Moving to cash

eastcorkram

I'm retiring at Christmas this year. I'll be just 65. 

I have a SIPP with HL, currently at about £110k. It's in four different funds. I would like to draw this down at £4000 per year. Like everyone else, I've no idea how it's going to perform in the future. 

If I sell the funds, and just leave it as cash, then I'll know where I am. Just leave it in the SIPP, but withdraw £4k per year, until it's all gone. Maybe increasing the drawdown each year by a couple of percent. 

Assuming I'd be absolutely fine, knowing that the money would run out in say 20, 25 years or whatever, (which I am),  is this a reasonable idea? 

400ixl

How do you expect your investment to keep up with inflation to allow you to increase your drawdown each year for it when you have moved to low interest cash.

Moving some to cash to create a buffer (say 2 years) with the rest invested may be a better strategy.

Saying that though, £4k a year is not much, so do you need it to survive each year. How important is this this as part of your overall income. How much is guaranteed?

Dazed_and_C0nfused

400ixl said:

How do you expect your investment to keep up with inflation to allow you to increase your drawdown each year for it when you have moved to low interest cash.

Moving some to cash to create a buffer (say 2 years) with the rest invested may be a better strategy.

Saying that though, £4k a year is not much, so do you need it to survive each year. How important is this this as part of your overall income. How much is guaranteed?

Well at the moment I think HL are paying more than inflation on this sort of balance.

Not guaranteed to last of course.

Cash held in an HL SIPP Drawdown

Current rates and tiers

Account balance - Tax-free % for this tier only - AER% for this tier only

£100,000+     4.55     4.65

£50,000 - £99,999.99.    4.20.    4.28

£10,000 - £49,999.99.    3.90     3.97

£0 - £9,999.99     3.65.    3.71

eastcorkram

400ixl said:

How do you expect your investment to keep up with inflation to allow you to increase your drawdown each year for it when you have moved to low interest cash.

Moving some to cash to create a buffer (say 2 years) with the rest invested may be a better strategy.

Saying that though, £4k a year is not much, so do you need it to survive each year. How important is this this as part of your overall income. How much is guaranteed?

Clearly, it wouldn't keep pace with inflation. I'm fully aware of that. No, I don't need it to survive each year, but neither do I want to just set fire to the £110k. 

I haven't looked at what an annuity would pay, but I guess that would be another option. But I can't buy that I guess, until I sell the funds to convert it into cash anyway. 

Linton

If £4K per year perhaps halving in value over 30 years meets your needs then fine. You could do better for example by choosing long term fixed rate bonds which could guarantee you much the same income without cutting into the lump sum in £ terms.  But you may have better things to do with your time than thinking about investing.

eastcorkram

Linton said:

If £4K per year perhaps halving in value over 30 years meets your needs then fine. You could do better for example by choosing long term fixed rate bonds which could guarantee you much the same income without cutting into the lump sum in £ terms.  But you may have better things to do with your time than thinking about investing.

I know what you're saying, but in 30 years time, I'll be 95. If the value of it has halved, I'll probably not be too bothered. However, in theory , left as it currently is, it could halve tomorrow. 

MK62

How about a compromise of half in a money fund (atm returns more than HL's interest), plus half in a wealth preservation fund?

Sarahspangles

I don’t need my SIPP to pay out a flat profile like yours, as the main purpose of having it is to cover the period before my first DB commences. After that the amount that I need reduces and by SPA whatever is left is becomes a pot for ‘nice to haves’.

Earlier this year I sold some medium risk funds equivalent in value to what I need next year. They’re now in the Royal London Money Market fund. I know there are much more scientific ways to manage things but I just sold the funds at a point in May when the value of my portfolio had been rising steadily for a few weeks. If I’d waited until now, I would have got a bit more as they’ve now gone above that level again, but I’ve had the certainty through the intervening period - which is what I needed to give me the confidence to confirm I was retiring.

I’m thinking I’ll do the same for the following year’s income but generally leave the rest invested. If there was some downturn in the next 18 months I might have to rein in a bit. But I have headroom to do that. Money for ten years hence may as well get investment growth.

OldScientist

eastcorkram said:

400ixl said:

How do you expect your investment to keep up with inflation to allow you to increase your drawdown each year for it when you have moved to low interest cash.

Moving some to cash to create a buffer (say 2 years) with the rest invested may be a better strategy.

Saying that though, £4k a year is not much, so do you need it to survive each year. How important is this this as part of your overall income. How much is guaranteed?

Clearly, it wouldn't keep pace with inflation. I'm fully aware of that. No, I don't need it to survive each year, but neither do I want to just set fire to the £110k. 

I haven't looked at what an annuity would pay, but I guess that would be another option. But I can't buy that I guess, until I sell the funds to convert it into cash anyway. 

Rates from https://www.williamburrows.com/calculators/annuity-tables/ (the annuity tool at https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities can provide an up to date quote)

A single life level annuity taken at 65yo currently pays 7.1%. If you wanted £4000 for life, this would cost £56k (i.e., 4000/0.071) of your SIPP and still leave some over.

A single life annuity with RPI protection pays about 4.6%, so would cost £87k to provide an inflation protected £4k per year.

A single life annuity with 3% escalation pays about 5.2% so would cost £77k to provide an initial income of £4k.

Joint life annuities cost more than this.

Whatever is left over after annuity purchase could be left invested, converted to cash, used as legacy, spent!

In other words, you can almost certainly do better than just leaving it in cash.

michaels

OldScientist said:

eastcorkram said:

400ixl said:

How do you expect your investment to keep up with inflation to allow you to increase your drawdown each year for it when you have moved to low interest cash.

Moving some to cash to create a buffer (say 2 years) with the rest invested may be a better strategy.

Saying that though, £4k a year is not much, so do you need it to survive each year. How important is this this as part of your overall income. How much is guaranteed?

Clearly, it wouldn't keep pace with inflation. I'm fully aware of that. No, I don't need it to survive each year, but neither do I want to just set fire to the £110k. 

I haven't looked at what an annuity would pay, but I guess that would be another option. But I can't buy that I guess, until I sell the funds to convert it into cash anyway. 

Rates from https://www.williamburrows.com/calculators/annuity-tables/ (the annuity tool at https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities can provide an up to date quote)

A single life level annuity taken at 65yo currently pays 7.1%. If you wanted £4000 for life, this would cost £56k (i.e., 4000/0.071) of your SIPP and still leave some over.

A single life annuity with RPI protection pays about 4.6%, so would cost £87k to provide an inflation protected £4k per year.

A single life annuity with 3% escalation pays about 5.2% so would cost £77k to provide an initial income of £4k.

Joint life annuities cost more than this.

Whatever is left over after annuity purchase could be left invested, converted to cash, used as legacy, spent!

In other words, you can almost certainly do better than just leaving it in cash.

The rpi linked annuity is also less risky as with cash there is still considerable risk due to inflation which for some reason people are prone to ignore when they do worry about investment risk.

kempiejon

I get the impression the OP is more concerned about a reduction in absolute value than potential for growth or income; willing to see inflation eroding cash gradually is easier mentally than seeing a stock investment fall by 50%.

I think they could do better than that and an annuity looks an easy move to me. £4k index linked from £100k looks achievable. Better than cashing it all in and taking some each year while inflation eats your dinner. Gilt ladders are a more elaborate method.
One could use other methods for different, sometime better, probably riskier, sometimes worse returns. Annuities are more or less a guaranteed and know long term return.