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Deferring drawing my HYP income

General discussions about equity high-yield income strategies
OLTB
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Deferring drawing my HYP income

#98889

Postby OLTB » November 26th, 2017, 8:23 am

Morning all - I've been thinking about my HYP strategy and when I may start to draw on the income it generates for some time now and keep changing my mind. Originally, I was going to (and still am) planning on stopping work at 62 (various stars align at that time - mortgage repaid / youngest hopefully in work) and then drawing on my HYP income to replace work income, or, taking up some part-time work to supplement any shortfall.

I do, however, keep coming back to the compounding effect of re-investment of dividends and the positive effect this has on HYP income, especially the longer you are able to do this. Many experienced HYPers have in the past confirmed this and the recent post about a 'dividend millionaire' regretting not having re-invested his dividends as income would have exponentially enhanced (maybe regretted is not the right word, but the article suggests that ultimately income would have been so much higher).

Therefore, what I might do instead is use my Workplace Pension (WP) that started earlier this year at age 62 to live off - the plan I am thinking of is to draw the WP down to zero between age 62 - 67 as at 67, my State Pension starts. This should enable me to keep re-investing dividends in my HYP for a further 5 years and boost the 'compounding effect' by a further 5 years. This does mean having to build up my WP to a level that will support me for 5 years - but that's up to me over the next 14 years.

So, my question to those who have experienced this compounding effect and who run / draw from HYPs - does this plan sound sensible or will an extra 5 years of dividend re-investment not make that much difference overall? Just for context, I'm 48 now, my HYP is all in a SIPP with HL and have been running a HYP for just over one year and this change will mean re-investing dividends for a total of 20 years, rather than 15.

Thanks again to anyone offering an opinion - now, where's my bacon sandwich.

Cheers, OLTB.

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Re: Deferring drawing my HYP income

#98891

Postby Alaric » November 26th, 2017, 8:34 am

OLTB wrote: my HYP is all in a SIPP with HL


A SIPP and a workplace pension are the same thing in essence. Same tax rules anyway. The deeper question you need to answer is whether the combination of the two, along with the State pension, will pay out enough to live off from the age of 62 for the rest of your life.

Watch out for contribution limits as well, if you are putting new money in the HL SIPP.

Itsallaguess
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Re: Deferring drawing my HYP income

#98893

Postby Itsallaguess » November 26th, 2017, 8:53 am

OLTB wrote:
Therefore, what I might do instead is use my Workplace Pension (WP) that started earlier this year at age 62 to live off - the plan I am thinking of is to draw the WP down to zero between age 62 - 67 as at 67, my State Pension starts.

This should enable me to keep re-investing dividends in my HYP for a further 5 years and boost the 'compounding effect' by a further 5 years.


The devil here may well be in the detail OLTB, so you may need to provide further information for us to get a true picture of your potential options.

For instance, you say above that you might plan to draw the WP down to zero between age 62 to 67, when your State Pension will hopefully kick in, but you don't mention what might happen if you deferred drawing on your WP over the same period.

Is there any year-on-year benefit to you deferring your WP at age 62 onwards?

For instance, some WP's will raise the pension you eventually take, for each year you defer it. If this is the case with your own WP, then I think it might be important for you to understand the implications of that when carrying out these sorts of scenario-based tests.

As an aside, and given that you may eventually have three potential income-streams in later life, in the WP, the State Pension, and the HYP income, then there may be risk-benefits to maintaining as diverse an income stream as possible, rather than eliminating one too early (as in your above potential plan to draw down the WP between age 62 and 67), and then becoming totally reliant on a smaller number of income-streams.

Just some quick and initial thoughts...

Cheers,

Itsallaguess

Alaric
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Re: Deferring drawing my HYP income

#98897

Postby Alaric » November 26th, 2017, 9:31 am

Itsallaguess wrote:For instance, some WP's will raise the pension you eventually take, for each year you defer it. If this is the case with your own WP, then I think it might be important for you to understand the implications of that when carrying out these sorts of scenario-based tests.


I thought in the context that the Workplace scheme was defined contribution rather than defined benefit, so essentially equivalent to a SIPP for the practical purposes of what can be done with it.

OLTB
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Re: Deferring drawing my HYP income

#98903

Postby OLTB » November 26th, 2017, 9:45 am

Itsallaguess wrote:

The devil here may well be in the detail OLTB, so you may need to provide further information for us to get a true picture of your potential options.

For instance, you say above that you might plan to draw the WP down to zero between age 62 to 67, when your State Pension will hopefully kick in, but you don't mention what might happen if you deferred drawing on your WP over the same period.

Is there any year-on-year benefit to you deferring your WP at age 62 onwards?

For instance, some WP's will raise the pension you eventually take, for each year you defer it. If this is the case with your own WP, then I think it might be important for you to understand the implications of that when carrying out these sorts of scenario-based tests.

As an aside, and given that you may eventually have three potential income-streams in later life, in the WP, the State Pension, and the HYP income, then there may be risk-benefits to maintaining as diverse an income stream as possible, rather than eliminating one too early (as in your above potential plan to draw down the WP between age 62 and 67), and then becoming totally reliant on a smaller number of income-streams.

Just some quick and initial thoughts...

Cheers,

Itsallaguess


Thanks Itsallaguess - my workplace pension is a simple auto enrolment pension so employer and employee pay in 1% each, increasing to 3% me 2% employer from April 18 and then 5% me 3% employer from April 19. Nothing special about it so only benefit in keeping it would be the underlying funds growing (hopefully!). I should point out that I also have an IT and passive ‘portfolio’ also with HL in my SIPP so this would also eventually be drawn on for the special holidays / nice to do’s in retirement. My HYP would be used to cover the regular bills / food etc.

Cheers, OLTB.

Itsallaguess
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Re: Deferring drawing my HYP income

#98925

Postby Itsallaguess » November 26th, 2017, 11:43 am

OLTB wrote:
My workplace pension is a simple auto enrolment pension so employer and employee pay in 1% each, increasing to 3% me 2% employer from April 18 and then 5% me 3% employer from April 19.

Nothing special about it so only benefit in keeping it would be the underlying funds growing (hopefully!).


Ah, apologies, that makes complete sense now then, having better understood your opening post. The fault was mine, not yours...:O)

So on the face of it, all other things being equal, the only potential benefit from taking income from somewhere else other than the WP would be to perhaps protect a little against single income-source issues, a little bit like having an extra broker account?

Given the potential sums involved though, and the limit to the protection guarantees, would that be something still worth considering to be valuable to you, or would it be negated by the levels left in your other accounts being low enough not to have to worry at all about that side of things?

Cheers,

Itsallaguess

OLTB
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Re: Deferring drawing my HYP income

#98940

Postby OLTB » November 26th, 2017, 12:23 pm

Itsallaguess wrote:
Given the potential sums involved though, and the limit to the protection guarantees, would that be something still worth considering to be valuable to you, or would it be negated by the levels left in your other accounts being low enough not to have to worry at all about that side of things?

Cheers,

Itsallaguess


I wouldn't worry about it I think Itsallaguess - it was just trying to think through the practicalities at this stage rather than landing at retirement and then trying to think what to do!

Cheers, OLTB.

tea42
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Re: Deferring drawing my HYP income

#98945

Postby tea42 » November 26th, 2017, 12:31 pm

We are all mortal. Carpe Diem!

forlesen
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Re: Deferring drawing my HYP income

#99015

Postby forlesen » November 26th, 2017, 5:22 pm

So, my question to those who have experienced this compounding effect and who run / draw from HYPs - does this plan sound sensible or will an extra 5 years of dividend re-investment not make that much difference overall?


Well, I don't run a HYP, but a simple spreadsheet calculation suggests that over a timespan of 5 years (the period from age 62 to 67), compounding will not have time to have much effect on your HYP's valuation. For example, if you have an average yield of 4.5%, the difference between 1.045 ** 5 - 1 (the compounded interest) and 5 * 0.045 (the simple interest) is under 10%. In terms of your total HYP capital value, the difference is under 2% (assuming the overall capital value doesn't change).

So, a few hopefully constructive remarks:
  • Your plan is not necessarily wrong but...
  • There is no special magic that makes HYPs benefit more from compound growth than other investments. Whichever pot(s) you run down prior to reaching state pension age (HYP or non-HYP), a similar loss of growth would probably apply
  • By running down your non-HYP, you are committing yourself to a pure HYP strategy for retirement, with just the state pension as backup
  • I've noticed that quite a few other posters on this board are moving from pure HYP to a more balanced set of asset allocation between HYP and other investments (e.g. ITs)

In short, I think you are perhaps focusing too much on one piece of the bigger picture, how to manage your overall wealth as you move into retirement. That is perhaps more of a topic for the Retirement Investing board.

But it's all a long way off, so you have another 14 years to take stock of how your different investments are progressing, and refine your plans. In the meantime, best of luck with building up your wealth - that's the main thing to focus on at this stage. That, and of course enjoying your life, work and growing family!

tjh290633
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Re: Deferring drawing my HYP income

#99018

Postby tjh290633 » November 26th, 2017, 5:31 pm

forlesen wrote:[*] Your plan is not necessarily wrong but...
[*] There is no special magic that makes HYPs benefit more from compound growth than other investments. Whichever pot(s) you run down prior to reaching state pension age (HYP or non-HYP), a similar loss of growth would probably apply
[*] By running down your non-HYP, you are committing yourself to a pure HYP strategy for retirement, with just the state pension as backup
[*] I've noticed that quite a few other posters on this board are moving from pure HYP to a more balanced set of asset allocation between HYP and other investments (e.g. ITs)[/list]

In short, I think you are perhaps focusing too much on one piece of the bigger picture, how to manage your overall wealth as you move into retirement. That is perhaps more of a topic for the Retirement Investing board.

But it's all a long way off, so you have another 14 years to take stock of how your different investments are progressing, and refine your plans. In the meantime, best of luck with building up your wealth - that's the main thing to focus on at this stage. That, and of course enjoying your life, work and growing family!


Regardless of all that, if you are able to reinvest a portion of your dividend income each year, you will increase that income by more than the natural growth. Until you reach your retirement age, you will reinvest 100%. After that you will try to reinvest a portion of it, maybe 25%, maybe more, maybe less. As long as you reinvvest some, the result will be beneficial.

TJH

OLTB
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Re: Deferring drawing my HYP income

#99299

Postby OLTB » November 27th, 2017, 5:10 pm

forlesen wrote:So, a few hopefully constructive remarks:
  • Your plan is not necessarily wrong but...
  • There is no special magic that makes HYPs benefit more from compound growth than other investments. Whichever pot(s) you run down prior to reaching state pension age (HYP or non-HYP), a similar loss of growth would probably apply
  • By running down your non-HYP, you are committing yourself to a pure HYP strategy for retirement, with just the state pension as backup
  • I've noticed that quite a few other posters on this board are moving from pure HYP to a more balanced set of asset allocation between HYP and other investments (e.g. ITs)

In short, I think you are perhaps focusing too much on one piece of the bigger picture, how to manage your overall wealth as you move into retirement. That is perhaps more of a topic for the Retirement Investing board.

But it's all a long way off, so you have another 14 years to take stock of how your different investments are progressing, and refine your plans. In the meantime, best of luck with building up your wealth - that's the main thing to focus on at this stage. That, and of course enjoying your life, work and growing family!


Thanks forlesen - I appreciate your comments. I do have a separate IT and passive portfolio, so hopefully will have a relatively varied and balanced pot to potentially draw from...we'll see!

tjh290633 wrote:
Regardless of all that, if you are able to reinvest a portion of your dividend income each year, you will increase that income by more than the natural growth. Until you reach your retirement age, you will reinvest 100%. After that you will try to reinvest a portion of it, maybe 25%, maybe more, maybe less. As long as you reinvvest some, the result will be beneficial.

TJH


Thanks TJH - yes, I will be very strict in re-investing dividends and understand from previous posts that only drawing on a high percentage of income generated (75%-80%) when I do retire, rather than relying on 100%, is a sensible strategy to adopt.

Cheers, OLTB.

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Re: Deferring drawing my HYP income

#102257

Postby Dod101 » December 6th, 2017, 7:25 pm

I am out of touch with workplace pensions, but if you can manage to get at least some of your HYP into an ISA that is even better.

Dod


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