My investment strategy

[Oggy]

Folks

I am new to this forum so please be gentle...Some advice perhaps on my investment strategy would be most welcome and any comments on my views would be equally well received.

A brief overview

I am 59, semi-retired, married, mortgage free, currently living off savings in the bank. However I do have a couple of SIPPs with HL and AJ Bell worth @400K.

Some questions then please.

What are the present thoughts on drawdown vs annuity purchase on a performance basis only for the SIPPs? Obviously no-one has a crystal ball so I appreciate the difficulty and I am aware of the advantages/disadvantages for both, but I would be interested to hear folks' views on the current performance merits or otherwise. I have always been informed that annuities represent poor value for money in the long term. Is this still the case?

My funds are either held in global trackers - (Vanguard), the USB S&P 500 tracker fund, some UK FTSE tracker funds, and (of course?) Fundsmith Equity. Is this strategy wise and is Fundsmith still worth hanging on to?

Regarding HL and AJ Bell - If either of these platforms goes bust, are my investments protected and how would I access them?

[Urbandreamer]

What are the present thoughts on drawdown vs annuity purchase on a performance basis only for the SIPPs? Obviously no-one has a crystal ball so I appreciate the difficulty and I am aware of the advantages/disadvantages for both, but I would be interested to hear folks' views on the current performance merits or otherwise. I have always been informed that annuities represent poor value for money in the long term. Is this still the case?

Were annuities good value at one point? Are they so now? Who can say.

Some people value certainty very highly. Many avoid the uncertainty of investing.
Others are comfortable with the losses that they experience, counting upon or believing that the gains will be more than the losses.

I'm retired and living off my ISA's. My sums show that I will need to realize capital as dividends don't quite cover my expenses over the next 5 years.

However rather than tell you to do as I do, regardless of your own personality, can I recommend a book to read?
Beyond The 4% Rule: The science of retirement portfolios that last a lifetime.
https://www.goodreads.com/book/show/393 ... the-4-rule

Lot's of options covered. It even suggests: shock horror, that it might be a good idea to manage your income based upon the conditions in the real world at the time.

[Oggy]

Annuities - agreed, but every IFA I have ever spoken with and from reading around seemed to indicate annuities are poor value for money and I'd be better off in the long term keeping the money invested in my portfolio. Obviously certainty is not guaranteed, but is anything in this life?

My thinking for retirement - rightly or wrongly and do feel free to shoot me down - is to keep the money invested in my SIPP portfolio and simply drawdown an amount from it each year.

[vand]

The business model behind annuities is that they have to be run as a perpetual pot so that they:

- never deplete capital in real terms - retirement funds cannot afford to run down their capital
- provide profit for the provider even after the previous condition is met

Naturally then the expected payout is going to be lower than if you manage your own pot.

That said, Annuities have one huge factor in their advantage, and that is the near certainty of the life expectancy of their policy holders. The law of large populations means that the uncertainty can be priced out and annuities priced appropriately based on the population life expectancy.

Now, when you are 55yrs old that isn't necessarily a huge advantage, but as you get older the certainty of an increasing payout is worth more and more. At 70yr you don't really know if you have 5yrs left or 30yrs left and that is a big problem for drawdown portfolios and it may well be worth exchanging at least some of your pot for the certainty a guaranteed cashflow based off population expectancy.

[Oggy]

Vand - Many thanks for that. I'd agree with your two points regarding annuity providers - especially the latter! Who is to say that annuity providers can do any better than a reasonably informed investor. I also appreciate the point made regarding consideration of an annuity in later life. An alternative I also considered moving the funds into less risky pots - i.e. mainly bonds to varying degrees.

Another personal observation if I may. The UK is frankly a busted flush and likely to remain so for decades. My thoughts are therefore to move out of any funds where the UK is paramount and move more into global funds. This obviously increases diversification - good, and may also increase return over what could be expected from the UK - also good. Thoughts as to the latter point also appreciated.

[tacpot12]

I self-manage my own retirement portfolio and am drawing down on it. When I looked at Annuities, I was struck not only by the relatively poor rates, but also the very limited inflation proofing available from the providers. Any offers of of any inflation proofing were capped at 3% pa. This didn't seem enough to me, and so I continued down the route of self-management where I can decide if I can afford to increase my drawdown by any amount.

[SalvorHardin]

Annuities are effectively an insurance policy against living for much longer than a person's life expectancy.

They aren't going to show a higher return than gilts when purchased because they are backed by gilts. So the expected return is than available on gilts (of a term roughly equal to life expectancy) minus the insurer's costs and profit.

[JohnW]

It seems you wish to compare the investment merits of drawdown or annuity.

‘thoughts on drawdown vs annuity purchase on a performance basis’

Forget it. One is insurance and the other an at risk investment portfolio; you don’t try to compare ‘returns’ if that’s what you meant. A lifetime annuity is not a good or bad investment, it’s just not an investment it’s insurance like incinerating your house type insurance.
What might help you decide is what ‘band’ you are in. If you have so much money compared to expenses that drawdown will be very safe modest amounts, then you’re in the ‘don’t need an annuity’ band. If you have too little compared to your needs that an annuity won’t provide enough, then you’re in the ‘can’t afford an annuity’ band. In between those bands you have to make a choice for the better outcome.

‘every IFA I have ever spoken with … seemed to indicate annuities are poor value for money’

They charge, archaically, based on assets under management rather than ‘fee for service’; once your money has gone into an annuity the advisor’s charges fall. If you're observation is valid, their view is understandable, and they’re supposed to be working only in your interest. Retirement investing carries three major risks: market risk; longevity risk, and inflation. A lifetime inflation linked annuity off-loads all three risks, plus, you get the mortality credits because some annuitants will die early; no other way of putting your money to work brings that benefit. They can’t always be poor value for all people.

‘is Fundsmith still worth hanging on to?’

Assumption, as I know little about it: it has had much better returns than most comparable funds over some (?12) years. There are thousands of actively managed funds now in UK, and tens of thousands in USA/Europe over the last 40 years. You have 25 years investing ahead of you, but let’s count only 20. How many genius fund managers can you name who have performed above average for some years, and then continued that for another 20 years? I’ll guess two, giving Terry’s fund a 2/x0,000 chance of also doing that. Of course you should get out now if you’re ahead. Any names?

[Adamski]

Regarding HL and AJ Bell - If either of these platforms goes bust, are my investments protected and how would I access them?

The customers investments and cash are held separately to the platform's cash. If the investment platform goes bust your investments should still be safe, but would be frozen, until regulator steps in and sorts it out.

If fraud is involved and everyone's investments have been stolen, and disappear, highly unlikely I hope! then you'd be covered for the FSCS £85.000!! Because of this I'd only invest >85k on the main platforms, like you've done.

[Hariseldon58]

Starting with the security aspects of your funds it’s highly unlikely you would lose out in the long run from a problem with a provider but you might not have access to funds for some time , two platforms is sensible.

Annuities generally use Gilts and over a long period of time they are unlikely to outperform equities, however they provide a degree of certainty.

At 59 you probably have many years ahead of you and you can always come back to annuities later in life or split your funds between them. (They are taxed as if some of the payments are a return of capital.)

As regards drawdown from a portfolio the book mentioned previously is very good, here’s some guidance from the famous American investor Charles Ellis

What to do? In retirement, be conservative—better safe than sorry. Limit annual withdrawals to 4 percent of a three-year moving average of your portfolio. This will protect your portfolio from inflation and from overspending. If you need to draw 5 percent each year, you’ll want more stability. Put a rolling five years’ expenditures in medium-term bonds and the rest in equities the year you retire. Each year, convert one more year’s spending from equities to bonds unless the market is high and all the chatter is about good prospects—in which case, you’ll be wise to convert two years; if the chatter is about wonderful prospects, convert three. Yes, this is a form of market timing, but it’s seldom a bad idea to lean against the wind.

[Oggy]

Gents

Many thanks for your responses - very useful. The thinking that annuities are a form of insurance is sound and I think I'll continue with funds in my SIPPS for the moment. I like the idea of considering switching part of the funds to an annuity at some later stage or switching into bonds. However, I too noted annuities' poor inflation proofing and I don't like the idea of someone taking their cut.

Fundsmith - I'll hang on to it for now but keep a wary eye on things. I do think that once Terry Smith goes it will need some careful thought to consider switching all of it into one of my global trackers.

Protection - I have considerably more than 85K in HL and AJ Bell, but split over several differing providers. Perhaps limit to 85K per provider? I take the points mentioned though.

UK - Goosed. I cannot see any point in investing in it. Global trackers with @4% UK exposure excepted.....

Book - duly ordered. Thanks for the tip.

[Arborbridge]

I can't provide any information about high level philosophy or risk, not to match my illustrious friends here.

All I can tell you is how I have arranged my retirement. I do not care for the idea of selling of capital to fund income ("asset harvesting") - I've always preferred the route of living on dividends of companies and Investment Trusts. This reduces any decisions about which of the little darlings to sell down, and how to manage a stock market slump.

I run and "income reserve" for any earth shattering events when companies scale back dividends (eg Covid) and I only draw out 80% of my dividend income. The rest I re-invest as what I call a Strategic Reserve.

This system I have been operating since 2010. I did not buy an annuity; a) because that amounts to a total loss of capital; b) the income from an annuity would not have been enough; c) I was big headed enough to think I could survive on my investments; d) I could always buy an annuity later if it seemed worthwhile. I have the State Pension, but no other source of income. My capital is roughly 50:50 direct shareholdings in large dividend paying companies, and income paying ITs. I have a small amount in income paying OEICS which, as it happens, I've never drawn on. I hold very little cash - just enough in the reserve to ride over months when dividends are lower than average, or for unusual expenditures. Cash is just dead money.

As regards IFAs - I have never touched them. I doubt they know any more about what is "good" or "bad" than I do, and I believe the old adage that no one takes better care of your cash they you do yourself. I doubt an IFA can "take ownership" over your retirement or have the heart in it as you do.


Arb.

[MuddyBoots]

I don't think you mentioned whether you have children or anyone else to leave a legacy to, which is one potential difference between staying invested and buying an annuity.

Annuities are guaranteed in the sense that you (and your other half with a joint life annuity) get an income for life, then it's guaranteed to stop. The insurance company picks up any residual profit or loss.

With investments, there's no guarantees it'll last for life, but also no guarantees it won't, so any residue after you die will pass to your estate as an inheritance for someone else. The risk factors work inversely between you and your kids: the more prudent and skinflint you are for yourself to preserve your pot, the better for them. And the opposite if you're profligate.

[Oggy]

I am not sure whether I would need to sell capital to get by in retirement. The funds held in the SIPPs would (hopefully!) grow annually by an amount to roughly what I would spend annually - or am I being optimistic? Clearly there would be good and bad fund years, but hopefully they would cancel each other out. As a very rough guide, I'd want the fund pot to grow @5% annually which I don't think is a big ask.

I do have children - another reason not to go down the annuity path. I am not at all profligate - well except for the occasional classic motorcycle, for which I have managed to persuade Mrs. Oggers that it is just another investment vehicle and thus can safely justify purchase.

[Hariseldon58]

The issue of how you deal with drawdown successfully is to know yourself.

Arborbridge has a solid approach, a collection of UK Equity Incone Investment Trusts would give you a roughly 5% income , which is likely to trend upwards with some volatility of capital but a pretty solid reliable income stream.

Another approach is the total return , spending coming from wherever , which is my personal approach.

I have been doing this for a full 16 years now and I have taken around 3% or so a year.

I have monitored the growth in the residual portfolio over the years , the performance over the last couple of years has been quite poor, but the cumulative performance has been 6% a year, so all in including income around 9%. (Inflation has averaged around 3% over the period)

The ‘residual portfolio’ is simply the remaining portfolio at year end having spent some capital for living costs.

Six down years out of 16
Three years up by over 25% and 1 down year over 25% and a further 5 years up by between 10% and 25% with 1 down year by between 10% and 15%

In inflation adjusted terms the portfolio has ended the year at an all time high in 8 out of 16 years.

The time taken to re establish an inflation adjusted high has been 4 years and 5 years.

So this approach has delivered a real increase in income over the years, with significant volatility.

[Oggy]

Hariseldon

I think your approach would be similar to mine. I would like to drawdown from my portfolio, hoping the residual would make @5% year on year on average.

[vand]

Vand - Many thanks for that. I'd agree with your two points regarding annuity providers - especially the latter! Who is to say that annuity providers can do any better than a reasonably informed investor. I also appreciate the point made regarding consideration of an annuity in later life. An alternative I also considered moving the funds into less risky pots - i.e. mainly bonds to varying degrees.

I don't think this does much at all for helping with financial planning around the largest problem, being the very wide distribution of how many years you have left. Even if you could rely on a consistent 6%pa return the SWR still varies wildly depending on if you have a 5 year or 20yr timeframe.

Another personal observation if I may. The UK is frankly a busted flush and likely to remain so for decades. My thoughts are therefore to move out of any funds where the UK is paramount and move more into global funds. This obviously increases diversification - good, and may also increase return over what could be expected from the UK - also good. Thoughts as to the latter point also appreciated.

Yes, if you are depending on a passive strategy then you should be global market-cap weighted.

[AshleyW]

Annuity rates are now much improved so It’s well worth taking a look at least for part of your income. I recently purchased a single life level annuity (age 68) which pays out at over 8% (no impaired health increase). The RPI quote was over 5%. In my circumstances it beats drawdown at an SWR of 3.5% to 4%.

Annuities are not for everyone, with rates reducing for spousal benefit and if the opportunity of leaving the biggest possible inheritance is a priority. Age of course is a critical factor with the impact of mortality credits becoming far more important with age.

Some of the pros and cons are looked at here:-

https://retirementace.co.uk/2023/11/fin ... nuity-wins

[Hariseldon58]

Out of interest I got a quote today as a 65 year old , rpi annuity is 3.65% with 50% spouse pension, flat 7%

It’s a question of what suits the individual, my approach is largely passive global equity , with around 25% in UK and US Government bonds that would cover 10+ years of a generous income.

I can spend down the bonds and leave the equities alone for 10+ years , there’s a good chance that I can rebuild the bond portfolio.

There are many possible solutions to this, but so many unknowns it’s not possible to work out the perfect answer, roughly right and an ability to adapt to circumstances is key.

[Oggy]

Gents

Once again, many thanks. Main takeaways so far....

I'll have to think further about annuities, but I have time to do so. I like the idea of hedging my bets a little and buying an annuity with a portion of my total pot.

I don't think I am going far wrong by investing in passive global trackers.

All of my pension pot is in SIPPs in HL/AJ Bell. I'm still a little twitchy but less so now.

Drawdown from the SIPPs to fund spending requirements