Thoughts On First Time DIY Pension Plan

magd36

Situation:

Transferred an old obsolete £27k DC Pension Fund into a SIPP. It’s currently siting as cash ready to be invested. I’ll add a further £16k over the next 12 months to gain the £4k Tax relief. Total Fund £47k.

Intend to retire in 12 months and more or less deplete this DC Pension by the time of State Pension in 10 years. (Don't panic, this is'nt the sole source of income over the 10 years ;-)).

Min Objective:

Income Yr 1-10: £4.7k/year increasing with inflation. Hoping that anything remaining in DC will be a bonus going into SP Age but not essential.

Intended investment funds and allocation:

Global Equity (50%) - £23.5k “HSBC FTSE All-World Index Fund C Acc”

Bonds (30%) - £14.1k “Vanguard Global Corporate Bond Index Fund”

Inflation linked bonds (10%) - £4.7k “abrdn Global Inflation-Linked Tracker B Acc”

Cash/MM (10%) £4.7k

Plan:

Use a £10k cash buffer to reduce necessity of taking from DC if down > 10% in early years. DC withdrawals taken from cash first, then bonds, then equities.

Rebalance 50/30/10/10 annually if equity drifts > 10%

I’m a cautious first time DIY investor. Please critique, advise and comment on the appropriateness of my plan, any significantly better ideas or big red flags.

Thanks

El_Torro

I don't know what other taxable income you're going to have but make sure you use your full personal allowance between now and when you start receiving your state pension. Even if you don't spend all the money you withdraw you can put it into an ISA and get tax free growth that way. 

Are you planning to spend the full £47k within the next 10 years? If so then there's an argument that it should all be in cash, or in a short term money market fund. Having 50% of it in global equities might mean you end up with less money than you started with. 

magd36

El_Torro said:

I don't know what other taxable income you're going to have but make sure you use your full personal allowance between now and when you start receiving your state pension. Even if you don't spend all the money you withdraw you can put it into an ISA and get tax free growth that way. 

Are you planning to spend the full £47k within the next 10 years? If so then there's an argument that it should all be in cash, or in a short term money market fund. Having 50% of it in global equities might mean you end up with less money than you started with. 

My thinking is if I don’t withdraw more than 15k (12k PA + 25% Tax Free) per year. I’ll get tax free growth within the pension anyway.

As MMF or cash within a pension are unlikely to match inflation I think I need to take some risk. Maybe a lower percentage of equity would be better?

Xenon

I am no expert (by any stretch believe me)

Have you considered a multi asset fund ?

magd36

Xenon said:

I am no expert (by any stretch believe me)

Have you considered a multi asset fund ?

I have. The fact I’m really looking at prioritising protection against inflation with a fairly aggressive drawdown (10% per year over 10 years) makes me think I need to plan something more specific that will need cash to buffer poor years.

af1963

magd36 said:

El_Torro said:

I don't know what other taxable income you're going to have but make sure you use your full personal allowance between now and when you start receiving your state pension. Even if you don't spend all the money you withdraw you can put it into an ISA and get tax free growth that way. 

Are you planning to spend the full £47k within the next 10 years? If so then there's an argument that it should all be in cash, or in a short term money market fund. Having 50% of it in global equities might mean you end up with less money than you started with. 

My thinking is if I don’t withdraw more than 15k (12k PA + 25% Tax Free) per year. I’ll get tax free growth within the pension anyway.

As MMF or cash within a pension are unlikely to match inflation I think I need to take some risk. Maybe a lower percentage of equity would be better?

It's not "12k + 25% tax free = £15k".  It's 12.5K plus a tax free sum of a third of that ( because that makes the tax free cash work out at 25% of the total withdrawn), so you can take out a bit more: up to £16760 if you have no other taxable income.

And the point of withdrawing it from the pension at a time when you may have little or no other income is that you get it out of the pension without *ever* being taxed on it.  If you leave it in the pension, it can grow tax free, but you may end up paying tax on part of it when you later withdraw it.  Whereas if you take it out and put it in an ISA - even investing it in the same things as in the pension - it's out of scope for future taxation.

DRS1

magd36 said:

Situation:

Transferred an old obsolete £27k DC Pension Fund into a SIPP. It’s currently siting as cash ready to be invested. I’ll add a further £16k over the next 12 months to gain the £4k Tax relief. Total Fund £47k.

Intend to retire in 12 months and more or less deplete this DC Pension by the time of State Pension in 10 years. (Don't panic, this is'nt the sole source of income over the 10 years ;-)).

Min Objective:

Income Yr 1-10: £4.7k/year increasing with inflation. Hoping that anything remaining in DC will be a bonus going into SP Age but not essential.

Intended investment funds and allocation:

Global Equity (50%) - £23.5k “HSBC FTSE All-World Index Fund C Acc”

Bonds (30%) - £14.1k “Vanguard Global Corporate Bond Index Fund”

Inflation linked bonds (10%) - £4.7k “abrdn Global Inflation-Linked Tracker B Acc”

Cash/MM (10%) £4.7k

Plan:

Use a £10k cash buffer to reduce necessity of taking from DC if down > 10% in early years. DC withdrawals taken from cash first, then bonds, then equities.

Rebalance 50/30/10/10 annually if equity drifts > 10%

I’m a cautious first time DIY investor. Please critique, advise and comment on the appropriateness of my plan, any significantly better ideas or big red flags.

Thanks

Looking at the Min Objective made me think of a gilt ladder built from index linked gilts.  There is a useful tool to help construct such a ladder here.  If you use it make sure to select index linked gilts in the left hand column.
Gilt Ladder Builder · Streamlit 

According to that a 10 year ladder paying £4750 pa would cost just under £45700.  And yes even though the cash flow page may not show it the £4750 is index linked (I believe).

Of course that won't help if you are trying to get more out each year following the plan mentioned by @af1963.

It also won't give you scope for outperformance from equities that your plan gives you.

Bostonerimus1

I would stress test this withdrawal rate by doing a spreadsheet and seeing what happens if you have a few initial years with negative returns. I don't see an massive problem with your asset allocation, just the size of your annual drawdown. If your goal is to simply fund 10 years of spending and you are resigned to spending capital then a savings or bond ladder would be a risk free alternative.

OldScientist

A quick look at the results from https://www.2020financial.co.uk/pension-drawdown-calculator/ (a UK based historical data retirement simulator*) with 50% equities, 40% bonds, and 10% cash suggests that a 10% payout over 10 years failed just over 20% of the time (except for small equity allocations, changing the asset allocation only makes only a small difference to the failure rate - they lie from 15% to 30% for equities of at least 20% with fixed income as cash only rather than including bonds).

If you want more certainty in the income from your portfolio than this (this might depend on the other sources of income you mention), can I second the ladder approach mentioned by @DRS1 since, absent UK debt default, it will provide a guaranteed inflation adjusted income for 10 years. Of course, the ladder can be combined with your suggested portfolio to provide some guaranteed income and some on a probabilistic basis.

I also note the inflation linked bond fund has a duration of about 9 years, so will be quite sensitive to changes in real yields (e.g., an increase of 1 percentage point in yields would lead to a drop in fund value of about 9%) that will probably outweigh any increase due to inflation.

* The simulator is limited in that it only uses UK assets not global and the bonds used before the 1980s are relatively long maturity nominal gilts.

magd36

af1963 said:

t's not "12k + 25% tax free = £15k".  It's 12.5K plus a tax free sum of a third of that ( because that makes the tax free cash work out at 25% of the total withdrawn), so you can take out a bit more: up to £16760 if you have no other taxable income.

Understand that.

af1963 said:

And the point of withdrawing it from the pension at a time when you may have little or no other income is that you get it out of the pension without *ever* being taxed on it.  If you leave it in the pension, it can grow tax free, but you may end up paying tax on part of it when you later withdraw it.  Whereas if you take it out and put it in an ISA - even investing it in the same things as in the pension - it's out of scope for future taxation.

You've made me realise I could take all the 25% Tax Free Lump Sum (£11.75k) immediately followed by £12k/per year for the first 3 new tax years and put it in an ISA.

I'd just need to have a method of protecting the remaining £36k from inflation over the next 3 years.

Thanks

magd36

DRS1 said:

Looking at the Min Objective made me think of a gilt ladder built from index linked gilts.  There is a useful tool to help construct such a ladder here.  If you use it make sure to select index linked gilts in the left hand column.
Gilt Ladder Builder · Streamlit 

According to that a 10 year ladder paying £4750 pa would cost just under £45700.  And yes even though the cash flow page may not show it the £4750 is index linked (I believe).

Of course that won't help if you are trying to get more out each year following the plan mentioned by @af1963.

It also won't give you scope for outperformance from equities that your plan gives you.

I could take all the 25% Tax Free Lump Sum (£11.75k) immediately followed by £12k/per year for the first 3 new tax years and put it in an ISA.

The Gilt Ladder would maybe a method of protecting the remaining £36k from inflation over the next 3 years.