The charges on this product are low considering how much I expect to hold in there (only 0.35%) and "switching" funds (ie dealing) is free. So this all seems good. The only slight fly in the ointment is that the documentation talks about needing to take (paid) advice before you can start to draw down the money but hopefully this requirement will be something that is either dealt with when the budget changes are formalised next year, or it will disappear naturally over time as the new ways of working for pension funds becomes embedded.
I set the fund up with a £1000 lump sum and initial monthly contributions of £200. The money is sitting there as cash at the moment waiting for me to decide how to invest it. This is my task for the weekend.
What I Have and What I Want.
I must admit I'm struggling a little to make a decision. I know that I have a very "unbalanced" pot at the moment. The bulk of my money is in my S&S ISA (which, btw, still shows no sign of landing in my iii account - in fact I received a Manager's Annual Report from CIS this week so they still obviously have me on their books) which is invested entirely in a UK Equities Growth Fund (apart from a tiny bit in a US Fund which is a legacy from when I sold that fund off as part of a mis-selling dispute (long story).
I have started to spread my investments around a little since I set up my account on iii, but I will only be able to grow any of these new holdings very slowly with my monthly drip feeds unless I sell some of the CIS fund (when it arrives). I'm still not sure how to go with this.
However I ran my current holdings through Trustnet's portfolio tools and this is what came out:
| Asset Classes | Total(%) |
| UK Equities | 60.3 |
| Money Market | 16.8 |
| UK Corporate Fixed Interest | 6.6 |
| US Equities | 2.5 |
| Europe ex UK Equities | 1.6 |
| European Equities | 0.2 |
| Global Corporate Fixed Interest | 0.2 |
| North American Equities | 0.1 |
| Asia Pacific Equities | 0.1 |
| Other Holdings | 11.6 |
Therefore I have a fair amount of rebalancing to do given that I would ideally like to follow the asset allocation given in the the example by Monevator (Slow and Steady Passive)
- UK equity: 20%
- Developed World ex UK equity: 50% (North American equity: 27.5%, European equity ex UK: 12.5%, Japanese equity: 5%, Pacific equity ex Japan: 5%)
- Emerging market equity: 10%
- UK gilts: 20%
However I have to admit that I do not plan to stick to passive funds only. The reasons for this are complex, not very scientific and mostly down to my personality and how I approach "projects" (which is how I see my goal of retiring when I want to). However full discussion of this is something for a future post I think.
In the meantime I have the problem of how to position my SIPP in all this. Added into the mix is the fact that I have a specific time-frame and amount requirement for the fund. I want to use it to help fund the 6 years between 60 and 66 at a level just below the tax threshold (ie somewhere just below £10,500 on today's figures). Given that I will have a very small pension from an old job, plus some rental income from our studio flat, this means that I ideally want to draw a further £8,000 a year from the my personal pensions. I will then use the ISA to top up to the £15,000 per year I've calculated we will need as a household until my LGPS and state pensions kick in.
My existing CIS FSAVC should see me safely through 60-63 as it should total around £24,000 by the time I need it, but the SIPP has to work quite hard to cover the years 63-66. Given the tax advantage, I would still need to put in at least £250 a month and gain a 6% return to reach my goal. This is within what I can afford (just) but ideally I don't want to have to resort to funding the ISA much less than I originally intended, so I'm not quite sure how things will balance out. I may need to make a judgement call on this at some point but for the moment I'm just going to see how things pan out.
In addition, and from the point of view that the SIPP has a specific job to do in a very tight time scale, I'm wondering whether to treat the pension as a different pot altogether rather than try to balance it in line with the rest of my stuff.
Decisions, decisions...
> treat the pension as a different pot altogether rather than try to balance it in line with the rest of my stuff.
ReplyDeleteFrom your post it appears that the pension has a different timescale (invested now till you are 63, DD 63 to 66) whereas your ISA is a core part of your wealth/long-term tax-free 'pension' income. In that case you would definitely want to take the different investment horizon into account - the SIPP is a very short investment horizon that indicates steady-as-she-goes boring low equity sort of thing. It's not going to look anything like your ISA because it's doing a different job.
Most of the win on the SIPP will be the tax that the Chancellor doesn't steal from you. That's like a 25% bump up on the money you forego. Simulate this using a spreadsheet - once the legislation has passed it's an awesome risk-free return on capital. Because it is the return of some of your capital that you were robbed ;) The ROI calculation con cash is basically (the tax bung 25%/years SIPP runs)-3% (rate of inflation) as long as you can take the money in the SIPP out tax-free. That's the 25% tax-free PCLS plus £10000 personal allowance, assuming you do not have any other taxable income, it roughs out to about £13k.
It's the offer of a riskless return (unless the world ends or hyperinflation in the next 5 years) that makes a short SIPP transformational for people coming up to retirement. There's nowhere else in the world you can go get a risk-free return.
This only applies to people using a SIPP over a short time horizon, because of the years SIPP runs in the divisor means that you have to chase investment return if the SIPP lasts more than 5 years, and certainly if it runs for 20 or more years!
DYOR of course, as always - just throwing some ideas into the pot :)
Thanks ermine, that all makes complete sense. I will have a little bit of taxable income post employment (about £2,500 pa) but not enough to mess up the advantage altogether.
ReplyDeleteI finally decided on an "all-inclusive", (fairly) low equity lifestyle fund with low charges (Blackrock Consensus 60), pressed the buttons to move my cash into the fund but then got told "Your account cannot be managed online. Please call us for further information". Grr....So I will have to wait until tomorrow and give them a ring
(ps. I jolly well hope my account can be managed online!!)