The Lemon Fool

So a bit of background first, I am 42 and work in the Civil Service, I am on course for a good defined benefit pension from work however I am tied to the retirement age being dictated for me which at the moment is 67. I have a reasonable (£120k) SIPP from previous jobs, but as my main pension is the civil service one I will not be adding to this.

What I would like to do is build up the SIPP to bridge between when I want to semi-retire (60) and when the CS pension kicks in (67) which I think is achievable, I would also like to take a lump sum at 57 which will allow me to pay off any outstanding mortgage. Bad maths suggests if I obtain a return of 7% per year I should be able to take 25% out for to clear my mortgage, and take about £30,000 a year. These are all at todays prices and I know inflation would mean £30,000 now would not have the same purchasing power as it will in 20 years time, however with the mortgage paid off and kids long moved out I think I should be fine.

So how do I achieve 7%+ pa?

For the past 12 years I have been averaging a 7.2% return, however I know it's pure luck, I have as many terrible picks as winners. I would like to move from my current portfolio of 27 holdings to a passive portfolio which all I have to do is rebalance periodically, if I was to pick an index tracker I would almost certainly do better than trying to pick the market myself. I know this is an investing forum but I hope passive strategies are just as welcome.

Doing some research and I effectively have two options, a Global Tracker or S&P 500, obviously one is very much US focused, one is global. Hindsight would say the S&P500 should have been the one to pick recently but having all your eggs in one basket, even a basket like the US is more risky than a global fund. In that case is it then just picking which ever has the right balance of lowest fees and highest reputation? Is there a resource out there that compares the fees of common indexes? I am currently with HL which I know is more expensive than other platforms (I am paying 0.45% at the moment where as AJ Bell for example charges 0.25%)

Also my research suggests that I should not have a pure equities based approach, the old formula of 100 minus age as bonds etc, although this seems to have been replaced with 120 minus age as people are living longer they need more growth. This means a 78:22 split of equities and bonds.

To keep things simple lets pick two from the same institution:

LEGAL & GENERAL INTERNATIONAL INDEX TRUST
LEGAL & GENERAL GLOBAL INFLATION LNK BOND INDX

Would it be as simple as selling everything and just buying those two at the 78:22 ratio, the yield on the bonds at the moment is 2.9%, is that because historically interest rates have been low so this is reflected in the "safer" bond market?

Is there any preceding wisdom to do anything differently that a two stock approach? Should I be adding a third class like gold etc?

I know it's a big ask, so if you cant comment on the specifics, are there good resources to further my research?

TIA!

Treat your DB pension as the bond cover, go all in a All World Tracker.

insertwittynamehere wrote:Also my research suggests that I should not have a pure equities based approach, the old formula of 100 minus age as bonds etc, although this seems to have been replaced with 120 minus age as people are living longer they need more growth. This means a 78:22 split of equities and bonds.

To keep things simple lets pick two from the same institution:

LEGAL & GENERAL INTERNATIONAL INDEX TRUST
LEGAL & GENERAL GLOBAL INFLATION LNK BOND INDX

Would it be as simple as selling everything and just buying those two at the 78:22 ratio, the yield on the bonds at the moment is 2.9%, is that because historically interest rates have been low so this is reflected in the "safer" bond market?

Is there any preceding wisdom to do anything differently that a two stock approach? Should I be adding a third class like gold etc?

I know it's a big ask, so if you cant comment on the specifics, are there good resources to further my research?

TIA!

OK, there is no perfect answer to your question. Though global trackers have a very large allocation to the US.

The equity/bond mix comes out of modern portfolio theory and is commonly called CAPM. It's entirely theoretical but can be back tested against history. However your 80/20 split is just one idea. Another is Harry Brown's Cockroach portfolio. Equal weights of equities. bonds, cash and commodities.
There are plenty of choices.

Personally I am NOT a fan of bonds, but that is me. For the last 30 years I've been close to 100% equities. That has changed and I now have an allocation to wealth preservation funds, gold and bitcoin. My split is 27% sort term or safe, 52% medium/long term, 17% Adventurous. I no longer work, which shows how much acceptance of risk is personal. I've 5 years to wait for my pension.

Visit this site and select "Portfolio Templates". Ignoring bitcoin this will give you a selection of the most popular portfolio models. The site is actually intended to allow you to model the effect of adding bitcoin to one of the popular portfolio models or a portfolio of your own making.

You are limited to what you can hold in a SIPP and when you can access it. That said the tax advantages are huge.
You don't however have to just use one wrapper/method. I use to invest in ISA's as well as pension.

It sounds like you have done most of the hard work already!

With the HL charges, like most platform charges, the devil is in the detail. 0.45%, but capped at (IIRC) £200 for the SIPP for shares and ETFs. But funds are uncapped. So, choosing a tracker fund will cost you more than a tracker ETF.

If you do your sums again, but with a real return figure rather than the nominal 7% (perhaps a real 4%), you will get a better idea of where you will be at your target date.

You may find that Tim Hale's excellent book Smarter Investing, helps you to flesh out your plan.

Defined benefit pension.....can you buy added years?

monabri wrote:Defined benefit pension.....can you buy added years?

For that matter, does it not have early retirement options? These would be for reduced benefits.

JohnB wrote:Treat your DB pension as the bond cover, go all in a All World Tracker.

This is pretty much our approach. The DB income is as guaranteed as can be, and if it is adequate to cover the basic needs the SIPP can be more adventurous.

However, what we have done is take our DB schemes early. The reduction varies between schemes, but generally circa 4% reduction for each year taken early. This means a breakeven point circa age 84, or longer if the pension puts you over a tax threshold.

With this method you massively reduce the drain on the SIPP or other investments, meaning 100% equities and a cash buffer is a less rsky option.

You mention semi retirement - if this is Part Time then the reduced DB should amply cover the gap. Some schemes allow you to return to work at the same place with a max number of hours, but relying on that still being an option in 20 years might be more risky than the nvestments.

Paul

insertwittynamehere wrote:So a bit of background first, I am 42 and work in the Civil Service, I am on course for a good defined benefit pension from work however I am tied to the retirement age being dictated for me which at the moment is 67. I have a reasonable (£120k) SIPP from previous jobs, but as my main pension is the civil service one I will not be adding to this.

42 is a bit keen to be deciding you will stay in the CS until 67 so keep your options open. Why not add to your £120k SIPP? Or are you keeping that SIPP separate and starting another for you 2 stock portfolio? Like some other posters I'd agree that DB pensions replaces the job of bonds, though do check the details re inflation linking some have maximums. As DB and SP are both out at 67 for now and who knows what by the time you get there I would look at what the knockdown is for taking DB early. I know a scheme where taking at 55, the current earliest, knocks off 50%. A place I worked used to annually ask the workforce for volunteers for early retirement/redundancy as part of their staff reduction management. I know several people from there who were able to get the full pension at around 60 without reduction as part of business efficiencies. How is CS with restructuring, do they ask for volunteers?

Another idea, if you wanted to accumulate money to settle the mortgage paying into a SIPP/ISA why not over pay the mortgage now which will give you more disposable income later on to bulk up income provisions? It's an idea comes up from time to time. Being mortgage free when you're at an earnings peak might give a better return than keeping the debt and hoping investments beat it. Of course there's a tax opportunity with a pension and 25% lump sum.

If you wanted to move to semi retirement, part-time, taking some of the pension early and supplementing that with ISA investments is a way to fund your life while a reduction in working commitments reduces your income when you're still inclined to fritter money away on yourself. ISAs have no conditions on when you can take the money and while you accumulate are away from dividend income and capital gains taxes.

insertwittynamehere wrote:Would it be as simple as selling everything and just buying those two at the 78:22 ratio,

The big bang approach, could be good, or you could sell some each year and rebalance into your new plan. You'll know which version suits you best.

Alaric wrote:

monabri wrote:Defined benefit pension.....can you buy added years?

For that matter, does it not have early retirement options? These would be for reduced benefits.

No option to retire early on the scheme I have joined

kempiejon wrote:
42 is a bit keen to be deciding you will stay in the CS until 67 so keep your options open.

I don't think I will stay in the CS until I am 67, which is why I want to use my SIPP as a bridge between when I leave and when I will be able to draw a CS pension

kempiejon wrote:
Why not add to your £120k SIPP? Or are you keeping that SIPP separate and starting another for you 2 stock portfolio?

I think the best bang for my buck would be paying into the DB pension rather than my CS one, I wish I could do both but it's not an option as it stands

JohnB wrote:Treat your DB pension as the bond cover, go all in a All World Tracker.

This makes sense, I had been thinking I could take a higher risk approach as worse case I don't retire early and just wait until the DB pension kicks in

Boots wrote:It sounds like you have done most of the hard work already!

With the HL charges, like most platform charges, the devil is in the detail. 0.45%, but capped at (IIRC) £200 for the SIPP for shares and ETFs. But funds are uncapped. So, choosing a tracker fund will cost you more than a tracker ETF.

If you do your sums again, but with a real return figure rather than the nominal 7% (perhaps a real 4%), you will get a better idea of where you will be at your target date.

You may find that Tim Hale's excellent book Smarter Investing, helps you to flesh out your plan.

I thought 7% wasn't too ambitious a target

insertwittynamehere wrote:

Boots wrote:It sounds like you have done most of the hard work already!

With the HL charges, like most platform charges, the devil is in the detail. 0.45%, but capped at (IIRC) £200 for the SIPP for shares and ETFs. But funds are uncapped. So, choosing a tracker fund will cost you more than a tracker ETF.

If you do your sums again, but with a real return figure rather than the nominal 7% (perhaps a real 4%), you will get a better idea of where you will be at your target date.

You may find that Tim Hale's excellent book Smarter Investing, helps you to flesh out your plan.

I thought 7% wasn't too ambitious a target

Sorry, I wasn't meaning 7% was too high a rate.

What I meant was to remove the inflation element from it so what you are left with is the return you would actually get to enjoy - i.e. your spending power in today's terms. This is called in the terminology a Real Return, it's not meant to imply that it is more "realistic".

I use an estimate for future inflation of 3%, hence 7% - 3% = 4%.

I hope that helps.

Passive investment strategies such as index funds can be very effective and offer a wide spread of risk. Choosing between the global tracker and the S&P 500 depends on your comfort level with risk and your target strategy. Asset allocation between stocks and bonds is important to achieve a balance between growth and capital preservation.