This 54-year-old investor, who wishes to remain anonymous, has £625,000 in individual savings accounts (Isas) and cash.
He says: "I started investing 36 years ago, thanks to a great A Level economics teacher. I want this portfolio to provide an income for my retirement and a lump sum to pass on to my children. Being honest I just enjoy investing as a hobby. I have a regular salary so I am still in savings mode.
"I recognise that the market falls tend to provide buying opportunities and I tend to be a buy-and-hold investor. As an overall risk taker I am probably no more than a seven out of 10.
"The Isa portfolio, split between my wife and myself, generates an income of around £15,000 a year and we reinvest the dividends. The high risk in the shares is balanced by the low risk cash and premium bond holdings. Our home is mortgage free and worth £500,000.
"I don't have enough international exposure in the portfolio and want to add some smaller high-growth companies. Also, having worked for one of the main high street banks for many decades, I have far too many shares in the financial sector.
"Where my dilemma lies is that I am in a final salary pension scheme and wisdom has always said that you should never leave them. However, I am conscious that on my death the benefits halve and on that of my spouse the benefits are lost completely.
"I have three children all in their late teens and would like to pass the pension pot onto them. I have been toying with the idea of leaving the final salary pension and transferring the money into a self-invested personal pension (Sipp).
"Having discovered the transfer value is £1.46m I am wondering:
■ Should I leave the scheme?
■ Am I confident enough to manage it myself?
■ How do I allocate such a large amount?
■ How do I balance the risk against the existing assets?"
Individual savings account and final salary scheme transfer
Income and inheritance
ANONYMOUS ISA PORTFOLIO
|Name of holding||Value||%|
|Lloyds Banking (LLOY)||£59,617||10|
|WH Smith (SMWH)||£7,558||1|
|Imperial Tobacco (IMT)||£23,125||4|
|British American Tobacco (BATS)||£21,470||3.5|
|McColl's Retail (MCLS)||£12,684||2|
|Royal Dutch Shell (RDSB)||£15,095||2|
|BHP Billiton (BLT)||£13,119||2|
|Legal & General (LGEN)||£19,927||3|
|BAE Systems (BA.)||£18,180||3|
|National Grid (NG.)||£21,549||3.5|
|Royal Mail (RMG)||£19,579||3|
|Cash in Isa||£12,951||2|
Source: Investors Chronicle, as at 11 November 2015
YOUR FINAL SALARY TRANSFER DECISION
Chris Dillow, Investors Chronicle's economist, says:
There is at least one strong reason for you not to leave your final salary scheme. A final salary scheme gives you a known income on retirement, in a way that even a well-managed Sipp doesn't. Leaving the scheme would therefore increase investment risk.
And this risk is significant. If we assume that equities will offer an average real return of 5 per cent per year with a standard deviation of 15 percentage points, then there is around a one-in-six chance that an equity-only portfolio will lose you money over a six-year period - that is, up to your 60th birthday. And there's around a 5 per cent chance that it will lose you 40 per cent or more.
Of course, cash also protects you from these risks. But it does so at the expense of zero real returns. In considering leaving the final salary scheme you must weigh the increased investment risk against your desire to leave a big bequest. I suspect many advisors would urge you to stay in your pension scheme.
Simon Bonnett, head of wealth management at Fiducia, says:
Leaving a final salary scheme used to be about the math; now it is about lifestyle and generational planning. Like yourself, an increasing number of people see a defined contribution pension as a family wealth trust, and so adopt a trustee mentality and invest wisely for both today's beneficiary (you) and those of tomorrow (family).
A practical point: if you are an active final salary member and leave, check whether your death in service or other staff benefits cease on transferring the pension out.
Think cash flow: what level of household income do you want, and when? Academia generally supports a 4 per cent net of fees of drawn pension income as sustainable, and factor in the State pension (arrives almost age 67 for you) so your future draw decreases.
Take advice on Lifetime Allowance protection, and only take your lump sum when needed - on payout it willl become part of the assets subject to inheritance tax.
Choose a Sipp provider offering flat fees and access to a full-service custodian, allowing investment freedom. Always make sure the Sipp provider is aware of your wishes on your death.
James Baxter, a partner at Tideway Investment Partners, says:
There are way too many generalisations made about final salary transfers, so it's good that you have made the first steps to ignoring perhaps the biggest and worst... that they are always a bad idea!
Many families simply can't afford not to look at a final salary transfer, either because it's simply too much capital to allow it to vanish on the last death of a couple, as in this case. Or because the transfer, through swapping financial security beyond age 80 for cash flow now, can fund a lifestyle, in the early stages of retirement which would be untenable based on the defined benefit.
The key issues to think about are:
1. Is it a good offer relative to the defined benefits you will leave behind? At 54 I would recommend almost ignoring the traditional Transfer Value Analysis System critical yields which will look at the return you will need to make on the transfer offer to buy an annuity at normal retirement age to match the scheme benefits. If you want annuity style benefits in retirement, stay in the scheme. If you don't your key concerns are is it good value for money relative to the defined pension benefit and can you achieve the cash flows you want in retirement without taking too much risk. Most transfer offers from reasonable well-funded schemes will tick this box.
2. Can you afford to give up the twin guarantees of lifelong income and guaranteed income linked to inflation? This will come down to how much income you want through your retirement years versus the overall capital base you have to generate it.
3. Do you want something different than an annuity style benefit, the two obvious options here are accelerated cash flows, or preserving capital for the next generation.
4. Are you confident, able and willing to put in the extra effort required to manage a capital sum and all this entails, versus receiving a regular pay cheque in retirement with zero effort.
HOW TO IMPROVE YOUR ISA PORTFOLIO
Chris Dillow says:
You're right that your portfolio is a little overweight in financials. But this position is greatly offset by big holdings in defensives such as GlaxoSmithKline (GSK), National Grid (NG.) and tobacco stocks. Because these tend to fall less than the market in bad times, they offset the exposure to high beta stocks coming from banks and BHP Billiton (BLT). Even better, defensives tend to outperform on average over the longer run, so you might well be picking up some good returns here. In this sense, I like your portfolio.
You say you'd like some smaller high-growth stocks. I wouldn't be too worried by this. Small caps are now close to a 25-year high relative to the FTSE 100, which suggests that we've seen the bulk of their outperformance for now. And for another, it is dangerous to chase 'growth' stocks. Corporate growth is very hard to predict. A lot of it is random. It's easy therefore to see 'growth' where none in fact materialises, and so pay over the odds for growth stocks; the counterpart of defensives doing well is that growth stocks often do badly.
You might be right that you don't have enough overseas exposure. You do, of course, have some. A drop in the world market would hit your banking stocks and BHP Billiton (as you'll have noticed) and a recovery therein would lift these stocks.
More direct global exposure, however, might be useful for two reasons. One is simply that you'd benefit if sterling falls - especially if it does so because the UK economy underperforms overseas ones. The other is that overseas markets might continue to outperform the UK, perhaps because the UK is underweight in some sectors such as tech and industrials. The easiest way to remedy this is simply to hold a global equity exchange traded fund (ETF).
Tim Stubbs, investment manager at Fiducia, says:
Looking at your UK stock portfolio, you have done a good job at spreading the risk fairly evenly between individual stock names and sectors - aside from Lloyds Banking (LLOY), which needs to be reduced. On balance, your UK stock holdings, dominated by key FTSE 100 names, provide you with a decent defensive stance, offering an expected dividend yield of just over 5 per cent (albeit noting that some dividend cuts may follow).
HOW TO INVEST £1.46M TRANSFER VALUE
Chris Dillow says:
I would put the equity portion into an exchange traded fund (ETF) that tracks the global market. You should think of this as the default option: the average investor holds the global market so you should only invest differently to the extent that you differ from the average. This should be leavened with a holding in cash which would limit the riskiness of your overall portfolio.
Mr Stubbs says:
Once your £1.46m pension monies are also included, your UK stock holdings would represent 17 per cent of your total portfolio. We view this as a reasonable allocation to UK equities within a diversified international portfolio.
You may wish to consider adding alternative asset classes, such as infrastructure, convertible bonds, and Global Property Reits in moderation (they have a low correlation to UK residential property). Funds here can offer reasonable income, while select private equity investment trusts and defensive emerging market funds, such as PFS Somerset Emerging Markets Dividend Growth (GB00B4Q07115), offer attractive longer-term potential and dividend income, albeit not without risk.
In terms of lower-risk assets, your cash and premium bonds are preferable to conventional fixed-income assets. Make sure the overall risk of your portfolio does not creep too high in the hunt for yield.
James Baxter says:
I would view the transfer offer as irreplaceable capital. While you may have some capacity to make additional savings, amassing another £1.4m might be a challenge.
This should focus your mind on investment discipline and risk. How can I avoid selling investments at a loss when I need to start making withdrawals?
The reason you are getting such a great transfer offer is low interest rates, 10-15 year gilt rates in particular. A key point when cashing in this low rate bonus, is not to throw it away again by investing in assets that will likely fall if gilt rates rise. This will be gilts and low risk corporate bonds, and may well be blue-chip high-yield equities as well.
This leads to one area often ignored by self-investors, fixed-income assets. When investing a pension transfer for long-term income withdrawals, fixed income is the default 'liability matched' investment. This may well be where you would be best to use specialist funds. There are bond securities from blue-chip issuers offering inflation plus returns over short durations, but they are not easy to access and do not make up the broad fixed-income market, so don't get covered by bond ETFs.
Using your self-invested personal pensions (Sipps) and Isas to hold fixed-income investments and holding equities in a taxable account will lower tax charges on investment returns.
Consider deferring any excess fund over your pensions Lifetime Allowance (LTA), having first explored your protection options, to age 75. This will make optimum use of the tax exempt pension wrapper and mitigate the impact of LTA excess tax charges.
*None of the above should be regarded as advice. It is general information based on a snapshot of the reader's circumstances.
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