Selling/holding funds for/in drawdown

TeessideMag

Apologies in advance if this is a much answered query and I've just not got the terms right when searching the forum.

My SIPP is almost entirely invested in Vanguard Life Strategy 100%. At a point in the current tax year when I think the fund is reasonably high I sell an amount equivalent to what I want to take out in the next tax year and buy a money market fund with the proceeds (still within the SIPP). In the new tax year I sell the money market fund and move the cash into my SIPP drawdown. I don't invest that cash in any funds, and I withdraw from that pot on a monthly basis.

I came up with this approach on my own and while it seems to work I wonder whether I am missing a trick and there is a much better system out there which I'm just not finding. Pension planning advice online seems to be 90% about how to build the pot and 10% on tax and/or the choice between FAD and UFPLS. There's very little on the mechanics of withdrawal/moving the money around. Would welcome any thoughts on better ways to do it! Thanks in advance.

dunstonh

I came up with this approach on my own and while it seems to work 

It should not work as it would suffer severely during larger crash periods. I suspect you have not been doing it for very long. It has been a while since the last sustained negative period.

Pension planning advice online seems to be 90% about how to build the pot and 10% on tax and/or the choice between FAD and UFPLS. 

I strongly doubt any pension planning advice is offered online in that way. There may be opinions and discussion, but despite ample debate on the various methods, none of it constitutes advice.

Would welcome any thoughts on better ways to do it! 

There are several strategies for drawing down, and the differences are to avoid sequencing risk.

With 100 % equities and a tiny cash float, you appear to accept a very high‑risk strategy that can pay off during positive periods. If that works for you and you have a drawdown strategy to mitigate any failures, that’s fine. You have discussed your investment strategy, but not your drawdown strategy. We need to know both.

zagfles

Suggest you have a read of Monevator for ideas and strategies.

See Deaccumulation Archives - Monevator

gm0

As said. Nothing here is advice. Guidance at best. Nobody knows the will be best viewed retrospectively approach or portfolio to the last decimal. Not the DIY crowd. Nor the IFAs

Reaction somewhat negative. So OTOH - there is nothing much actually wrong with annual rebalancing (and making cash available for monthly draw without equity sales) via the mechanisms your platform supports.

So nothing is automatically sold to generate income during a flash crash from your growth assets. It offers control. You consume cash. Nothing happens until you push a button. Other than income from cash. Is this optimal to remain invested to the last second. No of course not. Is that a "bug" - no - it's a feature of the approach. Not being invested until the last second. Having cash not at market risk for immediate income. That's the point.

Then in a slump you consume cash as usual then free up short bonds or MMF (so called sell bonds first) to refresh it. And that buffers income in bad times to the extent the essential income requirement can be met before the supply of "not equities at depressed values" i.e. mmfs or bonds is exhausted
At which point equity sales resume at whatever prices to provide income. Year 2,3,4,5 whatever it is for you.
Other non-pension assets may also allow behaviour change, reduced draw and a longer period of suspended sales and capital depletion in a prolonged slump

Money deployed to sequence risk buffering like this and processed as cashflow. Is not invested for growth. And may get inflation ravaged in spending power.

So it affects the capital + returns = available income equation based on the portfolio mix. It cannot be otherwise. Protection of a sort - for a time - at an opportunity cost.

On the other hand having no sequence buffering thinking applied to your overall financial plans - is a bold posture. Some do that. But it is best done deliberately not accidentally lest you be the unluckiest surprised cohort of your generation

However the not equities/growth assets funds are stored. Nominal income is available - for a time. But inflation is still a risk to you to address as well - or not. Linker ladders may help (a bit) with throwing off partly inflation protected cashflow.

Nobody can hold enough buffer for a decade long slump or a quarter of a long retirement.

Attacking that requires you to more seriously annuitise - doing it yourself (linker ladder), or via purchase of a formal annuity in a death pooled product (lifetime), or fixed term.

Bostonerimus1

Being 100% in equities with only a year of cash exposes you to a lot of market risk. Whether that is an appropriate strategy will depend on your circumstances. So how old are you and do you have any other sources of retirement income? What is your annual drawdown percentage and how do you manage that? Have you thought about what you'd do if the markets were down 50% when you came to sell and take the resulting cash?

tacpot12

You are right that there's very little on the mechanics of withdrawal/moving the money around. I realised this as I was a couple of years away from retirement. There are options to consider, such as annuities, and the timing of other pension income.

However, once you have decided that you actually need to drawdown on a pension there are really only four options:

1. Buy an annuity - this decision moves all the thinking right to the front of the process; once you've bought the annuity, you don't need to think about anything else.
2. Setup a Bond Ladder - this decision also moves most of the thinking to the front of the process; once the Bonds are bought, you don't have to do much else, unless you find you don't need all of the money that is returned when each bond matures.
3. Buy income-producing investments - this decision moves some of the thinking up-front; once you have decided what investments to buy, you still need to monitor the investments to check that the yield isn't declining too much and deal with events such as Investment Trust mergers if you bought investment Trusts.
4. Buy investments with growth potential - this is your strategy - and splits the thinking between the start, when you decide what assests to buy, and through retirement when you have to decide what and when to sell, and whether the assets are still growing sufficiently.

The purpose of your 'cash' fund is to protect you from variations in income caused by the strategy above. If you have bought an annuity, you don't need any cash fund because there is no variation. With Bond Ladders and Income-producing investments, the income volatility is reasonably predictable, and smaller levels of cash holding is possible. I decided my strategy would be to purchase Income-producing investments and bought Investments Trusts AND had a small cash fund because Investment Trusts also hold 'cash' in the form of reserves that are used to smooth out the dividends paid to shareholders. I hold about 4 months of income as cash in my SIPP, and my SIPP provide pays interest on the money, albeit at a rate that is about half the rate you would get in a Cash ISA. But the reality is that 4 months of income is enough to top up dividend payments that are 20% lower than expected for 20 months. My experience through Covid-19 pandemic, war in Ukraine and Trump's second term is that the Investment Trust income has increased rather than decreased; which it really needs to if it is to offset inflation, and the increases have been very steady.

Your strategy has the highest requirement for a cash fund because you need to be able to survive until the market recovers if you don't want to have to sell during a crash or downturn. My experience is that such downturns last a minimum of two years, so you need to have two years worth of income in your fund. This means that your return on your investments has to be higher to offset the lower rate of return on cash. Using a money-market fund as part of your strategy for holding cash seems sensible to me, but only if the interest rate is high enough.

It is also worth pointing out that there is nothing to stop you combining the strategies (other than perhaps the lack of a sufficiently large pension pot to allow it to be split up). For many people, buying an annuity for their essential living costs, and buying growth assets (and not holding much cash) to sell when the market is high for their holidays and new cars is a sensible mixture. You can always forego a holiday or replacing the car if your investments haven't been performing. Or you can save from your pension income so that you can take holiday every year. Have a think about whether mixing strategies might work for you.

SVaz

I have enough in MMFs for 4 years income when I retire in 18 months ( the income takes me up to 67) .

In another untouched Sipp I have enough for a 25% tax free lump sum I intend to take in 2/3 tranches from next year.

I’ve held this position for a couple of years and it’s probably ‘cost’ me £15k - £20k in growth BUT, I was secure in the knowledge that I was protected if things tanked.

Only keeping a year seems risky if you have no other income stream. It means you are relying on blind luck.

My current contributions are going into a ‘balanced’ fund, which is doing quite well, not that far behind my 100% equities index fund over the last year.

TeessideMag

Thanks for the helpful comments. My SIPP is the smallest part of my pension provision, so I can afford to take some risk with market fluctuation - I will not be on the breadline if the market tanks and I have to wait for it to recover before I sell. I am aware of options like annuities etc. It appears that for my strategy (no. 4 on tacpot12's helpful list) there is no clever trick to manage the mechanics, so I'll keep doing it the way I do it.

kempiejon

The plan of once a year taking a set amount from a SIPP to be added to a spending account and drawn down monthly from that is as good a way as any for those with sufficient alternative provisions. Of course one could take half that amount every six months or another permutation, they'll possibly and overpay if the personal allowance for income is exceeded and a lump sum without a corrected tax code could result in the wrong amount of tax paid at source. I'm looking at frequent withdrawals from ISAs and an annual SIPP extraction. I feel I can optimise my tax planning most efficiently for my circumstances that way.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82164228#Comment_82164228

Cash funds in SIPPs typically pay around 2.5% interest. If instead you made one withdrawal a year and put that in an easy access account paying 4.5%, you will gain a bit of interest. ( although you may pay tax on it depending on your overall tax/savings interest position) .

gm0

A useful (and traditional) way to think about it is "liability matching" as thought experiment. Easy to capitalise an income requirement with a chosen multiplier and compare that number to accessible element of portfolio mix.

Founded on the idea that once age 75-85 other contingencies - like work - become less accessible for a variety of reasons leading to the not very profound observation that "the elderly and widows" need liability matched portfolios - essential income coverage - and perhaps longevity risk addressed to not run off the end of assets. There is a lack of options, a limited time frame for markets to once again co-operate. And deaccumulation of course means you don't participate in a later on recovery anyway. Whatever the long term average looking back 25 years later says. The difficult decade - depleted you.

Briefly but fairly well expressed in the Bernstein book. Rational Expectations. (Asset Allocation for Investing Adults) and elsewhere usually under "liability matching"

So this as a rule of thumb on safety thinking. The idea that essential income coverage is dealt with via SP, DB and other sources and a sensible proportion of portfolio. You choose a poison from close to complete safety (annuitisation death pooled bets) to something a lot more skimpy like 2 years of essential income in "cash like" assets - deposit, MMF, short bonds, linker ladders (bonds or bond funds without major duration risk).

You can of course make other "contingent" behaviour change assumptions. If a 75% correction occurred followed by a slump. Somewhere in year 2 - I would revisit retirement housing assumptions - trigger primary residence downsizing. But not as a fire sale. Yet in (possibly difficult) conditions of the time. Downsize with whatever transaction cost and impact on essential income requirement (reduced being the target).
That could take a couple of years - leading to a rule of thumb on needing say a total of 4 years coverage (from SP, DB and the "not growth assets" element of DC) from the "assumed crash" to coming out the other side of the contingency planned actions. To whatever new balance that represents. And any yield in reduced expenditure or released capital (if any) so achieved.

This sort of real world behaviour i.e it is not fixed and indexed for 40 years (as suits modelling DC). makes discussion of the whole topic very tricky. Personal situations, other income sources, lifestyle expectations and attitude to risk all vary so wildly as to make attempted generalisation of "rules of thumb" fallible (and also contentious). Bit of a waste of time

Ideas have their seasons as well. When i arrived here seeking guidance some ~7 years ago starting planning for an early retirement. 4% rule and Bengen study, WR and its sustainability SafeMAX - MSWR was a hot topic - somewhat US inspired around FIRE. And as I recall it - debate bifurcated between the gloomier - UK investor in sterling = lower number - <4% perspective. Low 3s. And the yes but - spending not actually flat over 40 years - U shape. Variable income with a deliberate higher early retirement income - 5-6%+ perspectives. Not 3.5% indexed rising and a high probability of a large residual pot in many cohorts.

Grains of truth can exist in both of these perspectives. More than one thing can be true at the same time (something of a theme of 2026 I find). With people reluctant to admit to that complexity as it is often ideologically inconvenient to a specific and simplistic narrative of whatever flavour.