Cash Pot?

GenX0212

Hi all,

I have seen a few references to holding a 'cash' pot as part of your pension portfolio. The idea being that you draw from your cash pot in market downturn rather than take from your investment pot.

I'm still not sure if I agree with this approach or not because when the markets are up then you have less investment growth. If the average/usual market conditions are for growth then is it a zero sum equation at best?

Anyway, my question is if you are holding a cash pot then what is the trigger point for you to draw from cash rather than investments. What rules/strategy are you each using for determining the market is down?
For example my main pot is down £10k in the week but that only actually equates to a short term 2% drop. It's not a concern for me at the moment as I expect it to recover in time but if I was in drawdown would that trigger me to use cash instead, or would it be a 5% drop, 10%, more?

thanks.

singhini

I put £2,880 into my SIPP (3,600 with the tax relief) each year and this is held as cash. The pot has built up to over £50k and its just sat there as cash earning £125ish a month interest.

Ive got no plans for it, i'm happy with the tax relief and the interest growth. 

I too would be interested what others view are on holding a "cash" pot as part of your portfolio 

Sarahspangles

Your investments were originally cash too. If the value of investments bought with a specific sum has fallen below the value of the equivalent cash holding, and you need to take income from your pension, then you take the cash and hope the investments recover before you either convert them to replenish your cash holding or withdraw them.

I sold some funds ten months ago to buy a low risk money market fund. It has underperformed other investments, but there was a ten day period last Summer when investments were under performing relative to the mmf. If I had needed to take a pension withdrawal at that point, the mmf would have allowed me to proceed as planned and I wouldn’t be making a loss concrete. 

GenX0212

Sarahspangles said:

Your investments were originally cash too. If the value of investments bought with a specific sum has fallen below the value of the equivalent cash holding, and you need to take income from your pension, then you take the cash and hope the investments recover before you either convert them to replenish your cash holding or withdraw them.

I sold some funds ten months ago to buy a low risk money market fund. It has underperformed other investments, but there was a ten day period last Summer when investments were under performing relative to the mmf. If I had needed to take a pension withdrawal at that point, the mmf would have allowed me to proceed as planned and I wouldn’t be making a loss concrete. 

Hi SarahSpangles,  what would you class as underperforming though? A 2% drop in the week you wanted to make a withdrawal or something bigger?

Sarahspangles

GenX0212 said:

Sarahspangles said:

Your investments were originally cash too. If the value of investments bought with a specific sum has fallen below the value of the equivalent cash holding, and you need to take income from your pension, then you take the cash and hope the investments recover before you either convert them to replenish your cash holding or withdraw them.

I sold some funds ten months ago to buy a low risk money market fund. It has underperformed other investments, but there was a ten day period last Summer when investments were under performing relative to the mmf. If I had needed to take a pension withdrawal at that point, the mmf would have allowed me to proceed as planned and I wouldn’t be making a loss concrete. 

Hi SarahSpangles,  what would you class as underperforming though? A 2% drop in the week you wanted to make a withdrawal or something bigger?

Underperforming = worth less in cash terms than it cost at the point I need the cash. The cash holding is there so that I am guaranteed to be able to take that amount of cash (pension withdrawal).

Whether a fund is too risky or volatile to retain long term is a different question.

bjorn_toby_wilde

singhini said:

I put £2,880 into my SIPP (3,600 with the tax relief) each year and this is held as cash. The pot has built up to over £50k and its just sat there as cash earning £125ish a month interest.

Ive got no plans for it, i'm happy with the tax relief and the interest growth. 

I too would be interested what others view are on holding a "cash" pot as part of your portfolio 

Like @Sarahspangles I hold my cash in a Short Term Money Market Fund. Mine is Royal London but there are others available. If I held cash in my AJ Bell SIPP it would earn interest at 3%, so less than inflation. The Royal London fund earned 5.2% over the last year so that seems a better option to me at the moment.

QrizB

GenX0212 said:

I'm still not sure if I agree with this approach or not because when the markets are up then you have less investment growth. If the average/usual market conditions are for growth then is it a zero sum equation at best?

Pretty much, yes.

Learned regulars on this forum have stated (and I paraphrase) that holding a cash pot offers little (if any) benefit under almost all historically back-tested conditions, but psychologically it makes it easier for the investor to keep up their withdrawal plans if they don't have to sell assets at a loss when the market is down.

Sarahspangles

QrizB said:

GenX0212 said:

I'm still not sure if I agree with this approach or not because when the markets are up then you have less investment growth. If the average/usual market conditions are for growth then is it a zero sum equation at best?

Pretty much, yes.

Learned regulars on this forum have stated (and I paraphrase) that holding a cash pot offers little (if any) benefit under almost all historically back-tested conditions, but psychologically it makes it easier for the investor to keep up their withdrawal plans if they don't have to sell assets at a loss when the market is down.

Exactly. It’s similar to the thinking behind an emergency fund. If you unexpectedly lose your regular income you need your rainy day money to be easy to access, even if that means lower returns. In the case of earmarked pension income you need it to hold its value for access at a particular date, even if that means lower returns.

Time4T_Accounts

Sarahspangles said:

Exactly. It’s similar to the thinking behind an emergency fund. If you unexpectedly lose your regular income you need your rainy day money to be easy to access, even if that means lower returns. In the case of earmarked pension income you need it to hold its value for access at a particular date, even if that means lower returns.

Again, exactly. It’s not always about maximising returns : there are a variety of objectives for a pension fund in drawdown … having sufficient cash to sleep easy might be one such objective.  If one doesn’t need to go for all-out growth, then why take unnecessary risk …?

SVaz

If you are using a lot of your pot for early retirement , say 7- 10 years, then having a cash/mmf pot or Gilt ladder seems the only sane way to do it.

I’ll stop having a cash pot at 67 and just take the yield from my funds.   

I have 2 sipps, one is now 40% STMMF which equates to 3 years income,  I’m still 50/50 on creating a Gilt ladder for the following 3 years,  which means selling another £20k of investments (  VLS 80 and Fidelity index world)  so it’s which one to sell, or chunks of both.
 Or I could gamble that interest rates will stay above 3.5% and just drip sell over the next few years to my cash pot.  

Of course the time to sell was before Trump went even more bonkers.  

My other Sipp is fully in HSBC dynamic global strategy ( income) and I may or may not take the TFC in around 5 years. 

Fink_Nottle

Sarahspangles said:

If you unexpectedly lose your regular income you need your rainy day money to be easy to access, even if that means lower returns. 

Like the OP, I'm trying to work out a position on this, so following all your thoughts with interest. The comments on the psychological aspects of holding cash to avoid locking in a loss certainly chime with me.

One small observation I'd make though is that if you're in a MMF, I presume your money is no easier to access than if it were in any other kind of fund i.e. you'll need to wait a few days for the sale to settle and transfer to a bank account?