The latest Investing Matters Podcast episode featuring financial educator and author Jared Dillian has been released. Listen here.
“…how much cash one should hold as well ( or percentage) or is some of you fully invested ?”
Personally, I’d think about it in terms of time, rather than percentage.
If you’re taking income mostly from dividends then you want to hold enough cash to smooth out the cash flow and allow for the event that a company or two cuts their dividend payment. I’m working to around six months income.
If you’re planning on selling funds then I’d be tempted to have enough cash to fund through a “stock market event and recovery”. Personally, I’d go for 12 months minimum and - ideally - two years. You have the opportunity cost of the money not being invested, but you can avoid selling funds if they suddenly drop 15-20%.
You can always keep cash in a money market fund (or similar).
You need to look at your total cash position - cheque account, savings, etc - not just SIPP / ISA.
“the high div shres imo dont rise over time like others”
In truth they do. But it depends on your market timing.
I’ve said before - and I’ll say again - that all investment returns as immensely personal. That 30% increase in my favourite fund is less great if you were sat on a 40% drop in fund value from 18 months ago.
My view is that we’re due a “rotation” into value. Just a +1 or +2 of P/E is going to tub into +20-30% on share price.
Or it may never happen.
I am, though, a keen believer in “mean reversion”. If we look at where LGEN and its peers have historically traded then a reversion to mean suggests a good upside.
Or not.
Not advice. Do your own research. Etc.
“why exactly are annuity quick quotes i from internet calculators not thru fin adv from aviva and lgen (the big ones) £1000 to £1500 yr below "just group". (150k)”
My best guesses would be that either:
- Just Group want more of your demographic to balance the statistical profile of their annuitants
- they have a long term investment that your profile matches.
Life insurance is like all insurance - it’s about balancing policies against “underwriting”.
In three months time it could be that LGEN offers the best value.
In truth, AV, LGEN and PHNX are quite different businesses. AV is the type of business you buy to leverage synergies. At the other end, PHNX is very tightly focused and the type of business you buy for free cash flow.
I suspect that LGEN would have the most opposition from shareholders to acquisition. It’s significantly important to a whole heap to companies in a way the other two aren’t (in my view).
“drawdown is a better option all round”
Only if your minimum income requirements are met and you can sleep at night.
“what is the best way of protecting your pension pot against such events”
Almost certainly an annuity.
Bonds are supposed to provide a counter-balance to share price volatility. But have manifestly failed to do that for the last couple of years.
Don’t get me wrong. I’m relying on dividends in retirement. But this year’s dividends provided 180% of my retirement income need and 220% of my minimum. And I’m two years from retirement. I’m also confident that I could easily generate work if I needed to. So I have a lot of room for things to go south on me.
In truth, if I could get a good annuity quote then I’d take it (I’m currently too young).
“0.25 - 0.5 % annual charge is now common”
Even less than that is possible. For fixed fee rate provides like iWeb and Interactive Investor the effective % may well be lower.
Remember that you can transfer out your employer pension to date and still remain part of the company scheme.
“I just don't get the point of annuities. Firstly, they are taxable income so you lose 20% or 40% & they / your money dies with you.”
This one’s easy. You either value certainty or not. Most people value a guaranteed minimum level of income.
Remember that no all annuities are now for life. You can get 5, 10 and 15 year versions that provide income and return capital. It’s a good option for some to bridge a period before getting their state pension.
“…good income paying stocks…preferably in an ISA…”
Whether you’re better off holding retirement investments in a SIPP or ISA very much depends your personal circumstances.
If you’re a 40% or higher tax payer then the money you pay into an ISA is already taxed at 40%+. The great benefit is that your retirement income is tax free.
That same tax payer paying to a pension will be investing tax free and almost always getting an employer contribution. At one point I was paying in 15% of my salary and my employer matching everything above 5% of salary up to 15%. I didn’t pay 40% tax and my money instantly doubled.
If your expectation is to be a 20% tax payer in retirement then the pension wins big time over the ISA if you do the maths. Even if you dip into 40% tax in retirement then you win up until (IIRC) around £80k of retirement income.
Pensions also provide significant inheritance planning benefits as any part not in drawdown can be left in trust - bypassing inheritance tax for that money.
ISA vs SIPP very much depends on the scale of your employer contributions.
In principle, once you get somewhere into to 40% tax in retirement then the ISA wins.
Phyl - if you’re considering an annuity and worried about rates dropping then it’s worth knowing that some providers allow you to buy one now to pay out when you actually retire.
“Is it better to hold a basket of shares as lgen aviva with 7/8pc divi and use drawdown !!!!”
It depends on your need for certainty vs appetite for risk.
An annuity gives you a guaranteed income either for a fixed period or for life. It comes complete with FSCS backing that protects 90% of your annuity income.
Investing in dividend shares gives you zero certainty. But may come with higher reward.
“Wisdom” would have it that you secure your minimum required income with as much certainty as possible.
“More” income through dividends is only “better” than a lower paying annuity if you can sleep at night through a big financial shock.
This is not financial advice. Please do your own research. Etc.
Just to clarify the tax situation.
You have your £20k ISA limit. For most people that, currently, can be only deployed into either a single stocks and shares ISA or cash ISA. (The Autumn statement introduced a proposal that, from the next tax year, you’ll be able to split your investments across multiple ISA products.)
Dividends reinvested within an ISA do not count towards that £20k.
All income (interest or dividends) and capital gains received from an ISA are tax free.
So, if you choose to pay the dividends out of your ISA to a bank account then it’s completely tax free.
The general rule with a pension is that money is tax free on the way in and taxed on the way out.
With an ISA the money (has already been) taxed on the way in and is tax free on the way out.
“ Whats your overview on phnx, why buy it when lgen is predictable stable high divi, just asking!”
From The Sunday Times, 14 March 2023 -
“ Pushing through a near-4 per cent rise in the dividend to 50.8p leaves the shares offering a dividend yield of 8.6 per cent...
… How sustainable is that dividend? Phoenix has business generating £12.1 billion of free cash, after the repayment of debt and interest costs. That would cover the present £500 million cost of the annual dividend as it stands for more than 20 years without Phoenix writing any new business or M&A deals.”
Apple News - https://apple.news/A8qC9h5ShQ8ScNEyB27aNyw
Web - https://www.thetimes.co.uk/article/dependable-dividend-a-big-attraction-for-phoenix-group-holdings-xh7xbhq0c
“…white men in senior roles, as set out in their charter.”
The charter doesn't mention race or ethnicity.
It is also supported by nearly every leading financial services company in the UK - https://assets.publishing.service.gov.uk/media/649d8720bb13dc000cb2e367/HMT_Women_in_Finance_Charter_List_of_Signatories_June_2023_.pdf
The charter is actually about working towards senior management representing the breakdown of male/female workers in the industry. If you read it you’d understand that.
In the spirit of the season...
https://www.youtube.com/watch?v=kxjwb5cXTI0
“ She should be fired for racism and neglecting her fiduciary duty to shareholders, bringing the organisation into disrepute, etc.”
None of which is true.
“I sense another Natwest episode coming down the line here.“
In what way do you equate a CEO outlining a perfectly legal policy to a Parliamentary Committee to someone who deliberately shared confidential client details with a journalist?
Ah yes! They’re both women!!!!
“The point is, why does she have to sign off on white males and not anyone else?”
Presumably to make sure that senior leaders ask themselves whether the candidate pool was drawn widely enough.
The key question is in how many roles has she rejected the chosen candidate? Probably none.
The thing is that you get what you measure. And it’s a form of measurement.
That we’re having this discussion itself illustrates the issue.
“I’m a white male, who is being actively shunned for a role - so I’m going to complain about the company’s performance and sell all my shares.”
Nice way to demonstrate the casual misogyny and racism that still pervades the top levels of most companies.
“It’s unreasonable to promote based on colour or gender (whatever that may be nowadays).”
Read what she said. It’s not about promotion based on colour or gender. It’s about making sure that the candidates aren’t from the same, narrow, self-perpetuating demographic - overlooking often better candidates.
Spend just one minute in any senior management meeting in a financial services and you’d spot the lack of diversity.
3-4 levels down in most organisations the demographic split is more representative of society.
Spoken as a straight white male of a certain age.
This isn’t about being “right on” - it’s that diversity has been repeatedly shown to improve performance.
When I was at LGEN the name, sex and age of candidates was removed from CVs before I could review them. It made for a much better process.
"Amanda might have to go now this won't help the share price"
Why's that? IMV it's not an unreasonable thing to do.
In reality, anyone at CxO level is ALWAYS going to get the tacit sign-off of the CEO on a senior hire within their team as they need to know that the CEO is going to have confidence in that person. That often extends to reports of reports at CxO level. As I consultant I've often had to meet with the CEO when being hire within, say, the CFO team.
That looks interesting Redinjun.
There's lots of ways to approach decumulation and I'm sure many would disagree with my approach. The key thing is to have a strategy that you're comfortable with and that you understand.
I am constantly surprised by the number of my friends who have financial advisors and just leave them to it. "What are in invested in?" - "Dunno".
You're most welcome.
I'm too young to get a decent annuity quote - despite the rates now on offer.
My approach FWIW...
At the end of last year I moved from 100% invested in tech funds to now being invested 70% in dividend shares and 30% funds. The shares provide 180% of my income need - so there's plenty of headroom if an individual company fails to pay out or cuts its dividend. I don't need the income yet, but any excess will be reinvested to provide cover against inflation. The funds are there to provide growth. I'll rebalance back to 70:30 once the funds grow to 40%.
For the dividend shares I've tried to only buy stuff I understand; believe is well managed; and I think is undervalued. Saying that, I have strayed into buying shares off the back of recommendations in Questor - and invariably regretted it and sold. Overall, my shares are up 6% with dividends reinvested, which represents a loss of around 1.5% on the original capital (but also includes losses I've made on investments I've regretted and exited). I'm now comfortable that I understand why I'm invested in everything I own.
I rotated out of funds because I realised that I was going to be psychologically uncomfortable selling down funds to provide an income. I'm happier following the maxim that "a Southern gentlemen never sells his capital". Even though, intellectually, I know that staying invested in funds will give more money overall.
My realisation was that certainty of income trumps overall size of wealth. And that I'm, anyway, much more likely to die with an excess of money than not. (No, you can't have any!)
I am trying to follow Buffett's hamburger wisdom with regards the capital value of my shares - https://www.roywalkerwealth.com/2018/01/warren-buffett-on-hamburgers.html#
I did look at income funds, but couldn't find one that was "passive" enough for me at the time. My general experience with actively managed funds has been negative as I've never believed that the fees reflect performance. I've subsequently realised that there are some higher yield indexes, such as the FTSE 350 Higher Yield Index, and some funds that track the index (L&G has one for the FTSE 350 one).
I'm not recommending my approach as I'll have no idea whether it's a good idea for another five years!
Gwm121 - one thing I've realised as I've repositioned my SIPP to take an income is that accumulating is far easier to strategise than decumulation. And made even more complicated if you potentially want to leave money to children.
A good place to start for annuity quotes is https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities
It's run by UK government and will give you quotes from a good range of companies.
One thing to remember is that drawdown vs annuity isn't a binary option. You could use part of your pension to buy an annuity and create a minimum income floor - then use the rest for drawdown.
You can also now buy fixed term annuities where you get some/most/all your money back after the annuity period. IMV this is particularly useful if you need to bridge the gap between stopping work and getting your state pension.
You could also go for drawdown whilst you can be bothered to actively manage what's going on - and then buy an annuity at the point in your dotage where managing stuff becomes a chore (and at which point you'll probably get very good value).
There is a horrendous lack of self-help information on HOW to drawdown. Not helped by much of it being based on a reliance on bonds, which hasn't worked out too well recently.
I'm too cheap to want to pay for an IFA. Particularly as every piece of "independent" financial advice I've ever received has been unbelievably self-serving - even when I've been lucky enough for my company to be paying for it.
I've also take the view that if I don't want to listen to the advice of a young financial adviser. And am suspicious that anyone still working as a financial adviser when they're old enough that I want to listen to them frankly isn't very good. They should be retired!
A couple of books that are worth a good read:
- Beyond the 4% rule, which is one of the few books on withdrawal rates written by a Brit
- Living Off Your Money: The Modern Mechanics of Investing During Retirement with Stocks and Bonds, which is a worthwhile but VERY difficult read
There's good review of the latter book at https://monevator.com/review-living-off-your-money-by-michael-mcclung/
Clicking links off that article is also worthwhile and there's lots of good thinking on that site.