Stick or Twist

[ADrunkenMarcus]

I began with Unit Trusts but, had I known then what I know now, it would have been Investment trusts. Oddly my first fund was Investment Trust Units. £3 a month until 1967 when I increased it to £5 a month. Cashed out in 1977, when I needed a deposit for a house before ours was sold, and the rate of return over 18 years was about 5.9%.

Is that a nominal rate of return? I assume it is, as I know inflation soared in the early and mid 1970s. Thanks.

Best wishes


Mark.

[Stanley117]

Stanley117,

The way I estimate the approximate value of a defined benefit pension is:

1. Look up current annuity rate data, e.g. here: http://www.ft.com/personal-finance/annuity-table

2. Choose the most appropriate age and benefit type, e.g. age 65, single life, increasing with RPI

3. This gives the amount of pension of that type that a sum of £100K purchases on the open market (assuming you are in good health etc)

4. To get the sum needed to purchase your pension, divide this figure (e.g. £3,120 currently for the example I gave at step 2) into your pension entitlement, and multiply by £100K

So, in your case (assuming age 65 is the correct age), this would be (£18,000 / £3,120) * £100,000 = £577K.

Note that income tax is not relevant to this calculation.

Thanks I didn't realise how valuable a DB pension was. In my case it also provides the same amount of pension for the wife if I died so I suppose it would cost even more.

Question - When making a comparison of my Cash like Assets to my Risky Equity allocation in my overall portfolio would it be advised apply a discount to the capital value of a pension if I wanted to treat the pension like a very safe bond because the capital value of a pension is cash that you cannot ever get at so it is not the same as cash or a safe bond for asset allocation purposes.

Stan

[tjh290633]

I began with Unit Trusts but, had I known then what I know now, it would have been Investment trusts. Oddly my first fund was Investment Trust Units. £3 a month until 1967 when I increased it to £5 a month. Cashed out in 1977, when I needed a deposit for a house before ours was sold, and the rate of return over 18 years was about 5.9%.

Is that a nominal rate of return? I assume it is, as I know inflation soared in the early and mid 1970s. Thanks.

That is the IRR of the cash flow, based on my subscriptions and what I got back.

For the record the starting price was 71.25p, there was a 3 for 1 split in 1960 and again in 1969. The final price was 23.98p when I sold. The equivalent on the original price basis is 215.8p. I don't have records of the dividend per unit along the way, but the last dividend was 0.36p/unit.

www.ons.gov.uk/ons/rel/cpi/consumer-pri ... e-data.pdf gives historical data for the RPI since 1800. The average RPI for 1959 was 48.6 and for 1977 it was 182. That is an increase of 275% and an annualised rate of 7.6%.

TJH

[ADrunkenMarcus]

Thanks TJH.

Best wishes


Mark.

[Fairleas]

I think the portfolio list is perhaps over-complex, and potentially contains duplication. You might be able to manage the admin of such a portfolio now but as both you and it age you will IME become weary of the admin involved.

I also had a 'health interlude' some years back where I suddenly spent maybe 4-5 months in hospital, then rehab at home afterwards; I don't even remember now how long I was so out of it. I probably didn't check my portfolio and whether all was paid and correct for 6+ months. It was a *nightmare*! Luckily I recovered but either way I'd encourage people to streamline and simplify their investments ahead of retirement.

That was more helpful than you realise.

[Fairleas]

Help!!!
I'm 65. Retire from employment in 3 years. No debts. House paid for. Private pension £300pm Annuity £220 pm. Then its old age pension.
I have approx £100,000 mainly in ITs and Funds, including a few grand in shares. Nearly all dividend paying. In addition I have £200,000 in cash.
Question: Would you stick with one third in stocks and share and two thirds cash?
If not, what adjustment would you make?

I realise I have not bored you with what Investments I have.

Do I open a SIPP?

[Urbandreamer]

Do I open a SIPP?

If it was most other people I'd say yes, without a doubt. However you are limited of £10kpa gross pension contributions.
https://www.gov.uk/guidance/pension-sch ... -allowance

Do you have enough allowances left to contribute to a SIPP after your existing contributions?

Use your full ISA allowance, consider VCT's and ETF's, spend or give the money away to good causes. The pension route is not the open door for you that it is for most of us.

[swill453]

Do I open a SIPP?

You've still given very little detail about your "Annuity £220 pm."

Could this be a defined contribution pension, containing possibly £60,000+ ?

If so, you could potentially forget turning it into an annuity (assuming you haven't done so already) and transfer the funds to a SIPP instead. This would give much more flexibility.

Scott.

[Fairleas]

I have an annuity with Partnership of £220 pm. That is fixed no annual increase. 50% to the wife.

I have a Local Govt pension £300 pm that will increase pa. Again 50 per cent to the wife.

[Fairleas]

For myself I'd chuck the job now and enjoy life as much as possible before old age starts to restrict what I'm capable of. Indeed I'm retiring this year when I hit 62 and can still climb hills. Only you know what you'd like to do with your time, and that's the really important thing rather than the money.

cheers
Spiderbill

Thank you Spiderbill. My job involves me working for a charity in the community. I was once described as somebody whose hobby has become his career. When I eventually retire, I will work for this charity for nothing,

[Fairleas]

You have a decent chance to see how you might pull through into retirement.
If you want to keep working for the next three years then leading up to that point why don't you try to live off a larger fraction of your £35k salary using the numbers you say you expect as income, in retirement, and leave the rest of your salary aside (ramping up savings into your SIPP or ISA). That way you will know if you have a shortfall. Based on the property rental + pensions + state pension I expect that would be about £21500 before tax assuming a full NI contribution history and maximum weekly state pension. So about 2/3 of your current income.

You don't specifically say if your SIPP income is generated by the portfolio you shared or not (or if your portfolio is in addition). Neither do you say if you are already spending the rental income from your property in France as that adds up to a larger salary. I/we don't need to know the answers to those questions either - but you do.


Hope that helps

midgesgalore

Thank you good for thought.

I was investing £600 pm with HL. City of London, MandS - my sole contrarian share - and Murray Int. So income from Pension and Annuity was being reinvested not spent. But it is a good idea to try and live off an estimated pension income now. So I will up my monthly saving. Have added £100 pm into Vanguard Global Equity Income ( it is difficult getting the correct ref with HL) .

Also, for the wife have started monthly saving £100 into:
Vanguard FTSE UK All Share Index Income
Vanguard FTSE Developed World ex-UK Equity Index Income
Vanguard Global Bond Index Income
These will be in an ISA.

I plan to increase this amount to use the full ISA allocation or top it up with cash this year. But for it to be fully invested in two years ish.

Mine. Nobody has laughed at my selections. One or two have suggested trimming. One or two suggested additions. I think I will hold all for now. But will slowly add more VWRL.

Any thoughts one and all?

[Fairleas]

French flat.
Income from the flat I return to the UK when £ is weak. I do not live off any of the income. Save it as cash. Will invest that as additional monthly Investment.

[Fairleas]

Do I open a SIPP?

If it was most other people I'd say yes, without a doubt. However you are limited of £10kpa gross pension contributions.
https://www.gov.uk/guidance/pension-sch ... -allowance

Do you have enough allowances left to contribute to a SIPP after your existing contributions?

Use your full ISA allowance, consider VCT's and ETF's, spend or give the money away to good causes. The pension route is not the open door for you that it is for most of us.

Thank you for the reply. Tho I must admit I did not understand it all. I read the document you referred to. I must admit I did not understand it all.

I am not investing in any pension other than 1% into NEST. If I was limited to £10k pa surely that may be worth it, even if only for 3 years?

[Fairleas]

Fairleas, I would add one comment if I may, and sorry if it puts a downer on things.

My own Father retired at 65, and had a life changing illness at 69. He certainly isn't enjoying retirement now.

So please think hard about how much you love your job. Maybe you would enjoy the next 3 years more at your studio apartment abroad rather than working?

It is a fine balance, the thought in my mind is always 'what if I run out of money?', but I still aim to retire as early as possible and enjoy life a little.

ATB
Bob

I really appreciate the thoughts. I have recovered from a recent life saving operation. It threw my concentration on investments, focused me on how short life is. Some of my investments accumulation and income in the same fund are a mistake made when i was in recovery. Some of the guidelines on investing I have forgotten and am relearning.

I realise in asking questions here, somebody may blow me out of the water, fine. So far everybody has been helpful.

But I don't want to retire yet. Perish the thought. My job serves the community, I love it, my hobby is my career, and if they stopped paying me now, I would do it for free.

I would consider a month at the flat in France. But I love it where I live, where I work, in fact it doesn't feel like work because it helps people. So job satisfaction is high. What do I do? Well that would be going off thread.

[Fairleas]

You haven't stated what you and your wife's state pension figures will be. If you haven't already done so, you should check your entitlements here: https://www.gov.uk/check-state-pension

Once you know that, you can see how things stand, in terms of the gap (if any) between your current monthly expenditure (which does not sound that high, and should cover a reasonably comfortable retirement) and your likely retirement income.

It there is a gap, you will need to cover that with income drawn from your investments (either from dividends or top-slicing capital gains). There are many different opinions on how to go about that, with varying levels of risk. We know you have some £300K to play with, but it's not clear yet how much income you need that to produce. In your position, I would shape the investment approach differently depending on the size of the gap.

However, from the discussion and figures above, and making some possibly incorrect assumptions, I'd guess your income gap might be relatively small, e.g. £5K or less. In that case, you would only need a ~2% income from your investments. Your existing £100K of mainly income oriented stock market investments could well be producing most of that already. In that case, your income need from the remaining capital is very low, and you should be thinking about this in terms of long term protection.

With it all in cash, it is likely that over the long term, it will lose a lot of value due to inflation, particularly if you need some income from it. So I would look to invest more of it. That said, I personally would still retain a cash buffer of several years' income need. Having enough cash to carry you through a lengthy stockmarket downturn is a wise measure if you can afford it.

For the remainder, I'd suggest investing it with a view to building in further diversification and some degree of capital protection rather than just maximising yield. You might consider adopting some of the following, in addition to your current investments (NB: I'm restricting the list to things I use myself for these purposes):

• Low cost global index trackers (e.g. Vanguard FTSE All-World etc)
• Growth-oriented investment trusts (Your current selection looks fine, but is clearly income-oriented, e.g. F&C, Witan, Scottish Mortgage etc)
• Capital protection oriented ITs (e.g. Personal Assets, Capital Gearing, Ruffer, maybe RIT Capital Partners)
• ZDPs (I use these myself to some extent - they generate a modest but reasonably steady capital growth each year, but no income. They tend to be relatively immune from market falls, although there is still some capital risk.)

Beyond that, there are obviously many other types of investment I don't use / know much about, but might suit your needs, e.g. HYP, P2P lending, REITs, bonds, etc.

Finally, as BaronWuffett has just remarked, markets seem quite high, so you might want to invest your cash pile gradually, even though that is not mathematically optimal in a world where markets tend to rise over time.

Anyway, best of luck, whatever you decide. Do keep us posted as your decision process progresses!

First of all, thank yiu for taking the time to write such a lengthy detailed reply.

Wife's pension £171 mine £165, I was opted out for a period. I am informed that I am unable to top up.

Present dividends pay £2130 pa and are re invested.

Will give consideration to the F&C. Witan etc.

Also, will try to invest gradually.

[Urbandreamer]

Thank you for the reply. Tho I must admit I did not understand it all. I read the document you referred to. I must admit I did not understand it all.

I am not investing in any pension other than 1% into NEST. If I was limited to £10k pa surely that may be worth it, even if only for 3 years?

Damm government doublespeak and tough maths!

Ok, in a previous post you said your income was £300k, or to put it another way £150k above their threshold. Your pension allowance, formally £40kpa is reduced by £1 per two that you earn over £150k until it hits a lower limit of £10kpa. The maths reduced the £40k by £75k so you hit the £10k limit.

You mention 1% into NEST, which ie £3k this year. Hence, yes, you can contribute £7k gross into a SIPP this year. You would not in fact contribute £7k but 0.8 x 7 as it would be automatically topped up by 20%. You would reclaim the remaining tax paid via your tax return (which I think you should also do for your NEST contribution). In the next few years NEST contributions are due to rise meaning that you will have to do the maths every year, or contract out of NEST to simplify the maths.

There is an additional wrinkle. You can carry forward any pension allowance that you didn't use in the last three years. Last year you probably had the same £10k allowance, but previous years pre-dated the taper rules and have larger allowances.

I'm not an expert, nor an accountant so I'd recomend seeking profesional advice. Especially as we are using "round" numbers.

Given what you have said, yes it is worth getting your skates on on sorting out SIPP contributions within the next two weeks. A very valuable year drops off the "carry forward" calculation come the 5th of April.

[forlesen]

Urbandreamer said

Ok, in a previous post you said your income was £300k...

Actually, Fairleas said in his second post:

Salary £35000 grand PA

.
I think he probably means £35000 PA. This is consistent with what he said in a later post:

Currently spending just over 2k a month

If I'm right, the rest of your post needs to be restated.

[Fairleas]

£35000 pa

[Fairleas]

Help!!!
I'm 65. Retire from employment in 3 years. No debts. House paid for. Private pension £300pm Annuity £220 pm. Then its old age pension.
I have approx £100,000 mainly in ITs and Funds, including a few grand in shares. Nearly all dividend paying. In addition I have £200,000 in cash.
Question: Would you stick with one third in stocks and share and two thirds cash?
If not, what adjustment would you make?

I realise I have not bored you with what Investments I have.

Ok,

I'm no expert, but my approach has been to treat pensions as equivalent lump sum, before asset allocation.:
Check UK pension allowance (see link above) - Hopefully ~£8,000 pa, If less, consider buying additional NI years.
Add personal pension and annuity to Pension. As not index linked, I would discount by 50%. So £8,000 + 12 * £250 = £11,000 pa
Convert the into an equivalent lump sum (i.e. how much it would cost to buy the same at current rates). I would guess that 5% is wildly optimistic, so £11,000 / 0.05 = £220,000. For you, this is effectively a bond like investment and has a different risk profile to stocks and shares.

So, your effective total is:
£220,000 pensions.
£100,000 Shares + funds
£200,000 cash
£520,000 total

So you are currently ~ 80% Cash / pensions.

Based on what others recommend I would say that 40 to 50% bonds / pensions is more reasonable for long term growth, maybe higher to protect capital..

£220,000 is 42%, but is not accessible. I would add upto £40,000 as readily available cash (instant / 30 day notice ISAs) gives a safety buffer, and takes you to ~50% pensions / Bonds / Cash.

That leaves £260,000 to invest in shares / funds / ETFs etc.

Retired income,
£11,000 pensions / annuity (Closer to £14,000 initial, but not fully index linked).
Then assume 3% withdraw rate form the remaining portfolio: £3000,000 * 0.03 = £9,000 pa.
So, at the moment, I would estimate an index linked income of £20,000 pa.

Other things to consider:
Your wifes investments / pensions.
Is as much as possibly in tax shelters (if not, can you both pay maximum into ISA / SIPP over the next 3 years and live of none tax protected savings.)
29 individual investments at ~£3,500 each is a lot to keep track of (but possibly better posted to the portfolio review board).
Market timing / drip feed (are we at the top of a bubble)?

I have admitted defeat with share picking and gone 100% passive. I now have 6 funds in my ISA and SIPP, and a mirror 6 funds in my company pension.
Have a look at your management fees and see if you can reduce some costs.

I would recommend reading "Smarter investing" by Tim Hale and browsing the monevator blog.


All, I my opinion, but I would be interested to read any comments / corrections. I'm planning to write up my asset allocation now all my reballancing and transfers have settled.

Regards

Buzzz

Thank you. Still working through your post. Interesting way of including the Pension.

[JohnB]

Are you drawing any pension yet? If not, why not open a SIPP and put lots in, so that with tax relief and your work pension contributions you get to £40k. You'd get the tax relief and at your age can start drawing any time, so its free money. If you are drawing pensions, you are much more restricted.

I'd not have so many small allocations. The paperwork on lots of 5k investments must be onerous.

That's an awful lot of cash doing not much.