Strategy for bridging gap to pension

Aylesbury_Duck

My wife and I (both 52) have a current plan to stop working at 57, use savings for five years, draw on DC pensions for another five years and then live off 2x full state pensions plus 2x LGPS pensions plus AVCs.

Our savings are currently comprised of £150k cash, mostly in ISAs, and £330k in Vanguard VLS60.  We intend to add to these over the next five years with any spare money after maximising our pension contributions, but additional savings from now on will be modest.  Looking at our retirement plan,  £60-70k p.a. is a desired income from 57-62, which assuming markets don't completely tank before then and don't recover, is achievable from our savings.

What do people think of our current savings spread in terms of security/risk?  Cash feels quite high, but my reasoning is that without it being what it is, I might change investments to VLS40.  Any views on where any new savings should be placed?  More in VLS60, or start to buy VLS40 given new money might be drawn in the next 5-10 years?  Our investments have done very well since we started adding significantly to them in 2018, using VLS80 and an all-equities fund.  Over the years we've gradually de-risked to what is now fully VLS60.

masonic

The main risks your portfolio currently has is investment risk coming from the equities portion and inflation risk coming from the bonds and cash portion. A significant crash would not prevent you from meeting your objective, but it could potentially leave you with very little left in 2035. Another period of high inflation could significantly increase your nominal spending needs, and send interest rates upward, which would in turn weigh on fund like VLS40 due to it holding bonds of medium to long duration.

If you are looking to use this money between 2030-2035, then you could consider using index linked gilts to mitigate the inflation risk, buying from say TR31 (RPI*+0.9%) to TRTQ (RPI*+1.4%), giving you a degree of confidence about funding your spending needs over those years. You could then take what is left (~£150k), including any future savings, and invest it for the long term.

* RPI will be harmonised with CPIH from 2030

Alexland

Aylesbury_Duck said:

Our investments have done very well since we started adding significantly to them in 2018, using VLS80 and an all-equities fund.  Over the years we've gradually de-risked to what is now fully VLS60.

I'm younger but took a similar path - taking a serious interest in investments around 2017 when I joined this forum initially using VLS80 etc then 100% equities during the TINA years before gradually tilting down to around 2/3rd equities initially using money market and short duration corporate bonds (although I did briefly tilt back into 100% equities during that crash in April)  then recently moving into longer duration inflation linked gilts via a fund and am now trying to lock in future purchase annuity rates for even longer by owning suitably matched gilts directly.

I'd always planned on sub 3% early retirement drawdown rate from a 60/40 portfolio but then seeing I could now get inflation linked annuities at 4.3% from age 55 and that it was possible to roughly lock in the rates in advance using inflation linked bonds and even make gradual commitments at the start using a fixed term annuity opened my eyes.

Albermarle

What are the AVC's invested in? You need to look at all your investments in the round, including those in pensions.

NoMore

Why would you wait to until your 62 before accessing pensions, leaving a lot of your income tax personal allowance on the table. 

Aylesbury_Duck

masonic said:

The main risks your portfolio currently has is investment risk coming from the equities portion and inflation risk coming from the bonds and cash portion. A significant crash would not prevent you from meeting your objective, but it could potentially leave you with very little left in 2035. Another period of high inflation could significantly increase your nominal spending needs, and send interest rates upward, which would in turn weigh on fund like VLS40 due to it holding bonds of medium to long duration.

If you are looking to use this money between 2030-2035, then you could consider using index linked gilts to mitigate the inflation risk, buying from say TR31 (RPI*+0.9%) to TRTQ (RPI*+1.4%), giving you a degree of confidence about funding your spending needs over those years. You could then take what is left (~£150k), including any future savings, and invest it for the long term.

* RPI will be harmonised with CPIH from 2030

Thanks.  I need to do more reading about gilts, it's something I don't know enough about, and I've always followed good advice on here about not investing in anything I don't understand.

Aylesbury_Duck

Albermarle said:

What are the AVC's invested in? You need to look at all your investments in the round, including those in pensions.

Thanks.  A mix when it comes to pensions and AVCS.  Firstly they're a bit lop-sided in that my DCs amount to about £500k and my wife's at about £170k.  AVCs are a mix of cash accumulation and equities, and the other DCs are quite complicated.  I'm going through a bit of work on them at the moment but they're a mix of all equities, targeting drawdown and targeting annuity.  I'm working on reassessing the risk level on one (an Aviva pension that's done really well but is almost all equities) and looking at the suitability of the others with respect to their targeted dates and outcomes.

Aylesbury_Duck

NoMore said:

Why would you wait to until your 62 before accessing pensions, leaving a lot of your income tax personal allowance on the table. 

It's a good point.  My first draft plan has things set out as I described, with the three phases of using savings, then DCs then DBs.  It's easy to compartmentalise that way but as you say, not optimal.  The plan as it stands has both of us staying under the higher-rate tax threshold throughout, but if our DCs continue to grow, that might be threatened, so taking some pension income earlier would be sensible.

Alexland

Aylesbury_Duck said:
Thanks.  I need to do more reading about gilts, it's something I don't know enough about, and I've always followed good advice on here about not investing in anything I don't understand.

Right now at current yields it seems worth giving it the time to learn. Like you I didn't previously need to know a huge amount about bonds as they were obviously extremely overvalued and when I did own them I used funds.

The problem with holding bonds in a fund is you don't get much certainty as the fund portfolio is churning as the short dated holdings reach redemption and new longer dated bonds are purchased. Even holding a gilt directly until redemption doesn't give you complete certainty as you don't know the rate at which you will be able to reinvest the income (when you are still in accumulation) because that depends on future prices.

I'm currently moving 99% of my workplace pension (which is already in bonds) into an II SIPP to invest directly in inflaiton linked bonds so am undergoing crash learning on as many considerations as possible about them and how to match them to future annuity rates although I am toying with the idea of building a ladder to do an amortisation based drawdown for some (maybe all) of the period. 

Aylesbury_Duck said:
The plan as it stands has both of us staying under the higher-rate tax threshold throughout, but if our DCs continue to grow, that might be threatened, so taking some pension income earlier would be sensible.

If you can then I'd suggest using your personal allowances in those early years whenever possible regardless of if you can keep under higher rate tax in later years.

Aylesbury_Duck

Thank you.  I'll run some alternative scenarios on my spreadsheet to see how that works.

My knowledge of gilts is so sparse that I don't even know how to go about buying them!  As you say, a good time to do some learning.

masonic

There's been lots of useful index linked gilt discussions here over the past year or two as many of us have viewed them with renewed interest following their yields getting back to historic norms, and better. So you should be able to follow in others' footsteps piecing it all together.