Have recently acquired lump sum to invest [UK]

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Topic Author
steveyg50
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Joined: Tue Jul 09, 2019 6:35 pm

Have recently acquired lump sum to invest [UK]

Post by steveyg50 » Tue Jul 09, 2019 7:22 pm

(Newish UK investor) I have just read Bogleheads Guide to Investing and also started The little Book of Common Sense investing. So am on the way to becoming a newbie Boglehead. :happy
Definitely a newbie though, as you will see from my current agonising over options !

I am currently virtually out of the market, having decided last year to sell most investments and pay my mortgage off, perhaps unwisely in hindsight but its nice to finally own your home outright and I feared a serious downturn.
But I have now recently acquired a fairly large lump sum :moneybag (by my standards).

I am totally undecided as to what to do. Currently it is in a savings account (1.5% interest) so going slowly backwards with inflation and needs investing.

But right now seems such a bad time to invest? I am aware of Boglehead feelings on attempting to time the market, and once invested will be staying invested until I retire in approx 17 years.However it seems I perhaps should time the market once at least - ie now!?

So I don't know what is best, since am sure a serious downturn is on the near horizon, but is it 1/2 year away, 1 year, 2 years?? :oops:
Currently my leading thoughts regarding my options are -
a) wait until the downturn and invest at the bottom (as best I can judge it). I know market timing is hazardous, but you can see how its tempting....
b) invest it all now but 100% in bond funds, at the downturn I can then switch to equity
c) invest it all now but very safe - perhaps Vanguard 20% equity lifestrategy fund
d) quit worrying and invest it all now as normally (65% equity is probably my ballpark given I am 50 years old)
e) Invest half normally and keep half in cash to invest at the bottom (as best I can)

I was wondering - if you were me what would you do with a big lump sum that you have just acquired ?

andrew99999
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Joined: Fri Jul 13, 2018 8:14 pm

Re: Have recently acquired lump sum to invest [UK]

Post by andrew99999 » Tue Jul 09, 2019 9:28 pm

Welcome to the forum.

If you are afraid of a market drop, you should not ignore that fear, it is there for a reason.

The way to deal with the fear is not to just ignore it and dump everything into stocks, it is to determine what amount of market risk you can handle, put that into stocks, and the rest into bonds.

Try imagine how you would feel if you saw your portfolio drop by a certain amount. Determine as best as possible at what point you will likely panic. Don't use percentages, use actual amounts based on the portfolio value when imagining it. Once you have an estimate, you double that maximum tolerable loss and keep no more than that much in equities, and put the rest into bonds.

For example, lets say you have $750,000 and you think you could tolerate seeing it go down to $500,000 but not below that. You would then put no more than 2 x $250,000 ($500,000) into equities and keep the rest ($250,000) in safe assets (bonds). Then in a severe bear market where equities drop 50%, you would have lost half of the $500,000 in equities and still have your $250,000 from your safe assets, so your total portfolio has only dropped from $750,000 down to $500,000 (33%) even though the equities market has dropped 50%. Not only will your portfolio value drop less, but you will recover faster since it has less to climb back up.

If you are still uncomfortable (particularly if you are closer to retirement), check the first link below by Rick Ferri about whether to consider splitting it up and invest over a few years.

Further reading
6 Things To Consider When Investing A Lump Sum - Rick Ferri
Asset Allocation Guide: Dealing with conflicting goals - Larry Swedroe
A general comment about "too conservative" investors here - Valuethinker
Math vs. Emotion - Humble Dollar

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Watty
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Re: Have recently acquired lump sum to invest [UK]

Post by Watty » Tue Jul 09, 2019 9:40 pm

There is a wiki on investing a windfall and one of the main points is that you should put it into something ultra safe for six months while you get used to having the money and come up with a long term plan.

https://www.bogleheads.org/wiki/Managing_a_windfall

glorat
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Re: Have recently acquired lump sum to invest [UK]

Post by glorat » Wed Jul 10, 2019 9:59 am

For more reading... https://jlcollinsnh.com/stock-series/

Looks like you're continuing the classic mistake of using your emotions to decide when to be in and out of the market - staying out when you are fearful and buying in when you feel confident. Aka sell low, but high. Which is how many investors underperform the average of the market.

Good advice above - figure out an asset allocation first (even if it takes a little while) then stick with it.

It also depends how large this lump sum is - the above link seems to be for lifestyle changing sizes of windfalls. If it isn't that big, I don't know if you are aware of really basic tax related advice like... max out your ISA allowance first.

LongTermInvestor88
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Re: Have recently acquired lump sum to invest [UK]

Post by LongTermInvestor88 » Wed Jul 10, 2019 11:31 am

Check this guy out has very good YouTube series and book for U.K investors https://youtu.be/_chiIIxMGl0 can't recommend enough. Advise simple global cap weight index mixed with home currency AA/AAA bonds. Pick your risk tolerance for ratio between the two and good to go you'll be fine. Other choice is a vanguard retirement fund if want to be trully passive. As a side note though what makes you so certain market will correct within 2 years if the global equity market has priced it as it is and as a whole it is alot wiser than us who are we to say it is overpriced...just a thought. Good luck

LHRAdam
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Re: Have recently acquired lump sum to invest [UK]

Post by LHRAdam » Wed Jul 10, 2019 2:07 pm

Currently it is in a savings account (1.5% interest) so going slowly backwards with inflation and needs investing.
I’ve been thinking about this. 1.5% is guaranteed and free of any fees - and if you are nervous about investing in stocks and/or bonds (neither of which guarantee anything except fees) then why not just stick where you are? On the other hand, the BH way is to choose an asset allocation that works for you, buy the whole market, keep fees low, and quit peaking.
I found that an allocation of 50/50 stock/bond works for me and honestly, since following the suggestions here and investing the money that way, I don’t worry about the money or lose any sleep.
There are a number of threads about whether to invest a lump sum in one go or in installments over 9-12 months. I invested all in one day because I didn’t want it on my mind.

Topic Author
steveyg50
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Re: Have recently acquired lump sum to invest [UK]

Post by steveyg50 » Wed Jul 10, 2019 3:33 pm

Thanks guys, have watched video and read much of the links, and will keep reading, very useful stuff. I did especially like the J L Collins blog - it is in fact near identical opinions to the Bogle Guide book I just read. Am certainly letting emotion rule (fear) but with a lump sum acquired at what seems to be near the end of the cycle it's hard to stop yourself thinking it's not a good time to start investing.

I think once invested I can stay the course, I've done it before, but am struggling to reenter now. I can keep swimming once in the pool but am finding it hard to jump in rightnow !

. So as advised I have to think about risk tolerance and have to be honest about what I can be happy with, and at the moment my risk tolerance is low! Or rather I mean that currently I think equity is too high a risk. I could be dead wrong, but I think I can only be happy at low risk right now. so at the moment I'm of a mind to be only 20% equity. If there is indeed a significant downturn, I can up the equity.
Well There's no rush, can think about it a few weeks

am aware of basic tax avoidance, a large amount of the lump sum will fit into my yearly SIPP and ISA allowance combined, the rest I can move into SIPP or ISA next year. At my age (50),seems like a SIPP is pretty much like an extra ISA.. presuming you don't need your money for 5 years....

Edit

Just found out about the Carry Forward, rule for SIPP. Hardly used any allowance in previous 3 years, so can certainly fit my lump sum into my SIPP.

xxd091
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Location: UK

Re: Have recently acquired lump sum to invest [UK]

Post by xxd091 » Thu Jul 11, 2019 3:13 am

Hi
From what you have been told and read you can see that there is never a good time to invest
Not helped by the fact that most market gains occur over a few days and if you are not invested you will miss them!
I would get the lump sum invested ASAP but if you are nervous-put a lot of it in Bonds and get to your desired Asset Allocation as soon as possible-over a year or two?
Good luck
xxd091.

minimalistmarc
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Re: Have recently acquired lump sum to invest [UK]

Post by minimalistmarc » Thu Jul 11, 2019 4:39 am

For your SIPP you should definitely use your carryforward but remember your allowance is limited by your earned income for this tax year and if your total income is more than 150k this year or at any point in the last 3 years your annual allowance will be tapered. HMRC has a calculator

UKFred
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Location: UK

Re: Have recently acquired lump sum to invest [UK]

Post by UKFred » Thu Jul 11, 2019 5:25 am

You can only put as much into a SIPP as your taxable income in the year (subject to 40K or less annual allowance + carry forwards). So unless your annual income and your lump sum are of similar magnitude, you can’t put much of the lump sum into a SIPP.

The other thing to think about is that with a SIPP, you don’t pay tax going in, but you pay tax on the way out. You can withdraw 25% tax free, but the rest is taxable at your marginal rate. Assuming your lump sum is non-taxable in your hands, the benefits of the SIPP are limited to the 25% (and inheritance tax benefits for your heirs if you die before the age of 75).

If the lump sum is non-taxable, I would invest it in non-taxable, while moving 20k (or 40k if you have a spouse) per year into ISA. You can use tax loss harvesting and annual capital gains allowance (10k) to limit your tax meanwhile.

Topic Author
steveyg50
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Joined: Tue Jul 09, 2019 6:35 pm

Re: Have recently acquired lump sum to invest [UK]

Post by steveyg50 » Thu Jul 11, 2019 1:57 pm

The lump sum is approx double my salary. It will fit entirely into my SIPP given the carry forward rule, because have not paying much into pensions currently, only my works pension. My SIPP is new, I only just started it

I thought I pretty much understood SIPP but please correct me if I'm wrong.

So say I got £100. I put into SIPP and it's boosted by tax relief to 125(basic rate PAYER).
Let's say invested for x years it doubles to 250. I get 25% tax free, pay 20% on rest, leaves me 212.50.

But with ISA there's no tax. same again I have £100. The investment again doubles, so I now got £200.

The SIPP therefore gave higher return than ISA.

So the way I see it, if you don't need to access your dough till 55, it's better than an ISA, even for basic rate taxpayers. For highrate tax payers it seems truly crazy not to max out a SIPP (or other pension).

minimalistmarc
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Re: Have recently acquired lump sum to invest [UK]

Post by minimalistmarc » Thu Jul 11, 2019 2:15 pm

steveyg50 wrote:
Thu Jul 11, 2019 1:57 pm
The lump sum is approx double my salary. It will fit entirely into my SIPP given the carry forward rule, because have not paying much into pensions currently, only my works pension. My SIPP is new, I only just started it

I thought I pretty much understood SIPP but please correct me if I'm wrong.

So say I got £100. I put into SIPP and it's boosted by tax relief to 125(basic rate PAYER).
Let's say invested for x years it doubles to 250. I get 25% tax free, pay 20% on rest, leaves me 212.50.

But with ISA there's no tax. same again I have £100. The investment again doubles, so I now got £200.

The SIPP therefore gave higher return than ISA.

So the way I see it, if you don't need to access your dough till 55, it's better than an ISA, even for basic rate taxpayers. For highrate tax payers it seems truly crazy not to max out a SIPP (or other pension).
If the lump sum is double your salary you can’t put it all into the SIPP this tax year.

If lump sum is 100k and salary is 50k the most you can pay into your SIPP is 50k even if you have much more in carryforward.

You I would put as much into a SIPP as you earn, then 20k into an ISA. Then repeat next tax year

WhiteMaxima
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Re: Have recently acquired lump sum to invest [UK]

Post by WhiteMaxima » Thu Jul 11, 2019 2:20 pm

S&P is up 20% since this year. Time in the market, not time the market.

TedSwippet
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Re: Have recently acquired lump sum to invest [UK]

Post by TedSwippet » Thu Jul 11, 2019 2:23 pm

steveyg50 wrote:
Thu Jul 11, 2019 1:57 pm
So the way I see it, if you don't need to access your dough till 55, it's better than an ISA, even for basic rate taxpayers. For highrate tax payers it seems truly crazy not to max out a SIPP (or other pension).
Your return numbers are right. A SIPP wins if you're saving for retirement. Monevator has a decent article that covers this.

That's not to say that it's all unicorns and magic fairy dust with a SIPP, though. There are several threats that can take the shine off. The most prevalent is political tinkering. Since 'pension simplification' in 2006, the government of the day has reduced some limit, allowance, or similar in virtually every budget. The end result is a painful confection of overlapping and incoherent rules. There are three separate annual allowances (standard £40k, fiendishly complex tapered £10k, and stingy MPAA £4k), and no end of lifetime allowances since with every reduction the government has to introduce one or two 'protected' regimes.

UK pensions are a perennial political football, and if you're a long way from access at age 55 -- scheduled to go up to age 57 at some point, or even higher when the government gets round to it -- that's an awful lot of budgets you have to sit through, none of which, on recent experience, will be anything other than another tightening of the screw. If you read around the press you can see regular calls for eliminating the 25% tax-free element, removing higher rate tax 'relief' (it's actually 'deferral' for the most part, but that's nowhere near as easy to demagogue), or even axing pensions entirely and forcing everyone into an ISA-like thing, and so on.

Provided you go in with both eyes open to the likelihood that when you come to withdraw from your SIPP the tax rules on pensions may look nothing at all like they do now, a SIPP can be a winner. On current rules, pensions win over ISAs. However, it's certainly the case that their benefits have been chiselled away by successive governments, and that may well continue, with the main unknown being the pace of deterioration.

I'm not saying not to put some of this money into a SIPP. I probably would, particularly if I was behind on retirement saving for any reason. Just be aware of the potential for a future government to make a mess of your plans.

Topic Author
steveyg50
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Joined: Tue Jul 09, 2019 6:35 pm

Re: Have recently acquired lump sum to invest [UK]

Post by steveyg50 » Thu Jul 11, 2019 3:25 pm

[/quote]

If the lump sum is double your salary you can’t put it all into the SIPP this tax year.

If lump sum is 100k and salary is 50k the most you can pay into your SIPP is 50k even if you have much more in carryforward.

You I would put as much into a SIPP as you earn, then 20k into an ISA. Then repeat next tax year
[/quote]

Yes you are correct. Thank you for pointing that out. :oops: I did not see that part of the rule, you can only put your salary in. Well I can fit 3/4 into SIPP and ISA combined. The rest can be in cash and non-ISA till next year.
Last edited by steveyg50 on Thu Jul 11, 2019 3:38 pm, edited 1 time in total.

TedSwippet
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Re: Have recently acquired lump sum to invest [UK]

Post by TedSwippet » Thu Jul 11, 2019 3:34 pm

steveyg50 wrote:
Thu Jul 11, 2019 3:25 pm
If you can put in 40k per year, and I have not put anything into pensions in the previous 2 years, can I not put 120k in this year?
Only if your salaried earnings are £120k or more this year. This article explains:
One of the key pension annual allowance carry forward rules is that you can’t receive tax relief on contributions in excess of your earnings in any tax year. For example if a person earns £60,000 in a tax year, they can only contribute up to £60,000 to their pension that tax year. No matter how much unused allowance they have remaining from the previous three years, they can only bring forward £20,000 so that their pension contributions equal their annual salary.

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corn18
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Re: Have recently acquired lump sum to invest [UK]

Post by corn18 » Thu Jul 11, 2019 3:45 pm

Might be a good time to write an IPS. Then follow it. I have been battling my emotions this year due to a large windfall. It sat in savings for a bit while I read my IPS. Now it is in a MM account inside my after tax retirement account. I move 1/3 into my 60/40 allocation. Now I am getting ready to dump all the rest into my 60/40 AA. I debated whether to pay off my house, too.

I am going to follow my IPS. I wrote it years ago and nothing has changed. And I haven't come up with a good reason not to follow it. I am thankful I have it, otherwise I would do something stupid. Here's what guides me:

Objective: $XXM in retirement savings by age 55 (2021).

Asset Allocation (AA): 60% stocks / 40% bonds with 25% of stocks international

Rebalance when AA gets outside of 5% or annually

Invest in very low cost index funds

Do backdoor Roth for myself and wife annually ($7000 me, $6000 wife). Leave in cash in traditional IRA while waiting to roll over to Roth. Wait one week to do roll over to Roth to allow funds to clear. Once in Roth, lump sum investment into total stock market index fund. Funds for backdoor Roths will come from RSU sale, bonus or pension.

Invest maximum allowed in 401k ($24,500) at a rate that maximizes company match. Use 401k to manage 60/40 AA. Invest only in low cost index funds where possible in 401k.

Invest maximum allowed in 401k after tax and do a mega backdoor Roth annually. Lump sum investment into total stock market index fund.

Invest a minimum of $75k annually in taxable account. Lump sum investment into total market, total international market or tax free muni's to manage AA. This can be met by RSU, bonus or pension.

Invest 5% of annual salary allowed into non-qualified deferred compensation plan (NDCP) in order to get the company match.

Minimize current taxes by investing only in total stock and international stock index funds in taxable account. Tax free muni bonds up to $50k is also allowed in the taxable account. Minimize taxes by concentrating bonds in 401k.

Maximize growth in Roth accounts by investing in total stock market index funds.

Restricted Stock Units (RSU): When RSU's vest, sell immediately and invest the money in a lump sum in accordance with my Asset Allocation (AA) in my taxable retirement account.

Bonus: Invest entire bonus each year in a lump sum in accordance with my Asset Allocation (AA) in my taxable retirement account.

Military Pension: Invest 100% of pension in taxable account short term fund for house down payment.

Mortgage: do not prepay mortgage

Life Ins: Maintain multiple term life policies laddered until age 78. As savings becomes sufficient to maintain DW current lifestyle with low risk, policies will be allowed to end without renewal.

Inheritance: let my wife decide what to do after waiting three months.
Don't do something, just stand there!

Topic Author
steveyg50
Posts: 9
Joined: Tue Jul 09, 2019 6:35 pm

Re: Have recently acquired lump sum to invest [UK]

Post by steveyg50 » Thu Jul 11, 2019 3:50 pm

Yeah just realised I misunderstood completely the carry forward, like a dummy.

Regarding government changes to SIPP rules that's a good point. I suppose if they spoil them a bit, one would max out ISA first then put in SIPP what's left.,not the other way round. Bit late what was already stashed in the SIPP though.

I'm basic rate tax payer, seems for high rate the SIPP would need to be totally ****ed for it not to be worthwhile, since you would be unlikely to be in the high rate tax bracket whilst drawing it unless rather rich :moneybag :moneybag

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