an income reserve experiment

[Arborbridge]

In January 2009 I had some cash floating about and wasn't sure what to do with it. It became part of what I think of as my "income reserve" but instead of putting it in cash, I dumped it into the Invesco Perpetual Monthly Income plus OEIC.

I sat on it as it seemed to be dishing out a fairly fixed amount and the capital value increased slightly. Naturally, I didn't expect anything like an equity return (although up to 20% of this fund is actually in equities) but it was just a relatively safe haven for unused cash.

Initially, the amount was £12273 - that would now be the equivalent of £30630 (that's in a period of low inflation!) so how has my " near cash" faired?

It's now worth £17199 and I've been paid £16374 in interest less the £688 in fees in my Bell SIPP. None of the income was re-invested, though perhaps it should have been. The current yield is around 5%.

Net these off and I get £32885. In other words, my cash has maintained it's value, and in a period of low interest rates probably served me better than a building society would have done.

It isn't a startling result, but it has done what I wanted - maintained my income reserve without drama.

Arb.

[MDW1954]

Arb,

You raise a very good point (and one that I've posted on before): what to do with cash earmarked as a "buffer", or income reserve?

Thank you for posting, and I hope other voices chime in.

MDW1954

[Arborbridge]

Arb,

You raise a very good point (and one that I've posted on before): what to do with cash earmarked as a "buffer", or income reserve?

Thank you for posting, and I hope other voices chime in.

MDW1954

That's why I thought it might be of interest on this board - though I was tempted to put it on HYP-P as "income reserves" are part of the system as practiced.

Mind you, I am now wondering if this decent sum should now be put into something with a better return. After all, I haven't needed to draw on this cash to supplement my income through the recent bad times, so is it strictly required? Vacillate, vacillate.

Arb.

[Urbandreamer]

Arb,

You raise a very good point (and one that I've posted on before): what to do with cash earmarked as a "buffer", or income reserve?

Thank you for posting, and I hope other voices chime in.

MDW1954

That's why I thought it might be of interest on this board - though I was tempted to put it on HYP-P as "income reserves" are part of the system as practiced.

Mind you, I am now wondering if this decent sum should now be put into something with a better return. After all, I haven't needed to draw on this cash to supplement my income through the recent bad times, so is it strictly required? Vacillate, vacillate.

Arb.

When I had an income from work, that is exactly the attitude that I took. If I really needed the funds for personal reasons, I could liquidate some assets. As I use my credit card to pay for everything I would have plenty of time for the transaction and transfer of funds to go through. I also was happy to have the funds in lower yielding assets, which makes me question if I should be replying on this board.

As I no longer have income I keep more cash, to reduce the effort of managing my funds. I've also shifted stance to regarding yield as useful to me.

[tjh290633]

I think that in simple terms a cash reserve should be just that, a savings account with a reputable body. At times of low interest rates that was a better source of cash than withdrawing accumulated dividends which might be reinvested to give yet more investment income.

As interest rates get higher, then the differentiation is different. Now you may do better selling a low yielding or non yielding share to provide the cash.

But should a cash reserve be untouched except in dire emergency? If so, at what level should it be kept? A year's income? Perhaps. Should it be a notice account or instant access?

My preference is for instant access, despite the lower rates that apply. I dip into it when unusual expenditure tops up, like my recent roof repair, but I have also withdrawn dividend income as needed and sold a couple of holdings, one unsheltered which had rising income.

I guess that there is no universal solution. We are all different and have different views.

TJH

[Newroad]

Hi All.

We have a similar consideration, which I've only acted on recently.

We've been putting money monthly into reserve fund - instant access NS&I Savings (currently paying 3.65%). When everything was yield around zero, it didn't make much difference to us. But now, with yield becoming a factor, there are differentials opening up again.

When NS&I started offering 6.2% for one year bond, it forced me to think and act.

My conclusion has been to invest in short terms gilts. Yes, there is some (very) short term capital risk (and/or reward) but it is not that great over the timeframes (to Jan 25 and Jan 26 respectively). On the upside, the capital gains on redemption are tax free, so given that they are not tax sheltered, this helps vs the 6.2% (these gilts yield high and mid 4%'s respectively to maturity). Further, I can get access any time (or, within a day or so at least) by simply selling them on the open market.

In any case, glad to hear Arb's strategy worked out for him!

Regards, Newroad

[Arborbridge]

Just an addition input: the cash I put into this funded became only part of my income reserve. I have some cash in reserve as well as the usual budget amount for household goods and repair type disasters.
So this Monthlu Incom plus account only had a fraction of the reserve and has not been needed - which is quite handy in the sense that I can write about how it performed with no withdrawals or additions to complicate matters.

Incidentally, I have another holding in the same fund (about the same amount) which I transferred to my Halifax ISA. In this case I elected to buy the accumulating version of the fund, and since HSDL (unlike Bell) do not charge fees to hold OEICS, it should score more higly.
I haven't checked the yield recently, but it isn't especially low - around 5%, I think.



Arb.

[DrFfybes]

It's now worth £17199 and I've been paid £16374 in interest less the £688 in fees in my Bell SIPP.

It seems for you this is a way of preserving a 'cash' balance within the SIPP that can be drawn upon to provide income if required? This is quite a different approach to what many are comparing it to, as there seems some confusion in other posts with an "Income Reserve" within a SIPP and a "Cash Reserve" which others are keeping in unsheltered accounts.

For me a 'reserve' is surplus unsheltered cash available at instant or short notice. What you are describing appears to me to be an investment strategy designed to keep place with inflation?

If I'm looking at the correct product ( ISIN: GB00BJ04K042 ) then the unit price is 10% down over 5 years and 14% down in the last 26 months. The Acc units are 6% down over 2 years.

Or am I missing something obvious?

Paul

[Urbandreamer]

It's now worth £17199 and I've been paid £16374 in interest less the £688 in fees in my Bell SIPP.

It seems for you this is a way of preserving a 'cash' balance within the SIPP that can be drawn upon to provide income if required? This is quite a different approach to what many are comparing it to, as there seems some confusion in other posts with an "Income Reserve" within a SIPP and a "Cash Reserve" which others are keeping in unsheltered accounts.

For me a 'reserve' is surplus unsheltered cash available at instant or short notice. What you are describing appears to me to be an investment strategy designed to keep place with inflation?

If I'm looking at the correct product ( ISIN: GB00BJ04K042 ) then the unit price is 10% down over 5 years and 14% down in the last 26 months. The Acc units are 6% down over 2 years.

Or am I missing something obvious?

Paul

Speaking personally:

Just how much actual liquid cash do you think that you will need at an "instant or short notice". While I was working I decided that £800 was enough. Should I need to buy a car or book a flight, then I could use a credit card and liquidate assets from my ISA. Since share trading is on a three day settlement and transfer to a current account taking about the same, is 1 week access "short notice".

At the end of the day it's a perception thing. Some actually WANT money as part of their portfolio. Others, like me, want the reverse, and there is that odd middle ground. Which I think that Arb was trying to find.

Ps, we don't know, in this thread, if Arb is currently in draw down. If so he can draw upon a SIPP the way that I can upon a ISA.

[Arborbridge]

It's now worth £17199 and I've been paid £16374 in interest less the £688 in fees in my Bell SIPP.

It seems for you this is a way of preserving a 'cash' balance within the SIPP that can be drawn upon to provide income if required? This is quite a different approach to what many are comparing it to, as there seems some confusion in other posts with an "Income Reserve" within a SIPP and a "Cash Reserve" which others are keeping in unsheltered accounts.

For me a 'reserve' is surplus unsheltered cash available at instant or short notice. What you are describing appears to me to be an investment strategy designed to keep place with inflation?

If I'm looking at the correct product ( ISIN: GB00BJ04K042 ) then the unit price is 10% down over 5 years and 14% down in the last 26 months. The Acc units are 6% down over 2 years.

Or am I missing something obvious?

Paul

Thanks - I need time to look into that, but I have a rather busy week, so that won't be just now. That seems odd given that I have a positive XIRR - I do know the fund has done badly since interest rates went up, and my XIRR at one time was far higher. So what you say over the shorter period may well be true.

You are correct - it was originally a cash balance within the SIPP that I wasn't sure what to do with. Then I thought I'd label it as part of my income reserve - to be drawn on if my true cash outside the SIPP ever needed bolstering. So far, it hasn't been needed, but it is still there, allocated to the Income reserve if needed to top up my dividends which are paid within the SIPP and provide my income. An income reserve is to top up a shortfall in dividends, and it makes no difference to me if it is in the SIPP or out of it. It's available at suitably short notice, so I think the difference is one of nuance. Obviously, as I mentioned previously, I have cash in addition for "instant" retrieval.

Arb.

[Arborbridge]

Ps, we don't know, in this thread, if Arb is currently in draw down. If so he can draw upon a SIPP the way that I can upon a ISA.

Well, ye'ken noo: yes, in drawdown since 2010-ish from my SIPP. Where preferable also cash from ISAs.


Arb.

[DrFfybes]

You are correct - it was originally a cash balance within the SIPP that I wasn't sure what to do with. Then I thought I'd label it as part of my income reserve - to be drawn on if my true cash outside the SIPP ever needed bolstering. So far, it hasn't been needed, but it is still there, allocated to the Income reserve if needed to top up my dividends which are paid within the SIPP and provide my income.
Arb.

Aha - so you tend to have 'pots' like I do. The difference is mine tend to be unsheltered, one provides Dividend Income and one is TR sold off to provide Income, leaving sheltered assets untouched.

I suspect you could run a comparisson with your fund and an Income IT like CTY and get a similar result. It is more how you mentally allocate your assets to suit you and your comfort levels.

Paul

[Arborbridge]

You are correct - it was originally a cash balance within the SIPP that I wasn't sure what to do with. Then I thought I'd label it as part of my income reserve - to be drawn on if my true cash outside the SIPP ever needed bolstering. So far, it hasn't been needed, but it is still there, allocated to the Income reserve if needed to top up my dividends which are paid within the SIPP and provide my income.
Arb.

Aha - so you tend to have 'pots' like I do. The difference is mine tend to be unsheltered, one provides Dividend Income and one is TR sold off to provide Income, leaving sheltered assets untouched.

I suspect you could run a comparisson with your fund and an Income IT like CTY and get a similar result. It is more how you mentally allocate your assets to suit you and your comfort levels.

Paul

Judging by my XIRR for CTY, it has progressed rather better but as you might expect has been more volatile, and that's point. This was intended as a near cash substitute which wouldn't be subject to a great crash if I needed to call on it. It's been a more stable investment - smoother ups and downs.

From my basket of ITs, no doubt I could choose similar performances, all by hindsight - which is not terribly useful!

Incidentally, I knew this OEIC would not react well during a period of increaasing interest rates, being 80% bond based, but that didn't bother me - what I'm interested to see is how it will react as rates steady or come down.

Arb.