Investment choices for 'spare' SIPP money

retireetobe

Hello, I wonder if anyone has suggestions to help me decide on investment choice. We are new to this type of thing, but have read around the subject plenty and find it fascinating if a little boggling!

My husband is 60, I am 58. We both intend to retire in 2019. We have just transferred his DC pensions to a HL SIPP and withdrawn the 25% TFLS to pay for refurbishments on our dream home. That leaves £98K in the SIPP. Over approximately ten years from 2019 we expect to draw down around £80K of this £98K to fund the years to SP age and beyond, minimising tax liability as we go. We will have other income in the form of my DB pension (drawn early with partial Rule of 85 protection) and of course both our (full) SPs in due course. We also own outright a BTL which will be sold at some, as yet unknown, point.

Of the £98K SIPP we have invested £80K in Vanguard LS40 which seems appropriate. The question is, what to do with the remaining £18K? I think the options are:

• Leave it sat in the SIPP in cash, being eroded by inflation (seems like the worst option)
• Invest in something riskier, given that it is likely to be there over 10 years? If so, what?
• Invest in something even safer, just in case? If so, what?
• Shove it in the Vanguard LS40 along with the rest?

Any suggestions very welcome and thanks in advance for any help

AnotherJoe

There are decent arguments for all 4 options.
Much depends on (1) your attitude to risk, and (2)how much you need that drawdown.

One thing you dont seem to have factored in is a stock market correction (or a crash). That £80k could drop to £50k or £60k in such circumstances. In which case having the £14k in cash might give you a good buffer meaning you can drawdown from that instead of from depleted funds.

Do you have any other savings that can provide that buffer ? If you dont I'd look for something safe, if you do, I'd probably just stick in all in VLS40.

retireetobe

Thank you Another Joe.

Risk-wise, I would say we are reasonably cautious although we do accept some risk. We do need the drawdown to retire completely, but if there was a stock market correction or crash my husband could and would do a bit of sub-contracting work locally to avoid drawing down at the worst time.

As for other savings, we will have around £10K in other savings by retirement time. And sadly but pragmatically we will probably inherit around £100K from our very elderly parents within the next few years - but of course we do realise that this could all disappear in care costs and never come our way (and we will encourage them to spend every penny of their money on getting the best care money can buy if they need it )

dunstonh

Why have you decided that a sector allocation strategy is better than a yielding strategy for drawdown?

There is no right or wrong reason for that. However, by going with sector allocation, you will be selling units in the fund to provide the withdrawals in future rather than the yield providing it.

EdSwippet

dunstonh wrote: »

However, by going with sector allocation, you will be selling units in the fund to provide the withdrawals in future rather than the yield providing it.

It is an illusion that living on yield alone is preserves capital. Figure 12 of this paper from Vanguard shows that results from a yield portfolio and a total return one are equivalent. Spending the yield in the first and selling units to the same value in the second produces identical portfolio balances. The number of units is smaller in the second case, but is compensated by the value of each unit being larger.

However, the potential problem with slanting towards yield is that it can distort diversification, leading to a less stable overall portfolio.

bostonerimus

You seem to have a good handle on your retirement income streams and the BTL is a nice safety net. I would make sure you have a comfortable cash buffer, maybe 1 year's spending in your bank account and then I would just put what's left in VLS40 and enjoy your retirement. As you spend down your bank account you can top it up with income and gains from VLS40 withdrawals. I would concentrate on doing a detailed budget so you have the awareness to control your spending......in a downturn it's nice to have a strategy to reduce your spending.

bostonerimus

EdSwippet wrote: »

It is an illusion that living on yield alone is preserves capital. Figure 12 of this paper from Vanguard shows that results from a yield portfolio and a total return one are equivalent. Spending the yield in the first and selling units to the same value in the second produces identical portfolio balances. The number of units is smaller in the second case, but is compensated by the value of each unit being larger.

However, the potential problem with slanting towards yield is that it can distort diversification, leading to a less stable overall portfolio.

I tend to agree, I'm using total return in retirement rather than emphasizing yield over capital gains.

One thing the OP should plan for is the effect of rising interest rates on the bond heavy VLS40

dunstonh

It is an illusion that living on yield alone is preserves capital. Figure 12 of this paper from Vanguard shows that results from a yield portfolio and a total return one are equivalent. Spending the yield in the first and selling units to the same value in the second produces identical portfolio balances.

I have used both methods and said a number of times on this board that growth should also be considered. However, you tend to find sector allocated portfolios are more volatile when used for drawdown than income yielding. If you are not having to sell units as the yield covers the income, then the sustainability is usually greater using the yield method.

If you are selling units as the method and the market falls during a typical crash, the impact of the sale of the units is greater and the portfolio could suffer erosion risks or require the income to be reduced. A sensible draw rate and a decent cash holding could reduce the chance of that.

However, a yielding portfolio would be built differently to a sector allocation portfolio. So, they would not be the same value if you used yield in the first and selling units to the same value in the second.

EdSwippet

dunstonh wrote: »

If you are selling units as the method and the market falls during a typical crash, the impact of the sale of the units is greater and the portfolio could suffer erosion risks or require the income to be reduced.

In such a crash one would expect yields to fall as well. That too means either reducing income or accepting some capital erosion.

Stock returns come from dividends and growth combined, but the division point on which route delivers that return is somewhat arbitrary. The company that makes the decision over what proportion of its profits to re-invest and what to pay as dividends. And the markets decide what effect the combination of that decision and the company's profits has on its stock price. This provides capital growth. Or loss, if profits don't appear to fully support dividends.

Of course, investor 'sentiment' and company fundamentals do not always move in the same direction, so disconnection is quite possible. But given the basics, it always seems a bit odd to me to artificially restrict oneself to living off an artificially and ultimately rather randomly set proportion of a portfolio's total return.

dunstonh

In such a crash one would expect yields to fall as well. That too means either reducing income or accepting some capital erosion.

In a crash, you would expect yield as a percentage to increase. However, for someone already in the investment, the yield amount in monetary terms wont change much unless the "event" is impacting on income as much as it is value.

But given the basics, it always seems a bit odd to me to artificially restrict oneself to living off an artificially and ultimately rather randomly set proportion of a portfolio's total return.

Growth is not exactly uniform.

Thrugelmir

EdSwippet wrote: »

The company that makes the decision over what proportion of its profits to re-invest and what to pay as dividends.

Profit does not equate to cash generated. Cash flow statements are far more important than P&L accounts. Profits can be massaged. The market decides if capital has been wisely allocated.