Asset allocation 10 years from retirement.

cmonwigan

Hi all, l consolidated my pensions into a SIPP on Vanguard, where l am currently 70% Global Equities and 30% Global Bonds. I pay £300 pcm into the SIPP from my post-tax salary. The SIPP current value is £275k. I also have a pension with my job which is salary sacrifice and l invest £1500 pcm solely into Global Equities. My workplace pension is currently worth £75k. I am 9 years from retirement. I am contemplating changing the investments in my SIPP to 100% bonds (MMF, short term fund, and global funds), but remaining 100% Global equities in my workplace pension. My thinking is that l would preserve more of my SIPP in a downturn but would be able to pick Equities at a discount in my workplace pension. This is all assuming l don't lose my job. I have received great advice in the past from forum members, and would hence would like to get a steer on my thinking. 

Bostonerimus1

You say you are 10 years from retirement, so your money could easily be invested for another 30 or 40 years. How would going to 100% bonds in your SIPP now affect your future retirement income? A common way to navigate retirement is to add a cash/ultra short term bond buffer of a few years spending to your equity and bond portfolio that can be used for spending in down years. 

MK62

Have you considered simply being a bit more tactical with your monthly contributions.......perhaps buying £1875 worth of bonds per month at the moment........and use that method to alter your overall asset allocation over time?
I'd also consider stopping SIPP contributions and switching those to the salary sacrifice workplace pension......depending on your choice of available investments in that scheme of course.

OldScientist

You are contemplating going from an allocation of about 75/25 (since (275*0.7+75)/(75+275)~75% if I've done my sums correctly!) to one of approximately 20/80 (since 75/(75+275)~20%) although the allocation to equities would probably gradually increase again with contributions over the next 10 years. This is quite a drastic change and is a very conservative long-term allocation.

In the short-term, whether it is a good idea or not rather depends on (unknown) future events. If equities crash by a lot (e.g., more than 50%) in the next few years, you'll be relieved you changed your portfolio so drastically. On the other hand, if bond yields rise again, then the fixed income component of your portfolio will drop in nominal terms, while if inflation picks up again, then the fixed income component will drop in real terms.

If you are considering an annuity at retirement, then increasing the amount of bonds in an attempt to lock in current annuity rates is a widely adopted approach (although gilts are usually used rather than global bonds).

Albermarle

If you are looking at drawing down your pensions, then you have to plan on a timescale in your case of around 45 year ( depending on age of retirement) Over that timescale it would be more risky to have a portfolio with only 20% equities, than say 80%.
A classic drawdown portfolio would be more like 50% equities. Maybe more to begin with, and then maybe a bit less when you are a lot older. 

cmonwigan

Thanks for all the comments.  My thinking has been influenced by Vanguard's 10 year returns forecast, and suggestion that investors with this horizon may want to de-risk to 30/70.  My method seemed a sensible, if very conservative approach as I would probably be looking at an inflation linked annuity in retirement.  It's possible I could have £750k by 67.  I also have a rental property which could also provide a source of income, and hopefully a state pension. I have no inheritances of note to include in my forecast,  so capital preservation is paramount.   

Albermarle

My thinking has been influenced by Vanguard's 10 year returns forecast

I do not think they have a great record with their forecasts, but then very few do.

Alexland

cmonwigan said:

My thinking has been influenced by Vanguard's 10 year returns forecast

As above Vanguard's record on forecasts is not great however when looking at asset valuations it's not a bad time to derisk given bond yields are so much better than a few years ago. The opportunity cost of being in bonds is less because equity risk premium is low at the moment.

However not all bonds are created equal and conventional bonds have have a tendency to be eroded by unexpected periods of excess inflation (you would think they should be expected by now...) so it really depends what kind of bonds you are thinking of moving into.

I'm also around a decade from retirement and have de-risked to roughly 50% global equities and 50% long dated index linked gilts which are offering around 2% above inflation if held to redemption however I've already hit my number in terms of having made enough pension contributions to provide all the income I will need without relying on further contributions or portfolio growth above 2% real pa. If your number requires a higher rate of growth you may want to take more risk than me.

Aylesbury_Duck

I've derisked my portfolio a little recently, but still have 70% in equities in pensions but less when my savings are included (56%).  I plan to retire in 4.5 years time and would have 10 years until full DB and state pensions kick in.  Crucially, I have about three years' expenses covered by cash ISAs and my pensions are in buckets, so once the bond buckets are included I have 5-7 years of retirement where I wouldn't have to touch any equities in they event they'd slumped in that time.

New money into savings and pensions will be going into things like VLS40, bonds, STMMs and cash ISAs, so the equity ratio will drop gradually as I near retirement.

Bostonerimus1

cmonwigan said:

Hi all, l consolidated my pensions into a SIPP on Vanguard, where l am currently 70% Global Equities and 30% Global Bonds. I pay £300 pcm into the SIPP from my post-tax salary. The SIPP current value is £275k. I also have a pension with my job which is salary sacrifice and l invest £1500 pcm solely into Global Equities. My workplace pension is currently worth £75k. I am 9 years from retirement. I am contemplating changing the investments in my SIPP to 100% bonds (MMF, short term fund, and global funds), but remaining 100% Global equities in my workplace pension. My thinking is that l would preserve more of my SIPP in a downturn but would be able to pick Equities at a discount in my workplace pension. This is all assuming l don't lose my job. I have received great advice in the past from forum members, and would hence would like to get a steer on my thinking. 

How much debt do you have? The best de-risking for retirement you can do is paying down debt.

cmonwigan

Bostonerimus1 said:

cmonwigan said:

Hi all, l consolidated my pensions into a SIPP on Vanguard, where l am currently 70% Global Equities and 30% Global Bonds. I pay £300 pcm into the SIPP from my post-tax salary. The SIPP current value is £275k. I also have a pension with my job which is salary sacrifice and l invest £1500 pcm solely into Global Equities. My workplace pension is currently worth £75k. I am 9 years from retirement. I am contemplating changing the investments in my SIPP to 100% bonds (MMF, short term fund, and global funds), but remaining 100% Global equities in my workplace pension. My thinking is that l would preserve more of my SIPP in a downturn but would be able to pick Equities at a discount in my workplace pension. This is all assuming l don't lose my job. I have received great advice in the past from forum members, and would hence would like to get a steer on my thinking. 

How much debt do you have? The best de-risking for retirement you can do is paying down debt.

Mortgages debts

£150k on residential mortgage. Nine years left on the mortgage  - 5 years left on fixed rate of  1.75%.
Current value of property @ £700k

£85k on buy to let mortagage. Nine years let on the mortgage  - 6 years left on fixed rate of 3.79%.
Current value of property @ £220k