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Dear Victoria,
I am in desperate need of your comments.
I have recently transferred both of my work and personal defined contribution pensions into a Sipp and have not as yet allocated money to any funds.
Following the pandemic, my wife and myself decided to retire early and live off our Isas. Next year we will both be 66 and drawing state pensions.
I will be aiming to drawdown £10,000 a year from my Sipp which will be backed up with a state pension of £11,000 and £10,000 from our Isas and hopefully both of us will be able to live comfortably.
We have around £150,000 spread across four Isas which each hold six funds and which will stay in accumulation.
Below is my proposed Sipp portfolio which I will be shortly implementing and hopefully it will produce a “natural yield” of £10,000 every year.
Do you think I have the right geographical spread and percentage against equities, bonds and property in the portfolio?
Many thanks,
– Stuart
Dear Stuart,
I’m pleased to see you’re making the most of your Isa allowances and I’m very excited to see you’ve grown the confidence to manage your own pension via a Sipp.
I note you’re looking to achieve a comfortable retirement via a combination of income from your Sipp, your Isas and your state pension and you’re aiming to withdraw 5pc, or £10,000, from your £200,000 pension pot per year.
I think it’s worth mentioning that 5pc per year is slightly higher than the 4pc that is often recommended. That’s because 4pc gives you some wiggle room for years when investment performance dips.
One way to manage volatility is to keep around two years’ worth of income in cash and gradually “rebalance” into cash over time as needed. With a moderate-sized pension pot like this, one of the biggest risks is running out of money, which could happen if you live for a very long time or investment performance isn’t strong enough to sustain 5pc withdrawals.
You do have your Isa wealth as a buffer, but it might make sense to set some cash aside to reduce this risk. You haven’t specified what’s in your Isas but if you don’t like the idea of cash sitting idly potentially being eroded by inflation, which is totally reasonable, you could allocate some to the Royal London Short Term Money Market (already one of your proposed Sipp funds).
As you know, it’s a cash-like low-risk investment which currently yields more than 5pc by using bank accounts and short-term bonds.
Of course you can withdraw up to 25pc of your Sipp tax free. But a significant withdrawal from your tax-free allowance could negatively impact how long your pot lasts.
The final thing to mention before digging into your Sipp is that I’m not sure whether you have any inheritance plans, but it’s worth pointing out that pensions do not attract inheritance tax whereas Isa wealth does.
That means some people choose to draw upon their Isas first to keep pension wealth protected for longer. That’s something you may or may not need to think about.
Moving onto your proposed portfolio, there’s certainly a lot to like!
You’ve kept things simple and manageable by sticking to 12 choices with a good geographical spread, and a mixture of equities, bonds, property and alternative assets. You’ve given a lot of attention to sourcing income which is appropriate for your stage of life, and you haven’t piled on too much risk, which suits your risk appetite.
Well done for cottoning on to the income edge that investment trusts have over funds.
The key difference is that investment trusts can hold back up to 15pc of the income generated from the underlying holdings each year.
In leaner periods, such as during the global financial crisis and the Covid-19 pandemic, many investment trusts maintained or increased their dividends by dipping into income retained during better times.
In contrast, most “open ended” funds cut dividends as they are not allowed to hold back income and are required to pay investors all the income received each year.
So, when there’s a shortage of dividend cheques during challenging times, cuts to shareholders payouts are pretty much inevitable.
One area I would suggest beefing up your exposure to is capital growth. While income is clearly a priority for retirees like yourself, it can be easy to neglect stocks and funds with growth potential.
It is important that a pensioner’s portfolio stands the test of time. You want your assets to appreciate so your wealth doesn’t whittle away too much and your Sipp can hopefully contribute towards a comfortable lifestyle for 20 to 30 years.
One idea is JPMorgan Global Growth & Income, which has been a solid performer over five years. It aims to deliver both capital growth and income. Its policy allows some dividends to be paid from capital, which helps it generate capital growth. It also has a handy dividend yield of 3.2pc.
I think the dual growth and income objectives could align nicely with your goals.
I would also consider Alliance Trust and Bankers. Yes, the yields are a bit lower at 2.1pc and 2.4pc respectively, but these funds will hopefully power the capital growth element of your portfolio long term. I admit the lower yields mean you may not reach a £10,000 income target purely from the natural income being produced.
However, to make up any potential shortfall, I suggest you could pay yourself from some of the overall total returns (capital growth and income returns combined), particularly in the boom times.
I mentioned earlier how investment trusts are more consistent than funds in terms of dividend growth. However, the flipside is that funds can offer more dedicated monthly income options, and this is an area worth considering for more regular income flows.
With monthly income funds, the amount of income generated is based on the dividends or coupons the underlying holdings have paid each month.
Therefore, as with any fund, the income can vary, but to counteract this most funds smooth the dividend payments into 12 equal amounts, holding back some income in good months, which is then used to top up leaner periods. Any excess cash left over at the end of the year is then handed back to investors.
Two monthly income funds that feature among our favourite funds list are Man GLG Income and Artemis Monthly Distribution. Man GLG Income has a yield of 5pc and invests in UK stocks that have above-average dividend yields. Artemis Monthly Distribution is a multi-asset fund that invests around 60pc in bonds and 40pc in shares. It also has an attractive inflation-topping yield of 4.5pc.
I hope this helps and I wish you a happy, healthy and lengthy retirement.
Victoria is head of investment at Interactive Investor. Her columns should not be taken as advice or as a personal recommendation, but as a starting point for readers to undertake their own further research.
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