SIPP and Retirement Strategy

Bravepants

Good morning everyone!

I'm just looking for some opinions really please...

I have a SIPP, which I have recently transferred from an AVC into which I have been paying for a good few years. I am in the 40% tax bracket and this has helped boost the pot.

My plan for the SIPP is to have in there 5 years worth of drawdown at a rate of the (current) tax allowance, plus 25%, per annum; so £11850/0.75 = £15800 per annum. A total pot of about £80k. I have other investments and a DB pension. My aim with the SIPP is to allow me to retire at 55, use up the £15800 per year, with other income, until one of the DB schemes kicks in at 60.

I am battling with a quandrary regarding whether I should keep the funds in the SIPP invested until I reach 55 in 5 years time.

Experts say that investing is for periods greater than 5 years, so each year before retirement I planned to sell a £15800 chunk and hold as cash, gradually removing risk of exposure to the global stock market. So take one chunk out of the investment, hold as cash, and keep the rest invested. The princple being that each year before retirement I will need one more year's worth of drawdown "safe".

However, I have begun to think that ACTUALLY, my decision to retire will happen at a single point in time...in 5 years! So philosophically, if I am to be confident in my decision to retire I need to take zero (apart from inflation of course) risk with the fund, get it up to the £80k mark and then hold it all as cash. Therefore I perhaps should keep ALL the SIPP contents as cash now!

Does anyone have any thoughts on this? I am invested in HSBC Global Balanced within the SIPP, with 1 year's worth of drawdown in cash.

Thanks in advance!

k6chris

Do you already have enough in the SIPP to make your plan work? If so, why would you risk the plan??

MK62

Nobody can say definitively that you are wrong, but it's a highly cautious approach.

You'd be holding as cash now, funds which you would not need to draw on for 9-10 years. I doubt I need to mention the eroding effect of inflation on cash held within a SIPP earning very little or no interest.

I assume to intend to withdraw the money as a series of five annual UFPLS payments (hence the £15800 figure) and pay no tax......however have you considered moving it into drawdown at 55, and taking the tax free 25%.....you could bank this and least get something back on it, then take £11850pa (or whatever the PA is in 5 yrs time) as drawdown with the £3950 difference coming from the tax free cash account.....

Bravepants

k6chris wrote: »

Do you already have enough in the SIPP to make your plan work? If so, why would you risk the plan??

Hi, thanks for your reply.

I'm just short by about £8k. I could top it up today and switch everything in there to cash.

I have been thinking further as you say, if I DEFINITELY want to retire at 55, then I would be better with it all in cash. The only reason it is there is to provide tax free drawdown in 5 integer chunks of tax allowance.

If the tax allowance increases I could top up as required.

So philosphically yes I should just hold it as cash, but my mind is drawn by things like "missing out on growth", "inflation risk" etc. However, that thinking is probably more in keeping with the way I handle my ISA, not the SIPP, which is for a different purpose and one that is very close to being met.

Bravepants

MK62 wrote: »

Nobody can say definitively that you are wrong, but it's a highly cautious approach.

You'd be holding as cash now, funds which you would not need to draw on for 9-10 years. I doubt I need to mention the eroding effect of inflation on cash held within a SIPP earning very little or no interest.

Yes, this is my quandrary. All my instincts say "keep it invested" and stick to my slow annual plan of shifitng fund to cash. BUT my risk averse side says the opposite.

MK62 wrote: »

I assume to intend to withdraw the money as a series of five annual UFPLS payments (hence the £15800 figure) and pay no tax......however have you considered moving it into drawdown at 55, and taking the tax free 25%.....you could bank this and least get something back on it, then take £11850pa (or whatever the PA is in 5 yrs time) as drawdown with the £3950 difference coming from the tax free cash account.....

I would probably take £1300 or so per month and not take a 25% separately.

Audaxer

Bravepants wrote: »

I would probably take £1300 or so per month and not take a 25% separately.

Even if you take it in chunks as UFPLS payments, you could still put it into an account that will earn you some interest while you pay yourself £1,300 per month from the bank account.

As to whether to sell all the investment now and leave as cash in the SIPP, I think if you have already made investment gains on the SIPP to achieve your target to have enough cash you pay yourself for 5 years, then I think I would be happy to convert it all to cash now.

kidmugsy

Why not buy a ladder of gilts, with one maturing in each year that you want to drawdown income? At least you'll get some interest rather than virtually none. Or you could have an extra big slug of money in the first-maturing so that you can take the whole 25% TFLS in one go if you want to.

Bravepants

kidmugsy wrote: »

Why not buy a ladder of gilts, with one maturing in each year that you want to drawdown income? At least you'll get some interest rather than virtually none. Or you could have an extra big slug of money in the first-maturing so that you can take the whole 25% TFLS in one go if you want to.

Hmm, this sounds complicated. The Hargreaves Lansdown website has access to the gilt secondary market, but I wouldn't want to buy from the secondary market and suffer a capital loss compared to par upon redemption.


As Audaxer says, I might be better resting on my laurels having made some gains and benefitted from the tax efficiency.


It's only one phase of my early retirement. If I decide to hold in cash for the next 5 years, that's one less fund I need to worry about. I will continue taking advantage of tax relief by adding to my DB pension, and pump cash into my ISA. So I will get growth through those.


I also want to test the water with dividend income funds and ITs.

tacpot12

I think your plan is reasonable: cash in the investments in the SIPP now but keep topping it up with cash until you are 55 to address inflation and get the benefit of the tax relief.

I don't see any problem with overfunding your SIPP to ensure it has enough cash to last for five years. The personal allowance will go up between then and now so you will need to forecast what the personal allowance will be in the first five years of retirement to give you a more accurate target to aim for.

You could consider an indexed link gilt fund/eft as an alternative ( or partial) alternative to cash.

Invest via your ISA if you want to get growth over the longer term.

kidmugsy

Bravepants wrote: »

Hmm, this sounds complicated.

Buying gilts in ISAs is dead easy in my experience. Why would it be complicated in a SIPP?

Bravepants wrote: »

The Hargreaves Lansdown website has access to the gilt secondary market, but I wouldn't want to buy from the secondary market and suffer a capital loss compared to par upon redemption.

What on earth does that matter if the interest you've earned more than compensates for the capital loss?

Feartiepants!

Bravepants

tacpot12 wrote: »

I think your plan is reasonable: cash in the investments in the SIPP now but keep topping it up with cash until you are 55 to address inflation and get the benefit of the tax relief.

I don't see any problem with overfunding your SIPP to ensure it has enough cash to last for five years. The personal allowance will go up between then and now so you will need to forecast what the personal allowance will be in the first five years of retirement to give you a more accurate target to aim for.

Yes, this is what I was thinking last night!


Keeping up with the tax allowance and getting tax relief on the cash going in is a definite benefit of the SIPP, making keeping the funds as cash more bearable.