Drawdown - Income or Acc units

ian16527

I have been reading a couple of books lately about Drawdown as I intend to start drawdown this summer at 56.
I will have to deplete the fund to do so at a higher rate than the safe SWR until I reach SP age. 

One book recommends buying income units for yield, CTY and various REITS among others and if necessary using some % of the capital if necessary, depending on the three types of fund mix, inheritance, compromise and high, for 3%,4% and 5% yield portfolios. 

On the other hand, John Edwards suggests taking the natural yield and some capital sell off as above basically or just sticking with accumulation funds and selling capital each year. The latter is the approach I was going for initially.

I am not an experienced investor, nor have the inclination to be one, so the plan was to use VLS60/HSBC Global Balanced B fund for the majority of the pot and a small percentage of Fundsmith.

I have been reading about the WP funds, CGT and PNL  on here some may diversify into a percentage of these as well.

So is it better to change to Income funds in drawdown or keep the Accumulations ones I have at the minute, or does it make no difference as I need to sell some units anyway. I also plan to have 2 years in cash as a  reserve.

AlanP_2

If you are going to deplete the fund over the next 10 years or so ahead of SP there probably isn't a need for WP funds as your objective is to spend it all not preserve it 

At most you might want the last 2-4 years value in WP funds.

Are there fees for selling investments on your platform - income distributing options could minimise those possibly.

ian16527

AlanP_2 said:

If you are going to deplete the fund over the next 10 years or so ahead of SP there probably isn't a need for WP funds as your objective is to spend it all not preserve it 

At most you might want the last 2-4 years value in WP funds.

Are there fees for selling investments on your platform - income distributing options could minimise those possibly.

I do not want to deplete it totally, still need to top up the SP and a small DB, so the last 2 -4 years in WP will make sense. 
I am on Fidelity at the moment so no fees for selling, but I am looking as how to best reduce the fees, so possible go to move to AJ Bell when I consolidate my other 2 DC pensions into the SIPP.

dunstonh

Drawdown - Income or Acc units

I use inc units but that is because it suits the drawdown strategy we use and the platforms we use.
The income goes into cash (which holds 18-24 months of cash) and allows us to delay the sale of units to be done at a time that suits us and not forced upon us (in most periods - always the chance a 5 year decline could occur).

On the other hand, John Edwards suggests taking the natural yield and some capital sell off as above basically or just sticking with accumulation funds and selling capital each year. The latter is the approach I was going for initially.

That is one method but it means structuring your portfolio to have a UK equity bias which many consider undesirable (UK equity tends to pay the highest dividends. its one of the reasons why the UK stockmarket often appears to underperform and why our companies dont tend to grow as much).     
at the end of the day, total return is what matters.    How much is made up from income or growth doesnt really matter.  The bottom line does.  So, I don't personally look for yielding assets as a priority, although I will use the income units.

jamesd

ian16527 said:

One book recommends buying income units for yield, CTY and various REITS among others
...
On the other hand, John Edwards suggests taking the natural yield and some capital sell off as above basically or just sticking with accumulation funds and selling capital each year. The latter is the approach I was going for initially....
is it better to change to Income funds in drawdown or keep the Accumulations ones I have at the minute, or does it make no difference as I need to sell some units anyway. I also plan to have 2 years in cash as a  reserve.

You're mixing up at least two things.

A FTSE tracker or many other funds can be bought in the form of income units or accumulation units. The income ones pay you the dividends, the accumulation ones internally buy more at times of their choosing, which makes capital gains harder to deal with outside a pension or ISA, irrelevant inside..

A choice of income(-oriented) funds, growth funds or total return investing are choices of investment type and style. Income-oriented, often described as high yield, tend to have lots of banking and utility shares with a reputation for high growth but possibly lower total return, which includes capital growth.

Outside ISA or pension, income units make tax simpler and in a drawdown account they provide cash, which you'll need anyway, so I prefer income units.

I don't favour picking income funds though historically that has been quite popular. I favour total return investing.

Because of the inc/acc issue it's unclear what John Edwards suggests, could be about unit types or could be about investing style.

Linton

Taking income from dividends/interest and taking lump sums from capital are both viable ways of managing one's finances in retirement.  As a strong believer in diversification I use both.  But they require very different types of underlying investments.  Dividend/interest payers dont generally provide good long term growth whereas long term growth implies volatility which is not best suited for the need for a stable income.

With income from capital one needs a cash or safe investment buffer ( WP funds may play a role here) to ensure that selling investments during market crashes doesn't deplete the core capital needed for future growth.  This is less of an issue with well-diversified dividend/interest generation as this is generally much less variable.  

I dont see much point in using an INC version of a growth fund within a SIPP.  Easier in my view is to release a year's worth of cash at a time as part of an an overall rebalance, were you to be doing one.  If you are going to take dividend income as and when it is generated better to use an S&S ISA as, at least with II, this can be sent automatically to your current account with no tax, no extra cost, and no delays.

ian16527

jamesd said:

You're mixing up at least two things.

I think I understand - Ive been mixing the terminology up. The first book is using an income fund approach whereas John is on about the income/acc type units. 
Thanks 

Audaxer

AlanP_2 said:

If you are going to deplete the fund over the next 10 years or so ahead of SP there probably isn't a need for WP funds as your objective is to spend it all not preserve it 

At most you might want the last 2-4 years value in WP funds.

If the OP is planning to deplete his pot, or most of it, over the next 10 years, I think WP funds with a relatively low percentage of equities and low volatility, along with some cash savings, may be a better choice than a medium risk 60:40 portfolio?

Triumph13

ian16527 said:

AlanP_2 said:

If you are going to deplete the fund over the next 10 years or so ahead of SP there probably isn't a need for WP funds as your objective is to spend it all not preserve it 

At most you might want the last 2-4 years value in WP funds.

Are there fees for selling investments on your platform - income distributing options could minimise those possibly.

I do not want to deplete it totally, still need to top up the SP and a small DB, so the last 2 -4 years in WP will make sense. 
I am on Fidelity at the moment so no fees for selling, but I am looking as how to best reduce the fees, so possible go to move to AJ Bell when I consolidate my other 2 DC pensions into the SIPP.

You might also want to consider managing your SIPP as two separate pots, each invested appropriately for their purpose.  One pot would be designed to provide a drawdown income 'forever' and the other to specifically replace your SP / DB income during the fixed period until that kicks in.

[Deleted User]

If it was me, I would stick with your plan and just use the accumulation units because:
1. Its simpler. Simple is beautiful.
2. Only total return has a meaning. There is no logical reason to skew your assets to REITs/dividend stocks/etc.
3. All you would need to do is  sell units  once a year based on annual needs. Very straightforward, low cost approach. 

[Deleted User]

“its one of the reasons why the UK stockmarket often appears to underperform and why our companies dont tend to grow as much).”

Not really. Performance is compared using total return and assuming dividends are reinvested immediately. Yahoo and most other sources do it for you.
UK dividends appear high in comparison because:
1. Stock valuations are depressed right now to reflect Brexit risks.
2. Firms in other countries return money to investors via means other than the dividends. But the money is still paid out rather than reinvested into company growth.
3. FTSE 100 has few tech companies (not counting pharmaceutical/biotech). The industries it has reflect “value” rather than “growth” and tend to pay higher distributions. Higher Dividends are the consequence of having low growth companies rather than the reason.