Thoughts On First Time DIY Pension Plan

magd36

Bostonerimus1 said:

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.

The DC pension is actually my wife's pension. She will have no income for 3 years and then 7 years of £7.5k DB until her SP kicks in. When the £47k DC is added she will have £100k of income over the next 10 years with a Personal Allowance of roughly £120k over the same time. I just want to make sure she doesn't lose 20% tax on her £47k or have to outperform the 20% tax she will lose on anything after SP age. I therefore want to draw it down aggressively over the 10 years but not let inflation erode the money. Does that make sense.

zagfles

If you just want 10% of the fund pa increasing with inflation for 10 years, then an index linked gilts ladder as mentioned above is almost a no-brainer. All you need is for investments to keep up with inflation, and the real yields on index linked gilts are positive so you can guarantee they will if held to maturity. Of course you could take take a risk and hope for a bonus, but also risk running out. You describe yourself as "cautious", so do you want to gamble? 

magd36

OldScientist said:

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.

I'm now considering this. Thank you.