When between contracts - have been planning for accessing rather than saving for DC Pension. This blog section provides a view into my personal research on roughly a quarterly update. Nothing here is financial advice - I am not an IFA. Do your own research. I have been evaluating "how difficult is drawdown" and self management thereof. The answer seems to be manageable but more complex than it needs to be and the investment side is as simple or complex as you let it get. Bureaucracy element awkard and a moving target. Also been discovering and working through the personal questions we all need to answer to build a plan - either alone or with an IFA.
This quarter - I have found the following to be useful sources: Book - Living off your Money (McClung), ERN blog. MoneySavingExpert forum.
Musings on handling sequence of returns risk in early retirement - such as a global market correction of 30%-50% between 2020-2030
For drawdown handling this is about the cash+bond buffering for near term “to be consumed” pot; the approach taken to extraction/flexibility and working out if/how bonds held to maturity fit in a cash buffer. I still lack clarity on bonds to stock correlation and have a general loss aversion to overcome for bond funds in current markets. Holding actual bonds to maturity and a rolling purchase approach for refreshing a ladder seems to mean that repricing vs interest rate risk/expectation not an issue for actual bonds in this buffer usage. Just coupon yield and any locked in losses from initial pricing vs par at redemption. My current challenge is how/when to change mix from 100% equities to avoid mistakes of inaction around a big correction. This is a game of chicken with trade wars, brexit and the complex currency/equity market interaction for sterling.
Local issues to my ex employer scheme
Sadly - I am told you can’t take a PCLS and leave crystallised but not drawn down funds which would have been a wizard wheeze to hold equities for 5-10 years (up to a £30k saving on platform fees). So it's transfer out to a SIPP pre-commencement or PCLS and open market annuity purchase. Can’t PCLS, defer annuity purchase and transfer funds out later. On the plus side TowersWatson say they will transfer out to two SIPPs if I want to hedge platform risk and improve the regulatory level of protection. This is an insurance which is likely to cost ~£1000/pa in incremental SIPP platform fees for double the regulated protection and 50% non-disruption of access to income in the platform failure case. Still moderately expensive over the long haul if you pick someone reputable to start with.
My emerging base case thinking is a cash+bond buffer of between 3 and 5 years this viewed across what’s in the SIPP and accessible elsewhere i.e. small business, cash ISA’s etc.) and the rest in global equities (passively at lowest possible fee drag). Waiting for Vanguard to launch their UK SIPP platform.
This KISS approach - cash buffer plus passive global equities is favoured by Lars Kroijer videos and blog. Videos are basic and repetitive but the challenge is to either accept the logic chain or frame a refutation and base a different strategy thereon. He recommends “hold the whole of the global market” cheaply. Argument is that the individual retail investor knows less than and is time and resource poor vs stock and sector analysts. Implication being you can’t realistically pick regional, sector or stock weightings better or tell which are the 1 in 10 seriously outperforming fund managers ahead of time when looking out over pension timeframes i.e. 40 years. Beating the market thus becomes a crapshoot. Aim to beat 8 out of 10 people through a whole of global market at weight at reduced fee drag. Short of a crash of Japanese lost decade dimensions – you pick your poison on % equity returns foregone vs size of the “insulation” cash+bonds to sustain income after a market correction. Mitigates forced of selling equities low for sequence of returns risk in early retirement to a degree.
However the ERN blog has done some back testing on this buffering and flexibility of income idea which bears further study as it suggests “flexibility” is less than a panacea in the worst back testing periods.
With base case in hand – any IFA recommended, managed options or anything spicier – say at ~20% of pot for a more diversified mix (HighYieldPortfolio stock picking, commodities, emerging markets/tech funds, commercial property etc.) will need a compare vs this base case on a back test net of fees. Anything magical and encapsulated with no easy history to compare will likely get short shrift
In reading this quarter - one interesting or alarming variant that I came across was a recommendation to use leveraged 3x ETF (derivative based) for equities exposure (at around a 25% of pot level) and the rest in a GI bond ladder/self built annuity. Logical in its own terms to ramp back up equity exposure for more discretionary upside and limit downside (to the wipe out of the 25%) but leverage of volatility now makes this 3x more likely. I then read about how (some) of these ETF’s work for margin and daily settlement and learned that buy and hold on these derivatives designed for intraday is likely to be a punishing experience. There is a lot of material out there on the internet all with passionate advocates: some of it dangerous to your financial health. Timely reminder of the old adage of only buying things you actually understand.
UK Political Risks on rollback of pension reforms and guaranteed income
Lots of media coverage on political risk around the stealthy reversal of pension freedom and the FCA consultation on pension flexibility “outcomes”. The research is very small, very early; the weight of evaluation is carried on a small sample. The directional narrative on “protection” of the naïve investor is clear. To “protect” people from no or bad choices via regulation and non-advised default pathways - and to perhaps also restrict non-advised choice. The emphasis around “advised” vs non-advised” has the stench of monopoly rent seeking lobbyists at work. One to watch for collateral damage to anyone planning self-managed.
Another political kite being flown doesn’t reverse pensions freedom as such but does so in practice for the masses. Forced purchase of guaranteed income to a minimum £ level (thus avoiding the terrible if hypothetical risk of destitute DC pensioners who freed up their funds bought ferraris and had them confiscated and crushed by French Plod - falling back on the state). This would remove drawdown freedoms for all but a vanishingly tiny minority with enough “qualifying” guaranteed income sources. Risk timing on this is ~2023 +/- 2. By way of illustration: a mandate to “buy as much as you can afford from your pot but without access to flexibility until you reach £20k guaranteed income”– on current annuity rates that is a ~450k DC pot (single life, level which is not what most want) or a ~675k DC pot (joint 3% indexed, spouse half). At those levels it’s goodbye to drawdown flexibility for most people based on the real world distribution of pot sizes.