Combined risk profile of DB and SIPP pensions

fcandmp

I wondered peoples thoughts on combined risk profile of my DB and SIPP pension arrangements. I had only previously considered the equity / bonds & cash split of my SIPP in its own right and have balanced at 50/50 as already retired and drawing benefits, prior to state pension in 18 months. It has made me wonder whether I should treat my DB pensions (all blue chip financial organisations) as though they were all bonds /cash, from a portfolio risk perspective irrespective of the underlying scheme holdings? If I were to do so, the outcome could be moving perhaps towards 70/30 in favour of equities in my SIPP, which when I commence state pension I will be drawing very little from annually.

Many thanks for your considerations  

El_Torro

I'm not sure you're looking at it the right way. Yes, your DB pension is pretty safe. Even if the pension scheme fails (may or may not be likely, depending on who the provider is) you will still continue to receive most of the money you are owed. 

As for your SIPP, how much do you need to draw on to maintain your preferred standard of living? If your SIPP is a nice to have this is very different than if you actually need the money in there to live. 

I don't really think the split between equities and bonds / cash is all that relevant. One way to look at it is how much of your SIPP will be needed in the next 5 years, how much in the next 6-10 years and how much after that. Then you can split your pot in a way that makes sense with your drawdown strategy.

Brie

I'm wondering why you need to consider of the DBs at all given how very secure they are.  It would take a catastrophic event to decrease the value (inflation aside).  With that in mind I would think you might go more high risk with your SIPP.  But I'm a mix of practical and reckless.

El_Torro

Brie said:

I'm wondering why you need to consider of the DBs at all given how very secure they are.  It would take a catastrophic event to decrease the value (inflation aside).  

All it takes is for the company providing the pension to go bust (OP says their DB pensions are private sector, not public sector). I wouldn't call that a catastrophic event. 

Admittedly the OP should still get 90% of their DB pension, even if the provider runs out of money.

leosayer

My way of thinking about this is as follows - let's say I have:

- A DB pension paying £20k per year

- Pension/ISA pots totalling £100k

- An annual income requirement of £35k

Therefore my £100k need to meet the £15k per year gap for the rest of my life, or at least until State Pension age.

That's probably not enough so I need to save more, delay retirement, take more risk or reduce my retirement income requirements.

cloud_dog

fcandmp said:

I wondered peoples thoughts on combined risk profile of my DB and SIPP pension arrangements. I had only previously considered the equity / bonds & cash split of my SIPP in its own right and have balanced at 50/50 as already retired and drawing benefits, prior to state pension in 18 months. It has made me wonder whether I should treat my DB pensions (all blue chip financial organisations) as though they were all bonds /cash, from a portfolio risk perspective irrespective of the underlying scheme holdings? If I were to do so, the outcome could be moving perhaps towards 70/30 in favour of equities in my SIPP, which when I commence state pension I will be drawing very little from annually.

Many thanks for your considerations  

I glad you have asked the question, as I am all ears on this subject.

At present (unless I am convinced otherwise of the benefits of drawing the DB early (1)), we will have a pure SIPP drawdown for the 6 years of early retirement until the main DB scheme kicks in, and 2 years later (for us) SP and another small LGPS DB kicks in.

Based on our projected income number once all the guaranteed pensions (DBs / SPs) are in payment we will only have a 10% funding requirement from our SIPP.  With this in mind I am tempted (2) to take a fairly high risk approach and leave the remainder of the SIPP invested in equities 100% (or at a very high level).  Worst case scenario, we tighten our belt / reign in discretionary spending during any particular market turmoil. 

(1) - Part of the reason I am quite keen to not draw the main DB pension early is to 'safeguard' (for want of a word) dealing with drawdown in out older years (and also because of point 2).

(2) - My longer term choices are also based on the possibility of me not being around and my partner having to deal with things (drawdown etc).  Simply getting them to open a new savings account because it pays 1% more than their current savings account is challenge enough. 

Albermarle

fcandmp said:

I wondered peoples thoughts on combined risk profile of my DB and SIPP pension arrangements. I had only previously considered the equity / bonds & cash split of my SIPP in its own right and have balanced at 50/50 as already retired and drawing benefits, prior to state pension in 18 months. It has made me wonder whether I should treat my DB pensions (all blue chip financial organisations) as though they were all bonds /cash, from a portfolio risk perspective irrespective of the underlying scheme holdings? If I were to do so, the outcome could be moving perhaps towards 70/30 in favour of equities in my SIPP, which when I commence state pension I will be drawing very little from annually.

Many thanks for your considerations  

It is good that you start to look at your finances in the round. You could also expand this to any cash savings/investments you have outside your DC pension, and take into account the guaranteed income from the state pension.
Also if you have a partner, how their finances fit in.

MarkCarnage

Your DB pensions are effectively annuities now. I would therefore frame your thinking around what you need from the SIPP. 

Your future requirements for income and the timing of this should drive your asset allocation in the SIPP, but other things being equal it should favour a greater allocation towards equity based investment. Your income/cash lump sum requirements could be met in a number of ways either by cash buffer, some shorter duration bonds or taking the dividend income from your equity investments....depending on how much you need and when. 

fcandmp

El_Torro said:

I'm not sure you're looking at it the right way. Yes, your DB pension is pretty safe. Even if the pension scheme fails (may or may not be likely, depending on who the provider is) you will still continue to receive most of the money you are owed. 

As for your SIPP, how much do you need to draw on to maintain your preferred standard of living? If your SIPP is a nice to have this is very different than if you actually need the money in there to live. 

I don't really think the split between equities and bonds / cash is all that relevant. One way to look at it is how much of your SIPP will be needed in the next 5 years, how much in the next 6-10 years and how much after that. Then you can split your pot in a way that makes sense with your drawdown strategy.

I am currently drawing 4% of my SIPP per year and we can live comfortably on this. In the next two years both my wife and my state pensions kick in and will reduce 4% draw to below 2%. The SIPP going forward will be more of an inheritance for our three children.

fcandmp

Albermarle said:

fcandmp said:

I wondered peoples thoughts on combined risk profile of my DB and SIPP pension arrangements. I had only previously considered the equity / bonds & cash split of my SIPP in its own right and have balanced at 50/50 as already retired and drawing benefits, prior to state pension in 18 months. It has made me wonder whether I should treat my DB pensions (all blue chip financial organisations) as though they were all bonds /cash, from a portfolio risk perspective irrespective of the underlying scheme holdings? If I were to do so, the outcome could be moving perhaps towards 70/30 in favour of equities in my SIPP, which when I commence state pension I will be drawing very little from annually.

Many thanks for your considerations  

It is good that you start to look at your finances in the round. You could also expand this to any cash savings/investments you have outside your DC pension, and take into account the guaranteed income from the state pension.
Also if you have a partner, how their finances fit in.

Thanks, I hadn't really thought about including other cash savings, but have brought together my Wife's SIPP and ISA holdings into the picture. 

fcandmp

MarkCarnage said:

Your DB pensions are effectively annuities now. I would therefore frame your thinking around what you need from the SIPP. 

Your future requirements for income and the timing of this should drive your asset allocation in the SIPP, but other things being equal it should favour a greater allocation towards equity based investment. Your income/cash lump sum requirements could be met in a number of ways either by cash buffer, some shorter duration bonds or taking the dividend income from your equity investments....depending on how much you need and when. 

Thanks, I keep a year's cash drawdown in the SIPP and use the Ultrashort Bond fund behind that for a further year. We take cash dividend income from the ISAs every six months as you suggest. Otherwise I don't plan on needing to take any non standard amounts from the SIPP which is already fully crystallised.