Portfolio Review and Advice Sought for UK Investor

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IsuzuIse
Posts: 4
Joined: Tue Mar 20, 2018 7:37 pm

Portfolio Review and Advice Sought for UK Investor

Post by IsuzuIse » Wed Mar 21, 2018 5:33 pm

I am based in the UK. I have a portfolio in the high six figures GBP. It is split between my employer's pension fund and my self-selected portfolio in a fund supermarket. Detailed breakdown below.

High-Level Information
Emergency funds: I keep three month's worth of expenses in an instant access savings account.

Debt: None other than short-term credit card debt. I never pay interest on it. Mortgage paid off.

Tax Filing Status: Married Filing Separately. (My wife's income is too high for us to benefit from the UK's married couple's tax advantage.)

Tax Rate: 20%

State of Residence: UK

Age: Mid forties

Desired Asset allocation: 60% stocks / 40% bonds (but open to suggestions)

Desired International allocation: 100% of stocks

Breakdown of assets
Within pension fund (74.5% of all assets)
24.8% UK stocks
22.1% International stocks
4.9% UK gilts
4.2% International gilts
2.5% Property funds
6.6% Multi-asset funds
8.5% Absolute return funds
0.9% Cash

Within ISA (UK tax-free wrapper, 18.8% of all assets)
1.4% Vanguard Global Bonds IE00B50W2R13 Charge: 0.15%
2.1% Vanguard S&P 500 UCITS ETF IE00B3XXRP09 Charge: 0.07%
9.2% Vanguard Developed World Ex-UK GB00B59G4Q73 Charge: 0.15%
2.7% Vanguard Developed Europe Ex-UK IE00BKX55S42 Charge: 0.12%
3.4% Vanguard USD Corporate Bond IE00BZ163K21 Charge: 0.12%

SIPP (UK tax-free personal pension)
2.1% Vanguard Developed World Ex-UK GB00B59G4Q73 Charge: 0.15%

Taxed trading account
1.7% Vanguard EUR Corporate Bond IE00BZ163G84 Charge: 0.12%

2.6% UK inflation-linked gilt (held directly)

0.3% Non-emergency cash

We own our apartment outright but we need to live in it so I don't count it as an asset.

Contributions - Regular
My employer has a generous pension contribution scheme, so I contribute the maximum tax-free annual allowance to that (GBP40k). I also pay a few thousand into my ISA once or twice a year.

Contributions - One-offs
1. I am expecting a tax refund to arrive in the SIPP in the next few months, adding (0.25*2.1%) = 0.5% to the fund value.
2. The UK gilt is soon to mature, so I'll need to work out where to put the money.
3. Similarly, come the next Financial Year in a few weeks, I'll be selling the "Vanguard EUR Corporate Bond" fund in my taxed trading account and moving it into my ISA. Which fund to spend the money on remains open.

Considerations
1. I don't have control over the pension fund asset allocation (naturally).
2. I think 25% of my investments in UK stocks is more than enough, so I want to avoid UK stocks in the parts of my portfolio I can control.
3. I strongly subscribe to the Boglehead philosophy. (Despite only discovering this site recently, I have read fairly widely on the subject, although I still have much more to learn.)
4. I don't invest for a hobby. I want to buy and hold.
5. My wife and I keep our finances completely separate so I've not included any joint information.
6. I have a moderate tolerance for risk. If there was a crash just as I was hoping to retire then I expect I'd be OK with working a few more years while things recovered.
7. The UK Government website tells me that from 67 I'll be eligible for a state pension of GBP8k, on top of what my savings will provide me with.

Goals
1. My goal is to be able to retire as early as possible on a comfortable income. The minimum age for me to be able to access my pension fund in the UK is 55. The word "able" is important here: I may decide to continue working because I enjoy it.
2. I expect to spend much of my retirement time away from the UK (in a random variety of countries), so I am not concerned hedging currency movements against GBP.
3. I don't have any dependants, so no college funds or legacy to worry about. My wife has her own occupational pension.

Questions
1. What do you think of this portfolio overall? Any comments welcome.

2. I've noticed that many of the above funds (specifically "Vanguard EUR Corporate Bond", "Vanguard S&P 500 UCITS ETF", "Vanguard Developed Europe Ex-UK" and "Vanguard USD Corporate Bond") are Income funds rather than accumulation funds. Can anyone suggest similar alternative index funds that are accumulators? I am happy to go beyond the Vanguard stable for suitable low-cost index products.

3. I am concerned that I am weighted too heavily on stocks. Whether that's the case partly depends on what the "Multi-Asset Funds" in my pension fund really contain.
3.1 Can anyone comment on my stock:bond balance in general?
3.2 Does anyone have any insight into what the enigmatic asset class "Multi-Asset Funds" might contain?

4. If I were to correct my stock:bond ratio, which fund would people suggest I consider putting money into? Ideally it would be diversified, international, low-cost, accumulation and un-hedged.

5. I have a feeling that the non-pension portfolio is too complex. It seems to me that I should be able to restrict myself to a very few (2-4?) widely diversified accumulator funds: maybe "Vanguard Developed World Ex-UK" for stocks and "Vanguard Global Bonds" for bonds. However, the latter is currency hedged (which I don't need), 66% Government bonds and doesn't exclude the UK (to where I have plenty of bond exposure through my pension fund). Does such a simplification make sense? I am happy to do periodic re-balancing.

Any insight very much appreciated.

IsuzuIse

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nedsaid
Posts: 10488
Joined: Fri Nov 23, 2012 12:33 pm

Re: Portfolio Review and Advice Sought for UK Investor

Post by nedsaid » Sun Mar 25, 2018 3:46 pm

IsuzuIse wrote:
Wed Mar 21, 2018 5:33 pm
I am based in the UK. I have a portfolio in the high six figures GBP. It is split between my employer's pension fund and my self-selected portfolio in a fund supermarket. Detailed breakdown below.

Nedsaid: Welcome to the Bogleheads forum. I am pleased that our neighbors across the pond participate in this forum. Good to hear that indexing is catching on in the United Kingdom.

High-Level Information
Emergency funds: I keep three month's worth of expenses in an instant access savings account.

Nedsaid: My standard advice is to have 6 months of living expenses in liquid savings and to work that up to a year as you approach 50. Don't know how it is in the UK put here in the US you get to be a lay-off target as you get past 50. I know this is ultra-conservative advice but my more recent life experiences have vindicated that advice.

Debt: None other than short-term credit card debt. I never pay interest on it. Mortgage paid off.

Tax Filing Status: Married Filing Separately. (My wife's income is too high for us to benefit from the UK's married couple's tax advantage.)

Tax Rate: 20%

State of Residence: UK

Age: Mid forties

Desired Asset allocation: 60% stocks / 40% bonds (but open to suggestions)

Nedsaid: This is a good allocation for most investors. For a 45 year old, this is a good but conservative allocation. Most Bogleheads would probably recommend 70% to 75% stocks for someone your age. I am fine with 60% stocks. Really, you have to take your personal situation into account. Since you have a guaranteed pension, you can afford to be a bit more aggressive.

Desired International allocation: 100% of stocks

Nedsaid: I take this to mean outside of the UK. Fortunately for you, the UK has had a very good stock market. My understanding is that it has performed better than the US. For you, probably an All-World Stock Index fund would fit the bill. Your UK investments would be whatever their market weight would be in a World Stock index.

Breakdown of assets
Within pension fund (74.5% of all assets)
24.8% UK stocks
22.1% International stocks
4.9% UK gilts
4.2% International gilts
2.5% Property funds
6.6% Multi-asset funds
8.5% Absolute return funds
0.9% Cash

Within ISA (UK tax-free wrapper, 18.8% of all assets)
1.4% Vanguard Global Bonds IE00B50W2R13 Charge: 0.15%
2.1% Vanguard S&P 500 UCITS ETF IE00B3XXRP09 Charge: 0.07%
9.2% Vanguard Developed World Ex-UK GB00B59G4Q73 Charge: 0.15%
2.7% Vanguard Developed Europe Ex-UK IE00BKX55S42 Charge: 0.12%
3.4% Vanguard USD Corporate Bond IE00BZ163K21 Charge: 0.12%

SIPP (UK tax-free personal pension)
2.1% Vanguard Developed World Ex-UK GB00B59G4Q73 Charge: 0.15%

Taxed trading account
1.7% Vanguard EUR Corporate Bond IE00BZ163G84 Charge: 0.12%

2.6% UK inflation-linked gilt (held directly)

0.3% Non-emergency cash

We own our apartment outright but we need to live in it so I don't count it as an asset.

Contributions - Regular
My employer has a generous pension contribution scheme, so I contribute the maximum tax-free annual allowance to that (GBP40k). I also pay a few thousand into my ISA once or twice a year.

Contributions - One-offs
1. I am expecting a tax refund to arrive in the SIPP in the next few months, adding (0.25*2.1%) = 0.5% to the fund value.
2. The UK gilt is soon to mature, so I'll need to work out where to put the money.
3. Similarly, come the next Financial Year in a few weeks, I'll be selling the "Vanguard EUR Corporate Bond" fund in my taxed trading account and moving it into my ISA. Which fund to spend the money on remains open.

Considerations
1. I don't have control over the pension fund asset allocation (naturally).
2. I think 25% of my investments in UK stocks is more than enough, so I want to avoid UK stocks in the parts of my portfolio I can control.
3. I strongly subscribe to the Boglehead philosophy. (Despite only discovering this site recently, I have read fairly widely on the subject, although I still have much more to learn.)
4. I don't invest for a hobby. I want to buy and hold.
5. My wife and I keep our finances completely separate so I've not included any joint information.
6. I have a moderate tolerance for risk. If there was a crash just as I was hoping to retire then I expect I'd be OK with working a few more years while things recovered.
7. The UK Government website tells me that from 67 I'll be eligible for a state pension of GBP8k, on top of what my savings will provide me with.

Goals
1. My goal is to be able to retire as early as possible on a comfortable income. The minimum age for me to be able to access my pension fund in the UK is 55. The word "able" is important here: I may decide to continue working because I enjoy it.
2. I expect to spend much of my retirement time away from the UK (in a random variety of countries), so I am not concerned hedging currency movements against GBP.
3. I don't have any dependants, so no college funds or legacy to worry about. My wife has her own occupational pension.

Questions
1. What do you think of this portfolio overall? Any comments welcome.

2. I've noticed that many of the above funds (specifically "Vanguard EUR Corporate Bond", "Vanguard S&P 500 UCITS ETF", "Vanguard Developed Europe Ex-UK" and "Vanguard USD Corporate Bond") are Income funds rather than accumulation funds. Can anyone suggest similar alternative index funds that are accumulators? I am happy to go beyond the Vanguard stable for suitable low-cost index products.

Nedsaid: I looked up the terms Accumulator Funds and Income Funds on the Morningstar website. Accumulator funds allow you to reinvest the income generated by the funds with no charge. Income funds distribute to you all the income derived from the fund investments. These are actually share classes of the same funds. I would recommend that you choose the Accumulator share class for whatever stock or bond (gilt) funds that you buy. You want the reinvestment of dividends and interest, at least until you retire.

In the United States, you just buy the fund. If you want Income, tell the fund company to give you the fund distributions in cash. If you want reinvestment or accumulation, tell the fund company to reinvest the distributions. The term Accumulator Funds and Income Funds seems to be a UK and European term, that terminology really isn't used here.

ETFs are a little different animal. Normally, they just distribute to you in cash their capital gains and dividend distributions. At my brokerage, in my retirement accounts, I can reinvest ETF capital gains and dividend distributions at no charge. In a taxable account, they charge $1 per transaction. The fees would vary depending upon the brokerage company you work with.

I would also focus on your stock/bond mix for your portfolio. Pretty much stocks are primarily for growth of capital though they do generate income through dividends. Bonds are there for safety and for income. The younger you are, the more stock heavy you should be.

3. I am concerned that I am weighted too heavily on stocks. Whether that's the case partly depends on what the "Multi-Asset Funds" in my pension fund really contain.
3.1 Can anyone comment on my stock:bond balance in general?
3.2 Does anyone have any insight into what the enigmatic asset class "Multi-Asset Funds" might contain?

Nedsaid: Target Date Retirement funds, Target Risk funds(conservative, moderate, aggressive), and even balanced funds would fall into this category. Target Date Retirement funds get more conservative over time, Target Risk funds and Balanced funds keep a relatively stable asset allocation over time. A Multi-Asset fund is any fund that owns different asset classes. The main asset classes are stocks, bonds, and cash. Such funds will sometimes venture into Real Estate, Commodities, and the so-called alternative investments.

4. If I were to correct my stock:bond ratio, which fund would people suggest I consider putting money into? Ideally it would be diversified, international, low-cost, accumulation and un-hedged.

5. I have a feeling that the non-pension portfolio is too complex. It seems to me that I should be able to restrict myself to a very few (2-4?) widely diversified accumulator funds: maybe "Vanguard Developed World Ex-UK" for stocks and "Vanguard Global Bonds" for bonds. However, the latter is currency hedged (which I don't need), 66% Government bonds and doesn't exclude the UK (to where I have plenty of bond exposure through my pension fund). Does such a simplification make sense? I am happy to do periodic re-balancing.

Nedsaid: Check and see if the Morningstar X-Ray feature works with European investments. Pretty much, you enter in the ticker symbols and number of shares for each investment. Hit the button and Morningstar will tell you such things as Stock/Bond allocation, Domestic/International, the credit quality and average maturity of your bonds. This is a great way to analyze your portfolio. This is a free service but Morningstar won't save your portfolio, you have to re-enter everything every time you want the X-Ray, unless of course you are a subscriber. You could also do with, but with less detail, with a spreadsheet.

Any insight very much appreciated.

IsuzuIse
A fool and his money are good for business.

magneto
Posts: 952
Joined: Sun Dec 19, 2010 10:57 am
Location: On Chesil Beach

Re: Portfolio Review and Advice Sought for UK Investor

Post by magneto » Mon Mar 26, 2018 10:10 am

To quote :-

"Considerations
1. I don't have control over the pension fund asset allocation (naturally).
2. I think 25% of my investments in UK stocks is more than enough, so I want to avoid UK stocks in the parts of my portfolio I can control.
3. I strongly subscribe to the Boglehead philosophy."


In your shoes would ignore the pension fund allocations.
As observed they are out of direct control, and the pension fund geographical weightings might in any event change over the years ahead.
So as noted perhaps concentrate on that which can be controlled?

UK Stocks today represent about 6% of Global Stocks.
Personally as a UK investor comfortable with UK at anything between 10% and 20%.
Valuations are driving towards the 20% at present.

Other : look at Bond durations
'There is a tide in the affairs of men ...', Brutus (Market Timer)

IsuzuIse
Posts: 4
Joined: Tue Mar 20, 2018 7:37 pm

Re: Portfolio Review and Advice Sought for UK Investor

Post by IsuzuIse » Thu Apr 05, 2018 4:51 pm

Many thanks to Nedsaid and magneto for your valued advice. That is plenty for me to ponder and act upon.

Thanks again,
IsuzuIse

Valuethinker
Posts: 36322
Joined: Fri May 11, 2007 11:07 am

Re: Portfolio Review and Advice Sought for UK Investor

Post by Valuethinker » Fri Apr 06, 2018 2:51 am

IsuzuIse wrote:
Wed Mar 21, 2018 5:33 pm
I am based in the UK. I have a portfolio in the high six figures GBP. It is split between my employer's pension fund and my self-selected portfolio in a fund supermarket. Detailed breakdown below.

High-Level Information
Emergency funds: I keep three month's worth of expenses in an instant access savings account.

Debt: None other than short-term credit card debt. I never pay interest on it. Mortgage paid off.

Tax Filing Status: Married Filing Separately. (My wife's income is too high for us to benefit from the UK's married couple's tax advantage.)

Tax Rate: 20%

State of Residence: UK

Age: Mid forties

Desired Asset allocation: 60% stocks / 40% bonds (but open to suggestions)

Desired International allocation: 100% of stocks

Breakdown of assets
Within pension fund (74.5% of all assets)
24.8% UK stocks
22.1% International stocks
4.9% UK gilts
4.2% International gilts
2.5% Property funds
6.6% Multi-asset funds
8.5% Absolute return funds
0.9% Cash
It just depends what type of pension this is. If it is Final Salary then it is irrelevant to you. The only issue is (private sector) if there is a pension fund deficit and whether your are likely to fall under auspices of the Pension Protection Fund (as British Steel workers, and Carillion workers, have done). Otherwise it's just an index linked annuity- indexed to either CPI (lower) or RPI.
Within ISA (UK tax-free wrapper, 18.8% of all assets)
1.4% Vanguard Global Bonds IE00B50W2R13 Charge: 0.15%
2.1% Vanguard S&P 500 UCITS ETF IE00B3XXRP09 Charge: 0.07%
9.2% Vanguard Developed World Ex-UK GB00B59G4Q73 Charge: 0.15%
2.7% Vanguard Developed Europe Ex-UK IE00BKX55S42 Charge: 0.12%
3.4% Vanguard USD Corporate Bond IE00BZ163K21 Charge: 0.12%

SIPP (UK tax-free personal pension)
2.1% Vanguard Developed World Ex-UK GB00B59G4Q73 Charge: 0.15%

Taxed trading account
1.7% Vanguard EUR Corporate Bond IE00BZ163G84 Charge: 0.12%

2.6% UK inflation-linked gilt (held directly)

0.3% Non-emergency cash
Generally better to hold bonds in tax free accounts like pensions. Shares you get the dividend exemption.

Indexed Linked Gilt yields right now are truly awful (-1.5% real)-- Financial Times gives representative yields and prices for main issues. How long to run?

EUR fixed income is paying nearly no yield. Even corporate. Eurozone interest rates are so low (German bunds (govt bonds) are on zero and negative yields).
We own our apartment outright but we need to live in it so I don't count it as an asset.

Contributions - Regular
My employer has a generous pension contribution scheme, so I contribute the maximum tax-free annual allowance to that (GBP40k). I also pay a few thousand into my ISA once or twice a year.
I am not sure how, on Basic Rate tax (up to about £42,500 from memory) you manage to contribute £40k a year to pension? Pension contributions are not particularly tax efficient at the 20% rate-- because you will most probably pay that in retirement. ISAs are actually favoured.

Once you have ensured you get the employer max contribution, you should prioritize ISA (for you and your wife) over pension. I speak from painful experience. Because the £1,030,000 lifetime cap on pension bites quite hard. Compound your pension investments by 6%, say, for the next 20 years, and you will hit that lifetime cap very quickly. BTW defined benefit/ Final Salary benefits count against that cap-- there's a formula (roughly 20x benefit at retirement). Above the cap, you will pay 55% tax on withdrawals. Thank you, Mr. Osborne!

ISAs before pensions, once you have the full employer contribution (for example my company match is to 5% of salary).

If the government changes at the next election expect further changes to pensions.
Contributions - One-offs
1. I am expecting a tax refund to arrive in the SIPP in the next few months, adding (0.25*2.1%) = 0.5% to the fund value.
2. The UK gilt is soon to mature, so I'll need to work out where to put the money.
3. Similarly, come the next Financial Year in a few weeks, I'll be selling the "Vanguard EUR Corporate Bond" fund in my taxed trading account and moving it into my ISA. Which fund to spend the money on remains open.

Considerations
1. I don't have control over the pension fund asset allocation (naturally).
This is very unclear to me. Normally:

- you have a Group Defined Contribution scheme -- in which case you pick the funds (there is a default fund for your monthly contribution) - is your employer only giving you one choice of funds?
- you have a Final Salary (Defined Benefit) or Career Average Salary scheme - the asset allocation is irrelevant to you, the pension is equivalent to an index-linked annuity

Which of the above is the case, and if the former, why do you have no control over asset allocation?
2. I think 25% of my investments in UK stocks is more than enough, so I want to avoid UK stocks in the parts of my portfolio I can control.
Yes
3. I strongly subscribe to the Boglehead philosophy. (Despite only discovering this site recently, I have read fairly widely on the subject, although I still have much more to learn.)
4. I don't invest for a hobby. I want to buy and hold.
5. My wife and I keep our finances completely separate so I've not included any joint information.
OK but you will get the joint state pension, not the single person one.
6. I have a moderate tolerance for risk. If there was a crash just as I was hoping to retire then I expect I'd be OK with working a few more years while things recovered.
7. The UK Government website tells me that from 67 I'll be eligible for a state pension of GBP8k, on top of what my savings will provide me with.

Goals
1. My goal is to be able to retire as early as possible on a comfortable income. The minimum age for me to be able to access my pension fund in the UK is 55. The word "able" is important here: I may decide to continue working because I enjoy it.
2. I expect to spend much of my retirement time away from the UK (in a random variety of countries), so I am not concerned hedging currency movements against GBP.
Or rather the other way, ie that you want as little exposure to GBP as practical. Your state pension and home equity will be in GBP.
3. I don't have any dependants, so no college funds or legacy to worry about. My wife has her own occupational pension.

Questions
1. What do you think of this portfolio overall? Any comments welcome.

2. I've noticed that many of the above funds (specifically "Vanguard EUR Corporate Bond", "Vanguard S&P 500 UCITS ETF", "Vanguard Developed Europe Ex-UK" and "Vanguard USD Corporate Bond") are Income funds rather than accumulation funds. Can anyone suggest similar alternative index funds that are accumulators? I am happy to go beyond the Vanguard stable for suitable low-cost index products.
I use ishares ETFs as well. Actually since Vanguard has only recently started directly marketing to UK investors, and does not do pensions, I don't use Vanguard.
3. I am concerned that I am weighted too heavily on stocks. Whether that's the case partly depends on what the "Multi-Asset Funds" in my pension fund really contain.
3.1 Can anyone comment on my stock:bond balance in general?
3.2 Does anyone have any insight into what the enigmatic asset class "Multi-Asset Funds" might contain?
Can't answer that without an answer to the question of why you have no discretion over this? It's very unusual for a DC fund to give no discretion.
4. If I were to correct my stock:bond ratio, which fund would people suggest I consider putting money into? Ideally it would be diversified, international, low-cost, accumulation and un-hedged.
Not sure I know of a non currency hedged bond fund. Have a check on ishares.
5. I have a feeling that the non-pension portfolio is too complex. It seems to me that I should be able to restrict myself to a very few (2-4?) widely diversified accumulator funds: maybe "Vanguard Developed World Ex-UK" for stocks and "Vanguard Global Bonds" for bonds. However, the latter is currency hedged (which I don't need), 66% Government bonds and doesn't exclude the UK (to where I have plenty of bond exposure through my pension fund). Does such a simplification make sense? I am happy to do periodic re-balancing.

Any insight very much appreciated.

IsuzuIse
Any further comment relies on understanding your company pension better.

IsuzuIse
Posts: 4
Joined: Tue Mar 20, 2018 7:37 pm

Re: Portfolio Review and Advice Sought for UK Investor

Post by IsuzuIse » Wed Apr 11, 2018 2:32 pm

Valuethinker: thank you very much indeed for your careful analysis. I've written some follow-up information below. Any further insight would be very much appreciated.
Indexed Linked Gilt yields right now are truly awful (-1.5% real) [...] How long to run?
It's an NSI Indexed Linked Gilt ("Granny Bond") and it expires in June 2021. :( I had naively assumed that because it's a RPI/CPI-linked product that it would at least keep its value. What am I missing that means I'm getting -1.5% on it?
EUR fixed income is paying nearly no yield
Noted. I'll bear that in mind as I tweak my portfolio.
I am not sure how, on Basic Rate tax [...] you manage to contribute £40k a year to pension?
The company I work for has a generous salary sacrifice scheme, which I make heavy use of. My employer pays me less and instead pays money into the corporate pension scheme. In addition to sacrificed salary I receive:
- The 13.8% NI contributions my employer would otherwise have paid; and
- 7% of my salary as the base company contribution.
Doing this keeps me safely below the 40% tax bracket. This strikes me as a good deal but I am interested in other perspectives. In particular, 55% tax would hurt if I exceed £1m.
the £1,030,000 lifetime cap on pension bites quite hard
Your warning has made a risk I have hitherto viewed as theoretical seem much more real. Heeded.
1. I don't have control over the pension fund asset allocation (naturally).
This is very unclear to me. [...]
I'm in a Defined Contribution scheme. My employer offers two funds: a conservative one and a mainstream one. I pay into the mainstream one; so I do have a choice between two funds. However, beyond that we don't get to pick funds for our individual accounts. As I undertand it, when I retire I'll have access to the money in the pension pot and will be able to choose how to use it (within the limitations of applicable laws at the time). I don't have any objections to the way the pension fund is structured. However, I am interested to know people's thoughts on whether I should allocate the funds in my ISA etc. with an eye on how funds are allocated in the pension fund.
5. My wife and I keep our finances completely separate so I've not included any joint information.
OK but you will get the joint state pension, not the single person one.
I didn't know that so thank you for pointing it out.
I use ishares ETFs as well.
Thank you for this suggestion. I've been looking at their products and they look like they could be suitable.

-- IsuzuIse

TedSwippet
Posts: 1865
Joined: Mon Jun 04, 2007 4:19 pm

Re: Portfolio Review and Advice Sought for UK Investor

Post by TedSwippet » Thu Apr 12, 2018 4:11 am

IsuzuIse wrote:
Wed Apr 11, 2018 2:32 pm
It's an NSI Indexed Linked Gilt ("Granny Bond") and it expires in June 2021 I had naively assumed that because it's a RPI/CPI-linked product that it would at least keep its value. What am I missing that means I'm getting -1.5% on it?
Assuming that this is what you hold, you won't be losing 1.5% on it. If you buy an index-linked gilt at face-value and hold it through to maturity you do fine. The problems start when gilts are auctioned or traded. Where such a gilt is perceived to offer a 'good deal' -- higher return than you might get elsewhere, say -- the auction or trade price of the gilt adjusts to compensate. And currently, traded gilts apparently indicate negative returns.

("Granny bonds" are something different, but since none has offered 2.6% I suspect these are not what you have. Also, you are not old enough to be able to buy them.)

NS&I index linked certificates are not auctioned or traded, so unless you cash your investment in early you will do fine to hold it. If it has a promised return then that is what you will get. Current renewal rates are 0.01% plus inflation, entirely underwhelming but tax free, so around 2.5% to 3% net to you. No ordinary taxable cash or bond investment can currently beat that for UK investors who are in non-zero tax brackets.
IsuzuIse wrote:
Wed Apr 11, 2018 2:32 pm
Your warning has made a risk I have hitherto viewed as theoretical seem much more real. Heeded.
This lifetime allowance on pensions is truly evil, and I suspect a lot of people are sleepwalking towards it. Compounding means that if you are a decade or two from retirement then even a modest current pension balance puts you at risk of exceeding it. For me, the lifetime allowance -- more accurately, its repeated reductions -- was the trigger to leave work four or five years earlier than planned. It really can be that drastic.

While in the 20% tax bracket the benefits of a pension are mostly down to employer match and salary sacrifice uplift. If/where you float into the 40% bracket -- or worse, the effective 60% one at £100k-£120k or so -- the tax benefits of pushing money into a pension become much more compelling. If you are putting £40k/year into a pension and your current tax rate is 20% it looks like you are probably getting a lot of that at 40% tax deferral. So you will need to balance that against the risk of exceeding the lifetime allowance. Project your current pension balance forwards to retirement at 4% real growth (say) and compare with £1MM, and you might be surprised, and that is even before you factor in any future contributions. No easy answer, unfortunately.

One final note. Given your use of the phrase "I expect to spend much of my retirement time away from the UK" suggests that you might become a tax-resident in another country in retirement. If that is the case, you may want to look across your investments to see if there is anything that might become a tax trap later on.

For example, ISAs are terrific tax shelters while you live in the UK, but most other countries will ignore the tax wrapper and tax the investments inside them as if they were just ordinary trading accounts. The results of this can be horrific -- for example, full capital gains tax on the entire ISA gain since first investing. And pensions are another area where countries vary on their treatment of (to them) foreign pensions, and where the tax results can be deeply unpleasant. Unlike ISAs, pensions cannot be 'collapsed' and simply withdrawn to cash as a last resort when moving country. Just a thought, anyway.

IsuzuIse
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Joined: Tue Mar 20, 2018 7:37 pm

Re: Portfolio Review and Advice Sought for UK Investor

Post by IsuzuIse » Tue Apr 17, 2018 4:45 pm

Thank you TedSwippet - much food for thought there, especially on changing my tax domicile.

minimalistmarc
Posts: 284
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Re: Portfolio Review and Advice Sought for UK Investor

Post by minimalistmarc » Tue Apr 17, 2018 5:26 pm

I wonder how another country would find out about your ISA? Given it is tax sheltered I didn’t think the broker sent anything to HMRC. I would be surprised if most people disclosed their ISA when moving abroad.

TedSwippet
Posts: 1865
Joined: Mon Jun 04, 2007 4:19 pm

Re: Portfolio Review and Advice Sought for UK Investor

Post by TedSwippet » Wed Apr 18, 2018 6:37 am

minimalistmarc wrote:
Tue Apr 17, 2018 5:26 pm
I wonder how another country would find out about your ISA? Given it is tax sheltered I didn’t think the broker sent anything to HMRC. I would be surprised if most people disclosed their ISA when moving abroad.
Ordinarily, the answer here would be FATCA for the US, and AEOI/CRS for other countries. However, ISAs are a particular exception to reporting for both of these international compliance regimes, so remaining below the radar may indeed be an option for now.

A more significant problem is likely to be this sort of thing from Royal London's ISA terms and conditions:
We can close your Investment ISA at any point if you no longer satisfy the criteria in Section 4.1, such as your United Kingdom residency, your holding of a United Kingdom bank account or if you become a United States Person.
Or perhaps the clear reaction to FATCA in this from Youinvest's ISA terms and conditions:
You must inform Us immediately if you become a USA citizen or a USA resident for tax purposes. We may close Your ISA and Lifetime ISA if You inform Us that You have become a USA citizen or a USA resident for tax purposes and We may close a Junior ISA for a Child, if You inform Us that the Child has become a USA citizen or a USA resident for tax purposes.

Valuethinker
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Re: Portfolio Review and Advice Sought for UK Investor

Post by Valuethinker » Wed Apr 18, 2018 7:06 am

IsuzuIse wrote:
Wed Apr 11, 2018 2:32 pm
Valuethinker: thank you very much indeed for your careful analysis. I've written some follow-up information below. Any further insight would be very much appreciated.
Indexed Linked Gilt yields right now are truly awful (-1.5% real) [...] How long to run?
It's an NSI Indexed Linked Gilt ("Granny Bond") and it expires in June 2021. :( I had naively assumed that because it's a RPI/CPI-linked product that it would at least keep its value. What am I missing that means I'm getting -1.5% on it?
Hi, sorry I just noticed your reply to me. Don't know how I missed it for a week.

National Savings are not Indexed Linked Gilts. So you are correct that it is RPI linked and you are getting whatever real return was specified when you bought it.

Indexed Linked Gilts are a form of bond (all UK government bonds are known globally as "Gilts" - gilt-edged securities. National Savings is separate and aimed at retail investors, fiercely objected to by the banking sector with whom it competes for retail deposits). All gilts are market traded post issue, the Debt Management Office (www.dmo.gov.uk) which reports to HM Treasury is responsible for the issuance and redemption of all gilts (there's something like £1 trillion of them in issue; about 25% by value index linked).

The longest maturity UK government bond was 2055 but there might be a longer one now (we did have a Napoleonic War Loan consolidation outstanding from 1846, but the Chancellor George Osborne bought them back and cancelled them).

Usually they are bought and sold wholesale although a UK broker will sell them to you retail (I've never actually tried). They used to sell them through the Post Office in fact.

What most of us do is simply hold a UK gilts fund, which holds a representative portfolio of the underlying bonds. The UK gilt index is an odd one, it has a duration of 12.9 years from memory. In practice what that means is the UK government has borrowed far longer maturities than other major bond markets like USA & Germany (c. 8 years from memory). Thus, a gilt fund (index) is more susceptible to upward rises in interest rates (but also benefits more if they fall).

There are also Indexed Linked Gilt funds (most threads here refer to Inflation Linked Bonds as "TIPS" which is the US equivalent) but the real yield averages c. (1.5%). If inflation is as the market expects, you will lose real value, compounded, by 1.5% p.a. (so x (1+0.015)^yrs)). Ouch. Only if inflation is 1.5% pa above what the market expects will you break even in buying power terms.

So I suggest avoiding Indexed Linked gilts at this time.

(I also cannot make up my mind whether gilts should be Gilts or gilts ;-)).
EUR fixed income is paying nearly no yield
Noted. I'll bear that in mind as I tweak my portfolio.
I am not sure how, on Basic Rate tax [...] you manage to contribute £40k a year to pension?
The company I work for has a generous salary sacrifice scheme, which I make heavy use of. My employer pays me less and instead pays money into the corporate pension scheme. In addition to sacrificed salary I receive:
- The 13.8% NI contributions my employer would otherwise have paid; and
- 7% of my salary as the base company contribution.
Doing this keeps me safely below the 40% tax bracket. This strikes me as a good deal but I am interested in other perspectives. In particular, 55% tax would hurt if I exceed £1m.
It does. Assume a conservative return of say net 6% on your portfolio, compound it ( x (1+0.06)^yrs to retirement) and when you get to that £1,030,000 it's time to start paying attention. Right now, it seems that the government will index the limit to inflation from here. it would be politically costless for a future government to stop doing that AND they might find other ways to tax pensions.

When it does look like you will cross the £1m+ RPI line at retirement, it's time to start switching into fixed income in that fund-- cut your future returns, increase your safety. You could assume say a 6% return and 2.5% inflation in working that out (for a 100% equities portfolio: 3.5% real return for equities, long run, and 1% for bonds, is probably not a bad bet).

In general, due to the £1m limit, if you hold bonds, you should hold them in the pension. Since you do not have control on that, the equivalent is switching to the conservative fund.

Nonetheless, even if you are going to pay the 55% tax rate, doubling your base contribution (employer match) + 13.8% of NI is still a pretty good deal and you should continue to make those contributions.
the £1,030,000 lifetime cap on pension bites quite hard
Your warning has made a risk I have hitherto viewed as theoretical seem much more real. Heeded.
1. I don't have control over the pension fund asset allocation (naturally).
This is very unclear to me. [...]
I'm in a Defined Contribution scheme. My employer offers two funds: a conservative one and a mainstream one. I pay into the mainstream one; so I do have a choice between two funds. However, beyond that we don't get to pick funds for our individual accounts. As I undertand it, when I retire I'll have access to the money in the pension pot and will be able to choose how to use it (within the limitations of applicable laws at the time). I don't have any objections to the way the pension fund is structured. However, I am interested to know people's thoughts on whether I should allocate the funds in my ISA etc. with an eye on how funds are allocated in the pension fund.
5.
Has a huge impact. Probably it tilts you towards taking more equity risk in your ISAs. More global equity funds. Even Emerging Markets.

You should work out your equity and fixed income (bonds) percentages *including* the allocations in the Mainstream Fund (if that is what you are using). You can then shift your equity position (down only) by increasing the allocation to the Conservative Fund.

Given your savings rate, you will hit the £1m limit, I suspect. Thus, you want the employer match in your pension but above that, it's worth making sure you are doing your ISA allowance *first* before putting any money into the pension (and you need to check your wife's position too-- your cash can be used for her ISA allowance and to make sure she can get the full pension match at her employer).
My wife and I keep our finances completely separate so I've not included any joint information.
OK but you will get the joint state pension, not the single person one.
I didn't know that so thank you for pointing it out.
I use ishares ETFs as well.
Thank you for this suggestion. I've been looking at their products and they look like they could be suitable.

-- IsuzuIse
Ishares work, and they use physical replication (ie they actually hold the underlying assets) which in principle is safer than using swaps (contracts with another financial firm that simulate the performance of the underlying index or asset).

ETFs with small market caps are more risky. 1). bid-offer/ask spreads are wider (you buy at the higher, the offer/ ask, you sell back at the lower, the bid)

2). if the manager does not get enough assets, the ETF is not economic, and may close it. At which point you might have a taxable distribution (not sure what UK rules are on that).

Note that your wife:

- should make her own contributions to a pension plan (even if you have to use your cash to do it) especially if salary surrender. That's 2 x £1m limits, not one

Let's leave it as a rule that if there is an employee match, she has to get it. Even if that means you "pay" her (in after tax money) so that she can do that. Employee match on a pension scheme is 100% rate of return, up front! If there's NI on top of that then that's "bunce" as they say in Yorkshire.

- should use her ISA limit (using your cash) if yours is fully utilized

I know that can be awkward in a marriage, but the potential impact on standard of living in retirement is significant. Can be sold as protecting her.
Last edited by Valuethinker on Wed Apr 18, 2018 8:44 am, edited 1 time in total.

Valuethinker
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Re: Portfolio Review and Advice Sought for UK Investor

Post by Valuethinker » Wed Apr 18, 2018 8:41 am

TedSwippet wrote:
Thu Apr 12, 2018 4:11 am
. Project your current pension balance forwards to retirement at 4% real growth (say) and compare with £1MM, and you might be surprised, and that is even before you factor in any future contributions. No easy answer, unfortunately.
This is a good way to do it.

Strictly speaking I think we should start at £1,030,000 because that's the limit for this tax year? Even if using real rates of return?

However if we assume a real rate of return - 4% probably is not a bad assumption for safety (higher rate of return means you hit the limit faster) then we don't have to worry about the RPI indexation of the £1m limit (I could see a future government doing away with it, anyways).

(in actual fact, I suspect a mixed bond-equity portfolio will only do 3%, after costs, from here. But 4% is giving "headroom" in terms of the £1m limit).

At £40k pa OP will get there pretty quickly. When the limit was £1.8m I put in rather a lot, not realizing that they would bring the limit down. Stupid.

Important to use ISA allowances for both spouses whilst they are still extant. UK governments in the future are going to be looking for revenue, and schemes like ISA will be politically low cost things to go after -- most people don't use anything like their full allowances.

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