Preference shares

[sackofspuds]

I plan retiring in 3 years. I'm 60.

I've recently started to think about making my pension pot last for the rest of my life (say 20 years). Obviously I'd have to be a bit more sensible - I find myself drawn to what you might call "special situations" which sometimes work out very well and at other times, er, don't. I'd also simply not have the cash coming in to fund new investments which would take some getting used to.

With base rates at 5.25% and potentially heading down next month it does make me wonder if it would be worth buying sufficient preference shares - say £300k - yielding about 6.5% in order to generate about £20k pa while I can. Unlike high yielding shares, the dividend won't get cut. All these currently yield between 6.9% and 5.9%:
STAC
LLPC
BWRA
GACA
NWBD
GACB
LLPD
AV.A
SAN
BP.B

Add that £20k to my wife's index linked public sector pension of £20k and we'd have a base level of income indefinitely. True, mine would get eaten away by inflation but I would still have £400k in investments to supplement it.

Sensible or too conservative?

[kempiejon]

I plan retiring in 3 years. I'm 60.

With average luck you'll have 25 years to go. You might be in the 20% that get to 90. Fixed interest looks fine for the first few years, as you comment inflation is the problem. Too conservative is my view - I'm prepared to take risks with my money. I have a growing dividend income portfolio giving enough of a base income to hopefully retire and have a growing global ETF portfolio SIPP, bugger all fixed interest and premium bonds. My asset allocation is 90% stocks.

But it's what let's you sleep at night. By the time (if) you get to 80 odd you could spend some of that £400k and bet against longevity.
If your wife predeceases you and what would your pensions look like then? Will you both get state pensions too?
Have you done the work to know how much you currently spend and use that to estimate what retirement spend looks like? Mine looks likely to increase for the first part then decline - but I know I don't know.

[monabri]

Not forgetting any state pensions!

[sackofspuds]

With average luck you'll have 25 years to go. You might be in the 20% that get to 90.

Yeah, 85 is average for a 60 year old. I was taking the starting point as 63 so 22 years from then. Frankly I feel I would be v. unlikely to last longer than early 80s.

Too conservative is my view

I tend to think the same, just that with rates the way they are it does feel a bit now or never in terms of locking in a decent rate.

If your wife predeceases you and what would your pensions look like then? Will you both get state pensions too?

I'd get half her pension and yes, we'd both get state pensions.

Have you done the work to know how much you currently spend and use that to estimate what retirement spend looks like? Mine looks likely to increase for the first part then decline - but I know I don't know.

Nah, haven't done that yet. There are a heck of a lot of variables and part of me thinks you can cut your cloth as you go to some extent. We're not spendthrifts. Definitely agree that spending more in the earlier years while you are physically capable makes sense.

[88V8]

...With base rates at 5.25% and potentially heading down next month it does make me wonder if it would be worth buying sufficient preference shares - say £300k - yielding about 6.5% in order to generate about £20k pa while I can. Unlike high yielding shares, the dividend won't get cut. All these currently yield between 6.9% and 5.9%:
...

I have more than that in Prefs, all those you list other than Lloyds, and a few others. But I am c15 years older.
On the plus side is the relative certainty, on the minus side inflation which even in single digits would be very noticeable over twenty years.

However, twenty years... when rates fall the price of Prefs will rise, so the current yields will reduce and eventually you may be tempted to do something 'better' with your money.
The other factor is that in the next year or two I expect some of the issuers to tender for their shares so they can be cancelled; the prospect of a capital uplift and meantime a nice yield, but some of these shares will vanish.

There is no great downside in buying now, imv, albeit I do not think you would still be holding them all in twenty years.

V8

[IanTHughes]

I plan retiring in 3 years. I'm 60.

I've recently started to think about making my pension pot last for the rest of my life (say 20 years). Obviously I'd have to be a bit more sensible - I find myself drawn to what you might call "special situations" which sometimes work out very well and at other times, er, don't. I'd also simply not have the cash coming in to fund new investments which would take some getting used to.

With base rates at 5.25% and potentially heading down next month it does make me wonder if it would be worth buying sufficient preference shares - say £300k - yielding about 6.5% in order to generate about £20k pa while I can. Unlike high yielding shares, the dividend won't get cut. All these currently yield between 6.9% and 5.9%:
STAC
LLPC
BWRA
GACA
NWBD
GACB
LLPD
AV.A
SAN
BP.B

Add that £20k to my wife's index linked public sector pension of £20k and we'd have a base level of income indefinitely. True, mine would get eaten away by inflation but I would still have £400k in investments to supplement it.

Sensible or too conservative?

A few points to consider:

1. Dividends on Preference Shares can be suspended.

Preference Shares do have priority over Ordinary Shares when it comes to any dividend, or indeed other payout, hence the name, but their dividends can most definitely be suspended, if thought necessary.

2. A 60 year-old living only 20 more years might be unduly pessimistic.

My father died last year aged 95. I would suggest that a target of 100 would be more realistic, in this day and age.

3. The ravages of Inflation

In order to keep its spending power at least in line with inflation running at say 3% per year, that £20,000 needs to rise to over £36,000, by the time you are 80. If you do make three figures, the amount would need to be in excess of £65,000.

4.Your wife’s index-linked pension

What happens to her pension if she pre-deceases you?


Your £400,000 in other investments may well make up for any downfall that may occur, I just thought that you should think on those few points, if you have not already done so.

Good luck in your coming retirement!

Enjoy!


Ian

[sackofspuds]

Yes, it is inflation which would be the killer. Guess you really want 10% total return pa but that's tough.

I also agree that over 20 years a fair few of these prefs would get redeemed.

The cash income wouldn't actually change though because it is based on your initial buy price.

[88V8]

Yes, it is inflation which would be the killer. Guess you really want 10% total return pa but that's tough.
I also agree that over 20 years a fair few of these prefs would get redeemed.
The cash income wouldn't actually change though because it is based on your initial buy price.

10%.. is impossible unless you feel lucky.

The cash income stays the same, as you say, which is its strength and its weakness.
But the yield... when the yields have fallen below the yield you could get from Shell, you will be tempted, and rightly so.

If you are going to buy these Prefs, do it now while prices are still relatively low. Otherwise it will become a coulda shoulda.

V8

[moorfield]

STAC
LLPC
BWRA
GACA
NWBD
GACB
LLPD
AV.A
SAN
BP.B

I have slowly unwound my pref holdings and replaced with NCYF and SMIF for fixed income exposure - these both hold several of those plus PIBS and Bonds. Aim to buy at distressed prices (under 100p), RE.B is one not on your list.

[stockton]

You seem to be ignoring the risk of the prefs. being redeemed at par, which is not insignificant.

[sackofspuds]

I have slowly unwound my pref holdings and replaced with NCYF and SMIF for fixed income exposure - these both hold several of those plus PIBS and Bonds. Aim to buy at distressed prices (under 100p), RE.B is one not on your list.

Thanks, NCYF and SMIF both look good.

I do already hold about £100k of prefs, some of which I bought during the GFC when various TMFers spotted the opportunity. Boy, they were distressed then! Hats off to those who bet the farm on NWBD at 30p or whatever. I was tempted to buy £50k worth but I really couldn't afford to lose the money so invested a few grand as I recall.

Bought more prefs on 26 March 2020. They weren't doing great then either but not sub 100. NWBD 122.

BWRA seems to be suffering currently at 130. Water companies not flavour of the month!

[moorfield]

I have slowly unwound my pref holdings and replaced with NCYF and SMIF for fixed income exposure - these both hold several of those plus PIBS and Bonds. Aim to buy at distressed prices (under 100p), RE.B is one not on your list.

Thanks, NCYF and SMIF both look good.

I do already hold about £100k of prefs, some of which I bought during the GFC when various TMFers spotted the opportunity. Boy, they were distressed then! Hats off to those who bet the farm on NWBD at 30p or whatever. I was tempted to buy £50k worth but I really couldn't afford to lose the money so invested a few grand as I recall.

Bought more prefs on 26 March 2020. They weren't doing great then either but not sub 100. NWBD 122.

BWRA seems to be suffering currently at 130. Water companies not flavour of the month!

Some of the more esoteric (and very high yield) ones available deal in aircraft leasing - search out Carcosa's posts on these, well worth a read for interest/education. Too hot for me though.

[sackofspuds]

I already hold DNA3, DNA2 and AA4 which are the aircraft leasing ones. Mostly DNA3 bought March 2020 and beyond. Great return. Don't think I'd buy more because risk/reward totally different now. AA4 still rather spicy.

[Charlottesquare]

Do not be too pessimistic on the inflation point, yes living to 100 could eat into real income, however ignoring care home costs there is a good chance expenditure drops as one ages- driving gets given up so less motoring costs, fewer foreign holidays etc

I am in similar position, wife has retired with her inflation proof pension, I have still to go (likely just under 2 years to go when state pension kicks in), yes there are jolts if either dies but hopefully by then it will not matter as we will spend less anyway

[vand]

I have considered Pref shares for my HYP, but ultimately I think I'd rather just go down the common stock with high yield route.

There are also debt funds that you could consider that may be a better risk/reward play - NCYF and SEQI come to mind.

There was some bad press a few years ago when Aviva tried to call back some supposedly uncallable pref shares.

Pref shares are still shares - the dividend can still be suspended and cancelled in the worst situations if the company can't meet its debt obligations. You should not make the mistake that they are gauranteed like with fixed income.

[Alaric]

Pref shares are still shares - the dividend can still be suspended and cancelled in the worst situations if the company can't meet its debt obligations. You should not make the mistake that they are gauranteed like with fixed income.

In extremis, Companies and even Governments can suspend or cancel bond fixed income. Indeed that's why bonds have ratings from AAA downwards. If a Company has both Preference Shares and bonds, one will rank above the other, but it will depend on the detail of the conditions as to which. Specialists fund managers in the fixed interest and related fields devote attention to assessing the relative risk of default.

[vand]

Pref shares are still shares - the dividend can still be suspended and cancelled in the worst situations if the company can't meet its debt obligations. You should not make the mistake that they are gauranteed like with fixed income.

In extremis, Companies and even Governments can suspend or cancel bond fixed income. Indeed that's why bonds have ratings from AAA downwards. If a Company has both Preference Shares and bonds, one will rank above the other, but it will depend on the detail of the conditions as to which. Specialists fund managers in the fixed interest and related fields devote attention to assessing the relative risk of default.

Of course, my use of the word "guaranteed" was probably ill judged. Bond issuers can and do default all the time when in bankruptcy. In which case though, those bondholders are still better off than equity holders.

For government issues debt, technically no government with a printing press *needs* to default on their interest payments as they can always print up more money to meet those obligations, although to paraphrase Greenspan, they can't guarantee the purchasing power of that money...

[simoan]

In extremis, Companies and even Governments can suspend or cancel bond fixed income. Indeed that's why bonds have ratings from AAA downwards. If a Company has both Preference Shares and bonds, one will rank above the other, but it will depend on the detail of the conditions as to which. Specialists fund managers in the fixed interest and related fields devote attention to assessing the relative risk of default.

Of course, my use of the word "guaranteed" was probably ill judged. Bond issuers can and do default all the time when in bankruptcy. In which case though, those bondholders are still better off than equity holders.

For government issues debt, technically no government with a printing press *needs* to default on their interest payments as they can always print up more money to meet those obligations, although to paraphrase Greenspan, they can't guarantee the purchasing power of that money...

The issue here is preference shares though, the vast majority of which are issued by UK banks and insurance companies. If the dividend payments on the preference shares are in question, then you can guarantee the equity dividends of those companies will be a big fat 0. As far as I'm aware (not being a practitioner) these companies are a key constituent of HYPs. We never know the future, but we can learn some things from the past, and we know for a fact that preference share dividends were paid even during the apocalypse that was the financial crisis, unlike equity dividends. Personally, I don't see a problem holding an amount of preference shares if you're looking for income as long as you understand their relationship with base rates. Inflation is irrelevant as not every holding in your portfolio has to keep up with inflation and I imagine the income of most typical HYP shares have not fared well in beating inflation in the past 10-15 years either given that the income is at higher risk.

[sackofspuds]

I am in similar position, wife has retired with her inflation proof pension, I have still to go (likely just under 2 years to go when state pension kicks in), yes there are jolts if either dies but hopefully by then it will not matter as we will spend less anyway

This sounds daft but when I've read or heard phrases like "investment horizon" in the past I've taken no notice. Now retirement is approaching, that phrase has real meaning!

[sackofspuds]

I have considered Pref shares for my HYP, but ultimately I think I'd rather just go down the common stock with high yield route.

There are also debt funds that you could consider that may be a better risk/reward play - NCYF and SEQI come to mind.

Yes, NCYF, SEQI and SMIF all look worth taking a look at. I guess the likes of RECI is similar to SEQI. RECI is yielding 10% and some of those others not far behind.