Living Time Plan

kt

I am considering retiring early next year. I have a SIPP which I was considering doing a "drawdown" on. However I have heard of another option which is this Living Term Plan. Do you consider this to be a good idea? I am also worried that my current SIPP is invested 95% in equity, should I now change to a less high risk investment. Your views would be much appreciated.

dunstonh

I dont see the point. The charges are too high to cover the cost of the guarantee and if you are that paranoid on risk, then either reduce the risk down or go with an annuity with capital buy back. Indeed, the guarantee they offer is often 10% or so less than the capital invested. So, why guarantee a loss when you can invest it low risk with the aim of no loss or potential small loss.

I am also worried that my current SIPP is invested 95% in equity, should I now change to a less high risk investment.

Is it high risk equity or low risk equity? Is your investment strategy growth based or yield based? What is your risk profile? (95% equity is fine if you accept the risk), how important is this pension to your overall income?

kt

Thanks for your reply. What do you not see the point in - the draw down or the living time plan? Sorry but I am quite ignorant over these matters.
I thought that the plan allows you to keep your options open longer than taking out an annuity now (at 60). If I left the annuity option until I was 75 (god willing) then I would get a better price than at present. It would also give me a guaranteed monthly sum for whatever term I chose. I also thought that the plan would allow me to keep my options open longer and also steer clear of the investment risk which would be there if I take the drawdown option.
I would consider that the SIPP is invested in lower risk UK based equities. I would consider my attitude to risk to be about 4. I have other pensions but these have guaranteed annuity amounts payable at 65. I therefore need to "bridge the gap" between 60 and 65 which is why I was considering utilising the SIPP.

EdInvestor

The living time plan is actually a drawdown itself.Thus you can do it youself in your SIPP.

Let's assume you will take income of 5% over the period (somewhat lower than the max you can take from a drawdown, but equivalent to a living time plan.) Gilts -totally safe - will pay around 4.75% so you can put much of your money in them.Add say 30% in big blue chip equities averaging a dividend yield of 4-5% , plus offering capital growth, and you are almost there.

With a plan like this is it sensible to keep 2 years worth of income in the SIPP's cash account (where it will earn interest).Then use this money to pay out your income over the period.This gives the income from the shares and gilts a bit of time to accumulate and means you don't have to cash in any of your capital to pay your income.

After five years you should be well ahead of where you started, and much better off than with the expensive LT plan.

kt

Thanks for that EdInvestor. Presumably after I have run down most of the 2 years income I then sell off Gilts/Equity to fund a further 2 years income.
At present this fund is being managed by a pension provider charging around £800 management fees plus commission,per quarter. Would it be more prudent to manage it myself? I would then however not be able to deal in the stocks and shares (too ignorant). Would this matter if the equity was based in big blue chip companies?

EdInvestor

kt wrote: »

Thanks for that EdInvestor. Presumably after I have run down most of the 2 years income I then sell off Gilts/Equity to fund a further 2 years income.

No, the idea is the dividend/interest income from the gilts and equities would pay the income, no need to sell off capital. You match the income you are being paid to the return on your assets.Over the long term the capital and the dividends should grow to cover inflation.

[qupte]At present this fund is being managed by a pension provider charging around £800 management fees plus commission,per quarter. Would it be more prudent to manage it myself?[/quote]

It would certainly be very much cheaper(!) if you used an execution only oinline provider such as www.sippdeal.co.uk and thus less risky.High charges are one of the main contributors to drawdown risk.

I would then however not be able to deal in the stocks and shares (too ignorant).

You might need to learn a bit but it's not that hard.You would not want to follow a trading strategy anyway as this wastes money.You just need to figure out what to invest the money in and how to do this.

Would this matter if the equity was based in big blue chip companies?

I see you're getting the idea already :)

Have a look at this:

http://www.fool.co.uk/news/foolseyeview/2000/fev001106c.htm?source=EDSP

dunstonh

At present this fund is being managed by a pension provider charging around £800 management fees plus commission

Dont you mean the £800 is the commission?

Would it be more prudent to manage it myself?

If you can do a better job then maybe yes. If not, then no. Maybe your adviser is charging too much and another would be cheaper.