[UK] Moving from accumulation to preparing for withdrawals

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Topic Author
maloflora
Posts: 15
Joined: Sat Oct 10, 2009 4:27 am

[UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

Hi all,

I started investing about 20 years ago and decided to use a number of different providers and a few different index-based approaches. As I see early retirement coming into view a few years from now, I realise it all looks a bit of a mess and I'd like to start to glide something a bit simpler and more sensible for withdrawal purposes.

Country of Residence: United Kingdom, and staying here
Currency: GBP
Emergency funds: Yes about 3 months worth
Debt: None
Age: 49
Desired Asset allocation: 65% stocks / 30% bonds / 5% gold, with appropriate amounts overseas. But see questions below
Workplace pension: Could be around 35k p.a. at age 65 but it's at risk I don't want to rely on it, so am looking for advice on a worst-case scenario as if it's not there
Total portfolio size: A few six figures into seven figures :wink:

_______________________________________________________________

So I have my investments split into five accounts.

Fund 1: A UK SIPP, following a Swensen portfolio. 8% of the whole portfolio.
2% Lyxor FTSE 100 UCITS ETF - Acc (L100.L)
2% iShares Core MSCI World UCITS ETF | SWDA
1% iShares £ Index-Linked Gilts UCITS ETF | INXG
1% iShares Core UK Gilts UCITS ETF | IGLT
2% iShares UK Property UCITS ETF GBP (Dist) | IUKP

Fund 2: Another UK SIPP, following the Permanent Portfolio, 10% of the whole portfolio.
2% HSBC FTSE All Share Index Fund Institutional A Accumulation
3% 30 year UK Gilts
2% iShares UK Gilts 0-5yr UCITS ETF GBP (Dist) (GBP) | IGLS
3% WisdomTree Physical Gold (GBX) | PHGP

I stopped investing in the SIPPS because of the potential value of my workplace pension, and hitting the annual and lifetime limits. But carried on the Permanent Portfolio in a general investment account

Fund 3: General investment account following Permanent Portfolio at same broker as fund 2. 24% of the whole portfolio
7% iShares UK Equity Index
6% Vanguard long duration gilt index
6% iShares Physical Gold
6% Cash in bank account

Fund 4: General investment account at same broker as fund 1. 37% of the whole portfolio
37% Vanguard 80% Lifestrategy

And finally...An ISA built up over the years invested purely in stocks.

Fund 5: Stocks and Shares ISA. 22% of the whole portfolio
8% Fidelity MoneyBuilder UK Index
15% Aviva Investors International Index Tracking SC1 Acc

So looking at all of them horizontally, and ignoring different potential withdrawal dates:
  • 19% UK equity
  • 46% World equity (counting the 80% LifeStrategy stocks as all world)
  • 18% bonds (counting 20% of the LifeStrategy)
  • 8% gold
  • 8% cash
  • 2% REITs
_______________________________________________________________

Phew! What a mess. :oops:

I'll keep investing over the next couple of years but what I'm really after is how to shift the portfolio to something simpler and more sensible, while avoiding capital gains tax if at all possible. I'm obsessively exploring withdrawal strategies and the like, and am currently ploughing through Living off your Money (McClung). However, I'm most likely to want to follow something like the Bogleheads VPW with annual rebalancing, or possibly the Prime Harvesting technique as outlined in McClung's book. But I'm really not attracted to the hugely sliced and diced portfolios recommended in the book, not least as most of the funds are US.

So to the questions (ignoring the at-risk workplace pension)...

Questions:
1. Does anyone have a recommended withdrawal strategy that's expected to work in the UK? So many of the strategies are US-based!
2. With those kinds of strategies in mind, what kind of portfolio should I aim towards?
3. Is it important to tidy things up or should I just leave things as they are and rebalance towards this AA?
4. In particular, is it worth converting the big LifeStrategy lump into separate equity and bond funds so I have a bit more control over withdrawals?

I hope that all makes sense. Thanks in advance for any advice and thoughts!
Valuethinker
Posts: 42661
Joined: Fri May 11, 2007 11:07 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by Valuethinker »

maloflora wrote: Sat May 01, 2021 12:55 pm
Workplace pension: Could be around 35k p.a. at age 65 but it's at risk I don't want to rely on it, so am looking for advice on a worst-case scenario as if it's not there
The vested portion of that pension almost certainly will be there. Even if it falls into the Pension Protection Fund, there are reductions, but for smaller pensions that's less of an issue.

Because Final Salary/ Career Average Salary benefits in the UK are indexed to up to 5% inflation (usually RPI, will be converged w CPI) they are particularly useful in financial planning. Also 50% survivor benefit is mandatory (at least).
Topic Author
maloflora
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Joined: Sat Oct 10, 2009 4:27 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

Thanks for responding! It's a big scheme and I'm a bit paranoid about it. Even at PPF levels it would obviously be a huge help and might allow me to be a bit more risky with my main portfolio.
TedSwippet
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Location: UK

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by TedSwippet »

maloflora wrote: Sat May 01, 2021 12:55 pm So looking at all of them horizontally, and ignoring different potential withdrawal dates:
  • 19% UK equity
  • 46% World equity (counting the 80% LifeStrategy stocks as all world)
  • 18% bonds (counting 20% of the LifeStrategy)
  • 8% gold
  • 8% cash
  • 2% REITs
Overall, this isn't heinous. It's overweight UK, but only about to the same extent as LifeStrategy. And if you add up your equity and bond holdings, you'll see that what you have when all put together is pretty much the same as LifeStrategy 80 on its own, just more fragmented. It seems to me that your obvious simplification seems to be move everything that is equity and bond into LifeStrategy 80, to leave your asset allocation more or less as is. The big question is, is the benefit of that worth doing it?

To tweak your asset allocation, you might want to reduce the UK bias to something closer to market cap. That would however mean moving away from LifeStrategy. And this is a large chunk of your GIA. If moving would generate a capital gains tax liability, I'd leave it and work round it by balancing away from the UK in ISAs and SIPPs.

Your 2% allocation to REITs looks to be more trouble than it is worth. It's never going to make a noticeable difference to your results at that level. Either increase it to at least 5%, or drop it entirely, would be my suggestion. Personally, I'm not one for gold, but many folk are so maybe that's just me; perhaps worth a second's reconsideration (or not).
maloflora wrote: Sat May 01, 2021 12:55 pm Workplace pension: Could be around 35k p.a. at age 65 but it's at risk I don't want to rely on it, so am looking for advice on a worst-case scenario as if it's not there
As already mentioned by valuethinker, not likely to evaporate entirely. Is the risk that this is projected provided you work for this employer for the next 15 years and they continue to run a DB scheme?

At these levels though, as I think you've already discovered, you're going to want to keep a close eye on your pensions Lifetime Allowance numbers. A DB pension is valued at 20x, so moving a £35k pension into payment is £700k of your LTA used. The current LTA is a bit over £1m, and it's anybody's guess what it will be in 15 years. It's a complete political football, subject to continuous goalpost-moving and broken government commitments. Currently, it's scheduled to freeze for five years and then increase with inflation, though I'd put a massive error bar on that. More freezes, or perhaps even reductions, seem entirely possible.

Against this, all the gains in your DC pensions (SIPPs) and any new DC pension contributions or DB pension increases due to promotions will have to sit in the rest of your LTA headroom. And you would expect (or at least, hope) that your SIPPs grow faster than inflation, meaning that they will outpace any growth in your LTA headroom from inflation linking the LTA. You've said that you've stopped SIPP contributions. Have you projected numbers, or is this a hunch?
maloflora wrote: Sat May 01, 2021 12:55 pm 1. Does anyone have a recommended withdrawal strategy that's expected to work in the UK? So many of the strategies are US-based!
Guyton and Klinger decision rules seem to make sense to me. I've seen some folk use them successfully. Personally I'm doing things a bit ad-hoc just now, but only because a) I have the flexibility to do this, and b) during Covid there's been nothing much to spend money on anyway.
maloflora wrote: Sat May 01, 2021 12:55 pm 2. With those kinds of strategies in mind, what kind of portfolio should I aim towards?
3. Is it important to tidy things up or should I just leave things as they are and rebalance towards this AA?
What you have is messy, but taken as a whole it's far from horrible. It's certainly not important to tidy it, provided you can handle its current diffuseness. And it can sometimes be a benefit to have separate portfolios, if for example they have different goals and timeframes. If you chose to retire today and run down your GIA and ISAs to cover you until you could draw your SIPP and then later any DB pension, having the same stuff everywhere might not be suitable.

What I would do though is perhaps look at some of your asset location. Keeping bonds out of GIAs and in SIPPs should be a bit more tax-efficient. Bonds grow slowly (an LTA benefit) and spin off most of their return as dividends (whereas things that produce capital gains are best in GIAs for the lower tax rate).
maloflora wrote: Sat May 01, 2021 12:55 pm 4. In particular, is it worth converting the big LifeStrategy lump into separate equity and bond funds so I have a bit more control over withdrawals?
As already noted above, I would say not if it generates any kind of capital gains tax liability. In that case, better to work round it. Otherwise, splitting it will make withdrawals more flexible, but also create some additional rebalancing that you might prefer to not have to handle. And remember that it has an element of bonds, and bonds are usually best kept in a SIPP -- that's a slight motivation for, say, moving to 100% stocks in your GIA and moving some stocks to bonds in a SIPP to balance (which would indeed mean selling your GIA LifeStrategy 80 holding).
Valuethinker
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Re: [UK] Moving from accumulation to preparing for withdrawals

Post by Valuethinker »

maloflora wrote: Sat May 01, 2021 1:37 pm Thanks for responding! It's a big scheme and I'm a bit paranoid about it. Even at PPF levels it would obviously be a huge help and might allow me to be a bit more risky with my main portfolio.
If it is the University Superannuation Scheme then ... Houston, there is a problem. The USS could turn out to be the iceberg that sinks the Titanic of the UK higher education sector, in my view.

If it is central government (or perhaps NHS) then there is no "scheme", ie nothing is pre funded -- however previous legislative changes (George Osborne) affected benefit accrual rather than past benefits. It would be heck and high water to pay if they broke with that principle. However the new Civil Service scheme only starts with the state pension age (ie 67) and that can be moved up.

So, private sector? Final Salary or Career Average Salary? And what is your forecast of £38k (presumably in today's money, ie real terms?) based on?

If you've built up £38k of benefits *now* then you are in good shape - as in a Career Average Salary scheme (where your benefit in effect vests at the end of each year, and then that amount for that year, grows with inflation until retirement). If Final Salary then did you make an assumption about salary growth? And did you do it in inflation adjusted terms or nominal terms.

You will almost certainly blow through the £1.070m lifetime allowance, though. That buys about £20-25k of annual benefit at age 65, right now. So your estimate is well above that?
minimalistmarc
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Joined: Fri Jul 24, 2015 4:38 pm

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by minimalistmarc »

maloflora wrote: Sat May 01, 2021 1:37 pm Thanks for responding! It's a big scheme and I'm a bit paranoid about it. Even at PPF levels it would obviously be a huge help and might allow me to be a bit more risky with my main portfolio.
Can you start taking your pension early (from 55)? This would reduce the LTA problem you are facing.
Topic Author
maloflora
Posts: 15
Joined: Sat Oct 10, 2009 4:27 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

Yes I probably can - I'll investigate and report back. It's a corporate DB scheme but I'd rather not go into any more detail. I've built up around £35k of index-linked benefits so far, so it's not a projected figure. I estimated I might get to £40k max, multiplied by 20, added the two SIPPs and realised I was heading very close to the LTA. So I stopped contributing to the SIPPs but continued with the DB scheme as the employer contribution was so valuable, even if there is risk in the scheme. I assumed that even if I exceeded the LTA, the employer contributions were worth more.

EDIT: I have to say the tax complications of the LTA do my head in! Any advice on finding a good advisor who can help with it would be greatly appreciated too.
Last edited by maloflora on Sun May 02, 2021 2:57 am, edited 1 time in total.
Topic Author
maloflora
Posts: 15
Joined: Sat Oct 10, 2009 4:27 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

TedSwippet wrote: Sat May 01, 2021 2:22 pm Overall, this isn't heinous. It's overweight UK, but only about to the same extent as LifeStrategy. And if you add up your equity and bond holdings, you'll see that what you have when all put together is pretty much the same as LifeStrategy 80 on its own, just more fragmented. It seems to me that your obvious simplification seems to be move everything that is equity and bond into LifeStrategy 80, to leave your asset allocation more or less as is. The big question is, is the benefit of that worth doing it?

To tweak your asset allocation, you might want to reduce the UK bias to something closer to market cap. That would however mean moving away from LifeStrategy. And this is a large chunk of your GIA. If moving would generate a capital gains tax liability, I'd leave it and work round it by balancing away from the UK in ISAs and SIPPs.

Your 2% allocation to REITs looks to be more trouble than it is worth. It's never going to make a noticeable difference to your results at that level. Either increase it to at least 5%, or drop it entirely, would be my suggestion. Personally, I'm not one for gold, but many folk are so maybe that's just me; perhaps worth a second's reconsideration (or not).
Thanks! This is really helpful. What's your recommended UK weight? By market cap it would be less than 5% but I presume it's preferred to be a bit higher? I think I should probably stick with the LifeStrategy - moving away from it would generate £15k CG tax if all done in one go. But I agree the REITs is more trouble, so I might consolidate all of funds 1 and 2 (the SIPPs) into a mix of a global stocks index fund to get closer to my desired weight, and a bond fund for the tax reasons below. I could risk sticking at about 20% bonds overall in the portfolio, because of the pension elsewhere.

TedSwippet wrote: Sat May 01, 2021 2:22 pmGuyton and Klinger decision rules seem to make sense to me. I've seen some folk use them successfully. Personally I'm doing things a bit ad-hoc just now, but only because a) I have the flexibility to do this, and b) during Covid there's been nothing much to spend money on anyway.
Thanks. I'll investigate G&K rules and run some scenarios.
TedSwippet wrote: Sat May 01, 2021 2:22 pmWhat you have is messy, but taken as a whole it's far from horrible. It's certainly not important to tidy it, provided you can handle its current diffuseness. And it can sometimes be a benefit to have separate portfolios, if for example they have different goals and timeframes. If you chose to retire today and run down your GIA and ISAs to cover you until you could draw your SIPP and then later any DB pension, having the same stuff everywhere might not be suitable.

What I would do though is perhaps look at some of your asset location. Keeping bonds out of GIAs and in SIPPs should be a bit more tax-efficient. Bonds grow slowly (an LTA benefit) and spin off most of their return as dividends (whereas things that produce capital gains are best in GIAs for the lower tax rate).
Ah I hadn't thought about tax rates between the different locations. Consolidating funds 1 and 2 into a simpler AA would allow me to put a bit more into bonds in the SIPPs while tilting a bit more global equity.
TedSwippet wrote: Sat May 01, 2021 2:22 pmAs already noted above, I would say not if it generates any kind of capital gains tax liability. In that case, better to work round it. Otherwise, splitting it will make withdrawals more flexible, but also create some additional rebalancing that you might prefer to not have to handle. And remember that it has an element of bonds, and bonds are usually best kept in a SIPP -- that's a slight motivation for, say, moving to 100% stocks in your GIA and moving some stocks to bonds in a SIPP to balance (which would indeed mean selling your GIA LifeStrategy 80 holding).
As above - potentially big CG liability, so I'm happy to stick with this as it is.
Thanks for all the help.
TedSwippet
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Location: UK

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by TedSwippet »

maloflora wrote: Sun May 02, 2021 2:50 am What's your recommended UK weight? By market cap it would be less than 5% but I presume it's preferred to be a bit higher?
I am not the person of whom to ask this question. I have -- or rather, had at the start -- a 50% allocation to UK stocks. Over the decade plus I've been running my portfolio ... well, let's just say that with hindsight this has proved an unwise initial decision.
maloflora wrote: Sun May 02, 2021 2:50 am As above - potentially big CG liability, so I'm happy to stick with this as it is.
You may be able to shift asset allocation gradually and without incurring any tax by using your £12k or so annual CGT allowance.

Be sure to use this allowance the the maximum possible anyway, even if not changing anything about your GIA's actual asset allocation. Simply moving some money from one fund into a different but equivalent fund or ETF is perfectly fine. Or, you can sell in your GIA and buy back in your ISA ("bed and ISA"). The only thing to watch out for is the silly "bed and breakfast" CGT rules. A bit of googling will get you all you need on that.
maloflora wrote: Sun May 02, 2021 2:37 am I have to say the tax complications of the LTA do my head in! Any advice on finding a good advisor who can help with it would be greatly appreciated too.
They do everybody's head in. No adviser recommendations from me. No matter how expert an adviser you can find, unless they possess a fully functional crystal ball or Tarot deck, anything they tell you now is unlikely to be of any help when your retirement arrives. :-(
Valuethinker
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Re: [UK] Moving from accumulation to preparing for withdrawals

Post by Valuethinker »

maloflora wrote: Sun May 02, 2021 2:37 am Yes I probably can - I'll investigate and report back. It's a corporate DB scheme but I'd rather not go into any more detail. I've built up around £35k of index-linked benefits so far, so it's not a projected figure.
You can see what happens if it falls into PPP - I believe the formulae re benefit reduction are on their website.
I estimated I might get to £40k max, multiplied by 20, added the two SIPPs and realised I was heading very close to the LTA. So I stopped contributing to the SIPPs but continued with the DB scheme as the employer contribution was so valuable, even if there is risk in the scheme. I assumed that even if I exceeded the LTA, the employer contributions were worth more.

EDIT: I have to say the tax complications of the LTA do my head in! Any advice on finding a good advisor who can help with it would be greatly appreciated too.
I would agree that the employer contribution is valuable to have despite the unpleasant tax ramifications. When I was in such a scheme it was over 3x the employee contribution. Needless to say they eventually terminated the scheme and moved to Defined Contribution ;-). I have this tiny benefit that sits out there, waiting for me to turn 60 (which will then screw up my current employer arrangements, due to the £4k pa limit on pension contributions if you are in receipt of a pension).

The DB scheme is valuable diversification. Really valuable diversification given that synthesizing it with Index Linked Gilts (ie UK TIPS to the casually interested reader) would be incredibly expensive right now, almost unbelievably so.

The reality is if that scheme pays out at your estimated level, then you are in better shape than perhaps 95% or even 99% of the country.** Middle class lifestyle guaranteed in retirement - you might have higher spending in the early years (travel) but most people I know of in retirement over 80 hardly spend it (at least until the nursing home fees kick in ). The Tax on the LTA makes that a little bit more complex.

The value of the survivor benefit to our (especially female) spouses cannot be overstated. Most (women) have little or no pension benefit, yet have life expectancies well into the 90s.

I can give you the name of my accountant who retains a financial adviser who seemed to know his stuff -- I will have breached LTA but his advice was not to look at it until I am ready to retire, meanwhile I keep adding to it due to mandatory pension contributions with my employers. So I didn't need formal advice. London prices for the advice, though.

** I haven't checked but am assuming you retire at a "normal" retirement age in that (you might wish to retire earlier - have to reread your OP) ie around mid 60s.
Topic Author
maloflora
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Re: [UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

Thank you - very helpful and if you could DM the name that would be much appreciated.

I think I'm likely to want to retire - or at least move to a part-time or voluntary sector kind of commitment - within the next five years, hence the desire to try to get my pre-planning in place now. Ideally I'd use my GIA/SIPP funds in some kind of withdrawal scheme like Guyton/Klinger or Variable Portfolio Withdrawal to bridge between here and 65 when the pension kicks in, and top up the pension beyond 65. And leave the ISA as a kind of long-term equity-based insurance against health needs much later in life. Does that make sense?
Valuethinker
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Re: [UK] Moving from accumulation to preparing for withdrawals

Post by Valuethinker »

maloflora wrote: Sat May 01, 2021 12:55 pm

So looking at all of them horizontally, and ignoring different potential withdrawal dates:
  • 19% UK equity
  • 46% World equity (counting the 80% LifeStrategy stocks as all world)
  • 18% bonds (counting 20% of the LifeStrategy)
  • 8% gold
  • 8% cash
  • 2% REITs
ity and bond funds so I have a bit more control over withdrawals?

I hope that all makes sense. Thanks in advance for any advice and thoughts!
As per Ted Swippet - bond investments should be held in SIPPs. Equities in ISAs.

Re asset allocation:

- in the long run, one should not hold more cash than 1-2 years emergency spending. Cash is a drag on performance. If the difference on average between ovenight and 10 year interest rates is 1% (it's actually somewhere between 1 & 2% I think) then that's what you are losing on the cash portion of your portfolio, every year - compounded by 30 years.

A related problem is that if your broker were to go bust, you are only protected up to £75k for cash balances, whereas ETFs & funds you should be 100% protected (the assets are just transferred to another manager).

*However*

Cash

Cash currently returns 0%. Gilts have negative nominal yields. Ouch. So holding 8% cash, right now, is actually giving you a better return - and will do so as long as the Bank of England maintains this highly accommodative stance, to support the economy.

As a hedge against financial apocalypse, cash, if held in govt guaranteed accounts, is a hedge. The cost is a likely negative after tax, after inflation, return.

REITs

REITs? It's go big or go home. Unless you have 5-10% in REITs (and realistically 10%) then it has little or no impact on final portfolio wealth. There is a case in the drawdown phase of having a higher REIT weighting. Note our tax position on REITs is that they are just dividends which is different than the US one.

Balanced against that:

- the UK REIT index is almost all commercial property - chiefly stores, offices, a bit of leisure, some industrial
- 80% of rent last quarter was unpaid. This is an industry which is totally banking upon the return of its customers. How many retailers are going to be left by this time next year? If M&S and John Lewis are going down the pan?
- and there's structural change. How much city centre office space will be needed? My guess is that employees will typically work from home at least 2 days a week (1 day a week was already something of a norm - you could have gone bowling in my office on a Friday without hitting anyone) and that employers will need much more flexible space - universal hot desking, lots of formal and informal meeting areas, etc. The trends of the next 20 years collapsed into 2 years. And ditto on the retail side - ecommerce.

So it's distribution centres and factory outlet shops yes, conventional retail no, offices definitely maybe.

My general feeling is that the UK index is underdiversified, and outside the USA (and maybe Australia) there's really no depth of market in these things -- ie wide dispersion into new types of property.

So I would be 0% REITs, which of course means whatever real estate companies are of the world index (2.5%?) I am full weighted *and* I have all the implicit exposure from all the other index constituents that own and use real estate.

Another factor is that by value, rather than square footage, the UK REIT index is very London centric (Land Secs & BL London offices (also Derwent), Shaftesbury & Covent Garden etc).

EDIT. I have just realised you are not holding a REIT fund (Land Securities, British Land, Shaftesbury Estates etc). You are holding a Direct Property fund. Probably it was frozen to realizations or a severe "Market Value Adjustment" imposed during the past year since the first lockdown began? That's a constraint - you might not be able to sell when you need to (on the other hand, behaviourally, since asset classes tend to recover, preventing holders from panicking out at the bottom is a good thing, as long as no one starves because they cannot access the money).

I bet you'll find if you read the Annual Report for that fund that they have spent the past year raising cash/ liquidity? Some of those funds are now 33% cash, to meet an expected flood of redemptions.

Gold

A big "meh" from me. At least it's a real bet - having 8%. William Bernstein on the Efficient Frontier (an online journal he used to publish, now he keeps the website going) had an article about 10-15 years ago entitled "the most patient asset" or something like that. It's worth a read.

I think gold is likely to give you poor returns *but* it's about as likely as any asset to perform well in a stock market crisis. Poster market timer had a neat little graph a year or so ago - the performance of gold now very much tracks the (inverse of) the 30 year TIPS bond. Yields go up, gold falls, yields go down, gold rises.

You haven't mentioned cryptocurrencies and thank the Lord. To my mind, this is a classic speculative asset - the entire value is in what someone else will pay you for it in the future, there's no dividend or income stream attached to it. Cue bubbles and busts. Of course, you could say that of gold, but gold has had a utility as money for several thousand years (at least in Eurasian civilisations)**. Crypto might have utility as a means of transaction, but as a store of value?

Inflation linked bonds

In retirement, I think these should be a key asset. Perhaps half of all bond exposure. Because the big risk in retirement is unexpected inflation (although in your case your pension hedges against that).

However current yields are truly lousy. Maybe US TIPs are OK, *if* you are prepared to take on the currency risk.

** there's also the seemingly ever increasing cost of mining for gold as the South African mines are exhausted & environmental restrictions make exploiting new deposits more and more difficult (and rightly so) -- but of course you could say the same for Bitcoin, etc.
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tre3sori
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Re: [UK] Moving from accumulation to preparing for withdrawals

Post by tre3sori »

Valuethinker wrote: Sun May 02, 2021 7:21 am William Bernstein on the Efficient Frontier (an online journal he used to publish, now he keeps the website going) had an article about 10-15 years ago entitled "the most patient asset" or something like that. It's worth a read.
Probably this:
William Bernstein - The Longest Discipline
http://www.efficientfrontier.com/ef/adhoc/gold.htm
Let every man divide his money into three parts, and invest a third in land, a third in business, a third let him keep by him in reserve. Talmud | 35% Real Estate, 45% Stocks, 15% Bonds, 4% Gold, 1% Cash
Topic Author
maloflora
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Re: [UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

Valuethinker wrote: Sun May 02, 2021 7:21 am
As per Ted Swippet - bond investments should be held in SIPPs. Equities in ISAs.

Re asset allocation:

- in the long run, one should not hold more cash than 1-2 years emergency spending. Cash is a drag on performance. If the difference on average between ovenight and 10 year interest rates is 1% (it's actually somewhere between 1 & 2% I think) then that's what you are losing on the cash portion of your portfolio, every year - compounded by 30 years.

A related problem is that if your broker were to go bust, you are only protected up to £75k for cash balances, whereas ETFs & funds you should be 100% protected (the assets are just transferred to another manager).

*However*

Cash

Cash currently returns 0%. Gilts have negative nominal yields. Ouch. So holding 8% cash, right now, is actually giving you a better return - and will do so as long as the Bank of England maintains this highly accommodative stance, to support the economy.

As a hedge against financial apocalypse, cash, if held in govt guaranteed accounts, is a hedge. The cost is a likely negative after tax, after inflation, return.
Thanks for this. I'll have a think - cash is obviously a key part of the Permanent Portfolio, and I was wondering if I could combine the cash holding with my emergency fund. If I sell down fund 2 (the PP SIPP) into bonds than that would work.
Valuethinker wrote: Sun May 02, 2021 7:21 am REITs

REITs? It's go big or go home. Unless you have 5-10% in REITs (and realistically 10%) then it has little or no impact on final portfolio wealth. There is a case in the drawdown phase of having a higher REIT weighting. Note our tax position on REITs is that they are just dividends which is different than the US one.
I agree with all of this and I'll probably remix fund 1 (the other SIPP) to bonds or world equities, depending on the overall asset allocation.
Valuethinker wrote: Sun May 02, 2021 7:21 am Gold

A big "meh" from me. At least it's a real bet - having 8%. William Bernstein on the Efficient Frontier (an online journal he used to publish, now he keeps the website going) had an article about 10-15 years ago entitled "the most patient asset" or something like that. It's worth a read.

I think gold is likely to give you poor returns *but* it's about as likely as any asset to perform well in a stock market crisis. Poster market timer had a neat little graph a year or so ago - the performance of gold now very much tracks the (inverse of) the 30 year TIPS bond. Yields go up, gold falls, yields go down, gold rises.
I'm afraid I have a soft spot for gold, and the PP has performed well for me over the last 15 years - steady if not spectacular growth and very low drawdowns. So I'll probably keep a corner of the portfolio that is forever permanent. 8-)
Valuethinker wrote: Sun May 02, 2021 7:21 am You haven't mentioned cryptocurrencies and thank the Lord. To my mind, this is a classic speculative asset - the entire value is in what someone else will pay you for it in the future, there's no dividend or income stream attached to it. Cue bubbles and busts. Of course, you could say that of gold, but gold has had a utility as money for several thousand years (at least in Eurasian civilisations)**. Crypto might have utility as a means of transaction, but as a store of value?
Yuk. Not going anywhere near these!
Valuethinker wrote: Sun May 02, 2021 7:21 am Inflation linked bonds
In retirement, I think these should be a key asset. Perhaps half of all bond exposure. Because the big risk in retirement is unexpected inflation (although in your case your pension hedges against that).
However current yields are truly lousy. Maybe US TIPs are OK, *if* you are prepared to take on the currency risk.
Did I read somewhere there was a problem pricing UK index-linked gilts? Are the funds robust or should I stay clear?

Thanks for going through all this in such detail. I'd welcome any more advice on:
  • Overall UK / World equity balance
  • Suggested withdrawal strategies for the UK
Thanks!
Valuethinker
Posts: 42661
Joined: Fri May 11, 2007 11:07 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by Valuethinker »

maloflora wrote: Sun May 02, 2021 11:49 am
Valuethinker wrote: Sun May 02, 2021 7:21 am
As per Ted Swippet - bond investments should be held in SIPPs. Equities in ISAs.

Re asset allocation:

- in the long run, one should not hold more cash than 1-2 years emergency spending. Cash is a drag on performance. If the difference on average between ovenight and 10 year interest rates is 1% (it's actually somewhere between 1 & 2% I think) then that's what you are losing on the cash portion of your portfolio, every year - compounded by 30 years.

A related problem is that if your broker were to go bust, you are only protected up to £75k for cash balances, whereas ETFs & funds you should be 100% protected (the assets are just transferred to another manager).

*However*

Cash

Cash currently returns 0%. Gilts have negative nominal yields. Ouch. So holding 8% cash, right now, is actually giving you a better return - and will do so as long as the Bank of England maintains this highly accommodative stance, to support the economy.

As a hedge against financial apocalypse, cash, if held in govt guaranteed accounts, is a hedge. The cost is a likely negative after tax, after inflation, return.
Thanks for this. I'll have a think - cash is obviously a key part of the Permanent Portfolio, and I was wondering if I could combine the cash holding with my emergency fund. If I sell down fund 2 (the PP SIPP) into bonds than that would work.
Valuethinker wrote: Sun May 02, 2021 7:21 am REITs

REITs? It's go big or go home. Unless you have 5-10% in REITs (and realistically 10%) then it has little or no impact on final portfolio wealth. There is a case in the drawdown phase of having a higher REIT weighting. Note our tax position on REITs is that they are just dividends which is different than the US one.
I agree with all of this and I'll probably remix fund 1 (the other SIPP) to bonds or world equities, depending on the overall asset allocation.
Valuethinker wrote: Sun May 02, 2021 7:21 am Gold

A big "meh" from me. At least it's a real bet - having 8%. William Bernstein on the Efficient Frontier (an online journal he used to publish, now he keeps the website going) had an article about 10-15 years ago entitled "the most patient asset" or something like that. It's worth a read.

I think gold is likely to give you poor returns *but* it's about as likely as any asset to perform well in a stock market crisis. Poster market timer had a neat little graph a year or so ago - the performance of gold now very much tracks the (inverse of) the 30 year TIPS bond. Yields go up, gold falls, yields go down, gold rises.
I'm afraid I have a soft spot for gold, and the PP has performed well for me over the last 15 years - steady if not spectacular growth and very low drawdowns. So I'll probably keep a corner of the portfolio that is forever permanent. 8-)
Valuethinker wrote: Sun May 02, 2021 7:21 am You haven't mentioned cryptocurrencies and thank the Lord. To my mind, this is a classic speculative asset - the entire value is in what someone else will pay you for it in the future, there's no dividend or income stream attached to it. Cue bubbles and busts. Of course, you could say that of gold, but gold has had a utility as money for several thousand years (at least in Eurasian civilisations)**. Crypto might have utility as a means of transaction, but as a store of value?
Yuk. Not going anywhere near these!
Valuethinker wrote: Sun May 02, 2021 7:21 am Inflation linked bonds
In retirement, I think these should be a key asset. Perhaps half of all bond exposure. Because the big risk in retirement is unexpected inflation (although in your case your pension hedges against that).
However current yields are truly lousy. Maybe US TIPs are OK, *if* you are prepared to take on the currency risk.
Did I read somewhere there was a problem pricing UK index-linked gilts? Are the funds robust or should I stay clear?

Thanks for going through all this in such detail. I'd welcome any more advice on:
  • Overall UK / World equity balance
  • Suggested withdrawal strategies for the UK
Thanks!
I would take the world weightings. UK is about 8% of world index and that's fine by me. I use the Vanguard FTSE World fund in my ISA to avoid thinking about Emerging Market v Developed Market weightings. The more asset allocation decisions I make the more mistakes I make. But it is a higher expense ratio.

I have only begun to think about withdrawal strategies but vaguely to be about 50% bonds at retirement (due to LTA I moved from 10% fixed income to about 50% 3 to 4 years back).

Withdrawal strategy will be small DB pensions first, then keep at least 5 years expenses in bonds, them stocks then housing equity.

Not retire before age 63 if I can avoid it.

I do need to read some books.

With my spouse I use Vanguard Life Strategy 40: 60 and 60: 40 so she will never have to worry re asset allocation. Let VG sort it out even if think they have too much in UK equities (presumably for marketing reasons).
Topic Author
maloflora
Posts: 15
Joined: Sat Oct 10, 2009 4:27 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

Thanks, that's v helpful. I can probably reduce my UK weight to around 20% without incurring a lot of capital gains tax. But because of the DB pension, I'll probably not want to go higher than 20% bonds and 5% cash. So I may just have to stick with an 'annual rebalancing' strategy for withdrawals rather than trying to play with a 'bonds-first approach' or a floating bond/stock allocation strategy.
xxd091
Posts: 269
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by xxd091 »

First you need to work out what income you need in retirement -some record keeping needed
Personally I have found we spend the same as when working-more time to travel etc
If you have saved enough then a more conservative portfolio can be adopted
Personally I have enough saved and have a 30/65/5 -equities/bonds/ cash=(2 years living expenses)
30/70 to 70/30 equities/bonds portfolios produce enough for most people -depends on how much saved and you willingness to take risks where you set your Asset Allocation-very personal
Initially I used tax free pension lump sums to live on for some years leaving SIPPS and ISAs to grow
Then took a single yearly cash withdrawal from SIPP (taxed) or ISA (no tax)-or a bit from both-enough to top up the cash fund plus keeping my set Asset Allocation intact
Gradually simplified portfolio down to 3 funds only
Simple cheap and easy to follow
Aged 75 now 18 years retired
Monevator.com another good free site for advice
xxd091
Topic Author
maloflora
Posts: 15
Joined: Sat Oct 10, 2009 4:27 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

Thank you xxd - very useful and pragmatic advice. I think I'll end up doing something similar - simplifying the mess above into something like:
  • 35% Global equity
  • 10% Global small cap
  • 20% UK equity (this level seems to do better in back-testing and wouldn't involve a capital gains issue from my current portfolio)
  • 20% bonds (mix of durations and linkers)
  • 10% gold
  • 5% cash
And then rebalancing every year to refill cash and rebalance back to this AA.
Valuethinker
Posts: 42661
Joined: Fri May 11, 2007 11:07 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by Valuethinker »

maloflora wrote: Fri May 07, 2021 1:57 am Thank you xxd - very useful and pragmatic advice. I think I'll end up doing something similar - simplifying the mess above into something like:
  • 35% Global equity
  • 10% Global small cap
  • 20% UK equity (this level seems to do better in back-testing and wouldn't involve a capital gains issue from my current portfolio)
  • 20% bonds (mix of durations and linkers)
  • 10% gold
  • 5% cash
And then rebalancing every year to refill cash and rebalance back to this AA.
I have taken the view to pay the capital gains, now, because 20% is almost the lowest rate I have seen in my lifetime. I used to pay the marginal income tax rate on capital gains (40%). It's a soft target for a future Chancellor to equalize the 2 rates, and reduce the current tax free allowance.

20% UK equity will work, but it's a considerable overweighting. If you are doing it to avoid paying tax, then fine. Otherwise I would have a global weight for UK equities.

Generally I would view cash as the emergency asset, with a negative real return. Oddly, the expected return of cash right now is nearly better than bonds. If you have issues (tax) with regard to rebalancing, then cash might be a sensible part of your asset allocation.

I cannot make myself buy Index Linked Gilts at current yields, but generally they are an excellent investment idea.
Topic Author
maloflora
Posts: 15
Joined: Sat Oct 10, 2009 4:27 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

Ta. I think the final AA may depend on how long I keep accumulating as I can reduce the UK weight without selling.
Siaigi
Posts: 85
Joined: Sun May 17, 2020 4:24 am
Location: Italy

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by Siaigi »

Did you already have a chance to read this wiki page Variable percentage withdrawal. I'm based in Italy but I think to use it when I'll retire. https://www.bogleheads.org/wiki/Variabl ... retirement

Here you can find as well the spreadsheet to help you every year
Topic Author
maloflora
Posts: 15
Joined: Sat Oct 10, 2009 4:27 am

Re: [UK] Moving from accumulation to preparing for withdrawals

Post by maloflora »

Yes thanks - I'm tempted to use a combination of that spreadsheet and the McClung one to come up with two similar withdrawal percentages and triangulate between the two.
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