Reply To: Consolidating personal pensions into a SIPP

Participant

Just for for readers’ information, I manage investments for my children (7 & 9), myself and my wife (mid 40s) and my father (mid 70s). We all have a portion of our investments held using the TDL strategy. I’ve been investing in individual shares for about 6 years and TDL for about 4 years. I’ve also been investing in funds for about 20 years. I have a special reason for preferring individual shares. We are dual US/UK citizens and therefore holding collective investment funds outside a pension is complicated and tax inefficient. I am strongly in favour of low-cost global index trackers, but I reserve these for pensions (SIPPs). I personally feel the TDL strategy works well for all age groups as an income, or future income, strategy. I think if you feel you may need to draw on capital in the future (5+ years) you should probably use index trackers and not TDL. Any less than 5 years and you should stick with cash, or perhaps a portfolio of individual short-term corporate bonds (although these are certain not risk free). I guess the issue is, that not everyone will be lucky enough to be able to put away enough money to use the TDL strategy to exclusively fund their retirement needs (even after taking any state benefits into account). And even if they did, then it would entail leaving a serious chunk of change to their heirs (or charity) when they die, which may or may not be what they want to do.

One consolation is that the TDL, over time, does look a lot like a low-cost index tracker. Yes, it has a high-dividend focus, which you might zrgue increases the risk. But the ‘large cap’, ‘cash/profit rich’, ‘industry diversity’, ‘value’, ‘strategic ignorance’, and ‘hold for eternity’ characteristics could arguably make TDL less risky than just holding the whole market. If you limit the size of your trades (whilst including the cost of TDL) it could even end up cheaper to run than an income tracker fund. I also fundamentally believe in the principle of owning equity in companies that are willing to pay you dividends, rather than companies that just push for growth on the assumption that you might find someone to sell the shares to in the future at a higher price than you bought them. Look at the companies that are in TDL. They own, operate and employ a significant portion of everything you see around you as you walk down the street. Yes, they mostly big and boring, and don’t generate much excitement in the press – unless perhaps when one appears to misstep and their price gets hammered. You’ll also notice that most well-regarded income funds hold many of the same shares…

Back on topic, the generally recommended withdrawal rate for a defined benefit pension pot is actually less than what the TDL yield historically appears to have delivered anyway. That doesn’t mean TDL will always deliver, but personally I think the income strategy is likely to be less volatile then relying on capital growth to cover future withdrawal needs. You should always have an emergency cash buffer to smooth out (many) fluctuating income or spending needs. It may not be enough to deal with every crisis, but what are the alternatives? You could buy an annuity, but when and with what? You would still need a pot of cash, but the income would be much lower than the TDL and what if you need to buy an annuity just after a major market fall?

No one ever said the TDL was going to be easy. I still find it very challenging, especially when an individual share price take a hit. But I try to take enjoyment from getting a chance to buy a new allocation to a high-yielding sector that needs topping up and try to ignore price fluctuations. I also do my best to calculate the effective on-going yield as well as the after-inflation internal rate of return (where all dividends are currently reinvested). I am satisfied with where they are and I don’t currently have a better plan! It’s all part of what I call “the loneliness of the long-term investor”…