How ‘adventurous’ should my SIPP investments be?

kjs31

I currently have 3 private pensions; a DB pension that I expect to be worth circa 8k PA when it starts paying at the end of next year, a workplace DC pension worth about 200k (and growing), and a SIPP that I am not currently paying into but is worth circa 860k. I am entitled to the full state pension when the time comes.

My workplace pension is invested entirely in equities as I have sold out of bonds completely. I’m happy with the risk level I have with this pension. 

I am going to move my SIPP to a different provider soon but need to decide how ‘adventurous’ I want to be. My SIPP pension funds haven’t performed particularly well over the last year and I’m down about 80k from the peak. I have quite a lot in bonds and gilts currently and I know that they’ve taken a reasonably big hit over the last year or so but I need to decide how much to invest in bonds vs shares when I move. My plan is to use flexible drawdown. I do not intend to purchase an annuity, so I won’t need the pot to be at its max when I retire in about 12 - 15 months. So how do I decide whether to go for bonds at 40%, 20%, 10%, or 0%? I understand that it’s down to appetite for risk but investing a large share in bonds appears to have negatively affected the performance rather than protect it so I’m not sure what to do. 

QrizB

You're currently 65?

How much annual income do you expect to require when you retire?

Do you have a spouse or any other dependents?

Do you have children or anyone else that you might want to leave an inheritance to?

Linton

Rather than choose an arbitrary % bonds  you may find it helpful to look at  matching liabilities. So 5 years total expenditure in cash or short dated bonds, 5+ years in cautious investments with some equity and the rest in 100% equity to provide for long term inflation.

The % bonds will automatically be what it needs to be to meet your needs. This will probably be near to 60 equity/40 bonds but you will be able to sleep at night despite the occasional equity falls knowing that your income is safe for the next 10 years.

Albermarle

So how do I decide whether to go for bonds at 40%, 20%, 10%, or 0%? I understand that it’s down to appetite for risk but investing a large share in bonds appears to have negatively affected the performance rather than protect it so I’m not sure what to do. 

Bonds /Gilts have suffered badly in recent times due to very unusual market conditions that you would not ( in theory at least) be expected to be repeated.
Years of QE/gilt buying by central banks and ultra low interest rates meant bond/gilts were on a roll for the last decade, and outperformed their normal patterns.
Unwinding of QE and particularly a rapid increase in interest rates brought the house crashing down. This was at least partly predictable ( not just saying that with hindsight).
Most likely bonds/gilts will in future revert to their usual rather boring role .
Equities will remain unpredictable and volatile as always.

kjs31

QrizB said:

You're currently 65?

How much annual income do you expect to require when you retire?

Do you have a spouse or any other dependents?

Do you have children or anyone else that you might want to leave an inheritance to?

No, I’m 58. My DB pension starts paying at age 60 and I expect to retire before then. I don’t expect to draw down from my DC pots until tax year 25/26. I’m currently paying the full 60k into my workplace pension so that pot should be at least 260k when I retire barring a fall in equities. 

I would like an income of the most I can get and stay under the higher tax rate but that’s a rough guess and I’m going to see how I get on with that. I have savings to use that are earning interest too so those will be used as income probably. 

My calcs are very roughly 

DB pension 8k
Tax free 2k
Taxable 6k

Savings interest 
Tax free 8k
Taxable 17k

Draw from pot 36k
Tax free 9k
Taxable 27k

Total taxable income 50k
Total after tax 42.5 
Total income after tax 61.5 (assuming my calcs are correct). This would draw down 3.4% of the pot but I might not need as much as that in truth so I might draw down a bit less than that to start with. 

I don’t have a spouse or anyone I expect to leave a large inheritance to so I can deplete the pot and my savings entirely if I need to but don’t really want to start depleting it significantly in the early years in case the stock market takes a dive. My pot has only grown 15% over the last 5 years given the drop last year. It lost about 10% in 2022. 

kjs31

Linton said:

Rather than choose an arbitrary % bonds  you may find it helpful to look at  matching liabilities. So 5 years total expenditure in cash or short dated bonds, 5+ years in cautious investments with some equity and the rest in 100% equity to provide for long term inflation.

The % bonds will automatically be what it needs to be to meet your needs. This will probably be near to 60 equity/40 bonds but you will be able to sleep at night despite the occasional equity falls knowing that your income is safe for the next 10 years.

I’ve been to see an advisor and the brochure I’ve got seems to focus on bonds as the first % in the different options available so that’s how I’ve structured my question. See below. The word ‘adventurous’ is from the brochure but I don’t feel confident enough to go fully into equities for my SIPP as I’m already in 100% equities for my workplace pension. I probably wouldn’t go higher than 40% into bonds so am just showing the top 4 choices from the brochure. 

kjs31

Albermarle said:

Bonds /Gilts have suffered badly in recent times due to very unusual market conditions that you would not ( in theory at least) be expected to be repeated.
Years of QE/gilt buying by central banks and ultra low interest rates meant bond/gilts were on a roll for the last decade, and outperformed their normal patterns.
Unwinding of QE and particularly a rapid increase in interest rates brought the house crashing down. This was at least partly predictable ( not just saying that with hindsight).
Most likely bonds/gilts will in future revert to their usual rather boring role .
Equities will remain unpredictable and volatile as always.

I guess I’m a bit nervous about bonds now as my existing funds were about 40% bonds and I’ve done a fair bit worse than if I’d had a lot more exposure to equities. I sold out of bonds completely in my workplace pension a few months ago as it’s a smaller pot of around 20% of my total across the 2 schemes so I’m willing to take a bit more risk with that. I have been tracking the bond performance in my workplace pension however and it’s still dropping (looking back 3 months) so when might they start to pick up a bit? We do have limited funds to choose from though and they don’t seem the best. I don’t have a huge amount of experience with investments in general as I’ve only had a SIPP since 2018 (took the CETV of my DB pension as it was capped so drastically and I got a good offer). CETVs have now dropped drastically so I believe that I exited at about the right time (well a year too late really but the CETV was still pretty decent). 

Linton

kjs31 said:

Linton said:

Rather than choose an arbitrary % bonds  you may find it helpful to look at  matching liabilities. So 5 years total expenditure in cash or short dated bonds, 5+ years in cautious investments with some equity and the rest in 100% equity to provide for long term inflation.

The % bonds will automatically be what it needs to be to meet your needs. This will probably be near to 60 equity/40 bonds but you will be able to sleep at night despite the occasional equity falls knowing that your income is safe for the next 10 years.

I’ve been to see an advisor and the brochure I’ve got seems to focus on bonds as the first % in the different options available so that’s how I’ve structured my question. See below. The word ‘adventurous’ is from the brochure but I don’t feel confident enough to go fully into equities for my SIPP as I’m already in 100% equities for my workplace pension. I probably wouldn’t go higher than 40% into bonds so am just showing the top 4 choices from the brochure. 

I dont think this is too helpful when considering financing retirement.  The problem being that you have different risk factors depending on the timescale.  So you wont want to worry about having insufficient money to meet you normal expenditure in the next 5 years.

On the other hand 20 years time is no different to the situation for many working people's pensions.  In the same way as people still contributing to their pension you may have a fairly secure source of income for the short/medium term  and so may not want to sacrifice long term performance to gain short term security you do not actually need.

My first thought on seeing your table was that the expectation is you would say "I'm Progressive" and your advisor would say " that is good, I have just the portfolio for you".  It all looks too simplistic. Also it you say you wont want more than 40% bonds.  Basing the next few year's quality of life on 60% equity seems highly risky to me.

You say that investing in bonds has significantly affected performance.  It will have done - the past year or two has seen a rapid fall in bond capital values of a size that has not been seen for more than100 years.  It is not the norm.  Now interest rates are much closer to their long term average I believe you can reasonably assume that recent circumstances will not be repeated, at least in your lifetime.  Bonds are now more capable of doing the job for which one would buy them than they have been for many years.

Were you actually talking to an IFA or someone like a bank advisor with investments to sell?

kjs31

Linton said:

My first thought on seeing your table was that the expectation is you would say "I'm Progressive" and your advisor would say " that is good, I have just the portfolio for you".  It all looks too simplistic. Also it you say you wont want more than 40% bonds.  Basing the next few year's quality of life on 60% equity seems highly risky to me.

You say that investing in bonds has significantly affected performance.  It will have done - the past year or two has seen a rapid fall in bond capital values of a size that has not been seen for more than100 years.  It is not the norm.  Now interest rates are much closer to their long term average I believe you can reasonably assume that recent circumstances will not be repeated, at least in your lifetime.  Bonds are now more capable of doing the job for which one would buy them than they have been for many years.

Were you actually talking to an IFA or someone like a bank advisor with investments to sell?

Schroders Personal Wealth so yes they have their own funds. That said I spoke to a supposed IFA when I took the CETV from my DB pension. I don’t feel like I received great advice as the funds haven’t been the best, and I didn’t take ongoing advice as someone I know who did was told that he was too busy doing CETVs to schedule her annual review so I didn’t bother paying the ongoing advice fee. All he used to do anyway was change the % allocation between 2 funds he used which I could have done myself. 

I don’t mind if the advisors are tied per se as long as I am investing in somewhat decent funds with the right balance for my needs. What I don’t want to do is pay a chunk of cash for what ends up being quite poor advice so I’m nervous about committing to using an IFA who will take a fairly big fee which proves to be cash straight down the drain. 

I have had the chat with the advisor about whether I am ‘progressive’ or ‘dynamic’ as I specifically said that I was disappointed in bond performance to date, but maybe I should scale back to balanced? But like I say I don’t really know. He had a big spreadsheet where he plonked in all of my figures and said that I shouldn’t run out of money until I’m about 90 and then I would still have my house as an asset. I am always nervous about the % returns they use to model future performance however I only ever seem to feel disappointment looking back when the funds never seem to perform as well as predicted. My workplace pension being a case in point. At least I haven’t been paying in for years to see my fund value lower than contributions as many people are at work as they relied on lifestyling to grow or protect their fund. 

Albermarle

 He had a big spreadsheet where he plonked in all of my figures and said that I shouldn’t run out of money until I’m about 90 and then I would still have my house as an asset. I am always nervous about the % returns they use to model future performance 

Drawdown strategies follow a similar pattern, so unlikely that the advisor would have deviated much from that.

A 50%/60% equity allocation.

Some standard average returns based on history.

Drawdown 3.5%/4% each year increasing with inflation.

By the time you are 90 there is a 95% chance the pot will not have run out and maybe well be rather large

Please note though I have simplified a complex subject discussed at length many times on this forum.

One thing you have not mentioned is charges. Often they can be quite high with this kind of company ( but I might be wrong)

Qyburn

kjs31 said:

My calcs are very roughly 

DB pension 8k  Tax free 2k  Taxable 6k
Savings interest  Tax free 8k  Taxable 17k
Draw from pot 36k Tax free 9k Taxable 27k

Total taxable income 50k
Total after tax 42.5  

How do you get tax-free income from your DB pension?

I assume the tax-free interest is from ISAs, and the DC drawdown will be an uncrystalised lump sum.