Investing in Drawdown

dunstonh

but surely cash holdings would be kept to a minimum and the rest of the funds invested to generate income (assuming that the pension holder has more easily accessible cash available elsewhere that could be accessed in the event of hard times)?

How much you would hold on cash would depend on your withdrawal levels, risk profile and which investment strategy you are using along with capacity for loss.

Aged

dunstonh wrote: »

How much you would hold on cash would depend on your withdrawal levels, risk profile and which investment strategy you are using along with capacity for loss.

OK think I'm beginning to understand - if all the funds were tied up in investments there would be nothing there for you to withdraw

jamesd

Aged wrote: »

So, once you have your brand spanking new drawdown account, what sort of investments are most suitable for retirees - anyone here in that position?

If you follow the latest research and stick to only conventional investments it would be roughly 100% equities but with a one year of planned income cash buffer deducted from that.

You would also follow one of the available sets of withdrawing rules to manage the chance of the income falling to an unacceptably low level, many of which are mentioned in Making Sense Out of Variable Spending Strategies for Retirees ​by Wade D. Pfau. The same person provides a dashboard giving some possible "safe" withdrawing rates for US retirees, where safe tends to mean a not unacceptable chance of failure over a 30 year time horizon.

Cash is not used just for cash flow convenience. It's used because a year's worth of planned investment income in cash increases the safe withdrawal rate and reduces the chance of failure, by making it unnecessary to sell investments during a market downturn. For the same reason, an equity release mortgage of the type that allows variable drawing on demand and only charges interest on the amount currently owed produces an increase in safe withdrawing levels and lower failure rate.

Have a read of these for more on the subject:

A post where I summarise some of these things
Equity release for risk reduction, particularly this post

Withdrawing strategies don't get much, if any, attention in the mainstream press but the difference between 4% and 6% drawing rate with the same success chance is huge.

jamesd

As well as drawdown you should consider state pension deferral. If you reach state pension age before 6 April 2016 it pays 10.4% mostly inheritable by a spouse, after that it's 5.8% not inheritable. Both increase with inflation. They are superb deals for providing guaranteed income for life, producing excellent protection for the long life case that you need to deal with somehow. With these rates being guaranteed and close to or more than double what a normal inflation-linked annuity would provide and also more than the UK stock market's long term growth of a bit over 5% plus inflation they are hard to beat.

While I mentioned equities, that's a conventional investment and 100% equities would have more volatility than most retirees would want to see, so most would want to compromise on income level to reduce volatility. The traditional investment used to do that is bonds and/or commercial property.

Use a bit of care here, some people wrongly describe volatility as risk. That description that is particularly inappropriate for drawdown when the time horizons are measured in decades and even less appropriate when a one year cash buffer is being used. The risk aspect comes from forced withdrawing during a downturn and that just isn't what is planned for a whole pension pot over the 30+ year retirement timespan.

Moving beyond the most conventional of investments you can add to the mixture something like lending via VCT or P2P with secured loans. The Albion VCT does this with close to 100% of the investment secured on property and expects to pay out 10% tax free a year in two 5% pieces. 30% of the purchase price is refunded by HMRC, capped at income tax actually payable in the year of purchase, has to be repaid if sold within five years. A significant range of secured lending P2P options is available paying 8-14% or more taxable, though a form of ISA that can hold P2Pis expected to be available from April 2016. Some of the P2P options can beheld within a SIPP though the choice of SIPPs is low at present and tends to be those with charges in the £750 a year and up range, so only appropriate where the planned investment is likely to be say 50-100k and up.

So: learn about withdrawing strategies and don't stick just to the basic investments, there are some really interesting things other than equities, bonds and commercial property available at the moment, with very interesting income properties for those who have retired.

Aged

JamesD, thanks for all of that information. Plenty of food for thought there! Re the state pension issue, I have 10+ years to go before I am entitled to draw my state pension anyway so it's unlikely that deferring is something I'd want to consider at this point in time at any rate.

I am generally risk averse, so (as you say) equities do not sit well with me. At the outset, all I am aiming to achieve is to withdraw a small amount of supplementary income (say 4-5K in the first year) and leave the rest invested so that it grows in value and is not exposed to risk. I am particularly keen that the value of my investment does not fall.

coyrls

Aged wrote: »

I am particularly keen that the value of my investment does not fall.

I doubt that you will be able to find a suitable investment strategy that doesn't include the possibility that the value of your investments will fall at some point. If you really can't accept any falls you are pretty much retricted to savings options or an annuity.

zagfles

coyrls wrote: »

I doubt that you will be able to find a suitable investment strategy that doesn't include the possibility that the value of your investments will fall at some point. If you really can't accept any falls you are pretty much retricted to savings options or an annuity.

And even those could fall in real terms! Unless you get an index-linked annuity.

Aged

The annuity option has already been considered and ruled out (at this point in time at least).

coyrls

Aged wrote: »

The annuity option has already been considered and ruled out (at this point in time at least).

In that case you will need to expose yourself to investment and/or inflation risk and revise your requirement that you are "not exposed to risk".

Aged

Hm, I'm beginning to wonder if drawdown is the right vehicle for me :undecided