Help - seem to be going in circles on what to do re retirement investing

[sealives]

Hi
Due to ill health, I had to take early retirement, age 57. Fortunately, PHI has plugged the income gap, and will continue to do so until I reach 60 early next year.
So, my focus is now all about generating enough income to live on, without using capital. Other investments plug a large part of my income requirements but I am £10000 pa gross short of my target.
In have spoken to an IFA who wanted me to go the route of a discretionary fund manager to look after my investments. I am also looking seriously at a commercial property investment via a syndicate scheme; returns 5.8% net. In the past I also played with a high yield portfolio (which still forms part of my SIPP).
The issue I face is that most of my SIPP (£300,000) is with Vanguard lifestrategy 80% equity Acc funds, and as such I don't see the income. So I am in the process of converting it to income funds via my SIPP platform. In addition, there is £45000 in various high dividend producing stocks. In summary, I have a SIPP worth £345000 and a S&S ISA worth £100,000, from these I want to generate an income of £10000 gross p.a. (2.25% return across SIPP and ISA)
I have already used the cash free lump sum from the SIPP. I am not interested in an annuity.

My current thought is to put half of the SIPP into commercial property, this will generate £10150 gross, but of course there are associated risks. The balance of the SIPP and my ISA would stay invested in S&S; but again is Vanguard now the best place as that was chosen for growth 10 years ago.
I have read about income funds, but would these provide a better return that staying with Vanguard, for example.
My question, and what is keeping me awake at nights is 'is there a better/less risky way to achieve my £10000 p.a. gross along with some capital growth to offset the effect of inflation?
As I stated above, because of my relatively young age, I do not want to access capital at this time.

I would be very interested and grateful for any advice.

[Quint]

Looks to me like you have more than enough capital to meet your income needs and then some.

I would look at some investment trusts to meet your income needs and leave the rest in growth stuff, either the life strategy or a vanguard all world fund.

Examples would be, City of London, Merchants Trust, Henderson Diversified Income, Murray International, Henderson Far East Income. Following the recent falls these are starting to look like they are at decent entry points.

The trusts should give a smooth and rising income as they hold income reserves, this is how they are designed to operate and they do it very well. The capital level will fluctuate but as you are not selling them to generate income this should help you sleep at night.

However, I am not a financial advisor so this is just my opinion but it is similar to what I have done with my wife's SIPP.

[Alaric]

My current thought is to put half of the SIPP into commercial property, this will generate £10150 gross, but of course there are associated risks.

Is there concentration risk? In other words could the whole investment go wholly or partly down the tubes?

If you can live with fluctuating income and fluctuating capital values, 2.25% should be achievable from almost anything apart from deposits and government bonds. You need to have an inflation target as well. Is that 2.25% level or 2.25% revaluing with RPI or CPI? For that matter, do you want the capital value to increase with inflation?

[Eboli]

I agree with Quint that investment trusts should be considered. You could do far worse than consider Luniversal's basket of 7 (investment trusts) which he last fully reviewed on this site in June this year. Here's the link:

viewtopic.php?f=54&t=12192

FWIW I have used these seven trusts to yield a similar income as you require for the last 5 years and have been more than pleased so far. But be aware that you might wish to consider another trust to include or a replacement for FCI.

Eb.

[tjh290633]

I agree with using the B7, but note that FCI has now become BCI, following the recent change of name.

TJH

[TUK020]

Basket of Investment Trusts like CTY City of London IT would fit the bill for your SIPP to provide a stable and growing income.

CTY are giving 4.48% yield at the moment. I think they have grown their dividend payment in nominal terms every year for the last 50 years, so this should provide a level of inflation protection. Very unflashy, boring, and the sort of thing you want for the backbone of your pension provision.
Mixed with some more international focus Like HFEL Henderson Far East, and MYI Murray International to reduce single provider risk.
B7 basket is a good start.

I am in the process of gradually (over 10 years) reducing my specific company investments, and shifting to a basket of ITs. This is not just about risk management but also preparing for the day I lose interest /ability to manage my portfolio (which I hope is more than 10 years away)

[xxd09]

Hi
In retirement-72 now .Retired 18 yrs
I use Vanguard funds only -Index Trackers-Bond and Equities in SIPPs and ISAs
You were on the right lines with your Life Strategy Fund though 80/20 is a high proportion of Equities but that is a personal decision
Currently I am at 30/70
I do not bother with semantics re income and capital
I just sell chunks of stock as required -in £5000 to £10000 lots depending on need and tax
Makes life very simple
£100000 stocks/bonds should be able to give you £3-4000 per annum without reducing capital-probably safer taking out no more than £3000
Low fees,costs and simple
xxd09

[sealives]

Quint, Alaric, Eboli, Tjh290633,Tuk020 and xxdo9

Thank you very much for your valued replies. It is comforting that others have had similar decisions to make.
I often talk to people with final salary pensions and at times I am envious of the simplicity of their lives; certainty, no big investment decisions to make, not worried about inflation or the stock market etc., but then I console myself that my funds will not die with me. Each to their own I guess. So now I have some new options to explore which I was largely unaware of - thanks again all.

[dspp]

Quint, Alaric, Eboli, Tjh290633,Tuk020 and xxdo9

Thank you very much for your valued replies. It is comforting that others have had similar decisions to make.
I often talk to people with final salary pensions and at times I am envious of the simplicity of their lives; certainty, no big investment decisions to make, not worried about inflation or the stock market etc., but then I console myself that my funds will not die with me. Each to their own I guess. So now I have some new options to explore which I was largely unaware of - thanks again all.

There does not seem to be a good reason to use a discretionary fund manager which is what your IFA is suggesting. I cannot think of any good reason to go that route in your circumstances, unless you need protecting from yourself.

Commercial property could be illiquid at just the wrong moment for you, and with any high yield comes high risk. You don't seem to need to go there, so why go there ?

Generating £10k/yr off of £445k is a nice place to be. Just stick it either in a basket of funds (e.g. per Luni B7 etc), or some Vanguard index trackers (or similar).

Just my 2euc/worth.

regards, dspp

[Chrysalis]

Just to add my twopennorth to those who say keep it simple and don't go for risky illiquid investments unless you really understand them and really want to be a commercial property investor.

Of course there are no guarantees in life but a withdrawal of £10k from more than £400k is less than 2.5% and should be sustainable indefinitely.
I'm in the 'income and gains are the same thing' school but tbh it should be possible to invest in either a basket of ITs or just a single diversified tracker fund (the latter would be my approach) and take the income, with a little capital if needed, as you need it.

[hiriskpaul]

Hi
Due to ill health, I had to take early retirement, age 57. Fortunately, PHI has plugged the income gap, and will continue to do so until I reach 60 early next year.
So, my focus is now all about generating enough income to live on, without using capital. Other investments plug a large part of my income requirements but I am £10000 pa gross short of my target.
In have spoken to an IFA who wanted me to go the route of a discretionary fund manager to look after my investments. I am also looking seriously at a commercial property investment via a syndicate scheme; returns 5.8% net. In the past I also played with a high yield portfolio (which still forms part of my SIPP).
The issue I face is that most of my SIPP (£300,000) is with Vanguard lifestrategy 80% equity Acc funds, and as such I don't see the income. So I am in the process of converting it to income funds via my SIPP platform. In addition, there is £45000 in various high dividend producing stocks. In summary, I have a SIPP worth £345000 and a S&S ISA worth £100,000, from these I want to generate an income of £10000 gross p.a. (2.25% return across SIPP and ISA)
I have already used the cash free lump sum from the SIPP. I am not interested in an annuity.

My current thought is to put half of the SIPP into commercial property, this will generate £10150 gross, but of course there are associated risks. The balance of the SIPP and my ISA would stay invested in S&S; but again is Vanguard now the best place as that was chosen for growth 10 years ago.
I have read about income funds, but would these provide a better return that staying with Vanguard, for example.
My question, and what is keeping me awake at nights is 'is there a better/less risky way to achieve my £10000 p.a. gross along with some capital growth to offset the effect of inflation?
As I stated above, because of my relatively young age, I do not want to access capital at this time.

I would be very interested and grateful for any advice.

Taking the inflation adjusted UK stock market returns from the Barclays Equity/gilts study, there is no period in which taking 2.25% of the starting value each year and adjusting for inflation in susbsequent withdrawals, would have lead to your running out of money. Even if you push it up by 1% to cover fees, you would still have been ok. The worst time to start would have been at the end of 1972. Starting then would have seen you down 78% (RPI adjusted) in capital by the end of 1974. Scary indeed, but sticking to the plan would still have been ok and by the end of 2016 you would have about 93% of the original capital (inflation adjusted). Taking annually rebalanced 80/20 equity/Treasury bills (short dated with returns similar to cash), would still leave 1972 as the worst time to invest, but by the end of 1974 you would only (!) be down 68% instead of the 78% for the all equity portfolio, based on a 3.25% withdrawal rate. Furthermore, by the end of 2016 you would have 162% of the original capital after adjusting for inflation rather than 93%. The thing about bonds/cash that many detractors continually fail to take on board is that they come to the rescue in extreme circumstances and lead to better outcomes in those bad sequence of returns scenarios. That is not to say that holding some bonds does not detract from returns most of the time - they do.

Personally I would stick with your 80/20 LS fund if you are happy with it and just take the 2.25% you want, rather than chasing after higher cost and higher risk income funds. Do check the platform charges you are paying on the LS and any other funds you hold though. These can be very costly and you may be better off replacing your LS 80/20 fund with a World tracker ETF and a bond ETF.

In your position I would certainly not want to take large concentrated risks in commercial property or anything else.

[hiriskpaul]

I should have pointed in my posting that I was only looking at the returns from 1945. I would not be surprised if there were periods before that when taking a 3.25% drawdown from a 100% equity portfolio would have resulted in running out of money.

[TimR]

These can be very costly and you may be better off replacing your LS 80/20 fund with a World tracker ETF and a bond ETF.

I agree the OP may be better off with the LS 80/20 fund and taking 2.25% each year . However with regard to using ETFs instead of LS 80/20 fund - although there are world tracker ETF's for the 80% Equity portion I don't know of a single Bond ETF to replace the 20% Bond portion - Do you know how this can be covered with one or more Bond ETFs ?

TimR

[hiriskpaul]

These can be very costly and you may be better off replacing your LS 80/20 fund with a World tracker ETF and a bond ETF.

I agree the OP may be better off with the LS 80/20 fund and taking 2.25% each year . However with regard to using ETFs instead of LS 80/20 fund - although there are world tracker ETF's for the 80% Equity portion I don't know of a single Bond ETF to replace the 20% Bond portion - Do you know how this can be covered with one or more Bond ETFs ?

TimR

69% of the bond allocation in the LS 80 fund is to the Global Bond Index Fund (hedged to GBP), 13% is in a gilts fund, 10% in index linked gilts and 8% in a GBP denominated corporate bond fund. There isn't a single bond ETF that matches that allocation. For the Global Bond Index Fund though, there is the iShares Core Global Aggregate Bond ETF (AGBP) (https://www.ishares.com/uk/intermediari ... s-etf-fund), or the SPDR® Bloomberg Barclays Global Aggregate Bond ETF (GLAB) (https://uk.spdrs.com/en/professional/et ... id=2225504). Both have very similar characteristics to the Vanguard global bond fund and a low TER of 0.1%. Personally I would go with the iShares ETF as this is larger and likely to trade on a smaller spread. Xtrackers do a similar ETF, but the TER is higher.

There are some experts (e.g. Warren Buffet, Tim Hale) who only include the highest quality bonds with short duration in their portfolios, essentially a 0-5 year gilts ETF for UK investors. The cheapest ETF is issued by Lyxor (GILS) with a TER 0f 0.07% (https://www.lyxoretf.co.uk/en/instit/pr ... 892592/gbp), but iShares and SPDR do similar ETFs. On the whole I think most retail investors would be better off with cash deposits and cash ISAs than these ETFs as the yield to maturity on these short dated ETFs is under 1%. Cash deposits are a hassle though as you have to keep moving money around to get the best deals.

[Quint]

Hi
Due to ill health, I had to take early retirement, age 57. Fortunately, PHI has plugged the income gap, and will continue to do so until I reach 60 early next year.
So, my focus is now all about generating enough income to live on, without using capital. Other investments plug a large part of my income requirements but I am £10000 pa gross short of my target.
In have spoken to an IFA who wanted me to go the route of a discretionary fund manager to look after my investments. I am also looking seriously at a commercial property investment via a syndicate scheme; returns 5.8% net. In the past I also played with a high yield portfolio (which still forms part of my SIPP).
The issue I face is that most of my SIPP (£300,000) is with Vanguard lifestrategy 80% equity Acc funds, and as such I don't see the income. So I am in the process of converting it to income funds via my SIPP platform. In addition, there is £45000 in various high dividend producing stocks. In summary, I have a SIPP worth £345000 and a S&S ISA worth £100,000, from these I want to generate an income of £10000 gross p.a. (2.25% return across SIPP and ISA)
I have already used the cash free lump sum from the SIPP. I am not interested in an annuity.

My current thought is to put half of the SIPP into commercial property, this will generate £10150 gross, but of course there are associated risks. The balance of the SIPP and my ISA would stay invested in S&S; but again is Vanguard now the best place as that was chosen for growth 10 years ago.
I have read about income funds, but would these provide a better return that staying with Vanguard, for example.
My question, and what is keeping me awake at nights is 'is there a better/less risky way to achieve my £10000 p.a. gross along with some capital growth to offset the effect of inflation?
As I stated above, because of my relatively young age, I do not want to access capital at this time.

I would be very interested and grateful for any advice.

Is it also safe to assume that you will receive a full state pension at 67. If so then the income requirement from the SIPP will reduce by a large margin giving an extra level of security.

[sealives]

Having tried to digest all the excellent advice, my current plan is along the following lines:
1) Create a blend of investments from the advice, probably in the ratio of 40% Investment trusts, 40% LS funds and 20% from my existing HYP stocks.
2) As I have a CASH ISA for rainy day needs, I think placing the highest yielding investments into my S&S ISA makes sense as the income will be tax free. I will probably convert my wife's S&S ISA on the same basis. This introduces an extra £50k to invest for income, building in an additional income stream.
3) The investments already in my SIPP will either stay as they are or some/all will be converted into IT's. If I get this right, I can minimise income taken from the SIPP for quite a few more years.

4) I will have access to an additional cash sum of approximately £90k in the next 2 or 3 years, maybe sooner. My plan would be to invest that into our S&S ISA's to further build in resilience for future spending needs.
5) Yes, I will have my full state pension in 6 years, age 66 and my wife will follow 6 years after that, also with a full state pension; that is really the icing on the cake.

I need to sift through the advice now to identify what to put in the ISA's and what to put in the SIPP.

Does this plan sound OK?

[Hariseldon58]

@Sealives

There has been some sensible advice that would work and if you balanced the approaches as you suggest it is very likely to work just great.

I have had 11 years living off investments and am probably a few months older.

Why not try a free sample of the John Baron Portfolios web page , lots of good information and some suggested investment portfolios using Investment Trusts (he is the author of the FT Guide to Investment Trusts)

I’d be wary of any direct or syndicated investment in commercial property without any previous experience.

There are some good Investment Trusts and REITs which cover property and some discussion and suggestions on the John Baron site.

I’ve had 10% returns from an Industrial Unit directly owned, but this is a by product of my previous business, it’s great when it’s occupied on a long repairing lease with the right tenant but when it’s not, it costs money and voids can be lengthy ( I’ve seen less attractive units empty on the estate for years ...) not good if you want an easy life.

[gbjbaanb]

I have to think the syndicated commercial property thing returning 5.8% is remarkably low. Given you could buy a REIT (ie an investment trust that invests in property) that returns a fair bit more than that, with more diversified properties, and easier to sell, and can be held in an ISA so none of those onerous taxes to be hit with, why would you go with owning property directly?

eg Regional REIT - around 8% yield. Plenty of others too.

[Bink333]

You could have a look at Investec's defensive quarterly income plans (structured products). You should be able to access these via your SIPP provider.

[sealives]

This question will expose my lack of understanding, but there you go, it's an honest approach.

So, I now have £202000 sitting in my SIPP having sold just before the market dipped 2 weeks ago. Given that 40% is going into investment trusts and 40% into a Vanguard LS (or maybe an ETF), my question is one of timing. Does it make a lot of difference if I wait and see if the market tanks in early 2019, or should I just get on with it now and make my purchases? The question is mainly concerned with the investment in the investment trusts.

The remaining 20% is fluid as I haven't made up my mind yet but I am considering the Vanguard Global balanced fund?