Asset Allocation + Strategy

[TimR]

My (SIPP + ISA) asset allocation is 70% Equity ETFs (£660K) / 30 % Fixed Income (£132 cash ISAs + £50K IS15 ETF).. I am 63 years old and have just retired with DB pension paying 20K pa (Pension is index linked which also pays same amount as a widows pension) .. My state pension will start in just under 3 years time.. We live in the North West house worth 430 K and mortgage is fully paid off .. My wife (Age 55) still works part-time and earns about 12 k pa..(She has about 10 small pension pots worth in total about £60 K.

(We have a 15 year oid daughter at home and also have a 24 year old daughter who works in nursing at an NHS Hospital and living in rented accommodation near East Dulwich, London who made need some help in the future as she doesn't have much left over to save after rent and living costs are paid.(Like many young people he is currently enjoying the London Scene)

The 70 % equity allocation on a SIPP + ISA platform is:-

USA ----- 42 % ----- VUSA -- + ----(about 1/4 of it is in ISP6)
UK ------- 13% ----- VUK ---+ ---- (about 1/4 of it is in VMID)
Euro ----- 20% --- -VERX -- + ---- (about 1/4 of it is in DFE)
Japan ----- 8% --- - VJPN
Asia Pac --- 7% --- - VAPX
EM ------- 10% --- -VFEM

What do readers think of my equity and other allocations. Is the equity allocation in my SIPP & ISA too high given my financial position ?

I am also thinking of selling the small mid cap ETFs (ISP6 & DFE) as they are expensive and to reinvest in to the large Cap ETFs to generate more dividend?

Tim R

[StepOne]

It would be good to know your spending requirements during retirement - i.e. do you have a safety margin and how much is it? For me personally a 20k DB pension plus 8k state pension would be all my essential spending taken care of, so the SIPP would all be excess and I would not be concerned with the equity allocation.

StepOne

[hiriskpaul]

Looks all good to me Tim. I hold far less equities than you, but don't have a DB pension. My global equity split is similar to yours, but a bit less in the UK and 3% in Canada. I target US 40%, Europe 20%, UK 10%, EM 10%, Japan 10%, Asia/Pacific 7%, Canada 3%.

If you want to replace your US small cap fund, you could do that in your SIPP and hold a US listed ETF instead. That would boost your dividend as there would be no withholding tax to pay (assuming your SIPP provider supports this) and you would pay lower admin fees. For example, Vanguard S&P Small-Cap 600 ETF VIOO has an expense ratio of only 0.15% compared with 0.4% for the LSE listed iShares ETF you hold. I hold the Vanguard Small-Cap Value ETF VBR, with an expense ratio of just 0.07%, but this is not so concentrated in small caps as the S&P fund. It does pay more income though if you would prefer that, with an historical yield of 1.92% compared with 1.26% for VIOO.

Instead of VUSA, I would suggest either the US listed VOO or the whole of market VTI in your SIPP, again assuming your SIPP provider can receive US dividends without the 15% withholding tax.

As you are underweighting USA, you are sort of overweighting smaller caps anyway, so could probably do without DFE, which is expensive (0.58% TER + rebalancing costs as this is not cap weighted). In my SIPP, to complement VBR, I hold Vanguard FTSE All-World ex-US Small-Cap ETF (VSS). Expense ratio is only 0.13%, which is very low for a small cap fund. Historic dividend yield is 2.31%, helped by the low running costs. DFE is very expensive and 25% is in UK stocks as well, probably overlapping VMID. Personally I would get rid of it.

[TimR]

It would be good to know your spending requirements during retirement - i.e. do you have a safety margin and how much is it? For me personally a 20k DB pension plus 8k state pension would be all my essential spending taken care of, so the SIPP would all be excess and I would not be concerned with the equity allocation.

StepOne

Thanks for the reply. As we have a pretty modest lifestyle the 20K DB pension plus 8K state pension plus wife's 12K salary would cover all of our essential spending. I suppose working on a 3% withdrawal rate I could take approx. 20K pa from my stocks ISA + SIPP and if I need more income. I have considered introducing some other asset classes into the SIPP and stocks ISA for diversification.

TimR

[TimR]

I target US 40%, Europe 20%, UK 10%, EM 10%, Japan 10%, Asia/Pacific 7%, Canada 3%.

Thanks for the reply. I see you are underweighting US as well but given the high valuation of the US market I was considering reducing the US allocation further to 38% and increasing Europe & EM a few percent.

Do you think the 3% you hold in Canada is worth the fee ?

Tim R

[hiriskpaul]

Do you think the 3% you hold in Canada is worth the fee ?

Quite probably not! Certainly has not done me any favours. Over the last 5 years, the Canadian market is up about 40% in pound terms with income reinvested. That compares with something like 115% for developed markets as a whole (e.g. iShares SWDA). The Canadian market has performed even worse than the FTSE 100, which is up about 50% with dividends reinvested. The Canadian market is heavy in financials, energy and basic materials, which has not helped. Canada is an expensive place to invest for UK investors as well. A cheap way would be to hold a Vanguard ETF listed in Canada, which costs only 0.05%, but they are not reporting funds so capital gains taxed as income. My SIPP provider does not offer them either.

[TimR]

Instead of VUSA, I would suggest either the US listed VOO or the whole of market VTI in your SIPP, again assuming your SIPP provider can receive US dividends without the 15% .

Unfortunately I am on the Best Invest Platform and I have a legacy deal to match the charging structure for (shares, ETFs and IT's) to be very similar to Hargreaves Landsdown's charges for shares. Best invest do not offer any US listed shares. (Best Invest platform is not as comprehensive as Hargreaves Landsdown). Do you think the saving in withholding tax is worth going to the expense of moving platform's to get access to US listed shares. However, I do have a separate Trading account with H-L so I could buy VOO or VTI on H-L outside my ISA and SIPP without moving my main Best Invest ISA (£450K) and SIPP (200K) or I could open a new ISA just for US listed shares ?

Tim R

[hiriskpaul]

You can only eliminate withholding taxes on US shares/ETFs if you hold them inside a SIPP. So no point moving your ISA or buying in a normal dealing account. You cannot buy US listed ETFs in an ISA anyway. Whether it is worth moving your SIPP depends on other factors, such as how fast you are drawing down and whether you are likely to run into LTA problems. However, a £100k investment in a US listed ETF such as VOO, inside a SIPP, would generate approximately £300 more dividends per year than holding VUSA in the SIPP. This easily covers the HL annual fee of £200. HL do not charge drawdown fees either, unlike most other providers.

A drawback with holding US listed ETFs in an HL SIPP are the higher dealing fees, so you need to take these into account as well, but if you just bought £100k of VOO and held indefinitely the extra fee would be about £350, so you would start to see savings in a little over 1 year.

[TimR]

However, a £100k investment in a US listed ETF such as VOO, inside a SIPP, would generate approximately £300 more dividends per year than holding VUSA in the SIPP. This easily covers the HL annual fee of £200. HL do not charge drawdown fees either, unlike most other providers.

A drawback with holding US listed ETFs in an HL SIPP are the higher dealing fees, so you need to take these into account as well, but if you just bought £100k of VOO and held indefinitely the extra fee would be about £350, so you would start to see savings in a little over 1 year.

I suppose I could move the SIPP over to HL and leave the ISA at Best Invest (or open a Second SIPP with HL) and put all of my USA exposure with HL..
By the way, do you know of any other SIPP platforms that allow you to hold US listed shares ?

Tim R

[hiriskpaul]

However, a £100k investment in a US listed ETF such as VOO, inside a SIPP, would generate approximately £300 more dividends per year than holding VUSA in the SIPP. This easily covers the HL annual fee of £200. HL do not charge drawdown fees either, unlike most other providers.

A drawback with holding US listed ETFs in an HL SIPP are the higher dealing fees, so you need to take these into account as well, but if you just bought £100k of VOO and held indefinitely the extra fee would be about £350, so you would start to see savings in a little over 1 year.

I suppose I could move the SIPP over to HL and leave the ISA at Best Invest (or open a Second SIPP with HL) and put all of my USA exposure with HL..
By the way, do you know of any other SIPP platforms that allow you to hold US listed shares ?

Tim R

I try to concentrate US shares in my SIPP as far as practical. Over 50% of my wife's SIPP is in VTI.

A competitor to HL, which also properly handles US dividend withholding taxes in SIPPs is Youinvest. Reasonably competent (HL are better though IMHO), but they annoyed me when they radically changed their charges and did not allow free transfers out for those made significantly worse off as a result. I just had a dealing account with them, which I have now closed. I don't know which other providers handle US investments properly, but not all do.

The risk in moving is of course that the charges for the broker you move to may subsequently be radically changed, making you far worse off than if you stayed put!

[TimR]

I try to concentrate US shares in my SIPP as far as practical. Over 50% of my wife's SIPP is in VTI.

My wife is currently not paying into a pension and doesn't have a SIPP but has about 10 small legacy pension pots worth in total about £60 K held at Standard Life, L&G, AVIVA ,etc from her former intermittent employment history, (she was thinking of cashing some of the smaller ones in) ..
I suppose we could open up a SIPP for her with H-L as I understand HL are good at 'transferring in' other pension pots and also invest an amount equal to her current 12K part-time salary in this new HL SIPP. Then use her proposed new SIPP to build up some of the US listed share exposure in her new HL SIPP (if she agrees). I could then reduce the US exposure in my Best Invest SIPP and ISA. ?

[TimR]

As a follow on from my previous question I would like to ask If I swapped Vanguard VUA for ishares CSP1 would that solve the US withholding tax deduction problem as no dividends are paid out ? (or even SWDA if I wanted a simple all world portfolio)

I could then just sell down shares in say yearly lots if income is required

TimR

[TimR]

Excuse my mistake above - I meant If I swapped Vanguard VUSA for ishares CSP1 would that solve the US withholding tax deduction problem ?

[hiriskpaul]

You cannot avoid US withholding tax by buying an accumulating fund. Any UK listed ETF, OEIC or IT will be subject to 15% dividend withholding tax and it makes no difference whether the dividend is paid or reinvested. The only way to avoid the tax is to invest directly in US shares/ETFs through a registered pension scheme, such as an HL or Youinvest SIPP.

Actually there is another way - by investing in Berkshire Hathaway shares! This works because Buffett does not pay dividends.

Your suggestion about moving your wife's myriad pensions to HL is a good one. HL make the process painless. The only difficulty you might run into is if there are any special features that may attach to a particular pension plan you want to transfer. If so, HL may insist on you taking independent financial advice about the plan first.

[Hariseldon58]

The portfolio mix is pretty similar to my own, except I chose not to hold Japan and the results have been very satisfactory.
I also chose to get rid of SPY4 and ISP6 and iShares Canada because of the costs, but in all honesty these minor changes with small holdings will not significantly change the outlook of your portfolio either way, yet I understand the temptation to feel one should "do something" , to temper such instincts unless something major happens I restrict portfolio adjustments and contributions to just twice a year and I feel this reduces unnecessary trading and tinkering. I did add a position in VVAL Global Value ETF from Vanguard, with a small value bias this has been encouraging and I think it compliments the large world passive indices.

Like HighRiskPaul I have no pension apart from a state pension in a few years and have lived off an 80-90% equity portfolio for 10 years on a total return basis quite happily. Masterly inactivity works very well !

[TimR]

I target US 40%, Europe 20%, UK 10%, EM 10%, Japan 10%, Asia/Pacific 7%, Canada 3%.

Have you always targeted US at 40% (which is underweight the MSCI compared to weightings) or recently since the USA became fully valued.

[TimR]

Like HighRiskPaul I have no pension apart from a state pension in a few years and have lived off an 80-90% equity portfolio for 10 years on a total return basis quite happily. Masterly inactivity works very well !

I consider my DB pension to be perform the same function of Bonds in a portfolio.

With an 80-90% equity portfolio what do you hold for the 20 - 10 %. High quality Gov bonds.

[Alaric]

Like HighRiskPaul I have no pension apart from a state pension in a few years and have lived off an 80-90% equity portfolio for 10 years on a total return basis quite happily. Masterly inactivity works very well !

Recent changes to the rules on dividend taxation show the political risk of living off potentially taxable income. That said, if the assets are in an ISA, that seems safe for the near future anyway.

[hiriskpaul]

I target US 40%, Europe 20%, UK 10%, EM 10%, Japan 10%, Asia/Pacific 7%, Canada 3%.

Have you always targeted US at 40% (which is underweight the MSCI compared to weightings) or recently since the USA became fully valued.

I have had that target allocation for about four and a half years. I am not intending to vary it according to valuation. If I did I would have much less in the US and more in EM, Europe and the UK. I have not checked it, but I suspect my chosen allocation has probably underperformed the FTSE World Index, but the performance is probably better than I would have achieved if I tried to regularly adjust according to CAPE or some such

[hiriskpaul]

Like HighRiskPaul I have no pension apart from a state pension in a few years and have lived off an 80-90% equity portfolio for 10 years on a total return basis quite happily. Masterly inactivity works very well !

Recent changes to the rules on dividend taxation show the political risk of living off potentially taxable income. That said, if the assets are in an ISA, that seems safe for the near future anyway.

What is the alternative to living off potentially taxable income?