Pension drawdown strategy

[Harry23]

I'm hoping to retire soon, before the UK state pension age, and have a mixture of pension savings. My main one is defined benefit which gives an annuity, and I want to use drawdown for my defined contribution savings (ISA and pension fund), all currently in unit trusts. So I'm deciding how much to draw down. I was thinking 3% annually would give me some income while preserving the lump sum. Or could I safely take more than that?

Also, it's currently held in accumulation funds, and I can't decide whether to transfer into income funds or keep in accumulation. I was thinking that accumulation gives me more choice for how much income to take, I can just sell units when I want, rather than relying on my fund manager's procedures. Any thoughts?

[xxd09]

Taking more than £3000 pa from a portfolio of equities/ bonds of £100000 will probably deplete the portfolio so 3% a good starting point
Accumulation units are easy to manage -just sell required number of units every year -simple
More info from you would get a more detailed response re 25% tax free lump sum ,tax etc
xxd09

[Harry23]

Thanks xxd09. The 25% tax free is another decision. I'm a basic rate taxpayer.

On one hand, I could take it out of the pension fund and feed into the ISA to increase both my tax free income, and my estate to leave my family when I die.

But on the other hand, what happens if I need care when I get older, I'm assuming ISA holdings count as savings to be used towards care fees. But what about pension funds used in drawdown? I don't know if just the drawdown income is assessed for care fees, or if the whole fund value is assessed too. Are pensions a way of legally sheltering money?

So the proportions to hold in the ISA vs the pension is another issue, as well as the percentage of withdrawals.

[nmdhqbc]

I was thinking 3% annually would give me some income while preserving the lump sum. Or could I safely take more than that?

well of course there is the "4% rule" so that would immediately suggest more could be safely withdrawn. it's important to understand what it really means though. it's 4% of current value then adjust for inflation thereafter regardless of how the portfolio performs. so the 4% is not applicable after the start. i assume this is what you meant anyway when you said 3%. otherwise the income would fluctuate wildly. actually maybe i should not assume that. if the defined benefit income is high enough to cover all your basic expenses then a % of the current portfolio value each year would be a prudent way to go allowing your fun spending to eb and flow with the markets. or just don't spend it all in the good years allowing your cash balance to grow for the bad years. in this case though i think a higher % would be fine as that system automatically reduces your withdrawals in bad times. oh, and the a certain % of bonds are assumed for the 4% to work in the worst case scenarios so it requires getting your portfolio suitably allocated.

I like to play around with this tool which looks back at historical inflation and markets data to show what the historic fails and successes would have been with different scenarios. it is US data though so we can't really rely on it fully. i notice with $100k portfolio and a £3550 initial withdrawal it's 100% success. £4000 is about 95% success rate. a few years where it cuts it fine though. "constant dollar" and tick the "adjust for inflation" (i think those are the defaults anyway). you can select "Percent of Portfolio" to see that way. the results are less meaningful though as by definition the portfolio will never run out. to see the amount withdrawn each year is laborious too as you'll need to click on each year to see the inflation adjusted withdrawal amount which can get quite low. notice the website uses the word spend and i withdrawal. with these variable strategies i don't think we should be spending everything we withdraw. there will be bad times ahead to save for.
https://ficalc.app/

Also, it's currently held in accumulation funds, and I can't decide whether to transfer into income funds or keep in accumulation. I was thinking that accumulation gives me more choice for how much income to take, I can just sell units when I want, rather than relying on my fund manager's procedures. Any thoughts?

I agree the accumulation funds make sense if any of your "income" comes from selling capital. the transaction will be happening anyway so that broker fee should be the same whether it's for £2000 or £4000 and you get the cash when you want this way. i'd still kepp in inc units outside of tax wrappers though as i just can not be bothered working out how to deal with dividends from acc funds on taxes.

[nmdhqbc]

and the "4% rule" was planning for 30 years of life

[EthicsGradient]

Thanks xxd09. The 25% tax free is another decision. I'm a basic rate taxpayer.

On one hand, I could take it out of the pension fund and feed into the ISA to increase both my tax free income, and my estate to leave my family when I die.

But on the other hand, what happens if I need care when I get older, I'm assuming ISA holdings count as savings to be used towards care fees. But what about pension funds used in drawdown? I don't know if just the drawdown income is assessed for care fees, or if the whole fund value is assessed too. Are pensions a way of legally sheltering money?

So the proportions to hold in the ISA vs the pension is another issue, as well as the percentage of withdrawals.

You may want to work out if you may be liable to inheritance tax. If that's possible, then consider if (under current rules, anyway) they might be better off if you kept the money in the pension. Pensions are technically like a discretionary trust, and not subject to inheritance tax when you die. If you die before 75, the administrators can pass it all on to your nominees free of tax (in theory, they have discretion over who it goes to, taking your wishes into account; I haven't seen any news about wishes not being respected - I think the idea is that they should have the ability to redirect it in a clear case where they wishes haven't been updated, eg divorce and remarriage). If you die after 75, money the nominees take out of the pension counts as income for them in that year, so is taxed at their marginal rate. Money in an ISA is subject to inheritance tax.

My plan at the moment is to delay withdrawing money from my SIPP until I approach 75 (I also have a small DB pension, and investments outside and inside an ISA), and then work out the position (or the rules will change).

[ursaminortaur]

I was thinking 3% annually would give me some income while preserving the lump sum. Or could I safely take more than that?

well of course there is the "4% rule" so that would immediately suggest more could be safely withdrawn. it's important to understand what it really means though. it's 4% of current value then adjust for inflation thereafter regardless of how the portfolio performs. so the 4% is not applicable after the start. i assume this is what you meant anyway when you said 3%. otherwise the income would fluctuate wildly. actually maybe i should not assume that. if the defined benefit income is high enough to cover all your basic expenses then a % of the current portfolio value each year would be a prudent way to go allowing your fun spending to eb and flow with the markets. or just don't spend it all in the good years allowing your cash balance to grow for the bad years. in this case though i think a higher % would be fine as that system automatically reduces your withdrawals in bad times. oh, and the a certain % of bonds are assumed for the 4% to work in the worst case scenarios so it requires getting your portfolio suitably allocated.

I like to play around with this tool which looks back at historical inflation and markets data to show what the historic fails and successes would have been with different scenarios. it is US data though so we can't really rely on it fully. i notice with $100k portfolio and a £3550 initial withdrawal it's 100% success. £4000 is about 95% success rate. a few years where it cuts it fine though. "constant dollar" and tick the "adjust for inflation" (i think those are the defaults anyway). you can select "Percent of Portfolio" to see that way. the results are less meaningful though as by definition the portfolio will never run out. to see the amount withdrawn each year is laborious too as you'll need to click on each year to see the inflation adjusted withdrawal amount which can get quite low. notice the website uses the word spend and i withdrawal. with these variable strategies i don't think we should be spending everything we withdraw. there will be bad times ahead to save for.
https://ficalc.app/

Other free tools which use either past history or monte-carlo methods which you might want to check out are

https://firecalc.com/

https://cfiresim.com/

https://www.flexibleretirementplanner.com/wp/

Most of the above are based on the US but you can just substitute £s for $s.

This one is UK based

https://guiide.co.uk/Home/UserHome

[Adamski]

Yes in a way pensions are a legal way of sheltering savings. If you don't drawdown, just leave in pension pot, this won't count towards your care costs.

But in reality nearly all of us save in pension to draw on it in later life. Only those with very high pension pots will leave some pensions untouched.

I'm thinking drawing the 25% tax free upfront when I qualify in a few years, as IFS controversially talked about capping it, so wouldn't surprise me if future govts looked to close this benefit.

[Harry23]

Many thanks folks for all the helpful advice and links. This process is like the mirror image of the budgeting I did about 20 years ago when planning how much to save per month, to achieve a target portfolio size over a given timespan. I used a simpler method back then; an average return on investments of 10% (8% capital + 3% divided yield -1% for fees & prudence). Put into a spreadsheet and drilled down to monthly figures to monitor performance, which turned out pretty accurate.

The trouble is I want to have my cake and eat it, ie keep my portfolio value index-linked, and take an income. So I'll do some modelling around the 3 to 4 % levels, and making an assumption about inflation too.

Also I'm wondering how often to make withdrawals. The ISA doesn't incur charges but the pension probably will. But I'm thinking I will try and stay disciplined by withdrawing yearly or at most quarterly and using a savings account to hold a cash float.

The sheltering issue is an extra complication, which also brings in tax consequences. The savings limits for means-testing is an example of major fiscal drag, because the £8k to £16k tapering hasn't changed in decades. If I remember correctly, over £16k and you pay all your care fees, but how it's assessed for drawdown income rather than savings is something I need to look into.

[ursaminortaur]

Yes in a way pensions are a legal way of sheltering savings. If you don't drawdown, just leave in pension pot, this won't count towards your care costs.

But in reality nearly all of us save in pension to draw on it in later life. Only those with very high pension pots will leave some pensions untouched.

I'm thinking drawing the 25% tax free upfront when I qualify in a few years, as IFS controversially talked about capping it, so wouldn't surprise me if future govts looked to close this benefit.

I wouldn't worry too much about think-tanks talking about either getting rid of or reducing the tax free lump sum - there have been rumours about the government doing that for decades and it hasn't happened yet. It is one of the few benefits of saving in a pension for those paying basic rate income tax (who will likely be paying basic rate tax in retirement) and without it many might balk at tying up their money for decades in a pension.

Note: The tax free lump sum is already capped by the LTA.

[ursaminortaur]

Many thanks folks for all the helpful advice and links. This process is like the mirror image of the budgeting I did about 20 years ago when planning how much to save per month, to achieve a target portfolio size over a given timespan. I used a simpler method back then; an average return on investments of 10% (8% capital + 3% divided yield -1% for fees & prudence). Put into a spreadsheet and drilled down to monthly figures to monitor performance, which turned out pretty accurate.

The trouble is I want to have my cake and eat it, ie keep my portfolio value index-linked, and take an income. So I'll do some modelling around the 3 to 4 % levels, and making an assumption about inflation too.

Also I'm wondering how often to make withdrawals. The ISA doesn't incur charges but the pension probably will. But I'm thinking I will try and stay disciplined by withdrawing yearly or at most quarterly and using a savings account to hold a cash float.

A few years ago SIPP providers were charging for drawdown withdrawals but most seem to have stopped doing that now.

https://www.ajbell.co.uk/faq/what-charges-will-i-pay-taking-my-pension

Accessing your pension by flexi-access drawdown or pension lump sums No charge

[Hariseldon58]

A couple of interesting books "Beyond the 4% rule" by Abraham Okusanya, and a very thorough book ( US but looks at UK as well) "Living off your money" by Michael McClung.

Monevator reviewed the books https://monevator.com/beyond-the-4-rule-abraham-okusanya/ and https://monevator.com/review-living-off-your-money-by-michael-mcclung/

I have been in drawdown with no other source of income since 2007 when I had just turned 49 and still waiting for the state pension !

I have only one experience of course, I started with a 4% rate but retired into the GFC, ie I experienced sequence of returns risk big time with getting on for a 40% drawdown, markets recovered, kept an eye on expenditure, I took some action that worked out well and saved my retirement plans. ( Ditched an HYP , concentrated on low cost investing, aimed for a total return, a mixture of Investment Trusts and later Passive Index funds)

2022 was unhelpful, inflation plus a portfolio loss, despite this the portfolio is still around 70% up in real terms, expenditure has risen in line with inflation plus a bit in the early days of the GFC I restricted expenditure to below 4% ( it was more than adequate) and its probably around 2.5% now. the portfolio has returned around 6% pa post inflation ( at the beginning of 2022 it was more like 7.5% real) down years are not uncommon in my experience.

I presently have a substantial investment in TIPs plus some UK investment grade bonds that would cover 10+ years expenditure and the rest in equities, given I can ignore it for 10+ years that will probably work out just fine. My drawdown policy takes elements from both books mentioned but I am not keen on the factor approach suggested by McClung. (that's too involved to discuss here)

Hope the OP has a great retirement and having a solid annuity income should allow a relaxed income stream without too much anxiety, the 4% is probably just fine but if 3% works for expenditure then that's an additional safety net.

[monabri]

But on the other hand, what happens if I need care when I get older, I'm assuming ISA holdings count as savings to be used towards care fees. But what about pension funds used in drawdown? I don't know if just the drawdown income is assessed for care fees, or if the whole fund value is assessed too. Are pensions a way of legally sheltering money?

So the proportions to hold in the ISA vs the pension is another issue, as well as the percentage of withdrawals.

ISAs will definitely count as assets ...you can readily cash them in to pay for care.

Pensions...if you have a SIPP then it is an asset and it could be used to pay for your care home fees.

If it is an asset in your name ( pension fund, savings, ISA , cash...stamp collection, vehicles...ie anything that could be sold to pay for care then, subject to a small allowance of £23250 ,then you have to pay full care costs).

That's my understanding. I'm sure that what I said on ISAs above is the case but others might wish to comment on my view regarding pension assets. ( I've seen Adamski's comment about pension assets being outside of means testing but I don't know why they should be?)

[ursaminortaur]

But on the other hand, what happens if I need care when I get older, I'm assuming ISA holdings count as savings to be used towards care fees. But what about pension funds used in drawdown? I don't know if just the drawdown income is assessed for care fees, or if the whole fund value is assessed too. Are pensions a way of legally sheltering money?

So the proportions to hold in the ISA vs the pension is another issue, as well as the percentage of withdrawals.

ISAs will definitely count as assets ...you can readily cash them in to pay for care.

Pensions...if you have a SIPP then it is an asset and it could be used to pay for your care home fees.

If it is an asset in your name ( pension fund, savings, ISA , cash...stamp collection, vehicles...ie anything that could be sold to pay for care then, subject to a small allowance of £23250 ,then you have to pay full care costs).

That's my understanding. I'm sure that what I said on ISAs above is the case but others might wish to comment on my view regarding pension assets. ( I've seen Adamski's comment about pension assets being outside of means testing but I don't know why they should be?)

Pensions are counted if you have already started withdrawing money from them or you have reached state pension age/pension credit age at which point you are assumed to be accessing the pension ( which will be calculated by looking at what you could get if you bought an annuity).


https://www.payingforcare.org/use-your-pension-savings-or-pension-drawdown/

How your pension pot is taken into account
Taking cash from your pension
If you take cash in chunks or your whole pot in one go and put it into savings or invest it, your local council will treat it as an asset and include it when they work out what you can afford to pay.

Leaving your pot untouched
If you leave money in a pension pot your local council won’t count this when they calculate how much you can afford to pay for care. When you reach Pension Credit qualifying age your local council will assume you’re receiving an income from your pension.
If you don’t take an income, they’ll check how much you’d receive if you bought an annuity and use this amount when they work out your income.

[1nvest]

Many thanks folks for all the helpful advice and links. This process is like the mirror image of the budgeting I did about 20 years ago when planning how much to save per month, to achieve a target portfolio size over a given timespan. I used a simpler method back then; an average return on investments of 10% (8% capital + 3% divided yield -1% for fees & prudence). Put into a spreadsheet and drilled down to monthly figures to monitor performance, which turned out pretty accurate.

The trouble is I want to have my cake and eat it, ie keep my portfolio value index-linked, and take an income. So I'll do some modelling around the 3 to 4 % levels, and making an assumption about inflation too.

Also I'm wondering how often to make withdrawals. The ISA doesn't incur charges but the pension probably will. But I'm thinking I will try and stay disciplined by withdrawing yearly or at most quarterly and using a savings account to hold a cash float.

The sheltering issue is an extra complication, which also brings in tax consequences. The savings limits for means-testing is an example of major fiscal drag, because the £8k to £16k tapering hasn't changed in decades. If I remember correctly, over £16k and you pay all your care fees, but how it's assessed for drawdown income rather than savings is something I need to look into.

Think, not sure, that its 23K+ before you pay all your care fees, that was due to rise to £100K+ as of late (October maybe) 2025, again don't know if that is still on the books.

As a ballpark guide, a Talmud strategy of retiring with a third in your UK house value, a third in US stocks, a third in gold, and drawing a 3% SWR relative to the stock/gold amount, across all 30 year periods since 1793 had a worst case of ending with 69% of the inflation adjusted start date stock/gold value remaining at the end of the 30 years. Median case had 2 times more. i.e. was safe. And with a Plan-B fallback of if the stock/gold value was spent down to zero over say 25 years (outside of historic worst case outcomes), a 65 year old retiree would be aged 90 and could sell their house to fund all-inclusive late life care home costs.

No need to rebalance, 3% SWR initial amount of the stock/gold value, uplifting that £££ amount each year by inflation as the amount drawn in subsequent years, and draw that from whichever of the stock or gold value was the higher at the time, so a regular inflation adjusted income stream, personally I like to pro rata that to monthly withdrawals - for a regular inflation adjusted 'wage' like income flow. Three currencies, three asset diversity, with low counter party risk (house/gold in-hand). A significant risk in forward time 30 years IMO is that of counter party risk, deposits you make into banks becomes the banks money; Deposits you make into broker accounts is the brokers money, where they buy the stocks that you like ... in their name. And where the tendency of states is towards bail-in's (savers/investors) rather than bail-out's (taxpayers) of troubled/failure cases. Physical gold instead of ETF/paper gold, where legal tender Britannias/Sovereigns are CGT exempt and there's no counter-party risk.

Have your cake and eat it. 3% SWR after 33.3 years and you've had your inflation adjusted capital returned via yearly instalments, and a good prospect of also having your inflation adjusted capital still available.

1972 was a interesting start year, as you spent from gold for the first 18 years, stocks were just left to accumulate for all of those years. Thereafter stocks stepped up to cover the SWR withdrawals for the remainder of years out to a total of 30 years, and you ended with 2.4 times the inflation adjusted start date amount still available, and holding a 83/17 stock/gold final portfolio. Fundamentally a bad start year for stocks, was a good start year for gold. More often its the reverse. A 1981 for instance start year and for all 30 years you just spent from stocks, ended with a 80/20 stock/gold portfolio and had 2.7 times more of the inflation adjusted start date portfolio value still available at the end of the 30 years.

[Harry23]

Think, not sure, that its 23K+ before you pay all your care fees, ...
portfolio value still available at the end of the 30 years.

Thanks for the super detailed reply 1nvest, I hadn't expected this to be as complex, but good to know this depth.

[ursaminortaur]

Many thanks folks for all the helpful advice and links. This process is like the mirror image of the budgeting I did about 20 years ago when planning how much to save per month, to achieve a target portfolio size over a given timespan. I used a simpler method back then; an average return on investments of 10% (8% capital + 3% divided yield -1% for fees & prudence). Put into a spreadsheet and drilled down to monthly figures to monitor performance, which turned out pretty accurate.

The trouble is I want to have my cake and eat it, ie keep my portfolio value index-linked, and take an income. So I'll do some modelling around the 3 to 4 % levels, and making an assumption about inflation too.

Also I'm wondering how often to make withdrawals. The ISA doesn't incur charges but the pension probably will. But I'm thinking I will try and stay disciplined by withdrawing yearly or at most quarterly and using a savings account to hold a cash float.

The sheltering issue is an extra complication, which also brings in tax consequences. The savings limits for means-testing is an example of major fiscal drag, because the £8k to £16k tapering hasn't changed in decades. If I remember correctly, over £16k and you pay all your care fees, but how it's assessed for drawdown income rather than savings is something I need to look into.

Think, not sure, that its 23K+ before you pay all your care fees, that was due to rise to £100K+ as of late (October maybe) 2025, again don't know if that is still on the books.

As a ballpark guide, a Talmud strategy of retiring with a third in your UK house value, a third in US stocks, a third in gold, and drawing a 3% SWR relative to the stock/gold amount, across all 30 year periods since 1793 had a worst case of ending with 69% of the inflation adjusted start date stock/gold value remaining at the end of the 30 years. Median case had 2 times more. i.e. was safe. And with a Plan-B fallback of if the stock/gold value was spent down to zero over say 25 years (outside of historic worst case outcomes), a 65 year old retiree would be aged 90 and could sell their house to fund all-inclusive late life care home costs.

No need to rebalance, 3% SWR initial amount of the stock/gold value, uplifting that £££ amount each year by inflation as the amount drawn in subsequent years, and draw that from whichever of the stock or gold value was the higher at the time, so a regular inflation adjusted income stream, personally I like to pro rata that to monthly withdrawals - for a regular inflation adjusted 'wage' like income flow. Three currencies, three asset diversity, with low counter party risk (house/gold in-hand). A significant risk in forward time 30 years IMO is that of counter party risk, deposits you make into banks becomes the banks money; Deposits you make into broker accounts is the brokers money, where they buy the stocks that you like ... in their name. And where the tendency of states is towards bail-in's (savers/investors) rather than bail-out's (taxpayers) of troubled/failure cases. Physical gold instead of ETF/paper gold, where legal tender Britannias/Sovereigns are CGT exempt and there's no counter-party risk.

Have your cake and eat it. 3% SWR after 33.3 years and you've had your inflation adjusted capital returned via yearly instalments, and a good prospect of also having your inflation adjusted capital still available.

1972 was a interesting start year, as you spent from gold for the first 18 years, stocks were just left to accumulate for all of those years. Thereafter stocks stepped up to cover the SWR withdrawals for the remainder of years out to a total of 30 years, and you ended with 2.4 times the inflation adjusted start date amount still available, and holding a 83/17 stock/gold final portfolio. Fundamentally a bad start year for stocks, was a good start year for gold. More often its the reverse. A 1981 for instance start year and for all 30 years you just spent from stocks, ended with a 80/20 stock/gold portfolio and had 2.7 times more of the inflation adjusted start date portfolio value still available at the end of the 30 years.

Not sure it is worth looking as far back as 1793 since the stock market was very different then - for instance those investing in a company faced unlimited liability.

https://en.wikipedia.org/wiki/Limited_liability

The world's first modern limited liability law was enacted by the state of New York in 1811.[15] In England it became more straightforward to incorporate a joint stock company following the Joint Stock Companies Act 1844, although investors in such companies carried unlimited liability until the Limited Liability Act 1855.

William Bengen's (author of the 4% to rule) study and the Trinity study both came to the conclusion that drawing down 4% from a US stock and bond portfolio would have survived all 30 year periods since 1925. No need for Gold or counting the House as part of the portfolio.

https://en.wikipedia.org/wiki/Trinity_study

The authors backtested a number of stock/bond mixes and withdrawal rates against market data compiled by Ibbotson Associates covering the period from 1925 to 1995. They examined payout periods from 15 to 30 years, and withdrawals that stayed level or increased with inflation. For level payouts, they stated that "If history is any guide for the future, then withdrawal rates of 3% and 4% are extremely unlikely to exhaust any portfolio of stocks and bonds during any of the payout periods shown in Table 1. In those cases, portfolio success seems close to being assured." For payouts increasing to keep pace with inflation, they stated that "withdrawal rates of 3% to 4% continue to produce high portfolio success rates for stock-dominated portfolios."


https://en.wikipedia.org/wiki/William_Bengen

[1nvest]

Not sure it is worth looking as far back as 1793 since the stock market was very different then - for instance those investing in a company faced unlimited liability.

Gold Sovereigns (around a quarter of a ounce weight of gold) were money back then, Pound coins. Those with surplus coins might have invested them ... in bonds for interest. Inflation broadly averaged 0% (median) such that bond interest was a real rate of return, and compared to stock total returns. So yes, way back and investors were more inclined to just hold bonds, be paid by the state/whoever for the safe keeping of their gold (coins). But the data provides more real world type variations, better (perhaps) than synthetic price/value modelling.

William Bengen's (author of the 4% to rule) study and the Trinity study both came to the conclusion that drawing down 4% from a US stock and bond portfolio would have survived all 30 year periods since 1925.

But that was just 'have cake' in some (worst) cases, all spent at the end of 30 years. 3% was a have cake and eat it, 33 years of 3% return of you inflation adjusted capital, and typically ending more often with the same or more as the inflation adjusted start date portfolio value still available.

[bdr1000]

I presently have a substantial investment in TIPs plus some UK investment grade bonds that would cover 10+ years expenditure and the rest in equities, given I can ignore it for 10+ years that will probably work out just fine.

Hi Hariseldon58

First, well done on holding firm through the GFC facing that sequence of returns risk.

I am age 48 and stopped my professional career a few years ago to travel full time pursuing a passion for climbing. I rent my UK home using that income for living expenses, leaving my ISA/SIPP/GIA investments to grow until I return to live full time in the UK in another few years. These investments are primarily passive low cost global index funds 70/30 equity/bonds.

I'm interested in your comment about your bond allocation, what do you invest in for TIPS (US) exposure and is it hedged?

Thanks!

[Hariseldon58]

I presently have a substantial investment in TIPs plus some UK investment grade bonds that would cover 10+ years expenditure and the rest in equities, given I can ignore it for 10+ years that will probably work out just fine.

Hi Hariseldon58

First, well done on holding firm through the GFC facing that sequence of returns risk.

I am age 48 and stopped my professional career a few years ago to travel full time pursuing a passion for climbing. I rent my UK home using that income for living expenses, leaving my ISA/SIPP/GIA investments to grow until I return to live full time in the UK in another few years. These investments are primarily passive low cost global index funds 70/30 equity/bonds.

I'm interested in your comment about your bond allocation, what do you invest in for TIPS (US) exposure and is it hedged?

Thanks!

Hi bdr1000

My TIPS are held in the iShares ETF ITPS.L the cost is 0.1% OCF and this is unhedged, I have more confidence in holding US$ then £, I made a big move from £ to $ in Feb 2016 prior to the Brexit vote, that's been a good move...

Longer term I have more faith in the $, there will be volatility in the exchange rate, thus the bulk of my bond holdings are in $ plus some £ bonds to cover more immediate needs and cover against volatility in the £/$ exchange rate. (£100k or so in Vanguard Short Term Investment Grade Bond fund, duration 2.9 yrs, YTM 4.7% credit A+)

The bulk of the equity world market is exposed to the $ and thus having your bond exposure in $ makes sense, you need some £ holdings as well , short duration to cover more immediate needs and thus you can ignore the short term volatility/noise of the £/$ exchange rate. I am firmly of the opinion not to hedge currencies if this can be avoided.

This a useful link for the TIPs market https://www.wsj.com/market-data/bonds/tips ten year real returns are now around 1.6% up form definitely negative a year back. (I have held a long duration TIPs ETF but this was a more speculative holding and is really a play on interest rates, worked out ok but I am now out of this).

Given a yield of around 3.9% on nominal US 10 yr bonds and a real yield of 1.6% on TIPs your working on a breakeven inflation rate of 2.3%, that's very dovish and thus you can hold TIPS with inflation protection without paying a premium for this....

My default position would be an even split between Nominals and TIPS but in the present market I feel TIPs are a much more attractive option at present.We don't know the direction of interest rates ( and even less about the future movements of exchange rates) but a real return of 1.6% on TIPs is okay.

There are short duration TIPS ETFs but the intermediate duration fits my needs looking forward, ie to cover 10 years plus of expenses.