A few questions about bond funds & gilts

masonic

Pizzapie0000 said:

Many thanks for your detailed response:

What do you intend to do when you retire at 60? If the plan is to use a lot of the money to buy an annuity, then derisking that would be more of a priority. Otherwise, a large part of your portfolio is likely to remain invested well beyond that date and would not need derisking prior. Does your pension default fund already have lifestyling built into the fund? Many do.

My plan was to take it into drawndown, rather than purchase an annuity, so I would need to keep the bulk invested. My employer offers a default drawn down fund, the pension fund will slowly switch from a diversified growth fund (65% equity) to a drawn down fund (25% equity)

The pension is already more than 2.5x the ISA, and presumably you are paying more into it going forward. So are you planning to generate enough income from the pension to use up your personal allowance and tax free 25%, then supplement from the ISA?
Interesting point, I was planning on using the ISA to help pay down my mortgage. The plan is to let the ISA grow for the next 5 years and then use the proceeds to pay of as much of the mortgage as possible. The mortgage is fairly meaty - around £340k, I am hoping the ISA increases to allow me to pay as much as possible. 

You currently have 20% bonds and 5% gold in the ISA. Perhaps you do not need to derisk any more than that in the short term. The money market fund will be less attractive as rates continue to fall, so taking some duration risk using gilts might be worth considering. Is the US Treasuries ETF hedged? (hopefully it is, as you'll have lost out to the dollar weakening if not)
Yes - all bonds are hedged to the GBP

The bond funds have done badly due to interest rates rising from historic lows. You are now considering getting rid of them at the point interest rates are falling again. This is classic buying high and selling low. Though I do think you could make three funds into one fund.
Do you have any suggestions about which fund i could opt for, i have gone for government bonds because they are meant to offer the greatest protection in a crash.

As others have mentioned, going down to 25% equities in the SIPP does not seem compatible with your desire not to buy an annuity. You may wish to avoid this lifestyling. The allocation looks good at 65% equity given what you have said about risk tolerance.

While the S&S ISA would seem to need urgent substantial derisking. You are lucky that the Trump crash has pretty much recovered, but further falls could be experienced at any time. If it is all to be used towards the mortgage within 5 years then it would be hard to make a case for more than about 25% of that to be in equities at this point. A cautious multi-asset fund might be an appropriate option. Or transfer to a cash ISA fix. That has the bonus of sorting out the messy allocation.

Pizzapie0000

Albermarle said:

 My employer offers a default drawn down fund, the pension fund will slowly switch from a diversified growth fund (65% equity) to a drawn down fund (25% equity)

I think you will find most on this forum, including the more cautious ones, would think 25% equity is too low.
However it does seems reasonably typical of a lot of these lifestyle drawdown pension funds. 

This current long thread may be of interest.
Anyone in high equity allocation whilst retired? — MoneySavingExpert Forum

My employers drawn down fund has a target of BOE Base Rate + 3.5%, and its under performed slightly against this bench mark. 28.2%  of the fund is in alternatives: EM debt, High Yield Bonds, Gold mining, Real Estate.

Pizzapie0000

boingy said:

That mortgage changes the picture quite dramatically!
What interest rate are you paying on it and, if it is fixed, when does that end?

I have 25 years left, and i have fixed for 5 years at 3.82%. Its £362k - much higher than I would like.  

Pizzapie0000

dunstonh said:

My plan was to take it into drawndown, rather than purchase an annuity, so I would need to keep the bulk invested. My employer offers a default drawn down fund, the pension fund will slowly switch from a diversified growth fund (65% equity) to a drawn down fund (25% equity)

That is a massive drop in equities.   Typically, those using drawdown in retirement (any regular income method) would be closer to 50-60% equities.   25% is far too low to make drawdown viable in most cases.

I agree - the rest is an even mixture of government and corporate bonds, alternative debt & alternatives. Alot of debt - well over half and a large cash allocation

Pizzapie0000

masonic said:

Pizzapie0000 said:

Many thanks for your detailed response:

What do you intend to do when you retire at 60? If the plan is to use a lot of the money to buy an annuity, then derisking that would be more of a priority. Otherwise, a large part of your portfolio is likely to remain invested well beyond that date and would not need derisking prior. Does your pension default fund already have lifestyling built into the fund? Many do.

My plan was to take it into drawndown, rather than purchase an annuity, so I would need to keep the bulk invested. My employer offers a default drawn down fund, the pension fund will slowly switch from a diversified growth fund (65% equity) to a drawn down fund (25% equity)

The pension is already more than 2.5x the ISA, and presumably you are paying more into it going forward. So are you planning to generate enough income from the pension to use up your personal allowance and tax free 25%, then supplement from the ISA?
Interesting point, I was planning on using the ISA to help pay down my mortgage. The plan is to let the ISA grow for the next 5 years and then use the proceeds to pay of as much of the mortgage as possible. The mortgage is fairly meaty - around £340k, I am hoping the ISA increases to allow me to pay as much as possible. 

You currently have 20% bonds and 5% gold in the ISA. Perhaps you do not need to derisk any more than that in the short term. The money market fund will be less attractive as rates continue to fall, so taking some duration risk using gilts might be worth considering. Is the US Treasuries ETF hedged? (hopefully it is, as you'll have lost out to the dollar weakening if not)
Yes - all bonds are hedged to the GBP

The bond funds have done badly due to interest rates rising from historic lows. You are now considering getting rid of them at the point interest rates are falling again. This is classic buying high and selling low. Though I do think you could make three funds into one fund.
Do you have any suggestions about which fund i could opt for, i have gone for government bonds because they are meant to offer the greatest protection in a crash.

As others have mentioned, going down to 25% equities in the SIPP does not seem compatible with your desire not to buy an annuity. You may wish to avoid this lifestyling. The allocation looks good at 65% equity given what you have said about risk tolerance.

While the S&S ISA would seem to need urgent substantial derisking. You are lucky that the Trump crash has pretty much recovered, but further falls could be experienced at any time. If it is all to be used towards the mortgage within 5 years then it would be hard to make a case for more than about 25% of that to be in equities at this point. A cautious multi-asset fund might be an appropriate option. Or transfer to a cash ISA fix. That has the bonus of sorting out the messy allocation.

Interesting, so i shouldn't be using my  equities to pay of my mortgage, is this because there is a risk of a crash and I need to tread carefully? On Reddit, the UK finance posts are much more adventurous about having a large equity portfolio, i am assuming their view is slightly different in that they believe equities will always recover.

Thanks

masonic

Pizzapie0000 said:

masonic said:

Pizzapie0000 said:

Many thanks for your detailed response:

What do you intend to do when you retire at 60? If the plan is to use a lot of the money to buy an annuity, then derisking that would be more of a priority. Otherwise, a large part of your portfolio is likely to remain invested well beyond that date and would not need derisking prior. Does your pension default fund already have lifestyling built into the fund? Many do.

My plan was to take it into drawndown, rather than purchase an annuity, so I would need to keep the bulk invested. My employer offers a default drawn down fund, the pension fund will slowly switch from a diversified growth fund (65% equity) to a drawn down fund (25% equity)

The pension is already more than 2.5x the ISA, and presumably you are paying more into it going forward. So are you planning to generate enough income from the pension to use up your personal allowance and tax free 25%, then supplement from the ISA?
Interesting point, I was planning on using the ISA to help pay down my mortgage. The plan is to let the ISA grow for the next 5 years and then use the proceeds to pay of as much of the mortgage as possible. The mortgage is fairly meaty - around £340k, I am hoping the ISA increases to allow me to pay as much as possible. 

You currently have 20% bonds and 5% gold in the ISA. Perhaps you do not need to derisk any more than that in the short term. The money market fund will be less attractive as rates continue to fall, so taking some duration risk using gilts might be worth considering. Is the US Treasuries ETF hedged? (hopefully it is, as you'll have lost out to the dollar weakening if not)
Yes - all bonds are hedged to the GBP

The bond funds have done badly due to interest rates rising from historic lows. You are now considering getting rid of them at the point interest rates are falling again. This is classic buying high and selling low. Though I do think you could make three funds into one fund.
Do you have any suggestions about which fund i could opt for, i have gone for government bonds because they are meant to offer the greatest protection in a crash.

As others have mentioned, going down to 25% equities in the SIPP does not seem compatible with your desire not to buy an annuity. You may wish to avoid this lifestyling. The allocation looks good at 65% equity given what you have said about risk tolerance.

While the S&S ISA would seem to need urgent substantial derisking. You are lucky that the Trump crash has pretty much recovered, but further falls could be experienced at any time. If it is all to be used towards the mortgage within 5 years then it would be hard to make a case for more than about 25% of that to be in equities at this point. A cautious multi-asset fund might be an appropriate option. Or transfer to a cash ISA fix. That has the bonus of sorting out the messy allocation.

Interesting, so i shouldn't be using my  equities to pay of my mortgage, is this because there is a risk of a crash and I need to tread carefully? On Reddit, the UK finance posts are much more adventurous about having a large equity portfolio, i am assuming their view is slightly different in that they believe equities will always recover.

Thanks

When investing in equities, you need to be able to commit to holding over the long term, typically >10 years. This is because there is a risk of negative returns over shorter holding periods. This is why it is sensible to derisk several years before the money will be needed. In the case of your ISA, you are saying you want to use it in about 5 years time. There's an appreciable risk of making a loss over a 5 year holding period. If you cash in to pay down your mortgage, you won't be in the market for the recovery.

It's really the same argument for why you don't need to derisk your SIPP. You'll only be drawing down a small percentage of it per year, so the part that won't be needed for over 10 years can be left in equities. If there were a market crash, you could fall back on the lower risk assets (and any dividend income) to avoid selling at a loss.