UK based PP pension fund

[chrish]

Hi All,

I am a novice investor based in the UK. Up until now, I have been paying into a managed pension fund, but I have decided to take control of my pension and start a SIPP. I have read as much information about the PP as I can find over the last few weeks, and I find the historically low volatility and steady growth very appealing, compared to alternative strategies I have found. However, I have a few questions that hopefully someone can help me with.

1) For the 25% stocks portion I was thinking 50% in the cheapest FTSE All Share tracker fund I can find, and 50% in a Developed World Excluding UK tracker fund. Is this too much international exposure (and hence currency risk)?

2) For the 25% long term bonds I am considering Vanguard's UK Long Duration Gilt Index. This tracks the gilt market for all gilts with >15 year duration. Would this be appropriate for a PP?

3) For the 25% gold portion, I would go for the PHGP ETF, on the basis that it is backed by physical gold and is priced in GBP. As I can't hold physical gold within my SIPP, I don't think I have too many other options here!

4) For the 25% cash, I was thinking of IGLS (UK Gilts with 0-5 years duration ETF). I appreciate that the duration is a bit longer than recommended, but I can't find a fund with a shorter average duration. Plus, as this is a pension fund that I won't be accessing for over 20 years, I don't think a little bit of added volatility with the cash portion should hurt too much.

5) Rebalancing strategy. Initially at least, my monthly contributions will be large compared to the total fund value. If the stocks or long term gilt funds are lagging, I will simply use new contributions to bring them back to balance (as I don't have to pay any dealing fees) . If either of the ETF's are lagging, then I will simply leave the money in the cash account for a few months, so that the dealing fees don't hurt too much. Am I likely to miss any gains with this strategy?

Any thoughts or advice would be much appreciated!

[stone]

I agree with Clive about buying long term gilts being just as convenient as buying an ETF and much better fitting into the PP. I hold TR60 which is a 50year 4% gilt. I'm using the broker x-o and with them buying and selling gilts is exactly the same online mouseclick operation  as for an etf or stock. Also for cash get ILSC whenever you can as Clive says.

I'm one of those people very much averse to leveraged etfs . There is now a London listed ishares physical gold etf like phgp but with a lower expense ratio.

I must admit I don't really trust stock or bond etfs so I hold the stock portion as investment trusts (closed end funds) but that's probably just my eccentricity.

[chrish]

Thanks for the feedback Clive.

I believe I can buy gilts directly within my SIPP, so I could possibly use a 5 year gilt ladder for the cash portion and a 30 (or 50?) year gilt for the long term bond portion. Would that give me any real advantages over the funds I suggested? Given the current small size of my portfolio, the management fees should be pretty low.

I really want the entire portfolio to be within my SIPP, so I don't think either physical gold or National Savings Index Linked Savings Certifcates are available to me.

[chrish]

There is now a London listed ishares physical gold etf like phgp but with a lower expense ratio.

I've just checked, and this (SGLN) does have a lower ER than PHGP (0.25 vs 0.39). Thanks for pointing this out.

The Vanguard's UK Long Duration Gilt Index has an average maturity of 28.7 years. Lots of the posts on this forum suggest buying 30 year bonds and then selling them when they have 20 years left, so I would have thought that 28.7 years maturity would be fine. Can you explain the downside of buying this fund vs buying gilts directly?

[gizmo_rat]

30 year, 50 year, undated Gilts are all pretty much fine for a PP. Whichever is the cheaper/more-liquid/lowest bid-ask spreads might be the best overall choice.

I have some of each. I'd thought that undated gilts were ideal for the PP because they;

• have similar volatility to the 30/50 year
• yield higher
• don't require any management

However poking about on the DMO yesterday I saw this

The redemption of these [undated gilts] is at the discretion of the Government, but because they carry low coupons 'in perpetuity', it would not be cost effective over the long run for Government to redeem and refinance them until long yields had fallen sufficiently below the coupon level for a sustained period, and it could be judged that future refinancing would be cost effective.

Which I think could be read as "these gilts are callable in long periods of deflation", which is of course just when you need them.

The fact that they seem to have had identical volatility to 30/50 year gilts over the last few months means that I'm not going to dump them but I don't think I'll be adding to them either.

If my reading of the redemption clause is correct I don't think I'd recommend using them for a PP.

Thoughts ?

[chrish]

Why pay a manager/group to buy and store (or maybe 'lend' out in a deal that turns bad and leaves you high and dry) something that you can quite easily do yourself.

I appreciate that there is a slight extra risk with a fund. However, where the ratio of new money to portfolio size is high, I'm not sure it is any cheaper to hold the gilts directly, once you factor in dealing fees.

For example, say I put £10000 in the Vanguard fund. The TER is 0.15%, so this will cost £15 over the year.
If I instead bought the gilt directly, then I would have to pay a dealing fee. I think this is around £30. Also, if I am contributing £1000 per month to my portfolio, then it is likely that I will need to purchase more gilts within the next 12 months (as I would have increased the size of my portfolio by ~30% I am likely to need to rebalance). So for the first few years at least, the fund should actually work out cheaper.

Of course, I'm very new to all this, so I might have misunderstood something - if so someone please correct me!

[gizmo_rat]

I appreciate that there is a slight extra risk with a fund. However, where the ratio of new money to portfolio size is high, I'm not sure it is any cheaper to hold the gilts directly, once you factor in dealing fees.

For example, say I put £10000 in the Vanguard fund. The TER is 0.15%, so this will cost £15 over the year.
If I instead bought the gilt directly, then I would have to pay a dealing fee. I think this is around £30. Also, if I am contributing £1000 per month to my portfolio, then it is likely that I will need to purchase more gilts within the next 12 months (as I would have increased the size of my portfolio by ~30% I am likely to need to rebalance). So for the first few years at least, the fund should actually work out cheaper.

Of course, I'm very new to all this, so I might have misunderstood something - if so someone please correct me!

I don't have a SIPP and some of what you're asking is very SIPP/broker specific.

The only potential downside to the Vanguard fund I can see is that if they control the maturity of the gilt mix between 15 (fund minimum) and 50 (current gilt max) years. There's clearly a difference in yield and volatility between these extremes which they will manage to your advantage (hopefully), and re-invest your interest payments for which they charge you 0.15% per annum. Clearly the (small) risk is that they need to speculate about interest rates etc. to manage the mix and that they might get it wrong.

I understand your point that the lack of dealing fees on the fund mitigate the risk in the short to medium term.

The reason you see people talking about buying 30 year bonds and selling at 20 year on here is that the maximum US bond duration is 30 years but they lose the required volatility at 20 years so their effective life in a PP is 10 years. It's not such an issue in the UK as you can buy 50 year gilts and forget about them for 30 years or so.

Your contribution / rebalance scheme seems completely rational, I understand how the SIPP fee structure changes your approach. The fee savings are predictable, any (hypothetical) missed gains are not, so why worry ?

[stone]

gizmo rat, I had also previously read that the undated gilts  were callable and that had also put me off along with them supposidly trading with wider spreads. In practice though you are probably getting a good deal with the (slightly) higher yields.  I guess it is unlikely that the treasury would actually bother to call them. They account for so little of the outstanding debt.

chrish, are you sure you have to pay a £30 dealing fee for gilts? I don't have a SIPP and I think the broker I use (x-o) might not do SIPPs but I just googled and "SIPP deal" seems to offer all trades including gilts for £9.95. They also seem to do a regular paying in facility at £1.50 per trade (I'm not sure that that would be useable though for the PP).
http://www.sippdeal.co.uk/Sipp/Offer/

[chrish]

Thank you all for your helpful responses.

chrish, are you sure you have to pay a £30 dealing fee for gilts? I don't have a SIPP and I think the broker I use (x-o) might not do SIPPs but I just googled and "SIPP deal" seems to offer all trades including gilts for £9.95. They also seem to do a regular paying in facility at £1.50 per trade (I'm not sure that that would be useable though for the PP).
http://www.sippdeal.co.uk/Sipp/Offer/

I was originally planning to open a SIPP with Hargreaves Lansdown, mostly because a couple of friends had recommended them. However, having done some more research into their charging structure, I don't think they would be the best choice if I decide to implement a PP (their charging structure strongly encourages you to go with their funds, and they have some good looking index tracker funds available, but it gets expensive if you want to buy gilts or ETF's).

sippdeal looks like it would work out cheaper for me so I will probably now go with them.

[stone]

chrish, I think you are right to stear well clear of funds. In the UK something to be extremely wary of about funds are cunningly hidden "trail commisions" of 0.5% (or more) paid to the broker for every year you hold the fund. I think Alliance Trust is the only UK broker that returns those trail commisions to customers. Even with Alliance Trust you apparently get an annoying seperate account containing just those trail commisions and it is awkward to move that money out. Basically in the UK it makes funds a bad deal for the customer.

[chrish]

Yes, I am finding it quite hard to figure out exactly what the charges are for various funds. I suspect they make it deliberately opaque.

I was surprised to find out that Hargreaves Lansdown also charge 0.5% per year simply to hold shares, gilts, or ETF's on your behalf. This is in addition to the dealing fees. As far as I can tell, sippdeal do not do this, so I am now thinking I could use them to implement a PP with a combination of gilts and ETF's: SGLN for the gold, XASX for the stock portion, and maybe IWXU for some international exposure.

[gizmo_rat]

chrish, I think you are right to stear well clear of funds. In the UK something to be extremely wary of about funds are cunningly hidden "trail commisions" of 0.5% (or more) paid to the broker for every year you hold the fund.  Basically in the UK it makes funds a bad deal for the customer.

IIRC Vanguard dosen't pay commission to brokers, which is why their funds can be a little difficult to find. 

[chrish]

IIRC Vanguard dosen't pay commission to brokers, which is why their funds can be a little difficult to find. 

All the SIPP providers I have looked at do offer the Vanguard funds, but they charge additional fees for them (e.g. sippdeal levy an annual £50 charge for using Vanguard funds). See http://monevator.com/2011/10/07/bestinvest-vanguard/ for a discussion of the different providers charges.

I guess it depends on the size of your portfolio whether it is worth paying the additional fees to get the lower TER of the Vanguard funds (in my case I don't think it is).

[stone]

chrish, personally I thought investment trusts looked the bast way to hold the stock part (I have it as CTY, BRSC and TEM in equal amounts). They seemed to me to be the most robust type of fund structure and have a very long history (some are over 100 years old). The supposed disadvantage is that they sometimes trade at a discount or premium. BUT since you would be rebalancing out of stocks when they had a premium and rebalancing in when they had a discount, that actually seems to me to be an advantage within a PP. I realize that this is not what most people consider kosher but that's just what seemed to make sense to me.

[chrish]

chrish, personally I thought investment trusts looked the bast way to hold the stock part (I have it as CTY, BRSC and TEM in equal amounts).

This gave me even more food for thought! I think I am going to stick with simple trackers for the PP, but I think I will also create a VP (representing around 10% of the total) with some money in small cap and emerging market equities; as this is a pension plan that I won't be accessing for over 20 years, I can accept a little more volatility in return for (hopefully!) greater growth.

I have also been wondering about the cash portion. With interest rates so low, any return will be very small and this was bothering me. It then occurred to me that the PP was supposed to encompass ALL my assets, not just my pension fund, and that I already have a cash ISA that (completely coincidentally) is very close to 25% of my total assets. I therefore think that there is no need to allocate any money to cash within my SIPP.

The downside to this is that there is no way to transfer money out of my SIPP into my ISA if I needed to rebalance. However,  I reckon I should be able to rebalance purely with new money for the first few years at least.

Any comments would be greatly appreciated.

[stone]

chrish, I thought that with emerging market and small cap stocks it was all the more important to hold them in a context where the volatility was being captured by rebalancing. I got the impression that just holding them without rebalancing would let the bulk of any potential gains slip by unharvested.

[chrish]

chrish, I thought that with emerging market and small cap stocks it was all the more important to hold them in a context where the volatility was being captured by rebalancing. I got the impression that just holding them without rebalancing would let the bulk of any potential gains slip by unharvested.

I think me describing this portion as a VP was probably incorrect. It would be more accurate to say that I am thinking of overweighting the stock portion of the PP, as I plan to rebalance any gains on the small cap/emerging market to maintain a 10% weighting.

So in summary my plan is:

Within a SIPP:

15% UK all share index tracker
15% Developed World Ex-UK index tracker
5% Emerging market equity
5% UK small cap equity
30% Gold
30% Long duration gilt

In addition to this I have a cash ISA worth roughly 25% of my total (or a third of the value of my SIPP)

[stone]

I see, I think there is a danger that stocks might not do as well as you hope though. Overweighting stocks wouldn't have benefited across the 1999 until now period after all and Japan has seen a multi decade stock bear market with no end in sight. The kosher rule is to never transfer money from your PP to your VP. My personal situation of having slightly the "wrong type" of stocks in the PP seems less of a deviation than such mixing.

[chrish]

Thanks once again for your feedback. I appreciate what you are saying, but I have to admit that only 25% stocks does worry me a little bit, as all other passive portfolio strategies I have looked at specify at least 50%. This is my attempt to find a middle ground that I am comfortable with. When you consider the total portfolio, I am not upping the stock portion by all that much, it works out at roughly:

30% stocks
22.5% ltgb
22.5% gold
25% cash

[stone]

I see what you mean. Will you move your rebalance bands a little bit too? The traditional thing is to rebalance back to 25% if anything hits 15% or 35%.

[chrish]

In theory I will rebalance when anything drifts 40% from it's desired allocation (i.e the same percentage as is traditional). So for stocks the rebalancing threshold would be plus or minus 12%.

I say "in theory" because, as I mentioned earlier, initially the ratio of new money to portfolio size will be quite high, so I expect to be able to rebalance with new money for the first couple of years. Every couple of months I will simply feed new money into the asset that is lagging the most.

[gizmo_rat]

It's worth remembering that the HB progressively simplified the PP over a number of years, you may or may not realise gains with adding complexity back in. You can see that it will probably be more maintenance effort over 20 years, clearly not a problem if you enjoy tinkering.

However the biggest gain ( a quantifiable 3% per year), is to be had by declining the efforts of the financial services industry, everything after that is gravy.

BTW Keeping the cash outside of the pension wrapper sounds like a good move.



   

[chrish]

However the biggest gain ( a quantifiable 3% per year), is to be had by declining the efforts of the financial services industry, everything after that is gravy.   

The whole reason for doing this is that I am fed up with 10 years of underperformance in my pension. I think this is due to the pension funds "lifestyling" appraoch, where the vast majority of the fund is invested in shares during your twenties and thirties, gradually shifting to more bonds as you approach retirement age. Obviously stocks have not performed as well as expected over the last 10 years!

Having said that, the charges on my pension plan were 1% per year, not 3%, unless there were some "hidden" charges I wasn't aware of.

[gizmo_rat]

Having said that, the charges on my pension plan were 1% per year, not 3%, unless there were some "hidden" charges I wasn't aware of.

The average equity fund manager makes explicit that they are charging about 1.5% a year of the sum invested for their services, but additional hidden expenses average 0.3% a year and trading costs cut a further 1.4% off an investment.

http://www.guardian.co.uk/business/2011 ... aders-fees

Coincidently I got a statement from a pension plan I 'd forgotten about today.  -9% (-14% real) return this year, well done chaps!

Let us know how you get on setting up your SIPP, I should sweep up all my assorted abandoned plans on principle.