/SIPPs at a limited rate. At the moment it is sitting in various fixed term savings accounts, but as it gets put into ISA/s/SIPPs I will re-evaluation the situation and will buy more equities if I feel the time is appropriate. A nice crash in the next year or two would suit me very well!

Albermarle

Bimbly said:

Thanks for your replies.

@GazzaBloom describes a lot of my thoughts. Sounds like we are in a similar position.

@artyboy - it's not that I don't like short term money market funds, it's just that I don't see what advantage they have over being paid BoE base rate interest in the cash account.

I realise I'm going to have to give up returns for low risk - that's a given. I'm just wondering if there's something I'm missing. A small amount of risk is fine, but I can't see bond fonds offering a return above cash.

If I had four more years like this last year, then I'd be a lot more comfortable for money in retirement. But the risk is that a stock market shock puts retirement plans on hold (and I really need to stop work soon!). I was going to wait until the last year to move into cash, but I got jittery.

The plan is to retire in four years, unless redundancy happens in two years (end of a contract). I sailed through the 2020 Covid dip but, emotionally, I don't think I could weather a crash now. 

Regarding the comment in bold.
I think most people are recommending money market funds, as normally cash in a pension, earns a bit less than the BoE rate. So Aviva are a bit unusual in that respect.

SVaz

Yep, Hargreaves and Charles Stanley only pay around 2.5% on cash but there are no charges either, so in effect it’s 2.85%/2.95%.   

Hopefully interest rates will stay above 3.5% for the next few years. 

Sarahspangles

AJ Bell now pay 2.5% on less than £10k in cash rising to 3.25% on over £100k (after the latest interest rate change).

Over a year the Royal London STMM has returned 5.2% though presumably that will eventually slow.

cfw1994

Sarahspangles said:

AJ Bell now pay 2.5% on less than £10k in cash rising to 3.25% on over £100k (after the latest interest rate change).

Over a year the Royal London STMM has returned 5.2% though presumably that will eventually slow.

I think you're right....not too many years ago (3?), most cash/MMF were languishing around 0-0.5% !

GazzaBloom

cfw1994 said:

Sarahspangles said:

AJ Bell now pay 2.5% on less than £10k in cash rising to 3.25% on over £100k (after the latest interest rate change).

Over a year the Royal London STMM has returned 5.2% though presumably that will eventually slow.

I think you're right....not too many years ago (3?), most cash/MMF were languishing around 0-0.5% !

Prior to the era of QE post 2008, an interest rate of 5-6% was typical, higher in some decades prior.

I can't see rates going back to the 0.somethings anytime soon, if ever again.

artyboy

GazzaBloom said:

cfw1994 said:

Sarahspangles said:

AJ Bell now pay 2.5% on less than £10k in cash rising to 3.25% on over £100k (after the latest interest rate change).

Over a year the Royal London STMM has returned 5.2% though presumably that will eventually slow.

I think you're right....not too many years ago (3?), most cash/MMF were languishing around 0-0.5% !

Prior to the era of QE post 2008, an interest rate of 5-6% was typical, higher in some decades prior.

I can't see rates going back to the 0.somethings anytime soon, if ever again.

Current geopolitics could have us back into double digits before you know it...

MetaPhysical

I'm in the same position as the OP and several other posters in that I am 58 in July and just cannot face much more corporate BS.  I have had a lot to deal with in recent years on a personal level and now just want to finish work which I started at 16 and spend time with my family and hobbies and travel.

As well as having some other DB pensions I'm also in Aviva with my currently contributing DC pension. Today I de-risked £100k of my £650k equities pot and put it into cash in my pension - I accept the prospect of lower growth on that £100k to provide a"buffer" to protect me from market crashes and downturns.  If there should be a crash I will have almost three - four years of withdrawals in that cash to keep us going.  Also, when I start to take a £20k "salary" from that pension I will do so via the cash first.

MarkCarnage

SteveBLFC64 said:

Does anyone use funds similar to below as part of their method of de-risking - on the surface it almost appears to be too good to be true - yield of 7.58, low risk and fairly consistent growth over the past few years. I'm sure I'm missing something..... ?

Default risk of individual holdings is probably not insignificant at times...particularly if we have a recession. Also, this won't perform as well in a falling interest rate environment....unsurprisingly it's done ok over the last couple of years in a generally rising rate backdrop. Holding some of it is probably a reasonable source of additional yield and a diversifier of fixed rate risk, but I wouldn't put all my credit exposure in there.