Help with pension lump sum

[PhillipPhillop]

Dp has a pension lump sum of 80k sitting in the building society since December that we can't decide what to do with. Eg travelling, property, rainy day, give it to the dc, etc. He has had advice from St James's Place where we already have investments that he should put 20k in stocks and shares ISAs for each of us for the current year and then another 20k each after April. I don't know much about the stock market but if it is high should we be putting it all in now? Would it be better to put in 20k each for this year and then feed in the rest over one or two years? I know the stock market is used for investments that you shouldn't need for 5 years or so, so do you think another type of investment would be better considering we are dithering over its use? Would love to hear what others would do with it.

St James Place charges fees that are too high.

A lot depends on the time frame you think you might want to use it

To me, S&S means - be ready to cash in but don't put money there if you think you will want it at a set time.

Also, I would not put £80k in one basket so to speak.

SJP are known to be pricey.

Agree about SJP high charges, probably wouldn't invest any more with them but that was their advice

With S&S ISAs you should be looking to keep the investment long term. It's not so much about timing the market as time IN the market.
What are your plans? I'm presuming you've cleared all debts, are ok mortgage wise and have a 3-6 month easily accessible emergency fund sorted.
Are dc likely to need a helping hand in the next few years or is there a house project to pay for? I'd be inclined to put that into a cash ISA. Anything over 5 years, I'd commit to a S&S.
SJP fees are high, somewhere like Vanguard Lifestrategy would be worth a look.

Yes, it's likely we are going to help our 3 dds to get onto the property ladder which could happen any time as they are all in their twenties. So don't want to have to tie up this pot for 5 years.

Will look at Vanguard, thanks. Yes, we have contingency funds and no debts.

You're in a good position then. Draw up a sort of 'sliding scale' in 5 yr chunks. Look at the stocks:bonds ratio of any S&S ISA. Generally speaking, history shows that funds with higher stocks ratio will need longer in the market to sit out any lows/highs of the stock market. That's why you don't risk money you might need in the short/medium term, because you might need to pull it out in a hurry during a low.

Having said that, there is tax benefit to very swiftly opening cash ISAs and getting some into it in this tax year (next couple of weeks). ISA gains are tax free, and the limit you can put in resets each tax year.

Interesting about the stocks/bonds ratio. Thanks

Ok, not all S&S ISA's are created equal...

Interactive Investors costs about £9.99 per month and then you have transaction fees on top of that. Much better than 1%+ than you can get charged with others accounts...

Funds... not all funds are created equal....
Watch out for transaction costs, ongoing management charges, and only occasionally now, a spread. Vanguard are generally regarded as the most competitive on the market and are available on most platforms....

In addition, you have thousands to choose from, so that can make like harder.... The Vanguard funds are decent, but not stellar, Baillie Gifford has had a fantastic year with Tech and Innovation, but in recent weeks they have rolled back 30%'ish and thus only made 70% in a single year, which is phenomenal.. Don't expect this to be the same in the coming year... Put simply tech allowed people to work from home and thus those companies that could carry on as normal or were essential benefitted..

A lot of people go for index funds because its damn hard to beat an index fund, but clearly last year Tech did... The rest of the time, most people are satisfied with a 7-20% return... I like Fundsmith Equity which has its Buffett based philosophy with a bit of resilience thrown in - but this is regarded as higher risk than Vanguard.
JustETF and Trustnet are good websites for reviewing what funds are available and the level of risk you might associate with them.

In terms of £80k - ISA is definitely the place to put it if you want growth, because of the tax free growth and as its a pension lump sum, you are on the decumulation phase of that pension. However, if that pension is a SIPP, be very aware of taking on the same risks with the ISA, that you have in the SIPP, if its defined benefit, there is no overlap, so that's good.

As others have stated, most investments should be planned for 5 years minimum, although many are starting to say 5-10.... That being said, nothing to stop you cashing out after 6 months, if you are in profit and you are looking to buy a Tesla, Yacht, etc... So you have to factor in to your thinking that you may have to sell at a loss or wait a year to break even... I had a Jupiter fund that never got back beyond its 95% of what I invested point, called it quits eventually, popped it into Baillie Gifford American and doubled it... Luck rather than judgement of course...

So which leads onto the final point, which is how much ready cash do you want available.... The 80/20 (Equities/Cash or Bonds) rule is good for some people, 60/40 is more robust for others.... Im currently at 20/80 because at Christmas I knew the tech dip was coming, cashed in and kept my profits... So im now in the same boat, trying to figure out what my 80% will head into... I choose slowly, but there is a mantra than many follow.... "Time in the market is better than timing the market" and I believe this to be correct, unless there are exceptional circumstances, and I believe this Covid period to be one such period...

I'd steer clear of Bonds right now... As I would crypto... As I would precious metals... So im kind of unorthodox, Stocks(equities) make sense to me, Bonds return has been heading in the wrong direction for a long time now, crypto could be a bubble about to pop, and precious metals is the biggest rigged game in town... Im sure others here will suggest im totally wrong, but I have 7 digits in investment terms and working on making it 8, and it works for me... So you have to find what works for you...

I can't do a recommendation for you... But at this point, if I was your goodselves, I'd keep a 20k in cash, unless you have a planned big purchase in mind, and split the rest 50/50 and pop half in a Vanguard fund that appeals, and the other half in Fundsmith Equity...

In terms of the market being high, it is in places, and tech, innovation, Tesla and some healthcare is... The less sexy equities are in a reasonable place right now, so I'd be surprised if you weren't in profit by May, but levelled out during the summer and by the end of the year, had a bit more profit... Vanguard Global has 200 different companies within it, so if any dodgy ones remain, max investment is 2% ish, and Fundsmith im pretty certain has nothing dodgy in its portfolio right now.

Given the level of funds you have, you could diversify further and pop 10k in a broader range of funds.... If you do decide to do this, I'd suggest you keep the levels nice and even, eg. make it the same amount in each fund... Too often I've popped 10% in many funds, yet it was one of the ones I put 5% that had the stellar performance... But then again, I have always gone for above average risk and we have had a great 20 years of investment returns, even though we have had 3 major catastrophes in the economies, more if you include currency issues...

Finally, one area im a little twitch about is the USD exchange rate... Its 1.4 right now.... If that drops back to 1.2, be cautious of that exposure because it will hit your returns for US Equities... We've benefitted as it went up to 1.4, and it may go higher... I won't go into the politics of this... If it does drop, you will have to wait longer for your profit.

I hope my inane ramblings assist... Happy to answer any questions you might have... Ultimately, I've found that if you view investing a little like gambling, you understand the highs and the lows a little better, the only reason why its better than gambling, is that your horse doesn't have to finish first for you to get your stake money back or some winnings...

Ooh gosh @Bard6817 thank you for all this info. Have had a quick look at some Vanguard funds. Have much to consider.

I agree with a large proportion of what @Bard6817@ wrote. I particularly agree on the importance of fees and the low attractiveness of bonds, and I also share the allergy to “cryptocurrencies”.

I would add the following: one possible method to avoid bonds, while avoiding to have 100% in stocks, is to use cash in lieu of bonds. So if you would have chosen a 60/40 fund (60 stocks), then instead, you put 60% into a pure stock fund, and 40% into cash.

Normally that would be very bad advice, but at the moment, interest rates on bonds are so low that unless you have the skill to select individual bonds, most of your bond yield will get eaten up by fees anyway, so you will get no return on the portion of assets you have in bonds, plus you will still have some risk of capital loss which can occur with bonds if interest rates go up or if markets start to worry that some of the issuers will not be able to pay back the bonds (aka “if credit spreads increase”)

A further benefit of using cash + a pure stock fund is that if stocks go down and then you then need some money, you can withdraw from the cash portion without having to sell any of the devalued stocks, so you can wait for markets to recover. Whereas with a balanced fund, any sale of shares entails a sale of stocks. This benefit only applies if you have the nerve to hold on to your stocks after a correction.

There is, however, one big disadvantage To this approach, which is this: as stocks go up or down, the percentage allocation to stocks also changes: there is no rebalancing. So you would have to monitor the markets from time to time, and add to stocks if they go down, or sell some if they go up, in order to stay with your chosen allocation. Or, you have to accept a fluctuating allocation,.

But, the most important thing is this: don’t leave it all sitting in cash unless you might need to use all of it within the next 5 or so years, or unless you have a very pessimistic view on markets. Any funds left in cash for 5 years are basically guaranteed to lose 10-15% of their purchasing power due to inflation. Bonds are not currently an effective way to avoid that: the only way to try to avoid that is to take some risk by buying stocks or other risky but return-seeking assets. So long as you put some portion of long-time savings into stocks, you have a fighting chance to offset inflation. WIthout that, you have none.

@YankeeDad thank you. Can I ask that if for example I put 20k into a cash isa for the year 20/21 can I at some time in the next few months convert all or some to stocks and shares and stay within the 20/21 wrapping? Also if I invest another 20k in a stocks and shares isa for 21/22 would it be better to drip-feed over the year eg £1600 a month? I'm a bit wary of the whole lot going in at one time. Tia

Hi @PhillipPhillop

I believe you can do that, but your bank or investment firm would be better placed to confirm.

With some banks, you can just have a “stocks and shares ISA” that also contains cash, and then you can move the cash over into stocks and shares over a period of time instead of all at once. WIth others, I think the cash ISA is a different entity and you have to transfer the funds to a stocks and shares ISA in order to invest. I think that can all be done while staying within the ISA wrapper, but it may depend on the bank.

Regarding whether to invest all at one go or on a monthly basis, there are pros and cons either way and it depends what you are more comfortable doing. I don’t think either way is uncategorically “better”.

Thank you for the info, much appreciated. Lots to think about.