Building the Bridge

[Storcko]

I'm edging towards retirement in June this year after one last 3 day a week contract. I'll have 9 years until SP age when Ms S and I will both get the full SP. Meantime we hope to live off mainly DC and ISA funds although there will be a small DB pension each in 3 years. So, what I'm grappling with just now is whether or how to use some of the funds to create a fixed income - as inflation proofed as it can be - to cover the 'keep the lights on' (KTLO) costs between now and SP date. Mainly so we can go and do stuff without looking at spreadsheets or Citywire etc. KTLO costs are approximately half what I have cashflowed we need to live comfortably, fund larger capex stuff and enjoy what we enjoy now.

Other relevant info:

a) We have one child, graduate, back at home temporarily and edging towards financial independence.
b) We both have interests that could be used to generate a small income if needed though we'd prefer not to.
c) OO no mortage.
d) The funds in my DC (55%) and our ISAs (30%) would, based on values today, comfortably provide enough at 4% drawdown but are skewed towards equities.

The options I'm thinking about are:

1) An index linked gilt ladder as per Monevator a few weeks back
2) A fixed term annuity
3) Re-balance the pots towards fixed interest
4) Just leave as is and hope for the best. We have 5 years' KTLO expenses in cash (roughly 15% of assets).

I realise this is fairly a summary level of detail but hopefully enough and would appreciate thoughts, pros/cons etc. as well as any strategies that I've not thought of.

Thanks

[JohnB]

You sound too cautious to me. If you've got 5 years already in cash, I don't think you need to sacrifice more growth by having another safe pot beyond that. But then I'm 11 years from SP, and I have nothing in cash.

[DrFfybes]

You don't say about absolute values, but the first thing I'd look at is what reductions you'd get for taking the DB income early if allowed. I found my scheme's breakeven point for early commencement was circa 85 years old. Also if this is your only taxable income then it may be tax free until you reach SP age, in which case the breakeven point moves further away.

This gives you a base income to KTLO and immediately reduces the strain on your other sources, although 4% from a 100% equities portfolio is generally regarded as pretty safe, but you do sounds a bit more risk averse than me. In my case I went for 100% equities with a cash buffer should markets take a turn for the worse. If you took the DB schemes and reduced your withdrawal from other sources you could even go for a high Yield approach and withdraw the natural dividends, or crystallise bits of your SIPPs each year and take the 25% and some taxable income if required.

Again depending upon the amounts, you might prefer to take more from the SIPP now and leave the ISA until later if you might end up a (higher rate) taxpayer.

I have an unsheltered pot that I set up in a Global fund, every month it sells a fixed amount (IIRC it started at 4.5% of the original fund pa, now circa 6%) which pops into my bank alongside my DB pension, the idea being this fund will cover the difference until SP age which is still a decade off. It is flexible, and when MrsF retires (again) this year the withdrawal will be over 10% for a few years until she reaches SP age. Conveniently the pot is still worth what I put in due to strong markets, but this was certainly more down to luck than judgement, and the aim was to deplete it whilst leaving SIPPs and ISAs untouched.

Paul

[Urbandreamer]

I agree with JohnB and I AM retired.

I have a couple of months in cash and intend living off my stockmarket ISA's for the next few years. It's part of a cunning plan.

State pension is 7 years away for me, but I do have a DB that kicks in two years before that.

Of course I have no issues with looking at spreadsheets, in fact I quite enjoy it.

I'm not you though. I'm confident that I can sell stuff when I need to, even if market timing is abysmal, without qualms.

You must do what makes you comfortable. There is no right or wrong answer.

Ps, I would NEVER hold five years worth of cash, anymore than I would hold five years worth of bitcoin. I am however willing to hold about a year in a gold etf.

[Gilgongo]

You seem to be roughly similar to my position (only I don't have the DB). As @Urbandreamer rightly says, there is no right or wrong answer, but for my part I plan to use a cash bridge to make up a (relatively small) shortfall from divis made up mostly from an ISA but also a SIPP until SP comes along in 10 years. So your Option 4 in other words I think. I too have roughly 15% in cash in fact - although not all of that will be used by the "bridge" to SP.

I don't mind using cash for a few years (not least as interest rates aren't too bad right now) but I think the effect of that will depend on the level of your non-cash assets. In my case also, using cash is a tactic to reassure my wife!

[swill453]

In a similar position to you, my wife and I always made sure my we took an amount equal to the personal allowance out of our DC pensions (SIPPs) every year, rather than from an ISA. If you don't do this then the tax free allowance is wasted.

2 x personal allowance is more than £25K p.a. in today's money.

Scott.

[Storcko]

Thanks all - some interesting suggestions. I guess I am being quite cautious but there's a definite feeling of having reached a point where protection rather than growth is the name of the game. The cash is high but that came largely from an unexpected windfall and is being switched into the ISAs when it can be but meantime earning a shade over 5% gross which I'm ok with. I like Scott's suggestion of drawing up to the personal allowance from the SIPP so i'll likely do that from FY24/25. Paul's of considering a HYP approach and taking the DBs early isn't something I'd thought of. The DB pensions are really small (c. 10% of expenses) though, so even if it's do-able, I don't know how beneficial that would be only 2.5 years before they are due to start.

Interestingly no-one's mentioned bond ladders or annuities which was my gut feel having briefly looked at the effort and cost of doing the former on my platform and failing to see the benefit of fixed annuities over term deposits.

[DrFfybes]

Thanks all - some interesting suggestions. I guess I am being quite cautious but there's a definite feeling of having reached a point where protection rather than growth is the name of the game.

If you feel more comfortable being cautious then that is fine, it is your money and your decision. I would just say you probably have 25-35 years left, so a bit of growth might not be a bad thing. Consider what your current SIPP situation would be had you been cash heavy for the last 25 years.

Paul

[Gilgongo]

Interestingly no-one's mentioned bond ladders or annuities which was my gut feel having briefly looked at the effort and cost of doing the former on my platform and failing to see the benefit of fixed annuities over term deposits.

Bond ladders just seem a lot or work from what I can see. Perhaps if laddering was your entire strategy for retirement it might be worth it, but otherwise I've only seen a couple of people on these board say they use them.

Annuities I have toyed with, but decided against for now at least because of the loss of flexibility.

[moorfield]

Bond ladders just seem a lot or work from what I can see.

It does. I want to start accumulating cash inside my SIPP over the next 3 or so years and currently looking at parking in a money market fund like Royal London, which I think can do that job for me.

Bond Ladders may be an interesting exercise to do on paper, but DIYers who actually try to run them are probably spending too much time at their keyboards, I would suggest.

[kempiejon]

Bond ladders just seem a lot or work from what I can see.

It does. I want to start accumulating cash inside my SIPP over the next 3 or so years and currently looking at parking in a money market fund like Royal London, which I think can do that job for me.

Bond Ladders may be an interesting exercise to do on paper, but DIYers who actually try to run them are probably spending too much time at their keyboards, I would suggest.

I hope to cash in a pension shortly and have been accumulating cash in that account for around a year. I think the idea of a known amount on a know date can be useful so I did buy some fixed interest maturing this year. My perfunctory look at gilts/bonds bought and held to maturity wasn't too much time if that is what's needed. I think they come at some opportunity cost and generally preferred an equity heavy approach. There was a helpful chap LateGenXer gave us his gilt ladder tool. https://lemonfool.co.uk/viewtopic.php?p=632512#p632512 looks a doddle