How best to use Inheritance

tacpot12

I have unexpectedly found that I will be inheriting c£120,000 shortly. I wanted to ask for ideas on how to use this money to best support my retirement. 

I am 56 years old. I retired at 53 having saved enough to support myself until I was able to draw down from my SIPP at 55.
The SIPP is now in drawdown, and of course has lost a lot of value since March, but is still producing all the income I need for my retirement when combined with c£400/month income from two rental properties I own. I currently drawdown £1800/month from the SIPP and pay tax on 75% of this. The SIPP drawdown and my rental income puts me firmly into the 20% tax bracket.
My living costs are £1,500/month; any income above this is spare. 

The SIPP is invested mainly in income-producing ITs (with a couple of EFTs and 3 Unit Trusts), and is producing a reliable yield 4% pa. My drawdown amount means I am withdrawing about 6% of the portfolio value pa (4% from yield and 2% from capital). This level of drawdown is temporary as I taking more out at the moment for a planned 'trip of a lifetime' to Australia, and will be able to reduce the level of drawdown to c £1600/month in 24 months time. I have two final salary pensions that become payable at age 62 and 65 (both will pay about £100/pcm), and I already have a full-state pension entitlement for £175.20/week from age 67 (so £760/month). The forecasting I have done and validated with FireCalc suggest the SIPP will support my retirement to age 100  (45 year time horizon, 100% success rate - but I know this is all based on history and not future circumstances, hence I wanted 100% success rate not 95% or anything else.) 

The assets in the SIPP are currently valued at £330K; they were £360K when I bought them. I have a cash buffer in the SIPP of c £10,000 which I expect to have to run down over the next two years as the impact of the Coronavirus pandemic feeds through into the IT dividends. So far, the idea that ITs have reserves that allows them to pay dividends during bad time is unproven, as far as I am concerned - it is too early for me to say whether the income from ITs is any more reliable than other types of holdings.

So, if I receive this inheritance of c£120K, I cannot paying into the SIPP as I am subject to the Money Purchase Annual Allowance (MPAA) and I am already making the maximum contributions allowed to the SIPP of £3600 (after tax relief). 
I can pay it into a Stocks & Shares ISA, but only at the rate of £20K per annum. 

My thoughts so far are that the best way to manage this will be to reduce the SIPP drawdown to the level of the Income Tax Personal Allowance, invest most of the inheritance in income producing assets (basically mirroring the SIPP portfolio) but split between a Stocks & Shares ISA and a General Investment Account (GIA). I would keep some back as cash to spend to replace the income from the SIPP.  I would then gradually move assets from the GIA to the S&S ISA (at £20K per annum or whatever the limit is for the next year) until the assets are all sheltered from tax. The cash and income coming into the SIPP I would reinvest in a mix of both growth and income assets. I'm not worried by the Lifetime allowance. 

My question is, "Is there a better way to manage this influx of cash, given my situation?"

Notepad_Phil

Personally I'd bump up the amount saved in cash to allow for the inevitable lowering of dividends and put the rest of the inheritance into diversifying away from the income producing ITs e.g. investing the rest into something like a global equity index such as VWRL (currently paying out just under 2% yield). 

You do seem to be taking quite a bit out of the SIPP, are you sure it will last?  You say you can reduce your drawdown to £1600 pcm in 2 years time, but on the currently valued £330k that's just under 6% - personally I'm drawing down a yield of under 3% on my SIPP.

dunstonh

The SIPP is now in drawdown, and of course has lost a lot of value since March,

It shouldnt have done.  Most people are now above or around what they were in January.   If you are still down a lot then you should take another look at your investments as it suggests an issue.

The SIPP is invested mainly in income-producing ITs (with a couple of EFTs and 3 Unit Trusts), and is producing a reliable yield 4% pa.

Is it a reliable yield or is capital being used to maintain the "yield"?

Thrugelmir

tacpot12 said:

and is producing a reliable yield 4% pa. 

I'd be taking a close look under the bonnet. As to current sustainability. 

Marcon

Maybe spend some of it getting proper financial advice instead of trying to do it on the cheap, based on incomplete information?

AnotherJoe

tacpot12 said:

The SIPP is now in drawdown, and of course has lost a lot of value since March,

why "of course" mine haven't.

but is still producing all the income I need for my retirement when combined with c£400/month income from two rental properties I own. I currently drawdown £1800/month from the SIPP and pay tax on 75% of this. The SIPP drawdown and my rental income puts me firmly into the 20% tax bracket.
My living costs are £1,500/month; any income above this is spare. 

The SIPP is invested mainly in income-producing ITs (with a couple of EFTs and 3 Unit Trusts),

and is producing a reliable yield 4% pa.

ah, thats why. income producing ITs. And i doubt it will be reliable, expect it to fall.

My question is, "Is there a better way to manage this influx of cash, given my situation?"

Dont just rely on income investments, an old fashioned strategy unlikely to give best results or highest return.

tacpot12

Thank you everyone for your thoughts. I will look at the investments as they have not fully recovered. 
I'm comfortable with the amount being taken out of the SIPP, the drawdown rate is about 6% currently, but this is for a relatively short term. Once I'm 67, I will only need to drawdown about 1% pa.

I would be more inclined to spend the money once I can see the effect on dividends of the pandemic. I clearly am prepared to take risks, but only upto a point. 

I made a conscious decision to invest in income producing assets rather than 'growth' assets, although I do have two growth ITs the portfolio. About 20% of the underlying assets are bonds, and the plan is to sell the holdings in the ITs & UTs that have bond holding over a 10 year periods so that the underlying asset base becomes more or less 100% equities by 2028. This gives time for the equities to recover.

I'm aware of at least one IT I hold that is supporting its dividend payments from capital, I'm keeping this under review. 
Thanks again for the feedback. 

[Deleted User]

I am not sure what your 'Income' assets are, but i'd suggest diversify the investments by investing in either diverse passive or active funds. 'Income' assets are only as good as their underlying businesses are. If the businesses are not doing well, you'll lose both capital and income. Also if companies are giving you a large chunk of their profits as dividends, it means they are unable to or inadequately investing profitably in their own businesses. As you want the investments to help you for next 30 years, always good to diversify and hold growth funds.