What is a sensible mix of assets to hold when in pension fund will be used for drawdown?

I_want_to_break_free

Hi,

I plan to start using flexible drawdown from April 2020. Value of fund is over £500k

I've stress tested the fund using a cash flow forecast with modest rate of growth and included inflation and all looks OK. I'm now thinking should I de risk to some degree into a mix of assets that are unlikely to all move in the same direction at the same time. I plan to draw on this heavily on this pension fund for the next 7 years until my DB pension kicks in. From then the drawdown will step down and 2 years later once SP kicks in the drawdown will be very modest. In addition to the DC pension fund of over £500k we have a cash buffer that we could comfortably live off for say 12 mts.

So welcome views from others on what is a sensible mix of assets. Are there any rules of thumb etc to use as a starting point?

SonOf

So welcome views from others on what is a sensible mix of assets. Are there any rules of thumb etc to use as a starting point?

No rule of thumb as it largely comes down to what risk you are willing to take and what investment strategy you are following. However, generally you want to be in cash for the money you are going to be drawing over the next 3 years. Money in for longer than that can still include risk based investments but there are different ways of doing it.

e.g. cash for withdrawals taken over the next 3 years, very low risk for withdrawals taken between 3-7 years and then your normal risk level of any amount above that.

Some people will segment their portfolios to cover each time period. Others will just average that out to give an overall portfolio.

So, you need to decide on your strategy and method. Each method has its pros and cons.

green_man

If you are drawing heavily on this for the next 7 years then it would seem sensible for this 7 years worth of money to be in low risk investments, especially given that equities seem to be towards to top of a cycle. Unfortunately many traditional low risk investments are not looking like great investments either: many think bonds are overpriced; index linked gilts are producing very low returns. So in your scenario an even greater level of cash investment might be preferable. Some SIPP platforms do provide some return on cash (Halifax pays BOE base rate for example) but you won’t beat inflation, so it’s buying power WILL diminish, but for a short period this might be the best low risk option.

Prism

I am not yet in drawdown but I do have non pension accounts that I treat in the same way even though I do not currently withdraw from them (but could). As the others have said, lots of ways of doing it but in general choose an equities % and then everything else is lower risk. Mine isn't fixed but its between 50-60% equities. For the lower risk part I include cash (and fixed savers) and low or intermediate duration government bond funds - so anything around 5-7 year duration. You can get that stat from Morningstar and maybe your platform. The only purpose of the cash and bond parts are to try and match inflation and either stay level or go up when equities go down. To be fair I still have to wait to see if this works, although in the small corrections we have had recently it has.

jim8888

I'm in a very similar situation to yourself. In my DC pot, I have all of it invested in Vanguard Life Strategy 80/20. I haven't drawn on it yet, but sometimes chew my nails over impending stock market crash which, "they say", is inevitable. But even if that happens, I don't need the whole pot immediately available, do I? I can sit it out, drip some funds out of the DC pension while the market is in the doldrums, and take a little more during that time from cash savings. And I can cut my outgoings too. Maybe I'd miss those trips abroad and the relatively flash motor, but maybe I wouldn't. So I continue to "do nothing" with my asset allocations and have faith that this is as good a long term strategy as any while trying to focus on what really will matter in retirement: health, family, friends and filling my days doing something useful.:D

bostonerimus

Your asset mix in drawdown is going to be influenced by the amount of income you need to generate relative to the size of your pot and your attitude and ability to take risk. For example if you have sources of income other than drawdown you might be able to generate the rest of your income with a very conservative and safe asset mix or you might also be able to risk a very high equity percentage as you can easily deal with portfolio volatility. If you need a withdrawal rate closer to 4% or 5%. then you will need a fairly high equity allocation and a sensible withdrawal and spending strategy.

Linton

If you can extract suffficient cash from your pension without paying higher rate tax perhaps as a UFPLS or partial crystallisation you could consider setting up a fixed term savings account ladder** to pay for your needs for the first 7 years. Then anything beyond the 7 years could be kept within the pension as a long term investment, with say 2-3 years post SP income needs held in a wealth preservation fund of which there are several with decades of history.


**A savings laddder is where you put a tranche into a one year fixed rate account, a second tranche into a 2 year account... and a fifth into a 5 year account. One one matures you can take the cash or start another 5 year saviong account.

atush

I have split mine into Capital preservation, Income and Growth sections. I have included some investment trusts.

DairyQueen

We are around 18 months from beginning drawdown and have a SIPP portfolio in a similar ballpark plus unwrapped assets.

Investment grade bonds are overpriced, inflation can only move one way in the short/medium term, and corporate bonds are behaving more like equities. I have therefore opted for cash for the chunk of our portfolio that will be drawndown in < 6 years. I had previously planned to hold more in bonds.

Like you, we will reduce drawdown substantially once guaranteed income kicks-in (DB in 2.5 years, OH's SP in 3.5 years and my SP in 5.5 years).

I have opted for a mix of wealth preservation fund and bonds for the 5-10 year drawdown timeframe.

The rest is in equities.

Our current allocation across our entire portfolio:

Cash 27% (includes: cash reserved for major spends - 21%, emergency cash - 26%, income bridge from 2021 to 2025 - 53%)
Equities 65% (10+ year investment)
Wealth Preservation and Bonds 8% (5-10 year drawdown)

The unwrapped cash is held in a mix of savings bond ladder, notice accounts, instant access and regular savers.

This is a much high cash %age than I had planned but I no longer feel comfortable holding bonds for short-term (< 5 year) drawdown. I would rather take the inflation hit than attempt to negotiate a 'conventional' withdrawal strategy in the confusing (for me) bond climate that QE has created. Unravelling the impact of QE on bonds will likely take a decade.

bostonerimus

The two examples above show you how individual drawdown allocations and plans can be. In my case my immediate income needs are covered by a pension and rent from a flat I own so I can afford the risk of a high equity allocation. I keep a couple of years income in cash in my bank account and a fast access saving account. I have about 5% of my pension pot in a very safe deferred annuity that is getting 4.6% interest this year, 20% is in a bond index fund and 75% is in equity index funds. Right now I am reinvesting dividends and interest, and not rebalancing so that the equity portion of my portfolio should increase. If I do need extra income I will just divert the dividends to my current account. I don't bother about capital preservation, other than the 25% I have in fixed income, or more complicated income strategies, I just stay heavily in equities and look for capital appreciation as well as dividends.

I_want_to_break_free

Thank you all for the feedback. A lot to think about and work through.