Stocks & Shares ISAs for 60+ yrs?

OldBill · 24 May 2019 at 6:30PM

I am due to retire in the next year or two (12-30 months) and am wondering whether or not it is worth investing for the next 3 years or so in stocks and shares ISAs.

BACKGROUND INFO:
Am in very good health; mortgage paid off (small house) & no outstanding debts; single, with no dependants; civil service DB pension (£9k pa) will commence on retirement; no expensive tastes (dining out, foreign travel, etc.); can comfortably keep £10,000 - £20,000 in my interest-paying bank current account for emergencies / rainy day & draw the £300 pa interest; eligible for state pension in 2025.

MY (TENTATIVE) AIM WAS:
To supplement work pension between 2021-2025 (and beyond?) with a bit of an income stream from one (or more) S&S ISAs. (Rather late to try to bump-up pension).

PROBLEM:
So far as I can see from the net, the income (at present interest rates) that a multi-asset stocks-and-bonds fund appears to produce is in the maybe £300 pa or so area (some funds a lot less). But £20k locked away for a year or two in a bank savings account @ 2% interest pa would give £400+. Even the "high yield"/"income" funds (as opposed to "Accumulation" ones) don't produce more.

So my question is this: is there really any point at my age in investing in S&S ISAs? I know that, over time ("absolute min 5 yrs, & preferably 10 yrs+", etc.), stock market investments outperform cash savings; but, unless I have a burning desire to accumulate capital assets into old age, is a stock-market investment worth bothering with? Or does the ISA tax-break alone make it all worthwhile, somehow?

As regards specifics: I note that the Vanguard (& other) funds / ETF products / blended funds are cheap and hassle-free; and I have looked into the keeping-it-simple portfolio construction / asset allocation subtract-your-age-from-100-thing, but, sprightly as I am, I have no burning desire either to leave a bundle in a will or to be filthy rich at 90 - there are no pockets in shrouds (as they say). I would just like another (say) £500-£1,000 pa plopping into my current account to add to my pension - even if only as a psychological quarterly "perk" (and one that can go down as well as up). Am I asking for the impossible? (And if I am, that's fine - I just want to know!).

The standard stock market investment advice for retirees appears to be that, given a relatively short timescale, it's best to focus on conservative, low-risk investments that might provide a mix of income AND growth - which I'm not knocking. And I can understand the wisdom of not ignoring capital growth, as care fees may beckon sooner than one would care to imagine. (Although low-risk investments do, of course, result in even lower dividends than noted above).

So, all in all, I am struggling to see how that, at my age, a S&S ISA is so much better than depositing money in a savings account. It's not my fear of "market volatility"; it's just down to the arithmetic of income from investment within a limited "time horizon". A couple hundred more £100s per quarter would make quite a difference.

In the meantime, the search for the best S&S ISA(s) for retirement continues - though I'm seriously wondering if it's worth it at all. I'm not despairing or dejected about this. I'm more puzzled than anything else, since the advice put forward by all commentators ("use you ISA allocation!") seems, in my case at least, not to be much of a fruit-bearing option.

Be grateful for any thoughts on this - both in terms of general points and specific ISA fund products / platforms, etc.

bowlhead99 · 24 May 2019 at 9:28PM

Maybe what you are missing when you see that the fund invested in a mix of assets only produces 1.5% income yield on your £20k investment while your bank account produces 2%, is that the fund is also growing the value of the capital as well, which will help generate a nice flow of income which comes from that enlarged capital value in the future.

Looking at the last five years total return on a bank account, the £20000 would have been giving you £400 a year income for a total return of £2000. But as you will have have spent all the income, you still only have £20000 of value in the bank account, and the annual flow of £400 a year is not as good as £400 a year was back in the good old days when goods and services were five years cheaper. In another couple of decades when you are 80, the income from the bank account may still be £400 a year, and the capital will still be £20000, but £400 and £20000 will have the spending power of only £200 and £10000 today - because beer will be £10 a pint instead of £5 a pint and so on.

By contrast, the total return over the medium to long term from a middle of the road mix of equity funds and bond funds is a lot more than just 1.5% of yield. Simplistically, while the bank account pays out £400 in a year and is still worth £20000 at the end of the year, the investment fund pays out £300 *and* the remaining balance of the investment is hopefully worth more than it started at. A fund delivering 5% a year total return might be giving 1-4% in income and the other 1-4% in capital growth.

If you don't want to grow your capital any more than inflation, or don't want to grow it at all, because you "don't want to die filthy rich", you can simply sell a part of your investment fund each year and take the cash into your own bank account along with the income you received.

if you take a look at the total return charts of those mixed asset funds you mention, and compare them to a bank account, you might see that the bank account is paying you 2% a year in total, while the fund is growing in total by more like 5%+, so the chart has gone up by 25, 30% over the five years while a chart of your back account would have only gone up by 10% in that time if you had left the interest in there.

So with the extra money generated by investments compared to cash savings, you can choose to withdraw a total of £0, £300, £500 or more every year, even if the headline "yield" (the natural income coming out of the investment product, ignoring capital growth) is only £300 a year.

The last five years has been pretty good in global equity and bond and property markets so you should probably not expect funds to deliver the same over the next five years as the last five years, and the markets will go up and down over time rather than going up smoothly in a straight line. But in the long term, investments should beat cash and beat or exceed inflation. So, if you are trying to take as much as possible out of your £20k over the next five, ten, twenty, thirty years plus, it stands to reason that you should primarily consider investments rather than cash savings.

OldBill · 25 May 2019 at 9:53AM

bowlhead99 wrote: »

By contrast, the total return over the medium to long term from a middle of the road mix of equity funds and bond funds is a lot more than just 1.5% of yield. Simplistically, while the bank account pays out £400 in a year and is still worth £20000 at the end of the year, the investment fund pays out £300 *and* the remaining balance of the investment is hopefully worth more than it started at. A fund delivering 5% a year total return might be giving 1-4% in income and the other 1-4% in capital growth.

If you don't want to grow your capital any more than inflation, or don't want to grow it at all, because you "don't want to die filthy rich", you can simply sell a part of your investment fund each year and take the cash into your own bank account along with the income you received.

Aaaah . . . . the penny just dropped. Apologies for being thick, but I really had no idea at all about capital growth. I get it. Thank you, bowlhead99, for explaining that so clearly.

Would I be right in thinking, then, that the basic difference between "Accumulation" funds (on the one hand) and "Income" or "high dividend yield" funds (on the other) is the amount paid in dividends - less in the former (if you want them) & more in the latter (presumably leaving less for capital growth)? And that the type of fund purchased (Accumulation or Income) will depend upon whether, on the whole, you are seeking capital growth (long-term) or income (shorter-term)?

I know this is basic, but have I understood correctly what you are saying?

I just want to clear about this before parting with any of my hard-earned!

dunstonh · 25 May 2019 at 11:35AM

Some people like to generate their withdrawals using yield only. Some use total return.

Would I be right in thinking, then, that the basic difference between "Accumulation" funds (on the one hand) and "Income" or "high dividend yield" funds (on the other) is the amount paid in dividends

No.

Accumulation funds do not distribute income. They retain it in the fund and it is reflected in the unit price. Income units distribute the income (either directly to your bank account or into your cash account on your investment platform).

I tend to pick income units regardless of whether I am looking for growth or income.

OldBill · 25 May 2019 at 7:22PM

So: taking all of the above into account, and following the guidance of Lars Kroijer in respect of keeping an investment portfolio:
(i) simple (so as not to complicate matters);
(ii) cheap (ensuring more returns are retained); &
(iii) well-diversified (to avoid unnecessary risk)
- and taking care to balance all of this in line with my "Attitude to Risk" (to be decided) -

does this look prudent?:

TWO FUND PORTFOLIO:
1. Vanguard Global All-Cap index - Income; &
2. Vanguard Global Bond Index - Hedged Account.

(The Life Strategy funds are a bit UK-heavy).

Or (ignoring Kroijer slightly) even a:
ONE FUND PORTFOLIO? (!)
Vanguard Global Balanced Fund - Income.
(OCF 0.6 managed). 67/33 shares/bonds. (Seems a bit bonds-heavy).

Am I in the right ball-park here?

dunstonh · 25 May 2019 at 8:25PM

does this look prudent?:

TWO FUND PORTFOLIO:
1. Vanguard Global All-Cap index - Income; &
2. Vanguard Global Bond Index - Hedged Account.

Where is your UK bond holding?
Where is your propery holding?

ONE FUND PORTFOLIO? (!)
Vanguard Global Balanced Fund - Income.
(OCF 0.6 managed). 67/33 shares/bonds. (Seems a bit bonds-heavy).

I didnt think Vanguard offered their managed funds range in the UK. The name says "balanced". So, around 67/33 is spot on for the balanced name"

If you are willing to pay 0.6% OCF on top of the platform charge, then why limit yourself to Vanguard?

OldBill · 25 May 2019 at 8:55PM

UK Bond holding - not there.
Property holding - ditto.

Serves me right for trying to be too global. Point taken.

The managed fund is available in the UK, but the price alone would put me off.

Back to the drawing board - at least with the fixed income element. (I'm presuming the All-Cap Index is OK).

It doesn't take long doing this to see why people just plump for the LifeStrategy option - or don't bother at all.

dunstonh · 25 May 2019 at 9:31PM

It doesn't take long doing this to see why people just plump for the LifeStrategy option - or don't bother at all.

There is more to life than Vanguard. There are plenty of alternative low cost multi-asset funds with different allocations.

OldBill · 26 May 2019 at 8:22AM

Thanks, dunstonh.

Let the search for a low-cost, multi-asset fixed-income fund commence . . .

Albermarle · 26 May 2019 at 4:05PM

67/33 shares/bonds. (Seems a bit bonds-heavy).

Many people approaching retirement and/or looking for a shorter investment time frame ( say 5 years instead of 10) would probably consider this 'equity heavy'
As part of Bowlhead's explanation he used an example of investments growing 25/30% over the last 5 years , which would be more in line with the performance of a multi asset fund with around 40 % equities . Such as Vanguard VLS 40 or Blackrock Consensus 60, Fidelity multi allocator 'Strategic ' etc

dunstonh · 26 May 2019 at 4:22PM

Many people approaching retirement and/or looking for a shorter investment time frame ( say 5 years instead of 10) would probably consider this 'equity heavy'

And indeed would the FOS for the average consumer who they consider to be low/medium in risk. (40-60% equity)

Stocks & Shares ISAs for 60+ yrs?

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