Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to MrFahrenheit,SalvorHardin,Anonymous,johnhemming,Anonymous, for Donating to support the site

New to Drawdown

airbus330
Lemon Pip
Posts: 90
Joined: December 1st, 2018, 3:55 pm
Has thanked: 37 times
Been thanked: 26 times

New to Drawdown

#323916

Postby airbus330 » July 5th, 2020, 5:50 pm

Hi,
I have recently retired and have 2 SIPPS from which I will have to drawdown on for my income for the rest of my life. The retirement came unexpectedly, so the knowledge I have built up is more on the planning and growth phase of investing. I have used resources like Firecalc to estimate that I have enough to live modestly until I am 90 (60 now). What I can't seem to locate is good info on how to most efficiently drawdown my funds in terms of tax. Has anyone any good written or online resources to recommend for more info on the transition from building a pension to taking a pension.
Thanks in advance

Dod101
Lemon Half
Posts: 6044
Joined: October 10th, 2017, 11:33 am
Has thanked: 1365 times
Been thanked: 2416 times

Re: New to Drawdown

#323918

Postby Dod101 » July 5th, 2020, 6:13 pm

Well it seems to me that the first thing you need to do is try to ensure that your drawdown keeps you within the basic rate of tax if that sits well with your income requirements. I would aim to try to draw only the 'natural yield' and leave the capital to hopefully grow over a period, because as you say you could have at least a 30 year drawdown period.

That may mean having to adjust your investments to higher yielding ones rather than growth although a mixture or one SIPP for the moment being dedicated to income and the other to ongoing growth would be good if one will generate sufficient income. Unfortunately as you will no doubt be aware this is not a great time to be seeking higher yielding shares.

I do not know that you will get much more than general advice like this but hopefully someone may be able to expand on what I have just written.

Dod

JohnB
Lemon Quarter
Posts: 1207
Joined: January 15th, 2017, 9:20 am
Has thanked: 92 times
Been thanked: 268 times

Re: New to Drawdown

#323957

Postby JohnB » July 5th, 2020, 11:31 pm

Don't take out a year's spending in one go. HMRC will assume you will be withdrawing the same ammount every month, and will impose high taxes which you will have to claw back. Make sure your SIPP provider is as competitive in drawdown as they were in accumulation. Decide on how big a cash buffer you want outside the SIPPs (with the small risk that your SIPP provider has of going into difficulties, your funds are probably safe, but you don't want to have to wait for them). There is no tax difference between paying tax now on a sum and putting it in an ISA to grow tax free, or leaving it in the SIPP to grow, and then paying more tax later, EXCEPT in a SIPP its exempt from Inheritance Tax, which may matter to you.

ursaminortaur
Lemon Half
Posts: 5052
Joined: November 4th, 2016, 3:26 pm
Has thanked: 19 times
Been thanked: 144 times

Re: New to Drawdown

#323963

Postby ursaminortaur » July 6th, 2020, 1:17 am

airbus330 wrote:Hi,
I have recently retired and have 2 SIPPS from which I will have to drawdown on for my income for the rest of my life. The retirement came unexpectedly, so the knowledge I have built up is more on the planning and growth phase of investing. I have used resources like Firecalc to estimate that I have enough to live modestly until I am 90 (60 now). What I can't seem to locate is good info on how to most efficiently drawdown my funds in terms of tax. Has anyone any good written or online resources to recommend for more info on the transition from building a pension to taking a pension.
Thanks in advance


The first choice will be the type of drawdown that you want to use. There are two types

1) UFPLS - with this you withdraw amounts either regularly or on an adhoc basis with 25% of the amount drawn out being tax free and the other 75% being taxed at your marginal rate. Each time you drawdown in this manner an LTA test is performed and a percentage of the LTA limit is used up. With a final LTA test being perfomed at age 75 which will cover any funds which haven't been drawn down.

2) Flexi-access drawdown - with this type of drawdown the SIPP is crystallised which means that you get 25% of the pot as a tax free lump sum at that point. Thereafter you can drawdown either regularly or in an adhoc manner with each sum drawn down being taxed at your marginal rate.
An LTA test is carried out when the SIPP is crystallised but no further tests are carried out when you drawdown. A final LTA test is carried out at age 75 but this only covers any growth which has occurred since crystallisation and which still remains in the SIPP.

UFLPS potentially allows for you to eventually get a larger amount of money out tax free since the untouched part of your SIPP will be growing over time. However that same growth also means that if you are close to the LTA limit you risk exceeding that limit. The LTA limit should now and in the future be growing with inflation (CPI) so this isn't as bad as it once was but if you have pensions of say £800,000 or more with the standard LTA limit (ie no protections) then depending on growth you might well exceed the LTA limit and face an LTA excess charge* by the time the final test is made at age 75. If that is the case then it would be better to use Flexi-access drawdown since to avoid exceeding the LTA limit at age 75 you would just need to drawdown the growth that had occurred before that test is carried out.

You will need to check with your SIPP provider which of these methods are available as not all providers support both (and there are even some which don't currently support drawdown at all).

* If you exceed the LTA limit then you can either take the excess as a tax-free capital payment in which case there will be a charge of 55% of that excess value before it is paid out or you can elect to have a 25% charge applied to the excess and then draw it down with it being taxed at your marginal rate. (These both amount to a charge of 55% if your marginal tax rate is 40%).

swill453
Lemon Quarter
Posts: 3490
Joined: November 4th, 2016, 6:11 pm
Has thanked: 255 times
Been thanked: 1111 times

Re: New to Drawdown

#323972

Postby swill453 » July 6th, 2020, 4:16 am

JohnB wrote:Don't take out a year's spending in one go. HMRC will assume you will be withdrawing the same ammount every month, and will impose high taxes which you will have to claw back.

This isn't really a big problem. It's what I do, to minimise drawdown charges (with AJBell). The excess tax can be back in your hands in a few weeks by filling in an online P55 form.

Scott.

xxd09
2 Lemon pips
Posts: 140
Joined: November 19th, 2016, 2:44 pm
Been thanked: 71 times

Re: New to Drawdown

#324017

Postby xxd09 » July 6th, 2020, 9:53 am

After making sure I have 2 years living expenses in cash I draw out enough once every year to keep the cash fund topped up
I only take what I need-varies from year to year and only take enough to stay under 20% tax limit
Withdrawal is like the Accumulation phase but in reverse! ie keep your Asset Allocation right-maintain your investment Plan
Some feel your age in bonds is a rough guide-depends on size of fund accumulated-I have enough and at 74 am
30/65/5 -equities/bonds/cash for example
The current crisis gives you an idea how you will do-there will be one or two more before you finish!
Your 25% tax free lump sum will fund your cash fund for living expenses initially
xxd09

airbus330
Lemon Pip
Posts: 90
Joined: December 1st, 2018, 3:55 pm
Has thanked: 37 times
Been thanked: 26 times

Re: New to Drawdown

#324255

Postby airbus330 » July 7th, 2020, 10:12 am

Hi all, thank you for all the helpful replies. I think I have already started on a viable plan. I was hoping that there might be a more formal approach to checking that I have not made silly errors, in the form of a book or website. The problem (and I mean this in an entirely uncritical way) with forums is that people answer a question wrt their own situation and knowledge, which may be inappropriate to my situation. So I thought I'd flesh out my plans in more detail, and invite comment.

First of all, I am by nature moderately cautious but due to starting saving for retirement late in life, adopted a risky all equity investment plan for the last 20 years which has worked out well. I have learned that my emotional reaction to the recent stock market volatility was not good. I thought I might be the type to go all-in at the bottom, which ironically I identified correctly, but I simply couldn't. Without an income to fall back on, the risk of another sudden collapse was unthinkable. So, the secondary position was do do nothing, as many were advised to do. I was relatively comfortable with this and only became nervous again after about 5 weeks of rally in the markets. So, as the markets gained I started swapping out of volatile assets and into cash and bonds so that my current situation is.
Cash 20% comfortable 4 years spending.
Gilts and Investment grade bonds 50%
Global Trackers 20%
Held in 2 SIPP. Small and Large one at about 20/80 split.
HYP 10% A bit of a mash up of hy shares and IT's. Held in ISA wrapper.

My original plan was for my income to be made up of 3 streams. 10k a year from the HYP. 11k a year from the SIPP and 9k a year from the cash buffer until State Pension Age where the SP would take over that element.

We have no debt, no great expenses and my wife will work for the next 3 years.
The SIPP drawdown was going to be comfortably below 4% to allow for inflation.
I have already taken the 25% PCLS from the small SIPP to invest in the HYP ISA.
So I have to make a decision on the large SIPP, whether to take the 25% PCLS or leave it fully invested and draw UFPLS. And whether I should exhaust the smaller SIPP (which is in Flex Access Drawdown but not accessed yet) first. Due to the recent stock market volatility, I have decided to entirely live off one of the years of emergency cash that I hold back, to allow the invested items a chance to recover. Currently, I am about 6% down from my January highs on investments and about 4% down on total pot. But, of course, I was hoping for the total pot to grow at 4% plus over the year to avoid an overall reduction, which optimistically means that my total pot needs to grow 10% roughly in the remainder of this tax year. I have decreased the chances of that happening with the substantial move from equity to bonds, but at least I can sleep at night!
Sorry this has turned into a bit of a ramble, but I'd appreciate any thoughts you might have.
Al

puffster
Lemon Pip
Posts: 78
Joined: November 16th, 2016, 9:25 pm
Has thanked: 29 times
Been thanked: 24 times

Re: New to Drawdown

#324276

Postby puffster » July 7th, 2020, 11:04 am

airbus330 wrote:... and my wife will work for the next 3 years.
Al

I like the way you think! :lol:

Regards, Puffster

xxd09
2 Lemon pips
Posts: 140
Joined: November 19th, 2016, 2:44 pm
Been thanked: 71 times

Re: New to Drawdown

#324312

Postby xxd09 » July 7th, 2020, 12:55 pm

I can only speak of general principles
If facing too few savings doing as you did-using mainly equities-is the right thing to do
However you have the problem of a crash as you retire -if you start drawing income while the Portfolio is down it may never recover!
In the perfect scenario you would have made your pile and be safely in (50% ?)bonds well before retirement
You have a lucky escape as1) you moved out of equities during the crash-should have held on-however not easy to do!
2) the market has bounced back quickly-luckily-for how long?
You are where you are with the lump of savings you have amassed
You now have to protect your capital first -only then can you draw the income you need to live on
Protection is Bonds -your age in bonds is a rough guide
Eg I am 74-saved enough and am 30/65/5- equity/bonds/cash
xxd09
PS another rough guide £100000 of investments equity/bonds gives you £3000 of income pa

dealtn
Lemon Quarter
Posts: 1545
Joined: November 21st, 2016, 4:26 pm
Has thanked: 37 times
Been thanked: 521 times

Re: New to Drawdown

#324328

Postby dealtn » July 7th, 2020, 1:24 pm

airbus330 wrote: So, as the markets gained I started swapping out of volatile assets and into cash and bonds...

...the substantial move from equity to bonds, but at least I can sleep at night!


Just in case you aren't aware, bonds can be volatile assets too, and not always sleep inducing. It's your portfolio and asset allocation but I would just say be aware of what you are potentially buying, and not simply rely on the relatively riskless and volatility free period of bond investing of the last couple of decades. It isn't always like that.

Holding Fixed Income assets, particularly should inflation return, might not prove as riskless as you imagined.

Urbandreamer
Lemon Slice
Posts: 857
Joined: December 7th, 2016, 9:09 pm
Has thanked: 52 times
Been thanked: 219 times

Re: New to Drawdown

#324346

Postby Urbandreamer » July 7th, 2020, 2:01 pm

airbus330 wrote:Hi all, thank you for all the helpful replies. I think I have already started on a viable plan. I was hoping that there might be a more formal approach to checking that I have not made silly errors, in the form of a book or website. The problem (and I mean this in an entirely uncritical way) with forums is that people answer a question wrt their own situation and knowledge, which may be inappropriate to my situation. ....
Sorry this has turned into a bit of a ramble, but I'd appreciate any thoughts you might have.
Al


I think that there is NO "one size fits all" solution. As you say people comment upon their own situation and knowledge, while you are in a different situation, hence possibly require a different solution.

Personally, I think that you are allowing recent events to overly influence your future plans, but that's just my opinion.

I can however recommend a good book that provides food for thought.
https://www.amazon.co.uk/Beyond-4-Rule- ... 8&qid=&sr=

Of course, since you use firecalc, you may have already read the following.
Percentage of your portfolio that is in equities, versus fixed income? Research seems to suggest about 50% for a 10 year term, almost 70% for a 20 year term, and around 85% for a 60 year term.

I note that you wish for a 30 year term but have settled on 20% equities. Then again I think that the research ignores our UK state pension.

Personally I'm looking to retire at 60 (three years time), but plan on my pension needing to last 40 years. I expect a full state pension and modest/small DB pension, so feel that I can accept higher risks in my investment portfolio/DC pension.

1nvest
Lemon Slice
Posts: 434
Joined: May 31st, 2019, 7:55 pm
Has thanked: 37 times
Been thanked: 110 times

Re: New to Drawdown

#324349

Postby 1nvest » July 7th, 2020, 2:08 pm

dealtn wrote:
airbus330 wrote: So, as the markets gained I started swapping out of volatile assets and into cash and bonds...

...the substantial move from equity to bonds, but at least I can sleep at night!


Just in case you aren't aware, bonds can be volatile assets too, and not always sleep inducing. It's your portfolio and asset allocation but I would just say be aware of what you are potentially buying, and not simply rely on the relatively riskless and volatility free period of bond investing of the last couple of decades. It isn't always like that.

Holding Fixed Income assets, particularly should inflation return, might not prove as riskless as you imagined.

General rule is when interest rates are low you want to be at the short (near maturity) end if you anticipate rates rising, as the maturing bonds will see little in the way of capital loss, and roll into a new higher yielding replacement. When yields are high and/or you expect yields to decline then look to hold long dated (20+ year gilts). At the long end however, prices are very volatile, as in effect they're priced for multiple years of income so a small change in expectations/yields results in a multiple year type price adjustment.

Even at negative real yields (below inflation) if yields move even more negative then longer dated bond prices can spike significantly. Here's a example of price volatility. Good little site that fixedincomeinvestor

Some hold 10 year 'average' type duration for the middle road type effect. Others hold short and long dated in around equal measure to near equal effect (short/long dated barbell generally compares to a central 10 year bond bullet).

A lower cost 'bond' (10 year central bullet type holding) might be to hold 5 rungs at the short dated end, via fixed term bonds offered by banks/building societies, along with a 20 year Gilt, perhaps buy a 25 year gilt, hold that series for 5 years and then swap that out for another 25 year gilt. At least in more normal times. At current levels/rates many are dropping the long dated end. Rate tart around for the best shorter dated yields. When you start with 5 rungs at the short dated end, as each bond matures so you roll that into another 5 year replacement. So for each £100 being invested, £50 into a 25 year gilt, £10 each into 1, 2, 3, 4 and 5 year fixed income bonds. But again, given current yields many instead opt for £20 into each of the 1 to 5 years, or even £33 into each of a 1, 2 and 3 year ladder.

Yet others roll the yield curve. More technical - where you find the steepest part of the yield curve, where the yield drops off the quickest, so that all else being equal if you bought and held that for the interval of the steep part, you maximise the rewards. Another approach is to swap out some/all of government bonds for Corporate bonds, but that's encroaching into the stock arena - others say forget that and just scale up stock weighting/hold less bonds if that's your preference. Typically Corporate bonds pay more, but have higher default risk, where the premium = chance of default. A firms Corporate Bond pricing can be used as a indication of the perception for the firms stock (the Bond markets pro's tend to be very good at analysis).

dealtn
Lemon Quarter
Posts: 1545
Joined: November 21st, 2016, 4:26 pm
Has thanked: 37 times
Been thanked: 521 times

Re: New to Drawdown

#324351

Postby dealtn » July 7th, 2020, 2:15 pm

1nvest wrote:
dealtn wrote:
airbus330 wrote: So, as the markets gained I started swapping out of volatile assets and into cash and bonds...

...the substantial move from equity to bonds, but at least I can sleep at night!


Just in case you aren't aware, bonds can be volatile assets too, and not always sleep inducing. It's your portfolio and asset allocation but I would just say be aware of what you are potentially buying, and not simply rely on the relatively riskless and volatility free period of bond investing of the last couple of decades. It isn't always like that.

Holding Fixed Income assets, particularly should inflation return, might not prove as riskless as you imagined.

General rule is when interest rates are low you want to be at the short (near maturity) end if you anticipate rates rising, as the maturing bonds will see little in the way of capital loss, and roll into a new higher yielding replacement. When yields are high and/or you expect yields to decline then look to hold long dated (20+ year gilts). At the long end however, prices are very volatile, as in effect they're priced for multiple years of income so a small change in expectations/yields results in a multiple year type price adjustment.

Even at negative real yields (below inflation) if yields move even more negative then longer dated bond prices can spike significantly. Here's a example of price volatility. Good little site that fixedincomeinvestor

Some hold 10 year 'average' type duration for the middle road type effect. Others hold short and long dated in around equal measure to near equal effect (short/long dated barbell generally compares to a central 10 year bond bullet).

A lower cost 'bond' (10 year central bullet type holding) might be to hold 5 rungs at the short dated end, via fixed term bonds offered by banks/building societies, along with a 20 year Gilt, perhaps buy a 25 year gilt, hold that series for 5 years and then swap that out for another 25 year gilt. At least in more normal times. At current levels/rates many are dropping the long dated end. Rate tart around for the best shorter dated yields. When you start with 5 rungs at the short dated end, as each bond matures so you roll that into another 5 year replacement. So for each £100 being invested, £50 into a 25 year gilt, £10 each into 1, 2, 3, 4 and 5 year fixed income bonds. But again, given current yields many instead opt for £20 into each of the 1 to 5 years, or even £33 into each of a 1, 2 and 3 year ladder.

Yet others roll the yield curve. More technical - where you find the steepest part of the yield curve, where the yield drops off the quickest, so that all else being equal if you bought and held that for the interval of the steep part, you maximise the rewards. Another approach is to swap out some/all of government bonds for Corporate bonds, but that's encroaching into the stock arena - others say forget that and just scale up stock weighting/hold less bonds if that's your preference. Typically Corporate bonds pay more, but have higher default risk, where the premium = chance of default. A firms Corporate Bond pricing can be used as a indication of the perception for the firms stock (the Bond markets pro's tend to be very good at analysis).


I think you are just overcomplicating it when the simple general point is that bonds can be volatile too.

So instead of the (often) default position of "equities risky, bonds safe" just satisfy yourself you understand the reality. What your words obfuscate is the very simple observation of your link. No need to read, just one click and use your eyes to see that volatility isn't restricted to equities.

airbus330
Lemon Pip
Posts: 90
Joined: December 1st, 2018, 3:55 pm
Has thanked: 37 times
Been thanked: 26 times

Re: New to Drawdown

#324397

Postby airbus330 » July 7th, 2020, 5:00 pm

Thanks for the reading references, very helpful.
Thank you for the comments about Bond and Bond Risk. I am very aware of my lack of knowledge about this area. I was aware of some of the risk associated with inflation, but not much else. I have split the bond money into a Blackrock UK gilts tracker and a Money Market Liquidity fund. I understand the Liquidity fund, but worry that the gilt fund may be vulnerable to political choices the government will have to make over the next year. When I feel there is a semblance of normality returning or if there is another big correction I will move back to a 60/40 split, which I was aiming to do over this year in any case. If gilts are considered risky, should I allocate some to Gold, or has that boat already sailed.

Urbandreamer
Lemon Slice
Posts: 857
Joined: December 7th, 2016, 9:09 pm
Has thanked: 52 times
Been thanked: 219 times

Re: New to Drawdown

#324408

Postby Urbandreamer » July 7th, 2020, 6:16 pm

airbus330 wrote:Thanks for the reading references, very helpful.
Thank you for the comments about Bond and Bond Risk. I am very aware of my lack of knowledge about this area. I was aware of some of the risk associated with inflation, but not much else. I have split the bond money into a Blackrock UK gilts tracker and a Money Market Liquidity fund. I understand the Liquidity fund, but worry that the gilt fund may be vulnerable to political choices the government will have to make over the next year. When I feel there is a semblance of normality returning or if there is another big correction I will move back to a 60/40 split, which I was aiming to do over this year in any case. If gilts are considered risky, should I allocate some to Gold, or has that boat already sailed.


What a lot of statements that demand addressing.

Bond's, gilts and trackers/passive funds:
There is a very strong argument that while passive funds have advantages for equities, they have disadvantages with respect to bonds. Tracking tends to slant things to the risky end of corporate bonds. 1nvest has basically explained the work that the manager of an active fund will put in. As you say, gilts are currently subject to fiscal repression. Basically gilts are currently a false market, as you suspect. Personally I don't expect that to change in years.

Has the Gold boat sailed: Who knows? There is little doubt that the increase in the gold price is due to a combination of low interest rates coupled with modest inflation. In simple terms, were gold to keep it's "value" for two years, CPI at 3% and next to 0% interest rates would likely cover the dealing costs. Is that likely to continue for 30 years? I doubt it. However some argue that gold has historically been good ballast. You were lucky in your sale's, but gold would have acted to smooth the volatility of a portfolio without selling. Not for me however. I'm going to accept the volatility, even accepting the sick feeling that I felt earlier this year. If you track stock market "crashes", we get one about every 8-12 years.

Thinking about drawdown, it's going to reverse my current portfolio management. Currently I'm looking where to invest and very seldom what to sell. When I go into drawdown I'll be regularly looking at what to sell, and infrequently looking at where to invest (ie when companies or sectors become moribund).

airbus330
Lemon Pip
Posts: 90
Joined: December 1st, 2018, 3:55 pm
Has thanked: 37 times
Been thanked: 26 times

Re: New to Drawdown

#324415

Postby airbus330 » July 7th, 2020, 6:51 pm

Urbandreamer wrote: but gold would have acted to smooth the volatility of a portfolio without selling. Not for me however. I'm going to accept the volatility, even accepting the sick feeling that I felt earlier this year. If you track stock market "crashes", we get one about every 8-12 years.

Thinking about drawdown, it's going to reverse my current portfolio management. Currently I'm looking where to invest and very seldom what to sell. When I go into drawdown I'll be regularly looking at what to sell, and infrequently looking at where to invest (ie when companies or sectors become moribund).


Good points again, thanks.
Re. Periodic crashes. As an investor, surely this is the biggest elephant in the room. Have we seen the crash, or is it just out of sight ready to pounce when the true impact of Covid is seen. You're Crystal ball is as good as mine, but my gut feeling is that a further fall is likely, hence moving effectively to a 20/80 equity/bond cash.

Re. Drawdown. Thats a good way to look at it. If we do tank again, my plan is to let the 20% recover in its own good time and drawdown the bonds (which are either gilt or v.short blue chip). I can't think of another way to play it and I accept that the portfolio will be permanently damaged, but with no income for 5 years until state pension kicks, what else to do?

TedSwippet
Lemon Slice
Posts: 404
Joined: November 4th, 2016, 12:57 pm
Has thanked: 69 times
Been thanked: 150 times

Re: New to Drawdown

#324416

Postby TedSwippet » July 7th, 2020, 6:53 pm

Urbandreamer wrote:Bond's, gilts and trackers/passive funds:
There is a very strong argument that while passive funds have advantages for equities, they have disadvantages with respect to bonds.

Can you back that up with a citation or reference? Preferably independent, rather than one from an active bond fund manager with a vested interest. Past research suggests that after fees, actively managed bond funds rarely outperform passives.

https://www.morningstar.co.uk/uk/news/1 ... -fees.aspx
Which Bond Funds Manage to Outperform After Fees?
The typical active fixed-income fund manager struggles to beat the benchmark after fees. Are investors better off buying an ETF?

The typical active fixed-income fund manager struggles to beat the fund’s benchmark after fees. As low-cost passive options become more available in the fixed-income space, investors need to be able to assess the relative merits of active and passive bond funds to make informed investment decisions. What are an investor’s odds of selecting an active fund that is likely to outperform its benchmark after fees?

In which categories is it preferable to choose a low-cost passive option instead? Results show that, although the median active manager can beat the benchmark in several categories before fees, after fees average returns were negative in all 25 Morningstar bond fund categories.

Urbandreamer
Lemon Slice
Posts: 857
Joined: December 7th, 2016, 9:09 pm
Has thanked: 52 times
Been thanked: 219 times

Re: New to Drawdown

#324428

Postby Urbandreamer » July 7th, 2020, 7:51 pm

TedSwippet wrote:
Urbandreamer wrote:Bond's, gilts and trackers/passive funds:
There is a very strong argument that while passive funds have advantages for equities, they have disadvantages with respect to bonds.

Can you back that up with a citation or reference? Preferably independent, rather than one from an active bond fund manager with a vested interest. Past research suggests that after fees, actively managed bond funds rarely outperform passives.


Sorry it was in a podcast by IC. Not sure if the person saying it was a manager, but he wasn't selling his fund. Now you can argue that he might have been selling active funds, but that is a very subtle distinction.

His point was that if you invest in passive bond funds, they MUST invest in companies most desiring to take on debt. With Equities you are investing in the biggest companies, with bonds you are putting your money towards the companies who need to borrow the most.

I think that most can see that argument.

That said, bonds are not my thing. Feel free to dismiss what I say on the subject. As I said, it's very much second hand and I have no skin in the game.

JohnW
Lemon Pip
Posts: 96
Joined: June 1st, 2019, 7:00 am
Has thanked: 1 time
Been thanked: 15 times

Re: New to Drawdown

#330149

Postby JohnW » August 1st, 2020, 12:40 pm

Urbandreamer wrote:There is a very strong argument that while passive funds have advantages for equities, they have disadvantages with respect to bonds. Tracking tends to slant things to the risky end of corporate bonds.

That seems to ignore investing in a fund holding only government bonds, in a passive fund at that.
Urbandreamer wrote:His point was that if you invest in passive bond funds, they MUST invest in companies most desiring to take on debt.

That also seems to ignore investing in a fund holding only government bonds. There are such funds, I imagine.
dealtn wrote:Holding Fixed Income assets, particularly should inflation return, might not prove as riskless as you imagined.

Not sure if that's meant to include inflation linked government bonds, but their return and capital is protected against inflation.
There's a bit of an argument for having half your bonds as inflation linked bonds, if you have equipoise about whether inflation or deflation is the bigger threat you face, since inflation linked bonds can be damaged by deflation in a way nominal bonds won't be. But for many people inflation is more likely to occur during their retirement, and they already have deflation protection in their cash holdings; so you might want to raise the proportion of bonds you have as inflation linked bonds.

dealtn
Lemon Quarter
Posts: 1545
Joined: November 21st, 2016, 4:26 pm
Has thanked: 37 times
Been thanked: 521 times

Re: New to Drawdown

#330179

Postby dealtn » August 1st, 2020, 1:49 pm

JohnW wrote:
dealtn wrote:Holding Fixed Income assets, particularly should inflation return, might not prove as riskless as you imagined.

Not sure if that's meant to include inflation linked government bonds, but their return and capital is protected against inflation.


And in that single sentence you demonstrate (and aren't alone as many others do too) a falsehood.

Inflation linked bonds do not provide such protection from inflation!

If you are able to buy them at par, and hold them to maturity, they provide that protection. Well nearly, not perfectly.

At current market prices you are spending £2 to get £1, for instance. Now that £1 might have inflation protection, and the income generated will also rise with inflation, but be under no illusion you are protecting the real value of your Capital. You are protecting from inflation an investment that halves your Capital.


Return to “Pensions - Practical Problems”

Who is online

Users browsing this forum: No registered users and 2 guests