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Shelford pension review 2018

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Shelford
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Shelford pension review 2018

#166292

Postby Shelford » September 14th, 2018, 12:37 pm

My annual review of my retirement portfolio is well overdue.

As a number of you were kind enough to appreciate the one last year, here is my 2018 update. You can find out more about the history and 'philosophy' behind the retirement portfolio here: https://www.lemonfool.co.uk/viewtopic.php?f=56&t=4636&p=46690&hilit=Shelford#p46690

This post will be more of interest to readers who are approaching retirement, or who have recently done so, and my 'lessons learned' are more relevant to them possibly than those at earlier stage of their investment journey. Though see my 'regrets' below.

With two years to go before retirement, my concerns now are increasingly less about capital appreciation, & more around preservation, reallocation of assets/diversification, sustainability of income, and tax optimisation.

I attach at bottom the portfolio breakdown by capital and income. The fixed income portion is overstated insofar as it includes two small company pensions. For convenience, I'm treating these as 'fixed income'. In practice, they will grow with RPI.

Some personal context

I’m 2 years off retirement. I'm mortgage-free other than a sum against a BTL. I’m married, but my wife is younger than me and anticipates working a bit longer. I have children whose longer term needs are provided for.
I am no longer actively paying into my SIPP, due to the lowering of the tax threshold to £1m from April 17. I am continuing to fund my ISA however over next 3 years, up to the annual limit of £20K.
Anticipated method of taking the pension in first few years: drawdown or UFFPLS or mixture of both
Platform provider: Hargreaves Lansdown
Annual platform fees: c £300 (0.03% of portfolio value).

Changes since last review

Value of portfolio: has increased by just under 8% over the year to £1.1m. Within this, the SIPP increased by 6% to £981K. Over the past 8 years, average annual growth before pension contributions has been 11% per year.

I'm OK with the lower growth rate in overall, given the reallocation away from UK equities to other asset classes including corporate bonds, renewables and property.

Current issues on my mind

Cash: I'm building a reserve fund to ensure that when I take an income from the portfolio there's a cushion to absorb any stock market falls. Clearly there is a wide range of acceptable 'cushions'. I would feel comfortable with an immediate access fund of six months' income, roughly £25K in my case, and 18 months worth in longer term fixed rate accounts, so a round £100K in cash. This sounds (and also feels...) a bit high given my emphasis on equities to date, but is probably sensible in the next turbulent year or so of post-Brexit Britain.

Asset allocation: new cash (invested into my ISA as my SIPP is knocking on the LTA) is going into investment trusts largely with the aim of ensuring a well-diversified portfolio, and little hassle in retirement.

Information: I use Hargreaves Lansdown. The habit of saving over the past 10-15 years has been a great one, but now I need to get my head round the fact I will shortly no longer be accumulating wealth, but spending it. I am probably spending too much time thinking about the value of the fund overall. Too much time checking it on the good app the platform provider gives. Perhaps I should delete it from my phone! I suspect I'm not the only person approaching retirement who has experienced this mild form of angst.

Tax: when I come to take my pension, I have the option of taking income from two smaller DB company pensions. I will need to work out whether it will be better to dip into these early (I will retire at 55), or withdraw from my SIPP. I suspect working out the best tax implications for me may be beyond my limited ability to understand the arcane rules of HMRC. Advice welcome.

Regrets

I've had a few. But not many. I've never regretted wrenching away my pension to run it myself - the best financial decision I've ever made. Frankly, a muppet could have done a great job with my capital over the past decade given the benign conditions. But given it's a reasonable performance, I'm glad that any benefit in terms of reduced fees has been to my benefit, rather than an over-paid adviser.

I have regretted not being more beady-eyed about the LTA limit. The combo of Brexit and Trump caused a big bump in the capital value of my portfolio, so I expect to be paying a higher tax rate on a portion of the pension in retirement. I appreciate this limit is not a concern for many readers. It is surprising however how many middle-class professionals will be affected longer term - any headteacher or GP for instance with 20 years service investing a sensible level of their income in their pension - we are not talking Bill Gates wealth levels here.

I have regretted not maxing out the ISA limt (and PEP before). I am now. Whilst I did use these vehicles, I have cashed them out in the past to buy a house etc. With hindsight, I would have retained them, and borrowed more at the ultra low level of interest rates. However at the time I was not to know that Lehmans would go bust and UK mortgage rates would go to a 200 year low, so I shouldn't cry over spilt milk.

Portfolio breakdown

Portfolio capital and income splits are as of 1 May 2018. Individual investments beneath. Since then, I've sold down around 90K of my UK equities (I'll detail these in May 2019 update), in favour of cash and other non-equity investments. The UK equities referred to below largely comprise a HYP (see my recent post on the HYP strategy board).

Summary portfolio breakdown:  capital value |           |     |                                                                                          | Current income breakdown |     
Asia Equities | 71,134 | 5% | | 3,861 | 6%
UK Property | 73,684 | 5% | | 4,427 | 6%
XUK Property | 28,968 | 2% | | 649 | 1%
Infrastructure | 73,040 | 5% | | 3,928 | 6%
Fixed Income | 545,213 | 36% | | 25,776 | 38%
Commodities/Mining | 53,453 | 4% | | 2,301 | 3%
Europe Equities | 97,682 | 6% | | 5,755 | 8%
US Equities | 17,892 | 1% | | 403 | 1%
UK Equities | 394,760 | 26% | | 16,501 | 24%
International Equities | 104,105 | 7% | | 4,188 | 6%
Private equity | 10,446 | 1% | | 57 | 0%
Renewables | 10,291 | 1% | | 618 | 1%
Cash | 42,399 | 3% | | 0 | 0%
| | | | |
Portfolio value | 1,523,067 | | | 68,464 | 100%




| Current holding | % of portfolio
HFEL | 59,441 | 3.9%
iShares plc DJ Asia/Pacific Select Dividend 30 | 11,693 | 0.8%
Cash | 42,399 | 2.8%
Blackrock commodities | 28,056 | 1.8%
EAT | 49,380 | 3.2%
Henderson Diversified | 29,556 | 1.9%
Vanguard UK Gilt | 24,376 | 1.6%
CQS New city HY Fund Ltd | 51,288 | 3.4%
Royal London Extra Yield | 34,816 | 2.3%
iShares corporate bond | 48,802 | 3.2%
Invesco IPE | 46,644 | 3.1%
DB Pension no. 1 | 87,500 | 5.7%
DB Pension no. 2 | 125,000 | 8.2%
iShares VI plc Global High Yield Corp Bond GBP Hedged UCITS ETF | 48,807 | 3.2%
Ecclesiastical PIB | 10,281 | 0.7%
Skipton BS PIB | 8,520 | 0.6%
Coventry Building Society PIB | 8,240 | 0.5%
Nottingham Building Society PIB | 12,500 | 0.8%
Vanguard EM bond ETF VEMT | 8,883 | 0.6%
HICL | 43,584 | 2.9%
Sequoia Economic Infrastructure | 14,993 | 1.0%
Middlefield Canadian | 14,463 | 0.9%
Murray International | 50,953 | 3.3%
Vanguard Funds plc FTSE All World High Dividend Yield | 53,152 | 3.5%
Blackrock mining | 25,397 | 1.7%
Woodford Patient | 10,446 | 0.7%
Princess Private Equity | 48,302 | 3.2%
John Laing Envrionmental Assets | 10,291 | 0.7%
UK Equities | 394,760 | 25.9%
Standard Life UK property | 30,096 | 2.0%
British Land | 13,888 | 0.9%
Regional REIT | 14,700 | 1.0%
AEW REIT | 15,000 | 1.0%
iShares plc MSCI USA Dividend IQ | 17,892 | 1.2%
FTSE EPRA property | 28,968 | 1.9%

Itsallaguess
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Re: Shelford pension review 2018

#166322

Postby Itsallaguess » September 14th, 2018, 1:37 pm

Great post Shelford.

It's fantastic to see someone planning their (relatively) imminent retirement with such detail, and I'm sure I won't be the only one here that'll be very interested to see how it goes from here into the 'implementation phase' of your plan.

Personally speaking, I'd especially be interested to hear about how your 6-months + 18-months cash/near-cash position plays out, in relation to adequacy over the first couple of years.

Of course much of that will have to do with external conditions at that time, and will clearly be variable for others at different times and with perhaps different requirements, but all the same, this is an area where much thought will go for most of us contemplating similar plans at some point, and detailed real-life scenarios are rare, so any future reports that cover this aspect, and whether you'd change anything when in 'looking-back-mode', would be most welcome, I'm sure....

For others reading this post, Shelford has mentioned his HYP review on the HYP Practical Board, so for the sake of completeness here's a link to that thread too -

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=13688&p=166273#p166273

Cheers,

Itsallaguess

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Re: Shelford pension review 2018

#166328

Postby Alaric » September 14th, 2018, 1:55 pm

Shelford wrote:Tax: when I come to take my pension, I have the option of taking income from two smaller DB company pensions. I will need to work out whether it will be better to dip into these early (I will retire at 55), or withdraw from my SIPP.


SIPP and Company Pensions have the same tax rules. What you may need to investigate is which option of taking the DB pension early, leaving it deferred until your normal retirement date, or even taking a transfer value to the SIPP suits. You may find that the Trustees of the DB scheme are inclined to de-risk, therefore may offer you a transfer value pitched to entice you to relieve them of the longevity and investment risk. You may also find that even if you don't want to transfer, that the reduction in income for taking benefits early, rather than waiting to retirement age or nearer retirement age is somewhat brutal.

Pendrainllwyn
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Re: Shelford pension review 2018

#166339

Postby Pendrainllwyn » September 14th, 2018, 2:27 pm

Thanks for sharing Shelford. I am also a couple of years off retirement so read with interest.

You look well diversified with some interesting holdings. I have also been thinking of preservation and have been looking for a quality high yield fund to invest in and haven't found one I like yet. I see you have a few and will take a closer look. For Ecclesiastical, is that Preference Shares or a PIB? I own the former and can't find the latter.

Your US Equity allocation is low, presumably because you think the market looks over-valued. May well be the case. For me I think the US has a disproportionate share of top quality companies so am taking a long-term view and staying in.

Best of luck,
Pendrainllwyn

OLTB
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Re: Shelford pension review 2018

#166345

Postby OLTB » September 14th, 2018, 2:55 pm

Cracking post Shelford - gives us all hope of getting there!

I'd be interested to hear next year what your expenses were like during the year and whether you spent more or less than you thought. My thinking is that without work getting in the way, retirement is like a permanent weekend and guess when most of my money is spent...

Cheers, OLTB.

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Re: Shelford pension review 2018

#166374

Postby Raptor » September 14th, 2018, 4:09 pm

OLTB wrote:Cracking post Shelford - gives us all hope of getting there!

I'd be interested to hear next year what your expenses were like during the year and whether you spent more or less than you thought. My thinking is that without work getting in the way, retirement is like a permanent weekend and guess when most of my money is spent...

Cheers, OLTB.


Except when something unexpected comes along. Car is 10 years old with 48K on the clock, gearbox problems, cost £1800. Car worth between 2.5 and 3K. Not a problem, reserves can pay for the repair but now I am going to save for a replacement next year and I do not do "cheap". My outgoings are about £1100 a month and I still work part-time 16 hours (stops me going up the wall). State Pension due next May. My "portfolio" brought in over £14K last year and I expect that to be higher this financial year. Old company pension kicked in many years ago as well. Was (up till the gearbox) saving over £250 a month. I am spending about what I expected but have learnt that a bigger reserve for the unexpected is needed. I have been re-investing divis in my S&S ISA and SIPP, but to pay for the car will now pay away the S&S ISA to join my trading account.

Good looking "portfolio" Shelford.

Raptor.

Shelford
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Re: Shelford pension review 2018

#166408

Postby Shelford » September 14th, 2018, 5:55 pm

Thanks for your supportive comments.

Cash reserve: most advisers will say we should keep six months cash as an emergency reserve for the imploding gearbox situation you mention. Easier said than done though, and it’s taken me to age 53 to achieve this.

Ecclesiastical is a PIB. More here: https://www.hl.co.uk/shares/shares-search-results/e/ecclesiastical-ins-office-8.625-non-cum?tab=security_details

If buying a Preference share, be careful of the price spread: can be large. There is little online sensible advice I can find on these perhaps because they are exceptionally dull. Part of the attraction of course.

Quality non equity high yield investment trust? Good luck. Royal London above has been good to me so far and relatively cheap in terms of cost. Check out CQS, GHYS and VHYL. And also the John Barron income portfolio in IC for ideas.

I subscribe to his subscription website but at 170 per year it isn’t cheap. But then, neither is ignorance, and it’s a lot less expensive than an adviser.

mickeypops
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Re: Shelford pension review 2018

#166421

Postby mickeypops » September 14th, 2018, 6:43 pm

Just posting to say that you can get a 7 day free trial to John Baron’s web site without having to pre-load your credit card details.

flyer61
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Re: Shelford pension review 2018

#166526

Postby flyer61 » September 15th, 2018, 9:42 am

Fascinating Shelford and well done!

Slightly older than you and trying to do something similar. A few observations.

How did you value DB1 and DB2? like you I have two small DB pensions worth about 11k per year with excellent uplifts attached. I like to think of them as Government bond proxies.

I am not sure about holding lots of cash. Like you I use HL, though I have started keeping a beedy eye on just how much having a 7 figure SIPP is costing me in fees/fx etc. I have decided to stay fully invested and use the RL High yield bond fund as a type of cash holding. ie if I need cash I sell some, spare cash goes back in again when available from dividends etc.

Have you looked at going all out to ensure your partner has a decent sized pension? Given the personal allowance is pushing 12K this is an area I would be working on.

Many of the best Companies are in the US, many FTSE 100 companies are not much kop as long term investments and give you little diversification. (standing by for incoming!)

Have a look at individual companies in Terry Smith's fund or Nick Train's fund for worldwide ideas. Also have a look at TS smaller companies fund when it comes out. It will not be small companies! Some of them will be huge in UK investors eyes!

Good luck.

Shelford
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Re: Shelford pension review 2018

#166915

Postby Shelford » September 17th, 2018, 12:59 pm

Thanks Flyer61 for your comments. In response:

-putting a capital value on a DB pension is obviously an academic exercise. I used 25X the projected income, on the assumption for example that to deliver £8500 per year (the projected income from them both) would take capital of £212500K, assuming a withdrawal rate of 4%. In practice, to deliver RPI increases YOY on this sum, it is possible that a bigger sum woudl be required. Either way, it's a prudent assumption.

RL HY bond: yes, with the caveat that there are risks around corporate bonds and reliance on individual fund managers. My personal risk profile dictates a mix of fixed rate cash accounts (3 months/12 months), with the goal of 2 years worth of spending in cash by 55. In practice I have found that I'm not brilliant at predicting one-off expenses (viz garden wall falling over; replacement fan belt etc), so realistically I'll probably end up with a buffer of 18 months of cash.

Partner's pension: good point. My support so far has been to ensure we maximise her ISA allowance, which we've done for the past four years.

US presence: with hindsight, I've been underinvested in US shares. Given US shares represent 50%+ of total global capitalisation, then I need to review this. The high premia on US equities is giving me pause for thought. Small caps: yes, worthy of further research.


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