Income Funds within L&G Pension

silverity

I was considering my pension drawdown retirement options. If this was an ISA, I would buy some income funds paying out the dividends from the companies held every quarter, etc.
Can this be done within a pension? If so, what do the pension administrators do with the dividend cash payouts?
Thanks for any feedback.

dunstonh

 If this was an ISA, I would buy some income funds paying out the dividends from the companies held every quarter, etc.

That is one method. Although it's not as popular as it used to be.

Can this be done within a pension?

Yes.

 If so, what do the pension administrators do with the dividend cash payouts?

Pay them into the cash account within the pension wrapper and you then draw from the cash account.

However, total return is probably the more popular method with a cash float to cover 18-24 months of withdrawals.  

Or drawing a fixed monthly amount from the cash account that equates to the anticipated annual yield

gm0

There are a number of options as to how to manage the "generate income" element (from minimal risk assets or dividends without asset sales - income funds as you suggest).  Rebalancing and asset sales (bonds or equities) works as well.

The "sleep at night" buffers to drawdown variable income (with market returns) to mitigate sequence of return risk can be in the pension wrapper but they don't have to be.  And the range of cash / minimal risk options outside pension can be better. 
Overall assets and allocation is what counts.  e.g. if you take a lower or no income for a couple of years in a major correction from equity sales and don't sell ACC units cheap then it doesn't matter where that cash was (ISA, emergency fund, in the pension cash holding (other than for IHT).  How big the buffer is sets the drag on overall portfolio returns (inflation erosion of cash, lost equity returns) and also the number of years portfolio protection in a crash + bump along the bottom scenario - say a 7 year cycle.

So income units can be used. But accumulation units are fine.  Provided you have nailed down your overall income plan and how income will be generated and re-generated by returns and sales/rebalancing.  There are whole books and blogs on this topic with extensive backtesting and montecarlo simulation summarised for different approaches and trying to squeeze the extra 0.25% of income without spiking the retirement failure risk for known past or simulated poor markets.

My take is that the most important thing is to have a well founded plan (rather than the perfect one) to commit to it and take the short term emotion out of the behaviour during the early years.

Linton

As said you can either take your income from the natural yield of dividends/interest or by selling assets.  As in many aspects of investing I believe the best answer isn't "either/or" but  "both".  This gives your extra flexibility and diversification at minimal effort

The advantage of natural yield is that you never need worry about how much to drawdown and what to sell.  With my II ISA account every dividend payment above £25 is automatically sent to my current account in a few days at no cost. So no ongoing effort whatsoever.

However with a SIPP life is not so easy.  Neither of the SIPP platforms I use offer this facility, and it could not work in the same way since payments can only made by the PAYE payroll which is run once a month.  For both platforms, unless you are taking a regular fixed income you have to explicitly ask the provider to make a one-off payment for which you are charged extra.

So I just take dividends from the ISA continuously and make annual one-off lump sum drawdowns from the SIPPs. after the cash has been freed up as part of annual rebalancing.

silverity

Thanks, I think I would like to preserve the capital and rely on the dividend payout, though if we were in a bull market, it would be tempting to skim off some extra, even if it reduces the overall dividends?

dunstonh

Thanks, I think I would like to preserve the capital and rely on the dividend payout, though if we were in a bull market, it would be tempting to skim off some extra, even if it reduces the overall dividends?

Its an old fashioned way of thinking but if its what you like then it's fine.  it does restrict choice and almost inevitably creates home bias and usually results in a lower return but it is an acceptable option.

AnotherJoe

silverity said:

Thanks, I think I would like to preserve the capital and rely on the dividend payout, though if we were in a bull market, it would be tempting to skim off some extra, even if it reduces the overall dividends?

That's only because you haven't seen the numbers.

Also, its likely an illusion to think you'll preserve the capital, what do you think happens to the price of a share when they cut the dividend?  Double whammy then.

[Deleted User]

As others have said, you will end up with a less diversified portfolio. Not a good thing. There is no meaningful difference in how you take money out: by selling shares or taking dividends. 

Linton

Deleted_User said:

As others have said, you will end up with a less diversified portfolio. Not a good thing. There is no meaningful difference in how you take money out: by selling shares or taking dividends. 

If you are correct and there is no difference financially between selling shares and taking dividends then surely the logical conclusion is that taking dividends is preferable as it requires much less effort.  The money just appears in one's current account automatically for free with no need for a monthly decision or payment of transaction costs.

Notepad_Phil

If you are intending to use the natural yield method then just be careful that in an attempt to up your income you don't get trapped into concentrating on higher yielding funds that could perhaps disappoint during market downturns etc.

I'm one of those people who find it easiest (at the moment) to simply take and live off the natural yield from my pension portfolio, but the total yield of my portfolio is less than 3% and I've a big chunk in simple global equity trackers such as VWRL. If I was not so lucky and hence needed to put more than I was happy with in high income funds then I'd definitely consider other means.

dunstonh

Value = dividends and growth minus dividends paid out vs
Value = dividends and growth minus regular withdrawal paid out.

Dividend only restricts choice.   Total return does not.