Asset allocation for drawdown portfolio

deeboy12

Background 

I retired seven years ago at age 46. 

Due to a house move and other reasons, my portfolio has become rather messy and very cash-heavy. 

So I want to reset things and make a clear decision on asset allocation that I can stick to. 

But I’m going round in circles a bit on how much risk to take and would love some input from others in a similar position!

Portfolio 

The total investible portfolio is a bit over £2.5m, split across SIPP, ISA, GIA and cash/ PBs. 

On top of this, I have an inflation-linked DB pension from age 60, currently £22.5k pa.

I have one home owned outright, and no dependents/ children.

Income 

My plan going forward is to take the basic rate limit of £50,270 a year, which is more than adequate for my needs. 

This works out at a withdrawal rate of 1.9%, although that drops to just over 1% once the DB pension kicks in at 60, and again at state pension age.

I know this is low, so I guess when I need/ want money for one-off spends and luxuries in addition to this, I’ll try and persuade myself to take it and can do so tax free from the ISA. 

Question

How should I split my portfolio between equities and lower risk assets?

Part of me says keep it low risk because I don’t need more income and should just aim to keep pace with inflation.

The other part of me says go for it, because I can afford to take more risk.

Or looking at it from a numbers perspective, I’m half way through setting up a ladder of nominal and index-linked gilts to cover my liabilities for the next 15 years. That works out at around £600k or 25% of the total portfolio (after deducting for the DB pension income when it kicks in). To that I’d add say £250k in cash (10%) so we’re starting to approach a 60:40 portfolio at that point. Is that the best starting point? 

For anyone in a similar situation, what approach have you taken and why? I’d love to hear your thoughts - thanks in advance! 

Bostonerimus1

When you have a large pension pot wrt your potential spending it doesn't matter so much what you do because you can survive the volatility of a risky portfolio and also be successful with a low return conservative asset allocation. My approach would be to secure what I needed for income through things like DB pensions, annuities, gilt ladders etc and then just leave what's left in low cost global equity index funds. You might also think about gifts to charity and family which are best spread out over the years.

zagfles

What about an annuity? I'd be looking at securing your required income at state pension age accounting for state pension and DB, so eg if DB is £22.5k and state pension (assuming full) is £11.5k, then if you want £50k total income then you need an index linked annuity paying £16k. Then set up an IL gilts ladder to cover the gap before the DB and SP kick in. Then you can invest the rest in whatever, or spend on frivolous stuff, knowing that your core income is covered. 

But is the DB pension fully index linked, or capped at 3 or 5%? Most private sector schemes are capped, and even just the recent spate of high inflation for a couple of years would have knocked 10-15% permanently off the real value of a pension in payment. So you may want something to hedge the likely fall in value of the DB if it is capped. 

Cus

You had another thread asking if you could retire as you were 50.

deeboy12

Bostonerimus1 said:

When you have a large pension pot wrt your potential spending it doesn't matter so much what you do because you can survive the volatility of a risky portfolio and also be successful with a low return conservative asset allocation. My approach would be to secure what I needed for income through things like DB pensions, annuities, gilt ladders etc and then just leave what's left in low coat global equity index funds. You might also think about gifts to charity and family which are best spread out over the years.

Thanks this makes sense and I kind of agree I may need to push myself to up the equities a bit. 

I’ve actively started on the charity side of things too, so that’s hopefully in hand. 

Cheers, this is helpful! 

deeboy12

zagfles said:

What about an annuity? I'd be looking at securing your required income at state pension age accounting for state pension and DB, so eg if DB is £22.5k and state pension (assuming full) is £11.5k, then if you want £50k total income then you need an index linked annuity paying £16k. Then set up an IL gilts ladder to cover the gap before the DB and SP kick in. Then you can invest the rest in whatever, or spend on frivolous stuff, knowing that your core income is covered. 

But is the DB pension fully index linked, or capped at 3 or 5%? Most private sector schemes are capped, and even just the recent spate of high inflation for a couple of years would have knocked 10-15% permanently off the real value of a pension in payment. So you may want something to hedge the likely fall in value of the DB if it is capped. 

Yes I like this approach.

The DB is 5% so feels fairly good for what it is.

i would definitely consider a part annuity - though I had assumed it would make more sense financially later on as I’m still early 50s - although maybe I could look into one for a limited period of time? 

I definitely feel comfortable with the gilt ladder approach so I’ll keep on with that, 

thanks for this, it’s all helpful! 

deeboy12

Cus said:

You had another thread asking if you could retire as you were 50.

Sure, I abbreviated here to keep things short, but after leaving the corporate world I was volunteering and then accidentally ended up doing paid work again in the charity sector during the pandemic (btw I don’t regret this as it was actually very fulfilling!) 

So, yes I imagine I posted that a few years ago when I was looking to stop (which I then did in 2022). 

Anyways, any input on current situation always appreciated  

tacpot12

I think there is a lot to be said for not taking risks you don't have to take. 

Triumph13

I would suggest stepping back a bit and addressing the question of what do you actually want to do with all this money?  You clearly have more than enough for your needs, so what is the excess for?  Do you want to be able to inflate your lifestyle?  To leave a huge legacy?  To get obsessive about minimising risk? 

In particular I would think long and hard about why you are arbitrarily picking the £50,270 number for drawings.  Partly because you shouldn't be worrying about paying some 40% tax, but mainly because it doesn't seem relevant unless virtually all your assets are in your SIPP.  Your taxable income is going to be your SIPP drawings plus the income from your GIA / interest on cash whether you draw from them or not.

Work out what your extra £1m is for first, then you'll be able to work out what your asset allocation should be.

deeboy12

Triumph13 said:

I would suggest stepping back a bit and addressing the question of what do you actually want to do with all this money?  You clearly have more than enough for your needs, so what is the excess for?  Do you want to be able to inflate your lifestyle?  To leave a huge legacy?  To get obsessive about minimising risk? 

In particular I would think long and hard about why you are arbitrarily picking the £50,270 number for drawings.  Partly because you shouldn't be worrying about paying some 40% tax, but mainly because it doesn't seem relevant unless virtually all your assets are in your SIPP.  Your taxable income is going to be your SIPP drawings plus the income from your GIA / interest on cash whether you draw from them or not.

Work out what your extra £1m is for first, then you'll be able to work out what your asset allocation should be.

Thanks. My SIPP is only 25% or so of the total portfolio (although the DB pension is also a consideration) so you're right I shouldn't get too fixated on tax thresholds and thanks for pointing this out. That said, the £50k feels like a realistic number that I should be able to increase my regular spending to which is also why I picked it.

The answer to your question about what do with any excess is, I think, a mix of philanthropy while I'm still alive (I've already begun this) and a bit of the 'inflate your lifestyle' point if I can persuade myself (luxury travel etc).

Thank you, the point about tax and SIPP is well taken!