Pension (SIPP), ISAs and Retirement

Aylesbury_Duck

If it's any help/comfort, I'm sort of in a similar situation in terms of pensions (albeit with some DB as well), investments and cash, but with no mortgage.  Planning to retire in 5 years' time at 57.  I've just done one of my regular reviews of everything and have de-risked my DC pensions and my S&S ISA.  One of my larger DC pensions was 100% equities and has done really well, and I've just taken it to funds that mean it's about 70% equities.  The other DC pensions were already at a similar equity exposure, anyway.  I've taken my S&S ISAs down from a mix that was about 80% equities to VLS60.

All told, nothing drastic, just a position that means I will sleep easy for another year but still allow for long-term growth should there be a market slump at some point soon.  I found a previous poster's point about holding separate equity and bond funds interesting, and I may look at that for my ISA instead of the VLS60.

the_medium_bear

Aylesbury_Duck said:

If it's any help/comfort, I'm sort of in a similar situation in terms of pensions (albeit with some DB as well), investments and cash, but with no mortgage.  Planning to retire in 5 years' time at 57.  I've just done one of my regular reviews of everything and have de-risked my DC pensions and my S&S ISA.  One of my larger DC pensions was 100% equities and has done really well, and I've just taken it to funds that mean it's about 70% equities.  The other DC pensions were already at a similar equity exposure, anyway.  I've taken my S&S ISAs down from a mix that was about 80% equities to VLS60.

All told, nothing drastic, just a position that means I will sleep easy for another year but still allow for long-term growth should there be a market slump at some point soon.  I found a previous poster's point about holding separate equity and bond funds interesting, and I may look at that for my ISA instead of the VLS60.

ah yes that in interesting and similar position too (although DB pention, well my wife has a 20K DB pension so thats something)

ref the separate equities and bonds in different fund absolutely makes sense and certainly something i never considered (just which bond(s) to go with

so you have gone from 100% equities to 70% equities (or was that 70% equities across your entire pension pot?) when you say " just taken it to funds" what funds do you take it too.

the_medium_bear

masonic said:

the_medium_bear said:

1-2% over say 10years + RPI/CPIH i guess would only be suitable for a split of the total SIPP as it would reduce the term i could say withdraw 4% from with the anticipated/potential >4% gain (if im correct here?)

I don't think that would be the case. The baseline long term return (15th percentile) for a 100% global equity portfolio is lower than inflation+1%. Drop to 60:40 and baseline return goes up. Remove some risk from the bonds component by liability matching and inflation hedging and you'd likely see an even better baseline return, which would give you a higher safe withdrawal rate. When dealing with shortfall risk and sequencing risk, conventional wisdom about risk and return can be turned on its head.

You can think of it has having a secure foundation to your retirement income that allows some discretion over selling equities at a market low. With that discretion you can actually draw from the portfolio at a higher average rate.

hello again, so re-reading your comment several times over i am just trying to clarify

your saying "long term 10(-15 years ish)" if holding equity 15% of it would average return an lower than inflation + 1%

and i think your then saying if i hold 40% of my SIPP in index linked bonds which would be ~1% + inflation

then in the remaing 60% in equities 15% of them would return lower than inflation + 1%

I did take a quick look at some index linked gilts here:
https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/uk-index-linked-gilts

and if i pick out this one for example : https://www.hl.co.uk/shares/shares-search-results/t/treasury-1.75-22092038-index-linked-gilt

is that saying if i pay in £ <x> amount in 2038 i will get out as a minimum <x pounds> + 1.75% per year [is the interest calculated per year? Can that interest paid be used to buy additional gilts like an Acc fund? I suspect not due to price fluctuation ?

And is that example gilt one that can be brought today (it was created in 2015) where i would get 1.75% + inflation here I guess is what im asking

DRS1

Have you read this thread?
Explain Gilts/Bonds to me like I am 5 years old please? - Page 5 — MoneySavingExpert Forum
Hopefully the link takes you to a page with a couple of good posts by @Secret2ndAccount and @SnowMan but I suppose you may need to read the whole thing (it is quite long) as there are other useful posts.  The one by @SnowMan shows you how the return on an index linked gilt is made up in picture form which personally I found made things a lot clearer than words sometimes do.. 

masonic

the_medium_bear said:

your saying "long term 10(-15 years ish)" if holding equity 15% of it would average return an lower than inflation + 1%

I'm saying in 15% of historic 10 year periods the return from 100% equities would have been lower than inflation + 1%. That's based on buying and holding. If you are drawing 4% per year, then the outcome would be worse due to there being less in your pot to recover, in the worst case the portfolio could run out in about 15 years. Whereas a classic 60:40 portfolio would give you a baseline return of inflation + 2.6% if rebalanced annually and would therefore get you closer to a 4% safe withdrawal rate. There isn't any good data for using inflation linked gilts, but if you compare the baseline return of global bonds (inflation-0.4%) with index linked gilts (inflation+1.5%), it suggests a further improvement at today's prices.

Using index linked gilts alone, you could lock in a 30 year retirement with a safe withdrawal rate of 4.2%, but your money would run out at the end of those 30 years, whereas buying an annuity (at a similar rate currently) the income would continue however long you lived. So you can provide an income floor for your needs, and save your equities for wants and extravagances, or buy a ladder of gilts to bridge the gap between retirement and state pension, to secure a guaranteed outcome.

So there are various ways to use them in a retirement portfolio.

the_medium_bear said:

I did take a quick look at some index linked gilts here:
https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/uk-index-linked-gilts

and if i pick out this one for example : https://www.hl.co.uk/shares/shares-search-results/t/treasury-1.75-22092038-index-linked-gilt

is that saying if i pay in £ <x> amount in 2038 i will get out as a minimum <x pounds> + 1.75% per year [is the interest calculated per year? Can that interest paid be used to buy additional gilts like an Acc fund? I suspect not due to price fluctuation ?

And is that example gilt one that can be brought today (it was created in 2015) where i would get 1.75% + inflation here I guess is what im asking

You can get some more information about this index linked gilt here: https://www.dividenddata.co.uk/gilts.py?ticker=T38

If you bought now and held to maturity, your overall return would be inflation+1.82%, although this assumes reinvestment of the income, so there might be a slight variation in your actual outcome. The current price is less than the £100 face value, so that return comprises a small tax exempt capital gain, the interest (0.875% paid every 6 months), index linking on that interest, and index linking on the maturity payment. You can reinvest your income, but would have to do this manually at whatever the market price was at that time. It's not unusual to sweep up this income into a money market fund or similar cash-like holding. Or just add it to the money invested in another gilt if you happen to be buying anyway.

Aylesbury_Duck

the_medium_bear said:

Aylesbury_Duck said:

If it's any help/comfort, I'm sort of in a similar situation in terms of pensions (albeit with some DB as well), investments and cash, but with no mortgage.  Planning to retire in 5 years' time at 57.  I've just done one of my regular reviews of everything and have de-risked my DC pensions and my S&S ISA.  One of my larger DC pensions was 100% equities and has done really well, and I've just taken it to funds that mean it's about 70% equities.  The other DC pensions were already at a similar equity exposure, anyway.  I've taken my S&S ISAs down from a mix that was about 80% equities to VLS60.

All told, nothing drastic, just a position that means I will sleep easy for another year but still allow for long-term growth should there be a market slump at some point soon.  I found a previous poster's point about holding separate equity and bond funds interesting, and I may look at that for my ISA instead of the VLS60.

so you have gone from 100% equities to 70% equities (or was that 70% equities across your entire pension pot?) when you say " just taken it to funds" what funds do you take it too.

When it came to my Aviva DC, being a group personal pension the fund choice is limited to about a dozen funds.  I had about £125k in international equities, £35k in UK equities and about £20k in with-profits bonus accumulation.  I chopped the UK equities completely, reduced the international equities and put the proceeds into the managed and retirement distribution funds.  It comes out at about a 70% equity mix.  My other DCs were at about that level already.  At some point I will probably move the Aviva DC into a SIPP to save charges but I need to do some homework on the MVR for the with-profits element, and to check there aren't any legacy benefits I'd be giving up because this is a pension that dates back to 2006.

the_medium_bear

DRS1 said:

Have you read this thread?
Explain Gilts/Bonds to me like I am 5 years old please? - Page 5 — MoneySavingExpert Forum
Hopefully the link takes you to a page with a couple of good posts by @Secret2ndAccount and @SnowMan but I suppose you may need to read the whole thing (it is quite long) as there are other useful posts.  The one by @SnowMan shows you how the return on an index linked gilt is made up in picture form which personally I found made things a lot clearer than words sometimes do.. 

Why thank you very much for that I will definitely take a read of those (once I'm sat at a computer and not a phone)

the_medium_bear

masonic said:

the_medium_bear said:

your saying "long term 10(-15 years ish)" if holding equity 15% of it would average return an lower than inflation + 1%

I'm saying in 15% of historic 10 year periods the return from 100% equities would have been lower than inflation + 1%. That's based on buying and holding. If you are drawing 4% per year, then the outcome would be worse due to there being less in your pot to recover, in the worst case the portfolio could run out in about 15 years. Whereas a classic 60:40 portfolio would give you a baseline return of inflation + 2.6% if rebalanced annually and would therefore get you closer to a 4% safe withdrawal rate. There isn't any good data for using inflation linked gilts, but if you compare the baseline return of global bonds (inflation-0.4%) with index linked gilts (inflation+1.5%), it suggests a further improvement at today's prices.

Using index linked gilts alone, you could lock in a 30 year retirement with a safe withdrawal rate of 4.2%, but your money would run out at the end of those 30 years, whereas buying an annuity (at a similar rate currently) the income would continue however long you lived. So you can provide an income floor for your needs, and save your equities for wants and extravagances, or buy a ladder of gilts to bridge the gap between retirement and state pension, to secure a guaranteed outcome.

So there are various ways to use them in a retirement portfolio.

the_medium_bear said:

I did take a quick look at some index linked gilts here:
https://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/uk-index-linked-gilts

and if i pick out this one for example : https://www.hl.co.uk/shares/shares-search-results/t/treasury-1.75-22092038-index-linked-gilt

is that saying if i pay in £ <x> amount in 2038 i will get out as a minimum <x pounds> + 1.75% per year [is the interest calculated per year? Can that interest paid be used to buy additional gilts like an Acc fund? I suspect not due to price fluctuation ?

And is that example gilt one that can be brought today (it was created in 2015) where i would get 1.75% + inflation here I guess is what im asking

You can get some more information about this index linked gilt here: https://www.dividenddata.co.uk/gilts.py?ticker=T38

If you bought now and held to maturity, your overall return would be inflation+1.82%, although this assumes reinvestment of the income, so there might be a slight variation in your actual outcome. The current price is less than the £100 face value, so that return comprises a small tax exempt capital gain, the interest (0.875% paid every 6 months), index linking on that interest, and index linking on the maturity payment. You can reinvest your income, but would have to do this manually at whatever the market price was at that time. It's not unusual to sweep up this income into a money market fund or similar cash-like holding. Or just add it to the money invested in another gilt if you happen to be buying anyway.

Thanks very much for the details here ( I think a lot of digest) here thanks I may come back with additional questions 

the_medium_bear

So brief look at index linked gilts. I took a looks at this:

https://www.hl.co.uk/shares/shares-search-results/t/treasury-0.25-31072031-gilt

And my question here

If I'm reading that link correctly and brought this this at £81.77 (which would mature in 2031 at a value of £100) 

I would essential maybe 18.23% over 6 years guaranteed if held to maturity on top  of this I would get 0.25% so that would be 3.28% per year + inflation 

Am I reading this data right? Or is my assumption correct here (I will read the links posted in previous comments when I have a bigger screen

And going forward I could have multiple of these maturing on subsequent years to drawn on 

masonic

the_medium_bear said:

So brief look at index linked gilts. I took a looks at this:

https://www.hl.co.uk/shares/shares-search-results/t/treasury-0.25-31072031-gilt

And my question here

If I'm reading that link correctly and brought this this at £81.77 (which would mature in 2031 at a value of £100) 

I would essential maybe 18.23% over 6 years guaranteed if held to maturity on top  of this I would get 0.25% so that would be 3.28% per year + inflation 

Am I reading this data right? Or is my assumption correct here (I will read the links posted in previous comments when I have a bigger screen

And going forward I could have multiple of these maturing on subsequent years to drawn on 

That is not an index linked gilt, so you would get an overall return of about about 3.8% total. If inflation were 3% over that period, it would just be inflation + 0.8%, but if inflation was higher or lower the outcome would be relatively worse/better in real terms.

TR31 is the index linked gilt with closest maturity, and that has an overall return of inflation + 0.95%.

For TR31, the clean price is £95.36, but this excludes index linking and accrued interest. What you'd actually pay is £132.46. It will mature with a clean price of £100, but what you'll actually receive is the dirty price (including all index linking) at that time, so could be £150+ (plus all of the 6 monthly interest payments from purchase to maturity). See https://www.dividenddata.co.uk/gilts.py?ticker=TR31