Help With 10 Year Retirement Plan Please

[GorillaSteve]

Good afternoon Lemons, long time lurker first time poster!

I know I'm late, but the time has come to plan my retirement. I have just sold an investment property that I had always designated as my pension fund and now I'm looking to direct the proceeds into SIPPs and ISAs. I've been doing lots of research and thinking, and I'd just like to air my thoughts to see if some helpful discussion could be had.

I'm 53, own home, 40k outstanding remortgage at 1.4% until 2027. I'm caring for my mother who has dementia and I seemed to accidentally retire a few years ago. I have a passive income of 60-70k from royalties that could increase going forward or a slim chance it could disappear completely. At some point I will start a business of some sort, so I have no intention of staying out of work.

I'm looking to invest for a 10 year-ish time frame with no preset targets for drawdown. I'd be looking to take a dividend income while leaving the principal largely intact to leave to my kids.

Royalty income is paid into a limited company and I will be investing circa 3k per month into a SIPP to reduce corporation tax liability. I will use cash in equal measure to pension contributions to live on, as that is already tax paid.

I have 24k in a Vanguard SIPP, currently cash as I got out of Global All Cap in November 21. 20k in an ISA and 18k in another SIPP (cash). 43k in Premium bonds (emergency fund) and just over 100k in cash.

I'm concerned about the state of the markets for an initial deployment of investment, they seem overvalued and there are plenty of macro issues and black swan events that could easily send them into a tail spin.

I was thinking of investing into a basket of REITs (AEW, BBOX, EPIC, THRL) through the SIPP and ISA with income reinvested and then drip the cash back into the Global All Cap fund with Vanguard. Going forward I would be depositing the 3k/month into the REITS, or in the event of a spectacular crash I would add to the Vanguard position.

After April I would deposit another 20k into the ISA and either self select some companies as a small portfolio to play with, or simply add to the REIT position.

I realise I would be very exposed to commercial property, but as I've been involved in property rental for most of my working life it feels familiar and I am convinced of the long term value and appreciating yield.

Sorry for the long post, and if I've been too vague or naive but I'd appreciate your comments before I commit!

[tacpot12]

Hi GorillaSteve, it's not entirely clear what your timeline to draw on your pension, but I have assumed that your plan to start and run a business is how you will support yourself until you need to start drawing on your pension, and that you will start drawing on your pension in around 10 years time (so aged 63).

You haven't mentioned your state pension entitlement. You should try to get a forecast of your state pension from the online service for this at gov.uk. You will likely find that you have some entitlement for a pension starting at age 67. You can factor this into your planning.

Any business you start may have a value when if it can be sold as a going concern, but we should ignore that possiblity until it is clear that you will be able to sell it. The proceeds would be 'icing-on-the-cake'.

Your situation is quite unusual as your income comes into a Limited company. Paying into a SIPP via company contributions to avoid PAYE, NI and Corporation Tax is almost certainly the best route for you. You are thinking along the right lines selecting investments that automatically reinvest the income they produce, e.g. the REITs you suggest. Personally, I would be nervous about investing mostly in one sector (Commercial Property). I have retired and have my retirement portfolio invested in dividend producing funds from pretty much all sectors apart from physical commodities. (I have about 5% of my portfolio in a commercial property fund. I also own an residential property that is rented out, so have exposure to that sector as well.) I've seen the commercial property sector be quite volatile, and it often seems to move in ways that are out of sync with equity markets, but you feel you know this market and that has to count for something. I would think that dripfeeding some cash into the Vanguard All Caps fund would give you some balance, and ultimately it's a personal decision about where is likely to be best to invest.

Moving funds from a General Investment Account to an ISA as fast as the ISA limits (and the new lower CGT limits) will allow is a sensible strategy.

The UK market is not overvalued, whereas the US market certainly is. My favoured measure of whether a market is overvalued or not is the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, sometimes called the Shiller PE ratio. I use this to review which markets might justify more investment.

I think your plan is pretty sound and that you can crack on with it. I wrote my plan down on paper (actually a MS-Word document) to remind me when I needed to review or move funds from each account.

FYI: My average dividend return is about 3.8% pa over the last 5 years (it didn't change much over the pandemic), and there was a time (about 18 months ago) when the portfolio was worth 12% more than I had paid for it!

Hope this helps.

[GorillaSteve]

Thanks for your comprehensive reply Tacpot!
By the age of 67 I will have contributed enough for a full state pension, whatever that will be worth at the time.

I am somewhat reluctant to make an entry at this point, as you say, the FTSE is seeing new highs while the SP500 is still down some 20% from its peak. This is mitigated though by the weak pound. It seems tricky to find good value in this scenario. This is one of the reasons I am attracted to REITs, as the whole sector seems to be languishing far below NAV. Thanks for the Shiller PE tip, I'll certainly look into it.

It's difficult to know when I will be needing to drawdown my pension as I am currently in carer limbo. Mum seems to be coping well at the moment, but there may come a time when she needs residential care. Thankfully I am making a reasonable living online at the moment, hopefully this will continue and remove any urgency to drawdown.

I have a complicated and unpredictable life, it's an 'evolving situation' as they say.

[Dod101]

On the investment front I would not be using a portfolio of REITS just because you are familiar with them. You need a diverse range of investments. You could simply use Vanguard in one form or another or as I might well do, use say 6 or so investment trusts. You get instant diversification and a full range of different investments, for income or growth, and specialists in different geographies or, usually large general trusts, investing worldwide. They can be held in ISAs or not as you wish.

Obviously use ISAs and subscribe to the maximum every year.

I would not worry about where the FTSE is, just invest. You will never time the market correctly except by luck or chance. Time in the market and all that, not timing the market.

Dod

[gpadsa]

I have 24k in a Vanguard SIPP, currently cash as I got out of Global All Cap in November 21.

prescient

My favoured measure of whether a market is overvalued or not is the Cyclically Adjusted Price-to-Earnings (CAPE) ratio, sometimes called the Shiller PE ratio. I use this to review which markets might justify more investment.

I have got the US one bookmarked and keep an eye on it, it didnt occur to me to consider the ratio for other markets too? https://www.multpl.com/shiller-pe

gpadsa

[JohnW]

‘I'm concerned about the state of the markets for an initial deployment of investment, they seem overvalued and there are plenty of macro issues and black swan events that could easily send them into a tail spin. ’

Can they be overvalued? All the combined knowledge and wisdom that is available to the market through those trading have set the value to what it is. Would ‘people’ set the price as overvalued? Would they not move their money to better valued investment opportunities? I don’t know.

‘sometimes called the Shiller PE ratio. I use this to review which markets might justify more investment. ’

If this were a successful strategy to get better than market returns, wouldn’t we all know an active fund using this strategy that had a long history of good returns?

‘the FTSE is seeing new highs ’

If a market constantly went up, which we’d like, wouldn’t it always be at a new high? Markets don’t go up that way, but does waiting until they’re off new highs give better returns? I’d be interested to see the evidence.

[tacpot12]

...

‘sometimes called the Shiller PE ratio. I use this to review which markets might justify more investment. ’

If this were a successful strategy to get better than market returns, wouldn’t we all know an active fund using this strategy that had a long history of good returns?
...

No, because the CAPE ratio is a measure used to compare markets. Any fund claiming to be better because it used CAPE would have to be able to move investments between different markets - it would be a 'Global' fund, but would only be invested in the markets where the CAPE suggested better returns were available. I don't think the problem is that this couldn't be a good strategy, but is that no-one has figured out how to market such a fund.

The CAPE ratio has no interest for a fund manager whose fund only invests in one market, but might be relevant to a 'global' fund manager who is trying to tweak the allocation of assets between different markets.

[Adamski]

Hi GorillaSteve, interesting post!

In terms of your investment objectives what would i like to see, and what is the purpose of your investing? Is it to maximize gains, or are you wanting to preserve capital, or a combination of both? Is it primarily dividend income, or total returns?

Personally, investing mainly in one sector is speculative and risky. Over a long time frame, 10 - 30 years, stock picking and/or actively managed funds is unlikely to beat the market. Also, retail investors, are on the whole bad at investing. So picking some trackers, and/or wealth preservation funds, maybe some commodities as well is (IMO) generally a better idea (for most people).

You're paying £3k pm into a SIPP. FTI - "You can contribute 100% of your annual income to your SIPP each tax year, up to the maximum annual allowance of £40,000. This annual allowance includes personal contributions, employer contributions and tax relief." So I assume you're salary taking out of the company is at least £36k? If you dont have earnings you can only contribute £3600 p.a. inc tax relief.

Looking after a parent can be tough. Have you looked at attendance allowance and carers allowance? The first is easier to get, the second you need to do 35 hours.

Bets of luck, and welcome to the forum. Cheers, Adam

[JohnW]

I don't think the problem is that this couldn't be a good strategy, but is that no-one has figured out how to market such a fund.

Investing Dept: ‘We have a great strategy of using CAPE in different equity markets; we’ve backtested it, retested it ‘out of sample’ and have a winner.’
Marketing Dept: ‘Don’t think we can sell that one. Try something else.’
You reckon?

[ursaminortaur]

Hi GorillaSteve, interesting post!

In terms of your investment objectives what would i like to see, and what is the purpose of your investing? Is it to maximize gains, or are you wanting to preserve capital, or a combination of both? Is it primarily dividend income, or total returns?

Personally, investing mainly in one sector is speculative and risky. Over a long time frame, 10 - 30 years, stock picking and/or actively managed funds is unlikely to beat the market. Also, retail investors, are on the whole bad at investing. So picking some trackers, and/or wealth preservation funds, maybe some commodities as well is (IMO) generally a better idea (for most people).

You're paying £3k pm into a SIPP. FTI - "You can contribute 100% of your annual income to your SIPP each tax year, up to the maximum annual allowance of £40,000. This annual allowance includes personal contributions, employer contributions and tax relief." So I assume you're salary taking out of the company is at least £36k? If you dont have earnings you can only contribute £3600 p.a. inc tax relief.

Looking after a parent can be tough. Have you looked at attendance allowance and carers allowance? The first is easier to get, the second you need to do 35 hours.

Bets of luck, and welcome to the forum. Cheers, Adam

The OP has a passive income of £60-70k in royalties and royalties count as relevant earnings.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#qualifying

Relevant UK earnings means any one or more of the following types of income:

employment income, such as: pay, wages, bonus, overtime, or commission - but only if taxable under Section 7(2) Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) - so including:

the part of a redundancy payment above the £30,000 tax exempt threshold in section 403(1) ITEPA 2003. The first £30,000 of the redundancy payment is not classed as employment income so does not count here. But any amount on top of the £30,000 threshold is classed as employment income and so it is also relevant UK earnings. In making this analysis, care is required not to confuse usual wages or pay, pay in lieu of notice or holiday pay, with the redundancy payment when such elements are bundled into a final payment.
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royalties or other sums paid regarding patent use and charged to tax under section 579 ITTOIA 2005 (intellectual property)
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https://www.legislation.gov.uk/ukpga/2005/5/section/579

579 Charge to tax on royalties and other income from intellectual property
(1)Income tax is charged on royalties and other income from intellectual property.
(2)In this section “intellectual property” means—
(a)any patent, trade mark, registered design, copyright, design right, performer's right or plant breeder's right,
(b)any rights under the law of any part of the United Kingdom which are similar to rights within paragraph (a),
(c)any rights under the law of any territory outside the United Kingdom which correspond or are similar to rights within paragraph (a), and
(d)any idea, information or technique not protected by a right within paragraph (a), (b) or (c).

[GorillaSteve]

Just to clear up a few points about how my income is distributed:
Income from royalties is paid solely to the limited company and is the only category of income for this company (there could be VAT issues this year which I will have to consult The Revenue about).

An employer can pay into an employees pension up to 40K pa irrespective of the salary drawn by the employee. So I will be drawing 12k pa so that I pay no tax but will keep my NI contributions up to date.

Pension payments are classed as a business expense, as are salaries, so the corporation tax liability of the company will be significantly reduced.

Cash generated from the sale of investment property is subject to CGT, which has been paid. So it makes sense to use this as income pro rata with the pension contributions of the company. So I am effectively using the property sale proceeds to contribute to my pension, just in a tax efficient manner.

[jimleigh61]

I don't think you draw funds from your pension at age 53, but I may be wrong.

Regards
Jim

[GorillaSteve]

Thanks Adam and Dod,
In response to your queries, I am looking at a 10 year investment period in which I want the pot to grow as much as possible. After 10 years, I'll see what my situation is.

I understand both of your points about not trying to time the market and the need for diversification, but I see 10 years as a relatively short time.

My biggest concern with front loading the pension with investment trusts and index trackers is that I have been following macro economics and the markets a lot more closely over the past year or two and I am feeling bearish. This is why I am thinking of front loading with the high yielding and discounted REITs and then dripping (or pound cost averaging) into other investment vehicles.

I am in no great rush to start with the funds held at Vanguard as the cash there is returning ca.3.1% in interest.

If I initially invest the 38k into a basket of REITs that would represent 18% of my total pot so far (I may be able to continue investing after the proceeds from the property sale have depleted). I think I would be happy with that level of allocation at this point.

From there I will hang fire with deploying any more until I have reassessed my Gung-Ho attitude and done considerably more reading and research!

My mum has got attendance allowance, but as carers allowance is means tested I would not be eligible.

Thanks for the feedback so far and for making me give my head a wobble before diving in!

[Hariseldon58]

JohnW adds some sensible comments.

After 30 years of doing this I can safely say that nothing is predictable, surprising things happen, a lot !

What seemed good ‘rules’ or guides to market behaviours, with long records can suddenly stop working and it almost seems inevitable that this happens.

CAPE has poor predictive value, it may be interesting but don’t rely on it. This article is informative https://www.evidenceinvestor.com/the-shiller-cape-10-how-to-use-it-not-abuse-it/

REITs do not behave like direct property investments, they are equity, they contain leverage and costs, why concentrate on one small sub sector of the market ? Buy them all !