Advice re. cash pot to be drawn down over 6 years

[mc2fool]

Me and Mrs Monabri have paid 2 years in so far with year 3 to be paid sometime later this year.

Save it until March next year, or even the year after depending on which year you are paying for.

You can pay class 3 NICs, at the same rate, up to 2 years after the relevant tax year. So, e.g., you have until 5-Apr-2020 to pay the class 3 NIC for the current tax year, 2017/18. So you might as well save it and gain whatever interest you can earn until then.

(You can actually pay 6 years in arrears, but the cost goes up after 2. And, exceptionally, as part of the transition to the new state pension, some people can catch up back to 2006. https://www.gov.uk/voluntary-national-i ... /deadlines)

[monabri]

I was keen to "bag the deal" before some bright spark decides to change the rules/reduce the benefit !

[toofast2live]

Yes, Monabri, very VERY sensible. I’m always amused in every budget mentioning ISAs that "they continue to remain tax free this year" - or words to that slimey effect. Imagine when red Jeremy and his sidekick hoist the red flag over No. 10.

[hiriskpaul]

In general terms, yes individual high yield prefs/bonds are more risky than a fund because of the lack of diversification.

If you are looking to invest for a specific period, you can choose maturity dates to suit. That removes interest rate risk, "just" leaving default risk. Over a six year period, you could choose maturities in 6,5,4,3,2,1 years. That then guarantees in money terms what you get back, subject to none of the bonds defaulting. A bond fund or ETF would likely be run to maintain a fixed outstanding average term, so is vulnerable to an interest rate spike shortly before your planned cash in date.

You could do the same thing with Gilts, but returns will be somewhat lower.

Agreed, cash flow matching was what I had in mind, with just a small allocation to a few higher yielding bonds, held to maturity, to enhance returns.

There is another standard way of doing this with a bond fund or portfolio whereby the average duration of the bond fund is matched with the average duration of the liabilities, but that approach requires regular rebalancing between the fund and cash to keep the durations aligned. Not really worth considering for a 60k drawdown over 6 years, especially as the return on the bond fund is likely to be similar to FSCS protected term deposits once costs are taken into consideration.

[mc2fool]

I was keen to "bag the deal" before some bright spark decides to change the rules/reduce the benefit !

Err, well "bagging the deal" earlier than needed doesn't make any difference, as they can change the rules/reduce the benefit at any time in the future anyway, even after you've paid it, and if you're worried about that then that's an additional reason to wait and see, at least while it's the same cost and you can be earning interest on the money.

After all, you'll be less than happy if you make, say, the 2018/19 voluntary contribution in 2018/19, rather than waiting until March 2021, and then they go and change the rules in 2020 so that it's worth less (or doesn't count at all). Of course, they may change the rules/reduce the benefit after the deadline anyway, but that'll be less peeving than if they do it before then and you've already coughed up when you didn't need to.

In any case, with the exception of dropping the triple lock increases down to only national earnings increases, it'd all require an act of parliament to change (including the ability to pay NICs 2-6 years in arrears) so there'd be plenty of warning.

[mickeypops]

Everyone, I've had some terrific responses to my enquiries and some great ideas.

I will definitely pay up Mrs MP's NICs to get to here to the max SP iver the next four years.

I'll look into some kind of bond ladder to see me over the next six years. I've no experience though of buying individual bonds or prefs and I remain slightly nervous about this.

Many thanks again.

MP

[Alaric]

I've no experience though of buying individual bonds or prefs and I remain slightly nervous about this.

Most if not all of the usual Brokers offer a list of what are termed "Retail Bonds". They are often only available by phone. You select a year of maturity and decide whether you trust the company to continue to pay out. You then buy for the price quoted and watched the annual or semi-annual interest coupon roll on, followed by pay back when it matures.

[hiriskpaul]

Agree with Alaric, prefs trade like normal shares and many retail bonds, such as the ones I mentioned, can be traded online at some brokers. Others may require you to deal over the phone. One quirk to watch out for with bonds, but not preference shares, is that you are usually required to pay accrued interest when you purchase in addition to what you pay to acquire the bonds. For example, Provident Financial 6% 27/09/21 is currently trading at £101.75 for each £100 nominal. So if you buy £10,000 nominal you would pay £10,175. But in addition to that, you have to pay accrued interest to compensate the seller for interest from the next interest payment that will not otherwise be received. The next interest payment is due on 27 March and will be £300, so most of the interest payment amount belongs to the seller. The amount actually works out at £268.51 (162 days interest).

You will receive the £300 interest payment, so in fact you will only have earned £31.49 interest by the payment date and this is the amount used for tax purposes. The seller is liable for tax due on the £268.51. What tax is paid, if any, will obviously depend on the personal circumstances of the buyer and seller. You don't need to work out the actual accrued interest as your broker will do that for you and it will appear separately on the deal slip.

[Parky]

Me and Mrs MP are retiring at the end of next month. We will live on some DB pensions, the dividends from our IT portfolios in our SIPPs, plus, in good time, the state pension.

I will get the SP in about 3.5 years and the Mrs in 6 years. Now. we've allocated a separate lump sum (around £60K) to "pay" ourselves the equivalent of the SP from day 1, drawing down from the pot over the required periods, hopfully moving seamlessly into receiving the SP propoerly at the approriate points.

I could just hold this cash in the bank, but it baulks a little to know that it will steadily lose some value due to the interest received being less than inflation. I'm not adverse to a little risk with it, so I'm looking for suggestions as to how to invest it during this drawdown phase with a view to doing a little better than just holding onto cash.

My initial thoughts were one third in cash, one third in defensive absolute returns funds and one thirds in low-volatility strategic bond funds.

I'd welcome any suggesitons from the forum.

Many thanks

MP

mickeypops,
For many years I have been doing what you are wanting to do by investing in Zero Dividend Preference shares, which pay no income but rise by a fixed amount each year to redemption. Yields at the moment for those providing data on aicstats are between 2.4% and 4.1%.
These beasts are much less volatile than ordinary shares, and tend to increase in value fairly smoothly.
I just sell what I need each year and if the capital gain is less than the annual allowance ( about £11000 ) there is no tax to pay (and in my case no tax return to fill in).
You can create a ladder of these for different redemption dates and avoid paying trading costs and dealing spreads when they mature.
One slight drawback is that they are less common than they used to be, and it is difficult to find good data for some of them.
Since the scandal involving the collapse of a few of these shares many years ago, this strategy has served me well . It's a pretty safe, if unexciting, way to invest.

[mickeypops]

Thanks Parky, I will certainly look into these.

[Alaric]

For many years I have been doing what you are wanting to do by investing in Zero Dividend Preference shares, which pay no income but rise by a fixed amount each year to redemption. Yields at the moment for those providing data on aicstats are between 2.4% and 4.1%.

I'm not sure that they are readily available to retail investors, but there are also what are termed "Gilt Strips". These are just the maturity part of Government Bonds. Returns would be much lower though. You could get indexed income by buying a ladder of Indexed Government Bonds. For recent issues, the coupon is derisory and they are priced so you make a loss in inflation adjusted terms. In other words you still get back more than you paid, but prices will have risen faster.

[Parky]

ZDPs are listed shares and available on investment platforms. I use Alliance Trust Savings as they have a flat fee rather than a percentage.