UK - Helping an older relative - Account Review

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Tourne
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UK - Helping an older relative - Account Review

Post by Tourne » Sun Sep 15, 2019 11:15 am

I am helping an older relative in the UK move away from her high-cost adviser. I will be managing her account for her using the Interactive Investor platform. While the basics of UK investing are very helpfully laid out in the BH Wiki, I just wanted to get a quick status check from those with more UK investing experience than me.

- 69 year-old retired widow
- No debt, house fully paid off
- All ongoing living expenses paid for via state pensions. This includes property tax, insurance, and basic home and car repairs. She leads a comfortable life without having to draw on her investments (no withdrawals since she set up the account five years ago).
- Health care covered by UK National Health Service, so health care costs are minimal.
- Emergency Fund: 2 years of living expenses. This is currently held in Premium Bonds. She is quite comfortable with this, so I am reluctant to push her to switch the emergency fund to something else, despite the abysmal returns from Premium Bonds.
- Tax rate: 20% (Basic Tax Rate)
- Portfolio value: ~GBP 300k
- Investment Objective: Capital preservation; keeping pace with inflation. The goal is to have a source of funds for contingencies later in life. For example, if she has to pay for some health care privately, if the NHS cannot provide a particular service. Or to plus up her pension money in order to be able to afford better nursing care. We could also use funds from the portfolio to top up the emergency fund if a major expense (e.g. roof replacement) came up in the next few years.
- Ability to take risk: Her previous adviser had her roughly 30/70 stocks/bonds, and she seemed ok with this level of volatility. To be honest, she wasn’t even really paying attention to it (which is why she did not see she was being charged more than 2% in fees!)
- I will gradually be switching her out of her existing actively managed funds, taking care to stay below the capital gains threshold (GBP 12k/year).
- The stocks and shares ISA will be fully funded each year (GBP 20k), using money generated from selling assets in the taxable account.

Proposed Allocation

Taxable Account
30% Fidelity Index World Fund (Accumulating Shares) (PIWOA) (0.12%)
31.5% iShares £ Index-Linked Gilts UCITS ETF GBP (Distributing Shares) (INXG) (0.10%)

ISA (fully funded for 2019)
3.5% iShares £ Index-Linked Gilts UCITS ETF GBP (Distributing Shares) (INXG) (0.10%)
35% iShares Core Global Aggregate Bond UCITS ETF - GBP Hedged (Distributing Shares) (AGBP) (0.10%)

Questions
1) I have not included a home-country bias in the equity portion of the portfolio, given how small the UK is as a percentage of the world equity market. Is there any reason I would want to have a UK home country bias?
2) Given that she will not need to draw on the account for ongoing expenses, have I included too high a proportion of inflation-linked bonds? (50% of bond allocation)
3) Are there other funds that I should consider for the portfolio that would be better for achieving the investment goal (capital preservation; keeping pace with inflation)? Unfortunately, Accumulating Shares are not available for either of the bond funds, which I understand would be (slightly) preferable in the tax-sheltered account.
4) Any other considerations that I am missing for a retired UK-based investor?

Many thanks (from both me and my relative) for any advice and guidance from the BH community.

-Tourne
Plans are nothing; planning is everything - Dwight D. Eisenhower

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

Re: UK - Helping an older relative - Account Review

Post by Valuethinker » Sun Sep 15, 2019 11:32 am

Tourne wrote:
Sun Sep 15, 2019 11:15 am
I am helping an older relative in the UK move away from her high-cost adviser. I will be managing her account for her using the Interactive Investor platform. While the basics of UK investing are very helpfully laid out in the BH Wiki, I just wanted to get a quick status check from those with more UK investing experience than me.

- 69 year-old retired widow
- No debt, house fully paid off
- All ongoing living expenses paid for via state pensions. This includes property tax, insurance, and basic home and car repairs. She leads a comfortable life without having to draw on her investments (no withdrawals since she set up the account five years ago).
- Health care covered by UK National Health Service, so health care costs are minimal.
- Emergency Fund: 2 years of living expenses. This is currently held in Premium Bonds. She is quite comfortable with this, so I am reluctant to push her to switch the emergency fund to something else, despite the abysmal returns from Premium Bonds.
- Tax rate: 20% (Basic Tax Rate)
- Portfolio value: ~GBP 300k
- Investment Objective: Capital preservation; keeping pace with inflation. The goal is to have a source of funds for contingencies later in life. For example, if she has to pay for some health care privately, if the NHS cannot provide a particular service. Or to plus up her pension money in order to be able to afford better nursing care. We could also use funds from the portfolio to top up the emergency fund if a major expense (e.g. roof replacement) came up in the next few years.
- Ability to take risk: Her previous adviser had her roughly 30/70 stocks/bonds, and she seemed ok with this level of volatility. To be honest, she wasn’t even really paying attention to it (which is why she did not see she was being charged more than 2% in fees!)
- I will gradually be switching her out of her existing actively managed funds, taking care to stay below the capital gains threshold (GBP 12k/year).
- The stocks and shares ISA will be fully funded each year (GBP 20k), using money generated from selling assets in the taxable account.

Proposed Allocation

Taxable Account
30% Fidelity Index World Fund (Accumulating Shares) (PIWOA) (0.12%)
31.5% iShares £ Index-Linked Gilts UCITS ETF GBP (Distributing Shares) (INXG) (0.10%)

ISA (fully funded for 2019)
3.5% iShares £ Index-Linked Gilts UCITS ETF GBP (Distributing Shares) (INXG) (0.10%)
35% iShares Core Global Aggregate Bond UCITS ETF - GBP Hedged (Distributing Shares) (AGBP) (0.10%)

Questions
1) I have not included a home-country bias in the equity portion of the portfolio, given how small the UK is as a percentage of the world equity market. Is there any reason I would want to have a UK home country bias?
Only about 15 per cent of UK tax payers file a tax return. Looks like she might have to. If you put together all the numbers yourself then an accountant should charge 500 to 1000 pounds plus VAT to fill it in and submit it.

The UK grants exemption on dividends up to 2000 from memory (the level is brimg lowered). That might be for dividends for YK listed companies only? Check.

There is no other good reason not to diversify.
2) Given that she will not need to draw on the account for ongoing expenses, have I included too high a proportion of inflation-linked bonds? (50% of bond allocation)
The yield on indexed linked gilts is horrible. Like minus 2.0 per cent. And the duration of the fund is very long. Something like 15 years?

Although short term index linked gilts have even lower yields I would put 25 per cent into ST gilts and 25 per cent into gilt index BUT I would wait until post Brexit as anything could happen depending on how we Brexit and impact on economy and interest rates.
3) Are there other funds that I should consider for the portfolio that would be better for achieving the investment goal (capital preservation; keeping pace with inflation)? Unfortunately, Accumulating Shares are not available for either of the bond funds, which I understand would be (slightly) preferable in the tax-sheltered account.
4) Any other considerations that I am missing for a retired UK-based investor?

Many thanks (from both me and my relative) for any advice and guidance from the BH community.

-Tourne
Nursing homes, decent ones, cost 5300 pcm. Care homes cost 3500+. Ask me how I know ;-). Once you have below 23200 in assets govt will pay (but not enough for a nice home).

Tbh interest rates are so lousy right now I would be tempted to be 50 per cent equity (given no immediate need for money and 2 years expenses in premium bonds). Reason being she could live another 30 years I have 2 aunts alive over 90.

TedSwippet
Posts: 2578
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: UK - Helping an older relative - Account Review

Post by TedSwippet » Sun Sep 15, 2019 12:35 pm

Tourne wrote:
Sun Sep 15, 2019 11:15 am
1) I have not included a home-country bias in the equity portion of the portfolio, given how small the UK is as a percentage of the world equity market. Is there any reason I would want to have a UK home country bias?
Not really. I have one, but it is historical rather than rational. That hurt me with Brexit, and continues to do so, as the whole saga seems to be neverending. (This may reverse, I suppose, if Brexit is goes better than expected. Or not, if it goes worse.)
Tourne wrote:
Sun Sep 15, 2019 11:15 am
2) Given that she will not need to draw on the account for ongoing expenses, have I included too high a proportion of inflation-linked bonds? (50% of bond allocation)
I too hold half and half normal bonds and inflation linked bonds. However, it would be a mistake to think that inflation linked bond funds protect fully and linearly from inflation. They're actually highly volatile at times. For example, INXG lost 2.66% last Friday. And more than 4% in one day a couple of weeks ago. A 7% loss over the past two weeks is not what you might expect from bonds, especially as there's no readily identifiable cause.
Tourne wrote:
Sun Sep 15, 2019 11:15 am
3) Are there other funds that I should consider for the portfolio that would be better for achieving the investment goal (capital preservation; keeping pace with inflation)? Unfortunately, Accumulating Shares are not available for either of the bond funds, which I understand would be (slightly) preferable in the tax-sheltered account.
All reasonable choices. I'm slightly mystified though about why hold an accumulation units in the taxable account when income units of the same fund are available.
Tourne wrote:
Sun Sep 15, 2019 11:15 am
4) Any other considerations that I am missing for a retired UK-based investor?
Nothing that springs to mind immediately.

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Tourne
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Re: UK - Helping an older relative - Account Review

Post by Tourne » Sun Sep 15, 2019 2:39 pm

Great. Many thanks to you both. TedSwippet, my thought on the accumulating shares in the taxable account was that the capital gains threshold is higher than the annual allowance for dividends. I take it from your comment that income shares are better in the taxable account?

Many thanks,
Tourne
Plans are nothing; planning is everything - Dwight D. Eisenhower

TedSwippet
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Location: UK

Re: UK - Helping an older relative - Account Review

Post by TedSwippet » Sun Sep 15, 2019 3:06 pm

Tourne wrote:
Sun Sep 15, 2019 2:39 pm
Great. Many thanks to you both. TedSwippet, my thought on the accumulating shares in the taxable account was that the capital gains threshold is higher than the annual allowance for dividends. I take it from your comment that income shares are better in the taxable account?
The problem with accumulation units in a taxable account is that in the UK you have to pay income tax annually on the 'notional' dividend that the units accumulate (but do not pay out). When you sell, you can then add these 'notional' dividends to the cost basis, so that you don't pay tax on them twice.

The end effect, though, is the same as if you had held distribution units, just with a painful tax computation process and a potential cash-flow issue (paying tax on money not yet received, and the need to sell shares if you do happen to want access to dividend-like income). The only possible saving is a minor one on trading costs, and even here that could be negligible given that the plan is to transition money from taxable into ISA as annual limits permit.

Barclays explains here: https://www.barclays.co.uk/smart-invest ... ion-units/

Personally, I use accumulation units where possible only in my ISAs and pensions, and stick to distribution units in my taxable account. It just makes life simpler, given that there's no tax advantage anywhere to using one unit type over another.

steveyg50
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Re: UK - Helping an older relative - Account Review

Post by steveyg50 » Sun Sep 15, 2019 3:18 pm

Maybe you know already, but perhaps worth pointing out that Fidelity index world tracks MSCI World index which is actually developed world, no Emerging markets. Seems misnamed to me.

I have same fund in my SIPP, so added Fidelity index emerging markets at 20% of the World fund. Some would say 10 or 15% more appropriate.

In my Vanguard ISA I have Global all-cap which is an all world fund.(10% emerging markets).

Pinkllama
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Re: UK - Helping an older relative - Account Review

Post by Pinkllama » Sun Sep 15, 2019 3:32 pm

You could go ultra simple with something like Vanguard Target Retirement 2015.
It currently stands at 38% equity and will end up at 30% in 2-3 years.
It contains short dated index linked gilts that will total about 17% of the fund when it gets to 30% equities.
I think the duration on the normal index linked gilt funds and ETF’s is about 22 years, so if interest rates rose 1% in response to inflation, the fund would go down by 22%. Not what you want really!

Valuethinker
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Re: UK - Helping an older relative - Account Review

Post by Valuethinker » Mon Sep 16, 2019 3:11 am

Tourne wrote:
Sun Sep 15, 2019 2:39 pm
Great. Many thanks to you both. TedSwippet, my thought on the accumulating shares in the taxable account was that the capital gains threshold is higher than the annual allowance for dividends. I take it from your comment that income shares are better in the taxable account?

Many thanks,
Tourne
As per Ted Swippet:

- in UK tax you pay tax on dividends from a fund, whether they are distributed (Distributing Fund) or accumulated

- you pay capital gains at disposal of the fund units - so you need to know your cost base, no matter how far back in time that was

Therefore Accumulation Units are a no-no in taxable accounts.

Valuethinker
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Re: UK - Helping an older relative - Account Review

Post by Valuethinker » Mon Sep 16, 2019 3:40 am

TedSwippet wrote:
Sun Sep 15, 2019 12:35 pm

Tourne wrote:
Sun Sep 15, 2019 11:15 am
2) Given that she will not need to draw on the account for ongoing expenses, have I included too high a proportion of inflation-linked bonds? (50% of bond allocation)
I too hold half and half normal bonds and inflation linked bonds. However, it would be a mistake to think that inflation linked bond funds protect fully and linearly from inflation. They're actually highly volatile at times. For example, INXG lost 2.66% last Friday. And more than 4% in one day a couple of weeks ago. A 7% loss over the past two weeks is not what you might expect from bonds, especially as there's no readily identifiable cause.

[/quote]

Did they hit a coupon date? That's a big move for a gilts fund.

Twitches in expectations of inflation & interest rates OR (perhaps more likely) an asset allocation shift by a major investor - Indexed Linked Gilts, especially at the very long end (20-30 years + the 50 year one out there) are very thinly traded, mostly held by "buy & hold" pension funds & insurers.

TedSwippet
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Location: UK

Re: UK - Helping an older relative - Account Review

Post by TedSwippet » Mon Sep 16, 2019 3:58 am

Valuethinker wrote:
Mon Sep 16, 2019 3:40 am
Did they hit a coupon date? That's a big move for a gilts fund.
I don't know. I hold my index linked gilts through a Vanguard fund. That showed similar NAV drops, so it certainly looked to me like a real thing rather than a second order effect of coupons. And as I understand it, the coupons on index linked gilts are small, since the inflation linking arrives as capital gain (right? bonds and gilts are not my strong point).

Anyway, I found this surprising, since I don't think I've noticed moves this large before. However, I just happened to be watching closely because I am -- or rather, was -- a hair breadth away from the pension lifetime allowance, and had planned to crystallise my pensions right at the LTA. I had the paperwork all filled out and ready to mail. No need to send it just yet, then.

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Tourne
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Re: UK - Helping an older relative - Account Review

Post by Tourne » Mon Sep 16, 2019 1:21 pm

Many thanks to all of you. Lots of good points in here. I will go for the income shares at Fidelity, and look to add a bit of EM exposure. Also interesting to think about increasing equity exposure if she doesn’t need to draw on the funds for the next few years. As always, the BH community is really generous in sharing its collective wisdom. :sharebeer
Plans are nothing; planning is everything - Dwight D. Eisenhower

Valuethinker
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Re: UK - Helping an older relative - Account Review

Post by Valuethinker » Tue Sep 17, 2019 4:37 am

TedSwippet wrote:
Mon Sep 16, 2019 3:58 am
Valuethinker wrote:
Mon Sep 16, 2019 3:40 am
Did they hit a coupon date? That's a big move for a gilts fund.
I don't know. I hold my index linked gilts through a Vanguard fund. That showed similar NAV drops, so it certainly looked to me like a real thing rather than a second order effect of coupons. And as I understand it, the coupons on index linked gilts are small, since the inflation linking arrives as capital gain (right? bonds and gilts are not my strong point).
The amount of the coupon is also indexed by RPI. The ratio is RPI index (now)/ RPI index (at issue). This is multiplied by the coupon rate to give the coupon paid (semi annually). Same for the redemption amount.

There are 2 types of ILGs: 8 month time lag on RPI (the old ones) and 3 month lag (the newer ones). Because it takes that long for an officially certified final RPI to be produced. This then becomes an issue at redemption time - how you estimate inflation for that time gap of 8 months.

The Canadians came up with a way of estimating inflation that allowed the lag on Real Return Bonds to be reduced from 8 months to 3 months - colonial hybrid vigour ;-).

In 2005 they issued a 50 year ILG in response to demand from pension funds. I don't know if they have done that again, since.
Anyway, I found this surprising, since I don't think I've noticed moves this large before. However, I just happened to be watching closely because I am -- or rather, was -- a hair breadth away from the pension lifetime allowance, and had planned to crystallise my pensions right at the LTA. I had the paperwork all filled out and ready to mail. No need to send it just yet, then.
I can't think of another explanation *except* volatility around Brexit.

The craziness of making so many decisions which affect peoples' lives so profoundly, contingent on the values of financial markets on a particular day.

Valuethinker
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Re: UK - Helping an older relative - Account Review

Post by Valuethinker » Tue Sep 17, 2019 4:44 am

Tourne wrote:
Mon Sep 16, 2019 1:21 pm
Many thanks to all of you. Lots of good points in here. I will go for the income shares at Fidelity, and look to add a bit of EM exposure. Also interesting to think about increasing equity exposure if she doesn’t need to draw on the funds for the next few years. As always, the BH community is really generous in sharing its collective wisdom. :sharebeer
EM I think is a nice to have not a must have.

There's an occasional argument advanced here which is "EM are the demographic and economic future therefore I must have EM investments".

The subordinate clause is not at all logically true from the first part. EM stocks don't necessarily perform with the underlying economy. They are not necessarily reflective of the underlying economy. There are governance and volatility issues (for example many EM stocks have large or majority state percentages of ownership). The countries with the high birth rates (Pakistan, Nigeria etc.) are not represented in EM indices (or may not have stock markets), whereas China say has the demographics of the First World. Many developed market equities have large exposure to EM - Caterpillar, Boeing, P&G, Unilever, Nestle, Diageo all come to mind).

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