Unplanned early retirement and haven't de-risked SIPP

TimeToEatCake

I'm 54 and was planning to retire around 58/59 but after resigning from work last summer after a stressful situation and taking a break to spend more time with my 10 year old, I've decided to retire early (or at least step back from work until she's settled at secondary school by which time I won't be able to - or want to - return to a well paid but very stressful, corporate role like the one I left and if I do work at all, it will be a much smaller, and no where near as well paid, role, ideally part-time).  

I've been through the numbers and am comfortable with my decision but my SIPP (and my stocks and shares ISAs) are 100% equities.   I have a decent amount of cash and a mortgage-free house, which I expect to downsize from eventually but not until my daughter is 20+.  Expect to use surplus proceeds of this to give my daughter at least a sizeable deposit for her own home.

My numbers are as follows:
Cash (including cash ISA/premium bonds): £190k
S&S ISAs invested in global equity index trackers: £135k
SIPPs invested in global equity index trackers: £645k
DB pension estimated at £20k per year from 65 (can bring forward but prefer not to as lose a lot of value by doing this)
Entitled to full state pension at 67
Daughter has £15k in S&S JISA and I plan to add child benefit to this.

Estimating that my daughter and I need £40k per year to maintain our current lifestyle and to keep funds aside for house maintenance (but have flexibility to reduce).  

My problem is that I am not sure how to de-risk my equities exposure, particularly in my SIPPs.   I am thinking of changing my S&S ISAs from accumulation to income and making sure I always have at least four years costs in cash.  But not sure what to do with SIPPs to mitigate the impact of an equity crash.  I'm assuming I should switch a % to bonds but am less familiar with these and every bond fund I look at with my existing SIPP providers seems to have lost money on a 3-5 year timeframe and it feels odd to move funds to an asset where the capital might not be preserved.  Cash looks like a better bet but I don't think the SIPP providers pay competitive rates on cash.  

Does anyone have any advice?  Thanks!

tacpot12

You don't need to de-risk too much - you are going to be retired a long time! (BTW I retired at 53 and am 60 now).

Conventional advice is that you look to have around 30-40% in bonds. I have about 30% in bonds in my retirement portfolio, and am finding that this works well for me. My bond investments are doing at least as well as my equity investments. 

I converted my accumulation portfolio to produce a dividend income stream that I could withdraw on when I was 54, with the aim of having one year of income built up in the SIPP ready to draw on when I was 55. My dividend income stream has proven to be so reliable (even through the pandemic, Ukraine war and cost of living crisis) that I have now wound this down to having just 6 months income held in the SIPP. (I also have a S&S ISA and about £10k in cash savings elsewhere). You have a lot of cash, and so don't really need to hold ANY cash in your SIPP as a buffer. However, I would suggest you hold about 3 months of withdrawals in your SIPP in case you have any problems accessing your other cash, and in case of any system problems with your SIPP provider. It sounds like you have more than one SIPP, so again you have some resilience there against individual providers having any technical problems. 

I hold my bonds in one bond-only fund and three mixed Investment funds:

Invesco Bond Income Plus (100% Bonds) currently yielding 6.81% 

Artemis High Income (90% Bonds) currently yielding 5.97%

AXA Framlington Managed Income (85% Bonds) currently yielding 6:40%

Henderson High Income Trust (10% Bonds) currently yielding 6:41%

I'd recommend looking at these as a starting point. That they are still in my portfolio is a recommendation from me at least. 

ali_bear

First thing to say is, there is no need to panic because of any short term market volatility. You are not going to cash in all of your stock market investments in one go, so you will not be crystallising big losses if the value tanks overnight. 

Secondly you can be congratulated on having a broad spread of savings and investments. Even if the value of stocks took a medium-term downturn you could still live off your cash investments for a number of years before having to start selling any share-based investments. Long enough for markets to stabilise and recover at least partly. 

You could move a portion of your SIPP investments into less risky funds, your provider should have a suitable choice available to you? 

El_Torro

One important thing to note is that global trackers are currently doing very well. So if you do want to derisk some of your SIPP and some of your ISA now is a good time to do it. 

You mention having 4 years worth of expenses in cash. Not a bad idea. I note that you already have £190k in cash, how much more cash do you need on top of this? You could put years 5 to 10 in say 60% equities and 40% bonds. The rest can stay in 100% equities. Not that I'm saying that this is the best or only way to go, there are many ways to skin this cat.

af1963

DB pension estimated at £20k per year from 65 (can bring forward but prefer not to as lose a lot of value by doing this)

It's worth doing the sums to see if that is actually the case.  You'll get less *per year*, but you'll receive it for more years. The reductions for taking DB pensions early are usually calculated to make the amount that you receive much the same if you live to average life expectancy.

And taking it earlier, long before state pension starts, you may be able to get part or all of it tax free, depending on what other taxable pension withdrawals you choose to make for living expenses.

On the other hand, having a guaranteed £20k DB might count as "derisking".  How good a deal that is, depends partly on how it increases with inflation.  If it increases with CPI/RPI, it would (currently) cost about £400k to buy an annuity that paid out the same from age 65, so you could consider that as being equivalent to having another £400k in cash/bonds.

Marcon

TimeToEatCake said:

I'm 54 

My problem is that I am not sure how to de-risk my equities exposure, particularly in my SIPPs.   I am thinking of changing my S&S ISAs from accumulation to income and making sure I always have at least four years costs in cash.  But not sure what to do with SIPPs to mitigate the impact of an equity crash.  

Why are you so worried about derisking when you are only 54? You could be in retirement for the same length of time.  Even the most severe equity crash isn't going to take that long to recover from.

You don't normally 'lose value' by taking a DB pension early. The reduction factors used to reduce the starting level of the pension are usually intended to be cost neutral, so that by the time you die, the overall amount you will have received is the same whatever age you start the pension (in practice that is never the case, but then people don't obediently die in line with actuarial tables!). Whether it's a good idea to take it early is, of course, a wholly different argument, especially if you have cash available from other sources.

Probably worth taking some proper professional advice from an IFA, given your circumstances changed fairly radically last year.

Albermarle

I'm assuming I should switch a % to bonds but am less familiar with these and every bond fund I look at with my existing SIPP providers seems to have lost money on a 3-5 year timeframe and it feels odd to move funds to an asset where the capital might not be preserved. 

Traditionally bonds and gilts were pretty stable, low growth investments. One reason to hold them is that often they stayed stable, or even went up during an equity crash, so diluting the impact of equities dropping.
During the last decade they did better than normal due to the ultra low interest rate environment. As soon as interest rates started rising back to normal levels, bonds and gilts dived in value, mainly during 2022.
This very unusual period is now over, interest rates are back at more normal levels and bonds/gilts are behaving normally and slowly growing again.
So having missed the bond crash, this may not be a bad time to be bringing them into your portfolio.
However as said, probably an 100% equity portfolio will perform the best in the long run, as long as you can continue to live with the potential volatility ( most people can not).

OldScientist

On a rough back of the envelope calculation your portfolio needs to provide income to cover three stages:
Pre-65: An inflation adjusted £40k per year for 11 years
65-67: An inflation adjusted £20k per year for 2 years (assuming your £20k DB pension is fully index linked)
Post-67: An inflation adjusted £9k per year for (say) 30 years

One way to fund the required income at different horizons is to think about which assets are appropriate. For example, the first 13 years could be funded by a mix of cash and/or short duration bond funds (assuming no flexibility in income and a real return of 0%, 440k+40k=£480k would be needed), or, for more certainty but greater initial complexity, a collapsing ladder of inflation linked gilts (which would currently cost about £470k, see https://lategenxer.streamlit.app/Gilt_Ladder ).

Long-term (i.e. post-67), provided you were happy to have year-to-year volatility in the £9k income provided by the portfolio, then an equity rich portfolio (with some cash and/or short or intermediate duration bond funds) might suit.

If some flexibility in income can be tolerated in the pre-67 stages, then that too might make holding risky assets to provide income during that period acceptable.

GunJack

Marcon said:

You don't normally 'lose value' by taking a DB pension early. The reduction factors used to reduce the starting level of the pension are usually intended to be cost neutral, so that by the time you die, the overall amount you will have received is the same whatever

With respect, but the "overall amount" you get out of a DB really isn't the point, it's the level of income p.a. you get. You shouldn't compare apples (DB) with pears (DC) especially in this way. Too many posters on this forum try and persuade people that it's ok to take a DB early with actuarial reduction even when it's highly unlikely it's in their best interest.....you can't extol the virtues of having a guaranteed income on one hand then suggest that it's fine to (possibly drastically) reduce that income by taking it early....

Ok, rant over...

NoMore

Nobody try's to persuade anything, there may be suggestion into looking to take a DB pension early with reasons, and a pushback against the belief it is a 'penalty' for taking it early (such as Macron post).

Plenty of reasons somebody might take a DB before NRA. Allows earlier retirement, avoids higher rate tax, in the past could avoid LTA issues, can help with LSA issues, allows for a more consistent income across the whole of retirement rather than a sudden jump in income. I'm sure there's more.

At the end of the day its up to individuals circumstances and desires, and often taking DB early is overlooked and not considered, so that's why it can be brought up but there's no conspiracy that the forum are forcing people to take it early, they are just pointing out the options.

GunJack

@NoMore I would dispute the feeling of penalty for taking (especially) a deferred DB as you're taking an actuarially reduced income at the current value, compounded with giving up the revaluation to NRD, and then further compounding going past that. 

Actuarially neutral maybe, and people on here make a thing about the break-even points when they ignore the often far lower income on offer. DB is all about income, not total amount you "get out" of the scheme...