Suggestions welcome re: SIPP investment strategy

[MDW1954]

I am 62, self-employed, and intending to work until 70 (although winding down gradually).

I have two SIPPs. The larger one is being positioned towards generating an income stream through investment trusts, while the smaller one is presently in trackers.

A former employer has offered me a six-figure transfer value in respect of a DB scheme, and I am in the process of seeking the mandatory independent financial advice that the pension trustees require. If I went through with the transfer (as I am likely to, for reasons not relevant to this request), then it would in effect form a third SIPP, although in practice I would likely roll it up within the second SIPP, on platform cost grounds.

The projections I have done indicate that the likely income at 65 would be lower than with the DB scheme, so it is useful that I am contemplating an extra five years' growth before taking income.

My question is this: for reasons of safety and diversification, I am minded to follow a different investment strategy on this (largeish, for me, anyway) pension pot.

But what? I have effectively zero exposure to fixed-income investments (gilts and bonds) at the moment, so have been mulling something like the Vanguard LifeStrategy products -- 60/40 equities/ bonds, perhaps. On the other hand, fixed-income investments seem priced for a fall in capital values (as has been the case for most of the last few years), so maybe that isn't so clever.

I guess what I am wanting to do is try and retain as much of the DB scheme's security of income as possible (albeit at perhaps a slightly lower level initially), while getting a decent element of rising income as inflation impacts price levels. That is the main drawback of the DB scheme I am in: only about 60% of the pension is inflation-linked. If I don't achieve a better income performance in an inflationary scenario, there is little point going ahead with the transfer, apart from adding to my childrens' already generous inheritance.

Thoughts, anyone?

MDW1954

[tjh290633]

You say that your SIPP would not provide the income that your DB pension would offer. I assume that you would have limited index linking on the DB pension, and that the investments in your SIPP would not provide the same level of income, unless you were to draw on capital.

Now you have been a regular reader of the HYP boards, so have an idea of what is possible there. An HYP does not offer the security of a DB pensions income, but it does offer a higher income than other investments with the attraction of an income which potentially can beat inflation.

This begs the question - what yield would you require from such a SIPP to match the DB pension and what inflation protection is needed?

Can this be achieved without resort to fixed interest investments? You are looking at "lifestyling" approaches, which have some merit in protection against market downturns, as seen in 2008-9, but do that at the cost of protection from inflation.

Would you need to take all the income available, or could you leave a proportion to accumulate in the SIPP? Bear in mind that leaving some behind would enhance the dividend yield in future years.

You know what I would advocate, but you need to decide what will suit you best.

TJH

[TedSwippet]

Is there any chance you could run into, or worsen, lifetime allowance issues that you would otherwise skirt if you stayed in the DB scheme?

Problems can occur where the CETV transfer multiplier is higher than the 20x used for DB LTA calculations. Outlined in this recent article.

[midgesgalore]

Hi MDW1954
I am in a situation similar to yours where a company I worked for has been purchased by another and they are doing their level best to be rid of the DB pension scheme in exchange for cash settlement, in my case only 21x the annual pension at NRD in 5 years. I am currently retired and was looking for this pension to give my income an uplift however I feel it was too much to resist and, after the obligatory advice, I expect to take that and circuitously absorb into my SIPP.

Like you what do I invest in?
this will definitely be a basket of ITs or ETFs as well as a few property income trusts.
The collectives will be looking for income / growth overseas, global and maybe a few bonds. Still working on it.

Meanwhile the DB pension would only be guaranteed for 5 years after my expiry date and be lost thereafter unless I pre-decease my wife.


midgesgalore

[BarrenWuffett]

For me it would be all about total return and a level of volatility I could live with.

I have historically used ITs but they are a very mixed bunch - some good returns but low yield such as Finsbury Growth and Scottish Mortgage (which I hold) and some reasonable with a reasonable yield - City of London, Edinburgh, Temple Bar(again I hold) and then some with nothing much to shout about and little more than the natural yield of 4% as an average return.

I am a convert to the Lifestrategy funds in recent years - not much in the way of natural yield, but I just take my 4% 'income' from selling down my acc units at each anniversary. Only 2 yrs but working just fine. I hold the VLS 60 fund which returned 18% last year and I think an average 10% p.a. since launch which compares well with the equity only ITs.

So far as gilts/bonds - the wise have been predicting a reversal in each of the past 6 yrs but I am still waiting - I will pass and rely upon strategic ignorance.

[richfool]

MDW1954, you could obtain (some) exposure to fixed interest investments, bonds and other asset classes, (without needing to invest directly and without determining precise asset allocations yourself), by including some IT's from the "Flexible" sector, - e.g. Capital Gearing, Personal Assets, Ruffer, Henderson Alternative Assets, etc.

http://citywire.co.uk/money/investment- ... ePeriod=12

If you are not proposing to retire at normal state pension age, make sure you investigate the possibility of deferring your state pension.

[taken2often]

Hi
DB Pensions are now high risk, and there are many more reasons to move than staying for a bit of indexing. I came out of a very good Section 32
pension at 65 now 71 The sipp is now producing more income than the pension. Ok I do not need to draw it and it is rolling up for me.

I have three Sipps. This week I am consolidating into one, for two reasons. I have become a sophisticated investor (sounds good) and one provider is good but basic and does not provide the information and service that I need. I also need to watch the life time allowance.

I have about 130 items ranging through PIBS, Prefs, IT's, CEF's ( US IT's) and Dividend Growth shares. So I am an income investor. No income no buy. My average yield across the board last year was 6.3% on value.

Unless you need capital to pay off a mortgage or debt UFPLS is the way to go. Due to the growth of income in my ISA and Taxable funds I am now in the strange position of never having to draw on the pension. So the compounding towards the LTA will be quite rapid. So a 20/30% market correction may be very welcome. This of course this would be very bad news for the Total Returners who sell units to gain income. Me I would just buy more cheap income.

When you buy income this reduces the growth and in turn helps staves off the LTA

Hope this helps a little, and good luck with it.

Bob

[ursaminortaur]

Unless you need capital to pay off a mortgage or debt UFPLS is the way to go.

Unless you are anywhere near the LTA limit. Every time you use UFPLS to take money out another LTA test is carried out and you use up a few more percent of your LTA. Hence any growth in your fund either remains in your fund or if taken out via UFPLS contributes to the percentage of the LTA you have used up and then at 75 there will then be a final LTA test which deals with any still uncrystallized fund. In contrast if you crystallize your SIPP by taking out the 25% tax free lump sum then there are no more LTA tests until you reach 75 and you can avoid breaching the limit by drawing down the growth before you hit 75.

See

http://www.scottishwidows.co.uk/extrane ... doc/FP0462

and the case of Simon.

[taken2often]

Good points, but you either have to spend it, or give it away and live for 7 years. Other wise you end up paying IHT.

Certainly taking the 25% will slow down the growth towards LTA. This brings us to the age limit of 75 and the 55% punitive tax rate, both a disgrace
and hopefully challenged in due course. It seems ok to extend your life when it suits them, but not when it helps us.

Bob

[ursaminortaur]

Good points, but you either have to spend it, or give it away and live for 7 years. Other wise you end up paying IHT.

The 7 years applies to giving away capital but surely taxable drawdown is income. Hence you should be able to set it up so that you are giving away excess income on a regular basis and avoid IHT that way.

https://www.warnergoodman.co.uk/for-you ... penditure/

[MDW1954]

Many thanks everyone for your suggestions. I'm hoping that my experience will in due course match Bob's!

The delay in replying has partly been due to a delay in meeting with the adviser. I have now done so, and moving the pension has been agreed. It will be a bit of a wrench for sentimental reasons (first employer, and all that), but I'm convinced it is the right decision.

MDW1954

[MDW1954]

Just a quick update to say that today I signed the forms. The experiment is now for real!

MDW1954

[Alaric]

Meanwhile the DB pension would only be guaranteed for 5 years after my expiry date and be lost thereafter unless I pre-decease my wife.

I would suggest that you check your understanding of the jargon. Guaranteed for five years means that a minimum of five years' payments will be paid even if you fail to live five years after retirement. Otherwise the income is for life.