SIPP Cash Buffer Handling

Doglegger

I think a similar question has come up before but I couldn't find the threads so apologies if it's coming up again.

I retired last April and started taking my works DB. Come next month I intend to crystallise my SIPP and start taking a monthly top up from that. I will keep 3 years worth of drawdown held in cash in the SIPP.

My question is, how do others handle the cash buffers in their SIPP? I understand it's there to get you through any potential bad times until recovery but what if markets continue to be bullish or even stand still? Are there any rough rules on how far to deplete before topping up again? I'd got the idea of a 3 year buffer from the forum but hadn't thought of the caretaking of that until now.

SVaz

You could use income funds to feed into the cash pot and sell some well performing funds to make up the difference?  

I’m planning on building enough cash for 4-5 years of early retirement then will only need to use the natural yield after that. 

Albermarle

Doglegger said:

I think a similar question has come up before but I couldn't find the threads so apologies if it's coming up again.

I retired last April and started taking my works DB. Come next month I intend to crystallise my SIPP and start taking a monthly top up from that. I will keep 3 years worth of drawdown held in cash in the SIPP.

My question is, how do others handle the cash buffers in their SIPP? I understand it's there to get you through any potential bad times until recovery but what if markets continue to be bullish or even stand still? Are there any rough rules on how far to deplete before topping up again? I'd got the idea of a 3 year buffer from the forum but hadn't thought of the caretaking of that until now.

Opinions of forum contributors vary from keeping no cash to > 5 years, but two to three seems the average.

but what if markets continue to be bullish or even stand still? Are there any rough rules on how far to deplete before topping up again?

This is probably the tricky bit, and again opinions vary I am afraid. Also you missed out the scenario if markets stay depressed for 3 years or more. Do you use all the buffer up, or keep some and start selling investments that are in a trough ?

ColdIron

I keep a cash buffer, maybe 3 years, and my platform pays 3.65%-4.20% on cash which helps (though it was 0% when rates were much lower)

The buffer is fed by natural yield and depleted by drawdown. I could keep less cash and buy more dividend paying investments, and even though dividends stand up far better than share prices during a downturn (for a while anyway), this seems to me to defeat the point. The buffer is there to provide certainty (to a point) and smooth things out. If you only make periodic sales to provide income your situation without a decent buffer is even worse

Even with a decent buffer financial gravity will assert itself after a long downturn but that's life

There are no hard and fast rules and opinions do vary as do people's circumstances and needs

Linton

I would not keep buffer cash in a SIPP because, depending on your provider, it could take 5 weeks to access.  All the providers I know only run their payroll once a month and you may have to give 2 weeks notice. Again for some providers simply getting cash involves some level of hassle.

I solve the problem of knowing when to swap beween buffer and core investments simply by always taking cash for expenditure from the buffer, never directly by selling investments. The buffer is fed from all the ongoing income from SP, annuities, income generating funds etc. 

All the proceeds from cashing-in long term 100% equity  growth investments also go into the buffer on a strategic level as part of general balancing, so once a year at most.

The advantages of managing investments/expenditure in this way include:
 - minimal disturbance to long term investments
 - plenty of cash if needed for emergencies or spur-of the-moment exotic holidays etc etc minimising the risk of having to pay higher rate tax to access large amounts of money.
- minimal management effort
- minimise need to make difficult timing decisions.
 - minimise stress arising from market volatility thus removing the need to hold bond cushions.
  

ukdw

Personally I don't keep cash in a pension due to charges and lower rates than are available in ISAs / general savings accounts etc.

So I keep my cash buffer outside of the pension.

When markets are down I continue pension drawdown at the same level, but during downturns I also do try to partially repurchase similar investments in my ISA while they are 'on sale'.

I think this approach does achieve a similar effect to changing around which parts of the pension are used during different market periods.

 It does however mean the balance between sipp and isa will gradually shift over time which might have IHT implications at some point.

BritishInvestor

Doglegger said:

I think a similar question has come up before but I couldn't find the threads so apologies if it's coming up again.

I retired last April and started taking my works DB. Come next month I intend to crystallise my SIPP and start taking a monthly top up from that. I will keep 3 years worth of drawdown held in cash in the SIPP.

My question is, how do others handle the cash buffers in their SIPP? I understand it's there to get you through any potential bad times until recovery but what if markets continue to be bullish or even stand still? Are there any rough rules on how far to deplete before topping up again? I'd got the idea of a 3 year buffer from the forum but hadn't thought of the caretaking of that until now.

Look back in history at the genuine bad times and how long they last, and it might make you question the point of the cash buffer.

zagfles

BritishInvestor said:

Doglegger said:

I think a similar question has come up before but I couldn't find the threads so apologies if it's coming up again.

I retired last April and started taking my works DB. Come next month I intend to crystallise my SIPP and start taking a monthly top up from that. I will keep 3 years worth of drawdown held in cash in the SIPP.

My question is, how do others handle the cash buffers in their SIPP? I understand it's there to get you through any potential bad times until recovery but what if markets continue to be bullish or even stand still? Are there any rough rules on how far to deplete before topping up again? I'd got the idea of a 3 year buffer from the forum but hadn't thought of the caretaking of that until now.

Look back in history at the genuine bad times and how long they last, and it might make you question the point of the cash buffer.

Yes having a cash buffer seems to be more an emotional comfort blanket than anything else, I don't know of any research that shows real benefit from having one. Strategies like "prime harvesting" seem to be better ways of dealing with ups and downs of the markets - it's a similar principle but on a much longer term basis. 

Scrudgy

My IFA was ok with me building a cash buffer, but his thoughts are that they are unnecessary. His view was that you should stay invested at all times following your investment plan. If in times of markets turmoil, you should tighten your belt, but stay the course and stick to the plan.

His view was that if it made me feel better then go for it, but he wouldn't do it. Having no cash buffer maybe doesn't suit every circumstance, but he said it was suitable for me. In the end I am building two years worth with a plan to retire in March 2025, because it does make me feel better.

It did get me thinking though - under what circumstances would I employ the buffer anyway, no growth, 10% market drop, 20% market drop and so on. In the end I now see the IFA's point. If your portfolio can sustain a significant drop for a few years and you tighten your belt during that period, having cash held for multiple years being eroded by inflation is probably not the best approach either, although does make feel better having one.

Bravepants

Scrudgy said:

My IFA was ok with me building a cash buffer, but his thoughts are that they are unnecessary. His view was that you should stay invested at all times following your investment plan. If in times of markets turmoil, you should tighten your belt, but stay the course and stick to the plan.

His view was that if it made me feel better then go for it, but he wouldn't do it. Having no cash buffer maybe doesn't suit every circumstance, but he said it was suitable for me. In the end I am building two years worth with a plan to retire in March 2025, because it does make me feel better.

It did get me thinking though - under what circumstances would I employ the buffer anyway, no growth, 10% market drop, 20% market drop and so on. In the end I now see the IFA's point. If your portfolio can sustain a significant drop for a few years and you tighten your belt during that period, having cash held for multiple years being eroded by inflation is probably not the best approach either, although does make feel better having one.

But with a cash buffer one shouldn't need to tighten one's belt. Isn't that the point? 

You've spent years working and diligently investing so that you can continue to live the same lifestyle in retirement as when working. The you decide to give up your job and career and retire, and THEN find you have to tighten your belt due to circumstances that you knew full well were going to happen at some point in the future before you even retired.  

Linton

zagfles said:

BritishInvestor said:

Doglegger said:

I think a similar question has come up before but I couldn't find the threads so apologies if it's coming up again.

I retired last April and started taking my works DB. Come next month I intend to crystallise my SIPP and start taking a monthly top up from that. I will keep 3 years worth of drawdown held in cash in the SIPP.

My question is, how do others handle the cash buffers in their SIPP? I understand it's there to get you through any potential bad times until recovery but what if markets continue to be bullish or even stand still? Are there any rough rules on how far to deplete before topping up again? I'd got the idea of a 3 year buffer from the forum but hadn't thought of the caretaking of that until now.

Look back in history at the genuine bad times and how long they last, and it might make you question the point of the cash buffer.

Yes having a cash buffer seems to be more an emotional comfort blanket than anything else, I don't know of any research that shows real benefit from having one. Strategies like "prime harvesting" seem to be better ways of dealing with ups and downs of the markets - it's a similar principle but on a much longer term basis. 

If having a buffer is merely an emotional comfort blanket couldn't the same be said about having a 60/40 asset allocation rather than 100% equity?  

In real life you have to deal with the ups and downs of the market in some way, ideally with minimal cost, effort and disturbance to day to day life.  The question is how.