Tuesday, 16 August 2016

Selecting Your DIY Pension Platform

Earlier this year I reviewed the process to select a diy online broker which mainly related to ISAs and dealing accounts. Most brokers who offer such platforms will also offer SIPPs however due to the nature of pensions, they can be a little more complex.

I thought it may therefore be worthwhile to take a look at the possibilities for those looking into a diy option for their online pension.


Some Considerations

The main aspects to consider at the start of the process are :

1. Value of portfolio

As with ISA providers, online brokers mainly divide into two categories, those that charge a percentage platform fee based on the value of your investments such as AJ Bell and Hargreaves Lansdown and those that charge a fixed annual/quarterly fee regardless of how much is held with them for example Halifax Share Dealing and Alliance Trust..

As a rough rule of thumb, if your portfolio is greater than say £60K to £70K then it will probably work out cheaper to look at the fixed fee providers and for those just starting out or with more modest pensions, the percentage fee may work out better. To some extent, it may depend upon the type of investments you intend to hold in the portfolio.

However, although costs are important they are not the only consideration. Customer service for example may be an important factor for many, for others, financial size/strength of the provider will be a consideration.

2. Will you be investing using mainly funds (unit trust/OEICs) or with shares, investment trusts or exchange traded funds (ETFs)?

With many brokers, the platform charges are similar but the dealing costs to buy/sell will vary and the charges on shares and inv. trusts/ETFs may be capped which can make a big difference with larger pension pots.

Some providers such as my broker AJ Bell charge a percentage platform fee - currently 0.20% (0.25% from 1st October) - for holding funds but will cap the charges for shares etc. at £100. Those with a portfolio of £50K in funds such as Vanguard LifeStrategy for example will pay £125 p.a. in platform costs but only £100 if invested in ETFs or investment trusts. On a portfolio of £200K the corresponding annual fees would be £500 and for ETFs, again £100.

There may be no charges for buying funds with some platforms however, all brokers will charge a transaction fee for buying & selling shares, investment trusts and ETFs - typically around £10.


3. Will it be a lump sum investment or are you drip feeding via regular monthly direct debit?

Most investors will probably be slowly building their pension pot over many years via regular monthly drip feeds via direct debits. For such people, it will clearly make sense to choose a broker who can offer a free (funds) or low cost regular investment option (shares, ETFs etc.).

As we have already seen above, some brokers make no charge for the purchase of funds (as opposed to shares etc.) which make these attractive, particularly where the monthly contributions are fairly modest. Many platforms offer a discount to their standard dealing charges of say £10 - maybe £1.50 or £2.00 for the regular monthly purchase of investments.

Where the investment is a larger lump sum, possibly due a transfer from another pension provider, it will obviously be more important to consider annual platform/admin charges, especially where no further monthly contributions will be made.

Combined Charges

It will be important to have a clear picture of both the platform charges and the cost of buying selling the investments as well as the cost of the investments themselves. For example, it may cost more initially for a one-off purchase of an investment but there may be lower ongoing platform costs.

Low cost index funds are becoming more popular with small investors. The ongoing charges for some are less than 0.10% which is incredibly good value but this can be negated by holding them in a sipp with percentage charges which apply up to say £250K. A similar product may be available as an ETF with a slightly higher ongoing charge but because the platform costs are capped, the combined costs will work out less than holding the lower cost index fund.

An extra 0.20% in broker platform charges may not seem much but on an typical sipp portfolio of around £50,000 it will be an extra £100 every year. On a larger portfolio of £200K the extra charges would be £400 every year.

Once you are fairly clear on the above points it should be easier to narrow down the best choices for the most suitable broker.

Some Other Considerations

1. Check out the costs for closing the account and transferring to another provider. It is common for providers to review their charges or other conditions from time to time. Typical fees are usually based on whether you wish to transfer your portfolio over without having to sell and then repurchase with the new broker and will be around £15 - £25 per line of stock. Obviously, if you hold many different investments, it could be very expensive to transfer out.

Some platforms also impose additional charges for transferring out as cash.

2. Although you may be at the start of the sipp building journey, be aware of the costs of taking benefits such as conversion to drawdown with your provider at a later stage. Also be aware that some providers currently do not offer benefits which will entail a move to another provider at a later stage.

3. Does the sipp provider offer the type of investment you wish to hold in your portfolio? Seems fairly obvious but some brokers such as Cavendish for example, will offer only a limited range of investment trusts etc.

4. If you are likely to hold shares and/or investment trusts, check the situation regarding re-investing of dividends - is there a facility for this to be done automatically and if so, is there a charge?

5. Be aware that tax credits will need to be manually invested from time to time.

6. Check if there are additional charges for telephone trades - probably unlikely that this will occur but some may be interested in investments such as PIBS for example which can only be purchased via a telephone trade.

7. Is it likely you will want to hold overseas listed investments? If so, make sure this option is available and check out any additional costs.

Comparison Sites

Comparing the best SIPP providers isn't simple. Which company will be best and cheapest for your journey over the coming 30 years will depend on how much and how often you invest. Some will be better for smaller pots, some better for free regular monthly drip feeding into funds. Others will be more appropriate for larger sums or for consolidating several smaller pots from other pension providers. There are no providers offering the best all round deal for small and large amounts alike.

There is therefore no single one-size-fits-all best sipp provider. The best one for any individual will be the one that ticks the most boxes according to that individuals specific situation and requirements.

Monevator has painstakingly created a comparison table covering most of the popular discount brokers and fund platforms. The table is mainly aimed at diy investors seeking a passive approach to running a portfolio using mainly index funds and ETFs.

Compare Fund Platforms is a spin-off from Candid Money run by Justin Modray. Select the ‘sipp’ button at the start then select the funds you wish to compare or may be interested in purchasing, confirm a few assumptions on period of investment and rate of growth (include the option of also holding shares and/or investment trusts also) and instantly see which broker currently offers the lowest cost.

It can be revealing to see the effect on investment returns of the various platform fees over a prolonged period.

Of course, you are not limited to just one broker. You can have more than one sipp and could use one to hold a lump sum transfer from another provider for example and a second sipp for your regular monthly contributions.

From April 2017, the new Lifetime ISAs will be introduced for younger investors and these may be more attractive/flexible than the traditional sipp.


Here is a random selection of some sipp providers to assist with research (this list is by no means comprehensive and other platforms are listed on the comparison sites above)

[N.B Prices/info will change over time and as I do not intend to regularly update this article please visit the platform provider if you are intending to start/transfer a sipp]

Fixed Flat Fee

Halifax Sharedealing - http://www.halifax.co.uk/sharedealing/our-accounts/sipp/sipp-charges/

Platform - £90 p.a. up to £50K,  £180 p.a. over £50K - flat fee
Dealing - £12.50 funds and shares etc.(£2 regular)
Drawdown - £180 p.a. to age 75 then £300 p.a.

Alliance Trust - http://www.alliancetrustsavings.co.uk/pensions/pension-charges-and-fees/

Platform - £180 p.a. flat fee
Dealing - £12.50 funds and shares etc.(£1.50 regular)
Drawdown - £255 p.a.

Iweb - www.iweb-sharedealing.co.uk

Platform - £90 p.a. up to £50K,  £180 p.a. over £50K - flat fee
Dealing - £5 funds and shares etc.
Drawdown - £180 p.a. to age 75 then £300 p.a.


Percentage

AJ Bell Youinvest - https://www.youinvest.co.uk/sipp/charges-and-rates (from 1/10/2016)

Platform - 0.25% on first £250K then 0.10% up to £1m (but capped at £100 p.a. for shares, trusts and ETFs)
Dealing - £1.50 for funds - £9.95 for shares, trusts and ETFs (£1.50 regular)
Drawdown - £100 p.a.

Hargreaves Lansdown - http://www.hl.co.uk/pensions/sipp

Platform - 0.45% on first £250K then 0.25% up to £1m (but capped at £200 p.a. for shares, trusts and ETFs)
Dealing - free for funds - £11.95 for shares etc (£1.50 regular but limited)
Drawdown - (no additional charges - same as platform)

Charles Stanley - https://www.charles-stanley-direct.co.uk/Our_Charges/

Platform - 0.25% (but capped at £150 for shares, trusts and ETFs and min. £20)
Admin - £100 p.a. + vat
Dealing - free for funds - £10 for shares etc
Drawdown - Take benefits £150 +vat; Payroll £50 +vat p.a.

Cavendish - www.cavendishonline.co.uk

Platform - 0.25% funds (limited range of ITs and ETFs)
Dealing - free for funds (0.1% for ITs and ETFs)
Drawdown - not available

Fidelity - https://www.fidelity.co.uk/investor/funds/fund-charge.page

Platform - £45 flat fee + 0.35% up to £250K, 0.20% on £250K+ (capped at £45 on limited range of ITs and ETFs)
Dealing - free for funds (0.1% for ITs and ETFs)
Drawdown - not available

Best Invest - http://www.bestinvest.co.uk/the-best-sipp/low-cost-sipp-charges

Platform - 0.3% on first £250K then 0.2% up to £1m
Dealing - free for funds - £7.50 for shares etc.
Drawdown - under £100K £100 +vat (over £100K no additional charges - same as platform)


Wednesday, 10 August 2016

New Charges from AJ Bell

This week AJ Bell have announced new charges for their customers from 1st October 2016. The new charges apply to all types of account - SIPP, ISA, Dealing Account and Junior ISA.

SIPP

I have held my sipp with AJ Bell for many years. The changes are as follows:

The tiered custody charge of between £5 and £25 per quarter will be abolished.

Charges for holding funds will be increased from 0.20% to 0.25%. Therefore, with a typical funds-only portfolio of say £50,000 the extra charges will be £25 p.a. I believe those with larger portfolios will take a hit as currently the charges are capped at £200 but with the new charges this cap will no longer apply and the 0.25% applies up to £250K then 0.10% up to £1m.

The dealing cost for buying/selling funds will be reduced from £4.95 to £1.50.

For those in drawdown who do not take an income, the £60 admin charge will be dropped.

The biggest change is for those holding shares, investment trusts and ETFs. At present they pay no platform costs apart from the dealing charges to buy/sell. Under the revised structure, they will pay a new custody charge of 0.25% but this will be capped at £25 per quarter.

So, those with a portfolio of shares, ITs and ETFs to the value of £40,000 or more will now pay an additional £100 per year. This option however may be worth looking at for those with larger fund-only portfolios who will be able to potentially save up to £500 p.a.

ISA

As with sipps, the dealing charges for funds is reduced to £1.50 which will make regular drip feeding more attractive. Platform charges for funds increases to 0.25% however, those with larger portfolios will be adversely affected as current charges are capped at £200..

A 0.25% new custody charge will also apply to portfolios holding shares, ITs and ETFs however this will be capped at a lower rate of £7.50 per quarter (£5 junior ISA) compared to the £25 for sipps.

So, those with a typical portfolio of £50,000 will pay an extra £25 per year for holding funds but will save £3.45 for each sale or purchase which could work out as a net saving for many. Those holding mainly shares etc. who currently escape the platform charges will now pay £30 per year extra.

The same charges will apply to the new Lifetime ISA when introduced in 2017.

Conclusion

It seems to me that the people most affected will be those with larger portfolios over say £100K holding mainly funds as their charges are currently capped at £200 per year for both ISA and SIPP. With the new charges they will pay 0.25% on their portfolios up to £250,000.

I have my flexi-drawdown SIPP and ISA with AJ Bell and hold a mixture of funds - Vanguard Life strategy & Vanguard UK Equity Income - investment trusts and shares. These days, I do not do a lot of dealing so the reduction in the charges for funds will make little difference. If I were building my portfolio, it would possibly be more attractive.

I have tended to hold mainly investment trusts in my sipp which had the added advantage of avoiding platform charges but the changes will mean it would be no more expensive to hold funds so I may well be looking at a switch into the Vanguard Lifestrategy for my SIPP.

With my ISA, I am slowly selling down my shares but hold a significant percentage of my portfolio in investment trusts. There will therefore be additional charges but these will be capped at a maximum of £30 per year so it’s not so big a deal.

Last year I opened a second ISA with Halifax Share Dealing for my funds as the platform charges were only £12.50 per year which seems like very good value for most portfolios where there will be little or no dealing. It will be interesting to see if there is any knock-on effect with other platforms.

Feel free to leave a comment below if you will be affected by the new charges.

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15/8/16 Here's a link to a response from Andy Bell posted on the Motley Fool board

Tuesday, 2 August 2016

A Look at Sustainable Drawdown Strategies

(Warning - Long Post!)

In the past few weeks there seem to be several articles around the subject of income in retirement. My fellow UK blogger RIT recently hit his FI number of just over £1m and is now looking to firm up plans to retire from the hard slog and live off his accumulated wealth in sunnier climes. His route to this monumental achievement in double-quick time is an inspiration to all - seriously well done if you are reading RIT!


Whilst RIT may now have learnt to navigate the investment world like a seasoned pro, lets face it, for many if not most people, the world of personal finance - pensions, investments, ISAs - can be a big challenge.

Of course we cannot expect to be knowledgeable in every aspect of life and as not many people have expertise in such areas as legal matters or pension planning, we have solicitors and financial advisers to help us out… but at a cost.

However, as a result of the Retail Distribution Review in 2014, fewer and fewer people have access to affordable financial advice, just at a time when more and more people need it. According to the FCA, two-thirds of retail financial products are currently purchased without advice, while many people with less than £100,000 to invest are going it alone when choosing pensions, investments and retirement income products. Many of these people will therefore be considering a diy option for their retirement plans.

The traditional goal of wealth accumulation is generally to seek the highest returns possible in order to maximise wealth, subject to the investor’s risk tolerance. After retiring, however, the fundamental objective is to sustain a certain standard of living while spending down assets over an unknown, but finite, length of time.

Investing during retirement is a rather different matter from investing for retirement, as retirees worry less about maximising risk-adjusted returns and more about ensuring that their assets can support their spending and lifestyle for the remainder of their lives.

My Drawdown Strategy

In a recent article on selling capital units from my Vanguard fund to provide ‘income’, there was a comment from Dave asking about drawdown strategy which set me thinking about the subject in more detail and hence this (rather long) follow-up post.

It is now over 4 years since I converted my sipp to pension drawdown. Here’s a link to my latest review in June.

Having built up my pension pot over many years, I was reluctant to hand it over to one of the large insurance companies in return for a once-and-for-all annuity as the rates on offer were not very attractive. Since then, the annuity rates have fallen further and are currently even less attractive than in 2012.

I more or less carried on with a similar portfolio of investment trusts and PIBS used during the build phase - instead of reinvesting dividends and interest, they were withdrawn for income.

Over 4 years, the returns so far have been a little better than expected at over 9% per year on average and have been boosted by a very good performance from my smaller company trust, Aberforth. As time passes, I expect this will revert to the longer term average of maybe 6% or 7%.

However, I could have used the one-stop simple solution of Vanguard Lifestrategy 60 index fund with its mix of equities and bonds - lower costs, globally diversified - and the return would be 8.2% p.a.

My aim at the start was to drawdown a natural income of 4%. I am unsure why I settled on this figure - possibly because the level represents the average yield provided by my investment trusts and shares in the years leading up to retirement. Although pension funds have been transferred from SIPP to my tax-free ISA in recent times, it does not affect my 4% target for income.

I do not really make much distinction between SIPP, ISA and cash reserve buffer - the total is regarded as one big pot from which I draw the income needed. Income can be withdrawn on a monthly basis from my ISA - most of my investment trusts pay quarterly dividends - and cash deposit account, and on an annual basis from my SIPP and Lifestrategy funds held in my ISA.

Some Basic Questions to Consider

So, getting back to the basic question - what is a sustainable longer term drawdown rate? It will depend upon a number of factors :

What level of income do you need in retirement?

What is the timeframe? Check out average life expectancy for age/gender.

Personality type and attitude to risk?

What is the balance between equities, bonds and other assets in the mix?

Natural Yield or Total Return approach?

Do you want to exhaust the pot or leave a legacy?

What other income will you receive - state/company pension, BTL rental, inheritance etc?

Level of Income Required

The starting point in this process will boil down to the size of the pension pot and the amount of income needed.

The bigger the pot, the more margin you will have - but what is a reasonable target to aim for?

To keep things fairly simple - multiply your average annual spend by a number between 25 and 35 to give you some indication of the final number required for a comfortable retirement. The figure of 25 gives a pot from which you should be able to drawdown 4% each year to cover expenditure.

Therefore, if your annual expenses - food, bills, holidays, etc. etc. amount to £20,000, you will need between £500,000 and £700,000.

Most people will probably need less income in retirement than when working and I guess an average figure would vary somewhere between £15,000 to £20,000 p.a. depending on location and individual lifestyle. For example, for those living in London and the South East, the figure will be much higher than someone like Frugal Freddy living ‘up north’ - possibly a difference of £10,000 or £15,000.

Someone who can get by quite nicely on £10,000 per year will need a pot of between £250,000 and £350,000. (These figures assume no other sources of income).

Will the level of income requirement remain constant throughout retirement or will other income streams such as state pension kick in at some point?

Some income will be required for essential expenditure and some for discretionary spend so it will be useful to have some idea of the minimum requirements for annual spend.

Timeframe

For the average person retiring at the age of 60 or 65 yrs, the standard drawdown analysis which usually covers a period of 30 years will probably suffice.

However, for those wishing to retire earlier - in their 50s or, like RIT in their 40s, some adjustments will need to be factored in to the equation. For a retirement period of 40 years, the 4% rule may still be appropriate however the probability that it will be sustainable will be reduced. For the probability to match the 30 yrs timeframe, it will be prudent to lower the drawdown rate to nearer 3% - certainly in the early years.

Of course, a lower SWR means you need a much larger pot. A fund of £500,000 will generate annual income of £20,000 at 4% but an additional 33.3% or £167,000 would be needed to give the same income at 3%.

Asset Allocation

The basic mix between equities and bonds - possibly property, maybe gold - will have some bearing on the level of return that can be expected from the portfolio. The higher the equity allocation, the higher the expected average return but also this comes with higher volatility which for many is probably not so desirable during the drawdown phase.

My personal mix has been 60% equities so far but over the coming 10 years or so I plan to reduce this to around 40%.

Maybe you can take some guidance from Vanguard’s newly launched Target Retirement Funds (pdf). The equity allocation gradually reduces from 80% to 50% at age 68 yrs and to 30% at age 75 yrs.

Their more conservative analysis starts with 70% equities to age 43 yrs, reduces to 40% by age 67 yrs and then just 20% equities at age 75 yrs.

Of course, as the percentage of equities reduces, the returns will become less each year so this will need to be taken into account.

Rate of Return

Once you are settled on the balance between equities and bonds, it should be possible to work out the expected return based on long term averages for that particular mix. I often use the Vanguard’s asset class risk tool which gives a figure for historical returns and also a breakdown of negative return years.

For example, taking a 60:40 allocation over the past 25 years to 2015 gives an average annual return of 8.6%. There is no guarantee that this will be the return over the coming 25 years but it's possibly the best indicator we have.

We then need to factor in a figure for inflation - again, lots of margin for error but maybe somewhere around 2% will be near the mark for the foreseeable future.

Therefore we could be looking at a real return from our portfolio of  between 4% or 6% p.a. depending your take on future returns and on the level of equities in the portfolio mix.

We also need to take into account charges such as platform fees and any ongoing charges of funds or investment trusts etc. This figure may therefore reduce returns by ~0.5% - higher if using the more expensive managed funds.

Drawdown - Sustainable Rate 

First of all to clarify, we are talking about taking a certain level of income from the investment pot which can go on indefinitely with very little possibility of the pot being exhausted regardless of future market conditions. This is often referred to as the 'safe withdrawal rate' or SWR.

We are all living longer - so goes the mantra - but we don’t know how long we will live - some will live to 100, some will die in their 60s or 70s. The big danger for many people will be running down their pension pot too quickly, especially if they have been dipping into capital for unplanned expenditure.

It will therefore be important to have some sort of plan or strategy to take advantage of the new pension freedoms. The key question will be - what is the safe and sustainable rate of withdrawal?


Various studies have suggested that a rate of 4% should do the job.

This was the figure suggested by Bengen in 1994. His studies showed that a 4% rate would have been successful in any 30 year period from 1926.

The 4% figure was later confirmed by the Trinity study which showed that a 4% withdrawal using 50/50 equity/bond allocation over a 30 yr period was successful 100% of the time.

However, more recently, other research has suggested this figure is too high. For example, Wade Pfau suggests that in today’s low interest rate environment future returns on equities and bonds are likely to be lower and therefore a more realistic rate of 3% should be used. Most of the research I have seen is based on returns from the US market.

The McKinsey report suggests returns for the 30 years to 2014 may have been exceptional and that we should expect significantly lower returns from both equities and bonds over the coming 20 years.

Most of the research I have seen is based on returns from the US market. However there is a recent study (pdf) focussed on the UK market produced for Morningstar which suggests that whilst historic returns for equities and bonds of the UK are broadly similar to global returns, for the near-term future they can be expected to be lower. The study also suggests a 50/50 balanced portfolio is most suitable for UK retirees.

Drawdown Methods

For those who may wish to drill down into the nitty gritty of drawdown, Bogleheads provide a summary of the various methods.

There are basically three approaches:

Constant dollar/pound - in year 1 you draw say 4% of the pot (3% or 3.5% for the more conservative). In year 2 your withdrawal amount is based not on the value of the portfolio but upon yr 1 amount plus inflation. In subsequent years your withdrawal is based upon the previous year and adjusted for inflation.

For example, with a portfolio of £100,000 you draw £4,000 in year 1. The following year, you draw £4,080 and in year 3 you draw £4,161 (inflation 2%).

Regardless of the ups and downs of the market, income withdrawn will always maintain real spending power as it keeps pace with inflation.

However, how would you feel taking ever increasing amounts whilst your capital is falling during a multi-year bear market?

Secondly Constant percentage - simply settle on a percentage figure, 3%, 4% or 5% and withdraw this percentage from your pot each year. Of course, the value of the pot will move up or down each year so the amount withdrawn will vary. This may not be an issue if the income is mainly for discretionary spending items and you have other income streams such as work/state pension for essentials.

Finally Natural Yield - you spend only the dividends and interest generated from your portfolio. This is the method I chose at the start of my drawdown phase using a selection of investment trusts and fixed interest securities.

Personally, I would feel more comfortable with a reasonably predictable annual income which will gently rise to keep pace with inflation. Therefore a combination of method 1 & 3 with the added flexibility provided by my 10% cash buffer.

The use of a buffer zone allows me to avoid selling a portion of my portfolio when prices are down. Working on the assumption that there is mean reversion in market returns, I hope this strategy will help to mitigate the effects of bear markets. It acts in a similar way to investment trusts use of dividend reserves which can smooth the distributions.

Much will depend on timeframe and asset allocation. For those working on a shorter period of 10 years, it could well be possible to withdraw maybe 5% or 6% p.a. without doing too much damage to capital.

Whatever the starting figure, it can always be revised - raised or lowered - as time goes by and actual returns and expenditure become known rather than guessed.

Guyton Klinger Rules

Some research suggests it may be possible to obtain a sustainable rate which is higher than 4%. For those who can cope with a more complex approach, the Guyton-Klinger rules (pdf) which are designed to optimise the withdrawal process.

The first two of its four rules are designed to make sure a sustainable withdrawal rate of about 5.5% is achievable over a retirement period of 40 years:

1. The withdrawal rule: Increase withdrawal in line with inflation in the previous years, unless the previous year’s portfolio total return was negative. This is by far the most effective of the rules. By making sure that withdrawals are frozen in the years following a negative portfolio return, the danger of pound-cost ravaging is drastically minimised. Following the rule means you do not ‘make up’ for missed withdrawal increases.

2. The portfolio management rule: Extract the gains from an asset class that has performed best in the previous year to provide the income, and move excess portfolio gains (beyond what is needed for the withdrawal) into a cash account to fund future withdrawals.

The last two rules are designed as safeguards to stop the income the retiree slices away from their retirement pot becoming so high that they risk running out of money, or so low that that their lifestyle is drastically reduced. (These two rules are no longer applied within the final 15 years of the planned investment period).

3. The capital preservation rule: If the current withdrawal rate rises above 20% of the initial rate, then current spending is reduced by 10%.

4. The prosperity rule: Spending in the current year is raised by 10% if the current withdrawal rate has fallen by more than 20% below the initial withdrawal rate. Doing this means you should not miss out on higher sustainable spending when markets are doing well.

I think this method would be too complex for me however, for some it may be worthwhile exploring the potential for higher income.

Online Calculators

A simple tool such as that provided by HL can be used to provide some rough figures according to various scenarios. Simply plug in a few basic items - age, gender, size of pot and required drawdown amount and the chart will give an indication of how the pension pot will be affected.

A similar tool offered by Fidelity.

Based on historical market returns, firecalc is a useful tool to indicate whether any desired income is sustainable from a given lump sum for a given period. Use the tabs at the top of the page to customise the calculations.


Conclusion

When it comes to pension drawdown, much will depend upon individual circumstances. There is no one-size-fits-all solution.

Furthermore, there are no certainties - everything revolves around percentages and probability. How long will you live; what about market returns; what about cost of living and inflation; will you need a care home - if so for how long and at what cost?

One big factor in the above scenarios is the level of the markets at your starting point. Obviously, if you were lucky/brave enough to start the drawdown in March 2009, your chances of success with a relatively higher withdrawal rate would be much improved compared to, say starting out some 18 months earlier.

Another factor is individual personality - some people are naturally more conservative/cautious than others. Some are more risk-averse and will feel more comfortable with a lower equity allocation and a correspondingly lower return. There are no right or wrong decisions. The person who has spent the past 30 or 40 years carefully building his/her slow and steady pension pot will have a good sense of risk tolerance and is unlikely to adopt a gung-ho strategy by starting with a 6% withdrawal rate for the coming 30 or 40 years of retirement.

Finally, be aware that the SWR academic research is mostly looking at a 100% success rate and is based on statistics which cover a worst case scenario. The 4% ‘rule’ would obviously appear more sustainable based upon a 80% or 90% probability of success. Many investors running a diy drawdown portfolio will be familiar with the concept of ‘living within your means’ and during periods of market downturn will naturally be able to decrease spending on non-essentials. They may decide therefore that they not need the luxury of the cast-iron 100% certain drawdown plan.

Finally simplicity - one option would be to choose one of the LifeStrategy index funds which corresponds to your required level of equities/bonds allocation, set up a cash buffer to provide income in bear market years and start off with a modest drawdown percentage of 3% or 3.5% - see how it goes for the first few years.

Another option could be to hold a selection of managed investment trusts to generate sufficient income to cover essential expenditure combined with the above. Most trusts aim to provide income which should gradually increase each year to keep pace with inflation. They also have dividend reserves which will help to smooth the payouts during bear market periods so there may be less need for a large additional cash buffer.

I hope some of the above will be useful to those approaching retirement and who wish to develop a workable diy drawdown strategy.

Feel free to share any thoughts or how you manage your personal drawdown strategy in the comments below.

Saturday, 30 July 2016

Collectives Income Portfolio - Consolidation & Update

This started off in 2013 as my investment trust income portfolio. Over the past year or so, it has morphed into a collectives portfolio as its scope broadens to include my low cost index funds.

Merger with Individual Shares Portfolio

In April, following the sale of Unilever, my individual shares reduced to just 8 holdings. In the past week, I decided to dispose of Sky following an assessment of prospects after the full year results were announced. With the number now standing at 7 shares, I have therefore amalgamated the two portfolios.

The starting capital for the shares portfolio was £36,000 and the starting capital for this portfolio was £28,000 - a combined total therefore of £64,000.

A couple of the Vanguard funds were held in both portfolios and the units for each have therefore been combined -

Vanguard LifeStrategy 124.46 (shares portfolio) + 43.60 = 168.06

Vanguard UK Equity Income  50.0 (shares portfolio) + 14.70 = 64.70

I last updated on my collectives portfolio at the end 2015.

Although this is demonstration income portfolio, it largely mirrors my own holdings..

The dividends for 2015 of £1,280 were used to top up my holding in the Vanguard UK Equity Income fund adding a further 8.1 units.

Performance

There is no doubt the start of the year has been very volatile, not to mention the past few weeks post Brexit! The dramatic fall in the value of the pound gave a boost to my global equity ETFs and as I need to rebalance my personal portfolio following the redemption of my Coventry PIBS, I have decided to sell my 2 Vanguard ETFs as I had not been overly impressed with performance. Over the 3 years to June, VHYL had returned 4% p.a compared to 8.6% from my Vanguard LS fund. In the past month post Brexit, it has received a boost from the fall in sterling.

These transactions will therefore be reflected in the demonstration portfolio :

63 shares in VHYL @ £36 less sale costs gives £2,258 and,

270 shares in VAPX @ £15.50 gives £4,175 after sale costs

The proceeds together with the sale proceeds from Sky are currently in cash and to be reinvested at some point.

So, how have the various investments fared over the past few months and are my investment trusts adding additional value compared against my Vanguard trackers? In June I compared performance of a basket of 12 investment trusts -v- index funds over the past 5 years and which showed the trusts had the edge.

With the Vanguard High Yield disposal, my benchmark against which I will measure performance will be the two remaining Vanguard trackers -

1. UK Equity Income fund, and
2. LifeStrategy 60 (acc) index fund.

Total returns including income over the past 7 months are 1. 5.8% and 2. 12.8%.  Therefore, taking an average, the benchmark figure against which to assess the portfolio is 9.3%

The managed trusts have provided mixed returns. Leading the gainers unsurprisingly are Blackrock Commodities Income +32% closely followed by Murray International +31% and which is showing signs of recovery after a couple of poor years, however these trusts form only a small percentage of the portfolio and so will have less impact on total returns. My largest holding, Edinburgh has been fairly flat year to date however there have been solid contributions from  Finsbury Growth and Murray Income both +10%. The only trust in the red for the year to-date is Aberforth Smaller -14%.

MYI -v- FTSE A/S Index Year to Date
(click to enlarge)

The portfolio has therefore made a little progress since 1st January. The value of the collectives portfolio at the start of 2016 was £35,129 and the shares portfolio was £40,425 - combined therefore = £75,554 compared to the combined current value of £80,837 - a rise of £5,283 and total return of 7.0%. The slight drag on performance has been the remaining individual shares which are collectively showing a negative total return of -3.5% (laggards include Next -25%, L&G -15% and Berkeley -18%).

The total return for the FTSE All Share index year to date is 8.45%.

Income

As I continue to depend on the returns from my investments to pay the bills and put food on the table - at least for the next 2 years when the state pension will kick in, the objective of the portfolio is to produce a dependable income. Of course, I hope the portfolio will continue to generate good returns for many more years but after 2018 I will not be dependent upon it to cover essential expenditure!

As a large proportion, ~1/3rd of my portfolio comprises Vanguard LS60 (acc), the aim is a positive total return rather than focusing on just the natural income. This will be the first full year that I have the option of selling units from my Vanguard LifeStrategy index fund.

In July following the fall in sterling and the corresponding boost to the VLS fund price, I took the opportunity to sell 13.46 units @ £155.32 to give £2,078 after sale costs and representing 8% of my total holding. This will provide my 4% income requirement for this year and the additional 4% has been added to my 10% cash buffer.

Capital appreciation is always welcome but will largely follow the ups and downs of the general stock market. I have therefore put in place a cash buffer equivalent to 10% of the value of my VLS fund to cover bear market periods when returns are flat or negative. The cash is held in my Coventry BS accounts which has interest of 1.5% so my buffer has now increased to 14.15%.

Here is the combined portfolio
(click to enlarge)

Good Enough

In my younger days, I was foolish enough to believe I could beat the market. In more recent times, I am slowly learning to be comfortable with ‘good enough’. A strategy where 'average' is better than average! I’m now more globally diversified - not perfect but for now, good enough. I am edging slowly away from the rollercoaster of individual shares and entering the relative calm waters of the 60/40 Lifestrategy option. Over the coming decade, I am thinking of a steady 5% or 6% return on average (after inflation) - that will do for me.

The average annualised return after 3.7 years is ~7.1% - so far, so good.