Managing SIPP in retirement

BobR64

My wife and I are hoping to retire in at most a couple of years. I think we are in a pretty sound position but I can't help feeling a bit clueless about how I should manage my SIPP.

A good proportion of our target income will come from more or less guaranteed income: DBs, gilts up to state pension age and then the state pension itself. I reckon that what I actually need to withdraw from the SIPP to top this up is equivalent to something like a 2% withdrawal rate.

Although this seems to be a sound financial position, I am no financial whiz and I feel like it's more from luck than judgement! I don't feel as though I have a sound grasp yet of what to do when I actually have to manage it in retirement.

The received wisdom seems to be that some sort of mix of bonds and equities is recommended. I hear various proportions mentioned. I also hear things like "three bucket" strategies discussed. As I understand it, the role of the bond component is to reduce overall volatility of the portfolio and to allow one a means of withdrawing when equity prices are (hopefully) temporarily suppressed. 

The sort of questions this raises for me include:

- Does the fact that I have a reasonable DB component and a relatively low required withdrawal rate reduce the need for bonds in the SIPP? (Even if my SIPP crashed 50% it would only mean my withdrawal rate would go up to 4%.)
- If it would be advisable to have a bond component:
   -- How do I decide what percentage?

   -- What form does this actually take? Do I buy bond funds/ETFs or am I buying gilts within my SIPP? If funds, what sort of thing am I looking for?

- Do I follow a three bucket strategy, with cash as well as bonds?

- What are the rules for rebalancing, particularly with regard to timing?

I should also mention that I did put about 6% of my SIPP into a Vanguard Life Strategy (80% bond/20% equity) fund a few years ago in anticipation of retirement not being too far off and based on my vague understanding that I should have something in bonds. This went into the red in 2022 and has only just broken even. I don't know whether I should hang on to this or move it to something else. I also have about 10% in MMFs at the moment and don't know whether that is too much.

While I would be extremely grateful for any comments addressing any of the specific questions I have raised here, an overarching question I have is: how on earth do I go about learning what I need to know here? I have watched various recommended YouTube content and it is fine as far as it goes but it always seems to be full of promotions of various paid for tools, and stops short of some of the details I am interested in (for example, my question above about what the bond component actually looks like). I am happy to put some time in, but being overwhelmed by endless videos that never quite answer my questions does not appeal. Specific suggestions for things I should read or watch would be very welcome.

El_Torro

I am not close to retirement myself but I can comment on what I think I will do when the time comes:

I would not be comfortable to have 100% equities in my SIPP at retirement, even with a low withdrawal rate. Some of the SIPP in 100% equities is fine, though I would keep at least 3 years (maybe more, say 5) worth of cash to cover any market downturns. This cash can be held in the SIPP or elsewhere. Then when markets dip you can eat into your cash savings and top them up when markets recover.

Even with a 3 year or so cash buffer I don't think I will be 100% equities with the rest of the money, probably more like 60%. Opinions will vary on what is the right amount of bonds though.

AlanP_2

There is no "ideal" answer to your questions and concerns and you are far from unique in having doubts and confusion.

We will be in a similar position with all of our normal expenditure covered by DBs and SPs. Our SIPPs/ ISAs etc. are "bonus" money that can be used for more extravagant items as and when we want them.

DBs are the equivalent (but better) than bonds / cash as the low volatility element of a portfolio so in theory you and I need none at all as we could still live comfortably even if our investments crashed by 70/80/90%.

However, human nature doesn't work like that and "loss aversion" is real. We feel that as we have "won the game" why take higher risks than we need to.

We are aiming at about 2/3rds equities to 1/3rd cash/bonds overall and with enough cash on hand to cover 3-4 years of anticipated bonus expenditure.

This will mean the bonds component will be quite small and will be covered by either a multi asset fund (like LS80) and holdings in so called "wealth preservation funds" (Personal Assets Trust and Capital Gearing Trust).

Bonds are too complicated for my small brain so I leave them for professionals to choose and manage but as you are already dealing with individual gilts you may prefer to be more hands on. 


What are your attitudes to "risk" and how would you feel during downturns?

What is the long term game - leaving an inheritance for example, or is "die with £0" the objective?

How would your OH get on managing the SIPP if you die first?

Does the 2-4% withdrawal rate hold true when there is only one of you alive and a portion of DB income and a SP have ended?

zagfles

If you only need 2% have you considered just buying an index linked annuity - you'll get a rate well above 2% even with 100% spouse protection. Obviously the disadvantage is that you won't leave a legacy from the pension, but you could always gift out of excess income if you don't need it all.  

artyboy

Right now, keeping a reasonable safety buffer (which for me would be 4-5 years expenditure) in cash-like MMFs is a no brainer, because they are still paying about double the rate of inflation. How long that will continue for is anyone's guess, but conditions right now are very favourable for a derisking strategy at or close to retirement without any real-terms depletion of capital.

Opportunity cost of not being 100% in equities, well that's another matter. But my older self will probably thank my (slightly) younger self the next time there is a major correction or crash...

Albermarle

While I would be extremely grateful for any comments addressing any of the specific questions I have raised here, an overarching question I have is: how on earth do I go about learning what I need to know here? I have watched various recommended YouTube content and it is fine as far as it goes but it always seems to be full of promotions of various paid for tools, and stops short of some of the details I am interested in (for example, my question above about what the bond component actually looks like). I am happy to put some time in, but being overwhelmed by endless videos that never quite answer my questions does not appeal. Specific suggestions for things I should read or watch would be very welcome.

I would suggest regularly reading this forum can be very useful. Many of us have learnt some of the 'finer points' this way.

 What form does this actually take? Do I buy bond funds/ETFs or am I buying gilts within my SIPP? If funds, what sort of thing am I looking for?
How is your SIPP invested now? Sometimes little/no change is needed when you start to withdraw. As mentioned having some cash available is usually a good thing, but this could be in the form of cash savings outside the SIPP. Have you any ?

I should also mention that I did put about 6% of my SIPP into a Vanguard Life Strategy (80% bond/20% equity) fund a few years ago in anticipation of retirement not being too far off and based on my vague understanding that I should have something in bonds. This went into the red in 2022 and has only just broken even. I don't know whether I should hang on to this or move it to something else. 

All investment funds will have good and bad years. For most 2022 was not a good year. Overall VLS80 has performed quite well. 45% up over the last 5 years. 
Again though it is not clear what you are invested in, apart from 6% in this fund.

tacpot12

One decision you will need to consider is whether your strategy to obtain the money you want to withdraw will be by selling assets OR by accumulating the income from assets as cash in your SIPP.

I decided a year before I retired that I would accumulate income from the assets. I have three buckets in my SIPP: 

• Growth Assets
• Income Assets
• Cash

The Income Assets bucket contains the majority of my portfolio. There is enough in there to produce all the income I need to withdraw from my SIPP. 
The Growth Assets bucket contains the part of my pot that I don't need to produce income, so it is invested for growth, and to buy additional income producing assets if there appears to be a good opportunity to do so. (I sold a bit of Socttish Mortgage when it was doing well and when IUKD was doing badly - IUKD is a favourite holding that is reliably producing a yeild of over 5%) 
The Cash bucket contains about 9 months worth of income. 

I've been retired for five years, and my Income assets, which are a globally diversified mixture of Investment Tusts and Exchange Traded Funds, have produced a very steady income stream despite Brexit, Covid, War in Ukraine, Israel, etc. I started holding 12 months of cash, but dropped this 9 months worth about a year ago as the portfolio seems to be producing steady income under fairly trying circumstances. 

The Income assets are split 70% equity 25% bonds and 5% commercial property. So I am using the three bucket strategy you mentioned.

BobR64

Thanks all for the responses so far. There are quite a few things to digest and a few of you have asked questions which I will try to respond to below.

The consensus seems to be that some sort of mix is advisable and that is what I will be pondering. I might come back with more questions later.

AlanP_2 said:

What is the long term game - leaving an inheritance for example, or is "die with £0" the objective?

How would your OH get on managing the SIPP if you die first?

Does the 2-4% withdrawal rate hold true when there is only one of you alive and a portion of DB income and a SP have ended?

I had been hoping to leave at something from my SIPP to my son, though obviously with the IHT changes that might not work out quite so well in any case.

Regarding OH, part of what I am trying to do now is to get an ideally not too complicated approach in place that she could follow if necessary and that I myself won't find too burdensome as I get older.

Good point about the withdrawal rate, though she does have the larger DB and should get half of mine. If we can assume lower (but not halved) expenditure for a single person I think it still more or less works out.

zagfles said:

If you only need 2% have you considered just buying an index linked annuity - you'll get a rate well above 2% even with 100% spouse protection. Obviously the disadvantage is that you won't leave a legacy from the pension, but you could always gift out of excess income if you don't need it all.  

It's certainly an option. Annuities seem to have become a much better deal recently. I suppose an option might also be to put a proportion of my SIPP into an annuity.

Albermarle said:

How is your SIPP invested now? Sometimes little/no change is needed when you start to withdraw. As mentioned having some cash available is usually a good thing, but this could be in the form of cash savings outside the SIPP. Have you any ?

It's mainly equities. By far my biggest holding (~70%) is the VWRP Vanguard index ETF. I have about 10% in relatively solid individual shares such as Berkshire Hathaway, Greencoat UK Wind, Games Workshop and Scottish Mortgage, and ~2% in some more speculative shares (Rocket Lab doing very well at the moment!).

Other than equities, I have the 6% in LS80 (edit: I meant LS20 here - 80% bonds) as mentioned and 12% in CSH2 MMF.

We do have reasonable S&S ISA savings and cash too. I am trying to keep this out of pension calculations and thinking of it more as a pot that can be dipped into for emergencies, helping son out, getting a new car, etc., without having to plan it in too much detail.

Looking at these figures maybe my SIPP isn't too far off from a sensible balance. Perhaps it's time to sell the individual shares and move that 10% into something more like bonds, so that I would have roughly 70/30 split between equities and bonds/cash.

Thanks again. This has been incredibly helpful to me in getting my thoughts in order.

OldScientist

BobR64 said:

My wife and I are hoping to retire in at most a couple of years. I think we are in a pretty sound position but I can't help feeling a bit clueless about how I should manage my SIPP.

A good proportion of our target income will come from more or less guaranteed income: DBs, gilts up to state pension age and then the state pension itself. I reckon that what I actually need to withdraw from the SIPP to top this up is equivalent to something like a 2% withdrawal rate.

Although this seems to be a sound financial position, I am no financial whiz and I feel like it's more from luck than judgement! I don't feel as though I have a sound grasp yet of what to do when I actually have to manage it in retirement.

One question that might be worth asking first is how much volatility in income (in real terms) are you willing to contemplate?

You say that a good proportion of your target income comes from guaranteed income - does that cover your essential spending (e.g., house, food, clothing etc.) or does it cover essentials a bit of discretionary, etc.?

In other words, what expenditure do you intend the withdrawals from your portfolio to cover?

A second question, is just how easy do you really want this to be? A joint life RPI annuity to provide 2% of your portfolio in income would cost (roughly, it depends on your exact ages) about half of your portfolio. The other half could then be left to grow (lifestrategy 80 might be a good choice for the long term) to provide a legacy and emergency income (although a cash account would be better for this).

bjorn_toby_wilde

Albermarle said:

While I would be extremely grateful for any comments addressing any of the specific questions I have raised here, an overarching question I have is: how on earth do I go about learning what I need to know here? I have watched various recommended YouTube content and it is fine as far as it goes but it always seems to be full of promotions of various paid for tools, and stops short of some of the details I am interested in (for example, my question above about what the bond component actually looks like). I am happy to put some time in, but being overwhelmed by endless videos that never quite answer my questions does not appeal. Specific suggestions for things I should read or watch would be very welcome.

I would suggest regularly reading this forum can be very useful. Many of us have learnt some of the 'finer points' this way.

 What form does this actually take? Do I buy bond funds/ETFs or am I buying gilts within my SIPP? If funds, what sort of thing am I looking for?
How is your SIPP invested now? Sometimes little/no change is needed when you start to withdraw. As mentioned having some cash available is usually a good thing, but this could be in the form of cash savings outside the SIPP. Have you any ?

I should also mention that I did put about 6% of my SIPP into a Vanguard Life Strategy (80% bond/20% equity) fund a few years ago in anticipation of retirement not being too far off and based on my vague understanding that I should have something in bonds. This went into the red in 2022 and has only just broken even. I don't know whether I should hang on to this or move it to something else. 

All investment funds will have good and bad years. For most 2022 was not a good year. Overall VLS80 has performed quite well. 45% up over the last 5 years. 
Again though it is not clear what you are invested in, apart from 6% in this fund.

Slightly confused!

The OP describes VLS, but 80% bonds and 20% equity. I thought this was VLS20 not VLS80? Have I got it the wrong way round?

Albermarle

bjorn_toby_wilde said:

Albermarle said:

While I would be extremely grateful for any comments addressing any of the specific questions I have raised here, an overarching question I have is: how on earth do I go about learning what I need to know here? I have watched various recommended YouTube content and it is fine as far as it goes but it always seems to be full of promotions of various paid for tools, and stops short of some of the details I am interested in (for example, my question above about what the bond component actually looks like). I am happy to put some time in, but being overwhelmed by endless videos that never quite answer my questions does not appeal. Specific suggestions for things I should read or watch would be very welcome.

I would suggest regularly reading this forum can be very useful. Many of us have learnt some of the 'finer points' this way.

 What form does this actually take? Do I buy bond funds/ETFs or am I buying gilts within my SIPP? If funds, what sort of thing am I looking for?
How is your SIPP invested now? Sometimes little/no change is needed when you start to withdraw. As mentioned having some cash available is usually a good thing, but this could be in the form of cash savings outside the SIPP. Have you any ?

I should also mention that I did put about 6% of my SIPP into a Vanguard Life Strategy (80% bond/20% equity) fund a few years ago in anticipation of retirement not being too far off and based on my vague understanding that I should have something in bonds. This went into the red in 2022 and has only just broken even. I don't know whether I should hang on to this or move it to something else. 

Slightly confused!

The OP describes VLS, but 80% bonds and 20% equity. I thought this was VLS20 not VLS80? Have I got it the wrong way round?

My error, it is VLS 20.

OP - 2022 was the worst year for bonds in living memory, due to the increase in interest rates from near zero levels.