Rejigging SIPP investments to preserve wealth and provide income

[DavidA]

Having been in my SIPP now for a long time in various Funds and Investment Trusts never changing anything as we are in it for the long haul we are getting to the point of beginning drawdown in the next few months. The value has grown considerably so we are now banging up against the LTA.
What I would like to do is rejig the investments in to Funds or Preferably Investment Trusts that will preserve wealth and also provide a dividend income that we can drawdown annually. Not sure if that is possible or do such investments exist or is wealth preservation and income generation mutually exclusive. i.e. income generation is more akin to growth rather than wealth preservation.

My initial thoughts were maybe PNL, RICA, CGT and maybe Caledonia& Law Debenture.
Any better ideas or insights thanks in advance.

[Wasron]

A couple of suggestions would be to look at European Assets Trust and Henderson Far East Income.

Both have done a decent job of income at the expense of capital growth, which may suit your situation.

A more niche option that would do something similar is Real Estate Credit Instruments

All three have provided lots of income but no capital growth over the last five years for me

Wasron

[tjh290633]

What I would like to do is rejig the investments in to Funds or Preferably Investment Trusts that will preserve wealth and also provide a dividend income that we can drawdown annually. Not sure if that is possible or do such investments exist or is wealth preservation and income generation mutually exclusive. i.e. income generation is more akin to growth rather than wealth preservation.

Growth in income usually leads to growth in capital value. The trouble with the capital preservation idea is that often one side negates the other, and so you get the worst of both worlds.

Bear in mind that growth in income is not the same as high income. You might find both in the same share, but not to the same extent. Total return is probably your best guide for the happy compromise.

TJH

[Dod101]

I do as the OP is suggesting with a much more modest capital base. I simply have the usual mix of investments, income certainly but also some growth. I accumulate the income and draw it down once a year. The trouble with wealth preservers (you could add RIT Capital Partners) is that they mostly have a very modest yield.

Before anyone else says it, you could of course simply sell some shares to create your own income. There is a school of thought that says that 'since all money is fungible..........'

I do not subscribe to that and must say that I prefer what you are proposing, that is to rely on the 'natural yield'.

Dod

[TedSwippet]

I do not subscribe to that and must say that I prefer what you are proposing, that is to rely on the 'natural yield'.

The problem I have with "natural yield" is that it is almost always used as a proxy for "dividends paid". And dividends paid are not necessarily reflective of a company's performance. A board might choose to pay more or less in dividends than revenue supports. Or, they might be ... instructed (coerced!) by the government to cut back on dividends.

If dividends from a company can be manipulated, then dividends from an Investment Trust that holds company shares seem to be prone to two levels of this. An Investment Trust with a track record of annually increasing dividends may feel that it is important to keep up that record, even if the dividends received from the companies they own don't fully support it (capital erosion).

I do understand the psychological comfort in spending only dividends, but for me at least, the logic much more strongly supports total return. (But then, I hold only passive tracker funds and ETFs, no Investment Trusts, so there's that ...)

See also these articles:
- How a total-return approach can help you make the most of your pension| Vanguard UK Investor
- Natural yield: a totally bonkers retirement income strategy - FinalytiQ (no fence-sitting there!)

[Dod101]

I do not subscribe to that and must say that I prefer what you are proposing, that is to rely on the 'natural yield'.

The problem I have with "natural yield" is that it is almost always used as a proxy for "dividends paid". And dividends paid are not necessarily reflective of a company's performance. A board might choose to pay more or less in dividends than revenue supports. Or, they might be ... instructed (coerced!) by the government to cut back on dividends.

If dividends from a company can be manipulated, then dividends from an Investment Trust that holds company shares seem to be prone to two levels of this. An Investment Trust with a track record of annually increasing dividends may feel that it is important to keep up that record, even if the dividends received from the companies they own don't fully support it (capital erosion).

I do understand the psychological comfort in spending only dividends, but for me at least, the logic much more strongly supports total return. (But then, I hold only passive tracker funds and ETFs, no Investment Trusts, so there's that ...)

See also these articles:
- How a total-return approach can help you make the most of your pension| Vanguard UK Investor
- Natural yield: a totally bonkers retirement income strategy - FinalytiQ (no fence-sitting there!)

I take your point of course. I am not a HYPer, although I live off my dividends. Depending on the resources (capital available) we can quite comfortably do that and take a total return approach. I should think that the OP has sufficient not to have to be chasing the higher yields and so is likely to get capital growth as well as a decent income from dividends. I certainly regard capital growth as important for almost any portfolio.

Dod

[DavidA]

Thanks for the responses. From the comments and links to articles looks like there is quite an argument over whether a stable income can be achieved by way of natural yield. Maybe I need to look at a portfolio that provides an element of income as well as growth. As has been pointed out we can always sell some of the investment to establish the right amount of income for the year. Wasron thanks for the recommendations we will have a look at those.
Am I right to focus more on Investment Trusts in our portfolio?
It is quite a task to ensure the portfolio is diversified enough to ride the ups and downs but also not double counting in terms of shares held in major companies. I am guessing thats why some opt for 1 fund like Vanguard. Currently I don't think we have enough in infrastructure, real estate and possibly energy. Therefore thinking of PNL CGT RICA and possibly 2 others to fill the gaps like HICL or SEIT, haven't found a real estate one yet. Is this going to be too conservative over the long term maybe add a bit of spice like SMT?

[richfool]

Thanks for the responses. From the comments and links to articles looks like there is quite an argument over whether a stable income can be achieved by way of natural yield. Maybe I need to look at a portfolio that provides an element of income as well as growth. As has been pointed out we can always sell some of the investment to establish the right amount of income for the year. Wasron thanks for the recommendations we will have a look at those.
Am I right to focus more on Investment Trusts in our portfolio?
It is quite a task to ensure the portfolio is diversified enough to ride the ups and downs but also not double counting in terms of shares held in major companies. I am guessing thats why some opt for 1 fund like Vanguard. Currently I don't think we have enough in infrastructure, real estate and possibly energy. Therefore thinking of PNL CGT RICA and possibly 2 others to fill the gaps like HICL or SEIT, haven't found a real estate one yet. Is this going to be too conservative over the long term maybe add a bit of spice like SMT?

DavidA, I would certainly agree with your choice of wealth preservers (PNL, RICA, CGT).

Depending on your requirements for income and the level of risk you are prepared to take, I would consider a couple of IT's from each of the UK and global growth and income sectors, such as: (UK): DIG, LWDB, (Global Grth & Inc): MYI, SAIN, or even (Europe): JEGI and (Asian Pacific): AAIF.

You could also include infrastructure (INPP) and renewable energy (JLEN or TRIG).

[fisher]

Here are a couple of articles that I've found useful for giving ideas for Investment trusts. They have performance figures going back 30 years.

https://www.itinvestor.co.uk/2020/06/20 ... -compared/

https://www.itinvestor.co.uk/2022/02/lo ... st-trusts/

I have been investing in CLDN, RCP, CGT, MRC, LWDB, AGT, WTAN and TRY.

TR Property (TRY) may be of interest to you with its yield in excess of 3%.

[Hariseldon58]

Thanks for the responses. From the comments and links to articles looks like there is quite an argument over whether a stable income can be achieved by way of natural yield. Maybe I need to look at a portfolio that provides an element of income as well as growth. As has been pointed out we can always sell some of the investment to establish the right amount of income for the year. Wasron thanks for the recommendations we will have a look at those.
Am I right to focus more on Investment Trusts in our portfolio?
It is quite a task to ensure the portfolio is diversified enough to ride the ups and downs but also not double counting in terms of shares held in major companies. I am guessing thats why some opt for 1 fund like Vanguard. Currently I don't think we have enough in infrastructure, real estate and possibly energy. Therefore thinking of PNL CGT RICA and possibly 2 others to fill the gaps like HICL or SEIT, haven't found a real estate one yet. Is this going to be too conservative over the long term maybe add a bit of spice like SMT?

I have been living off investments for 15 years and the state pension is still a few years away, you have a number of responses which are all sensible even though they are often contradictory !

Investing the money prior to retirement is pretty straightforward, just keep doing it through thick and thin, the decumulation is much harder. You need to decide on how much to take each year and separately on how to to arrange this.

Regarding the have I got infrastructure or enough real estate or energy questions etc I understand your thinking but a Developed World Index fund is a very simple solution, add in some short investment grade bonds and intermediate tips is my choice, very cheap and massively diversified. Nothing wrong with a portfolio of investment trusts but there are simpler solutions…

FWIW I have a passive equity portfolio and a passive cash/bonds portfolio ( there is a commercial industrial property in the mix from a former life) The equity portfolio is invested with accumulation units and I live off the bonds/cash, there is sufficient cash bonds for 6 to 10 years, when the equity portfolio gains a real 20% I will rebalance to the original proportions ( Equity 83% Bonds/cash 17%) Provided the equities can grow a real 20% before the bonds run out then the process is self sustaining. There are a few more details but the principle is very simple.

A lot of interesting info and thoughts here https://monevator.com/fire/

[JohnW]

Nothing wrong with a portfolio of investment trusts but there are simpler solutions…

If the annual investment management and associated fees were quite different (higher) that would be something wrong with them, n’est pas? Are they not?

[DavidA]

Thanks Hariseldon 58 I do like the idea of simple. The link is also going to be a good read. Is there such a thing as a Developed World Index Fund that covers all bases? Having had a look through what's available it becomes again quite complicated with likes of Vanguard and iShares offering numerous different versions i.e. ex FTSE or USD or incl Bonds. It would be good if there was a single one to do it because drawdown would be a lot easier because we could do just one transaction a year to draw out the income for the year.
My thinking is when we get to it we will drawdown enough to keep us just below the higher income tax threshold regardless of performance in the market. We are also not too bothered about having anything left when we depart the planet. The kids can fight over the house that should be enough!!

[kempiejon]

Is there such a thing as a Developed World Index Fund that covers all bases?

There's probably an argument as to which global is best and I have no idea where I sit on that spectrum but I have recently been pondering the Vanguard Developed world VEVE
https://www.hl.co.uk/shares/shares-sear ... orld-ucits
I already hold the vanguard all world which includes 10% ish emerging markets.

[Neutrino]

My SIPP could be seen as being in 3 parts:
Part 1. Index Tracker: 90% VEVE and 10% VFEM (Replicates FTSE All-World UCITS ETF VWRL with a lower ongoing charge of 0.13%).
Part 2. Assortment of shares and ITs
Part 3. Bonds: VAGP or AGBP, VGOV, INXG, IGTM, etc.

[Hariseldon58]

Thanks Hariseldon 58 I do like the idea of simple. The link is also going to be a good read. Is there such a thing as a Developed World Index Fund that covers all bases? Having had a look through what's available it becomes again quite complicated with likes of Vanguard and iShares offering numerous different versions i.e. ex FTSE or USD or incl Bonds. It would be good if there was a single one to do it because drawdown would be a lot easier because we could do just one transaction a year to draw out the income for the year.
My thinking is when we get to it we will drawdown enough to keep us just below the higher income tax threshold regardless of performance in the market. We are also not too bothered about having anything left when we depart the planet. The kids can fight over the house that should be enough!!

The Developed World Index Fund is certainly available and comes in an MSCI or FTSE version, overall it probably does not matter a lot which you choose, I use both SWLD.L and VHVG.L as accumulation ETFs ( Fidelity have a low cost MSCI OEIC if your platform does not charge an ad valoreum fee)

The iShares option is a little more expensive and for the All World the HSBC fund is cheaper than the Vanguard ETF option. There is a good argument that this is all you need for the Equity holdings. For bonds there are Aggregate Global bond index ETFs/Funds that cover the whole bond market.(VAGS.L)
IE you can cover everything in two funds ( Vanguard have a one fund solution in their Life Strategy funds, they have a home bias to the UK which I am not so keen on)

Personally I prefer to hold some bonds in sterling and others in dollars, conventional advice is to hedge to sterling (I have good arguable reasons not to do so but it’s not a big deal either way) I believe short bonds and index linked US Bonds are a sensible tactical decision at present but more generally the Aggregate Global Bond index is a sensible choice also.

Keep it simple and low cost has great merit, ( I have used more complex approaches in the past, the benefits are weighed against significant cost and a huge amount of effort)

The Monevator links are very interesting, you may wish to look at this https://monevator.com/review-living-off-your-money-by-michael-mcclung/ the Monevator Fire links may already refer to it.