Age: 68
Status: Widowed, two children
Portfolio value: £250,000 
Risk profile: 5 (balanced)

This scenario is for illustration purposes only. To see how you may deliver better outcomes for your clients, book a consultation here.

ANNABEL'S SIPP PORTFOLIO OBJECTIVES

Primary: Additional guaranteed income of £10,000 pa, adjusted for inflation

Secondary: Discretionary pot to cover ad-hoc expenditure

ANNABEL'S STORY

Annabel is 68 and currently in good health. She lost her husband, Bob, ten years ago and has two children who are financially stable.

Together with her ‘balanced’ attitude to risk, Annabel has a low capacity for loss. Her investment portfolio is currently worth £250,000. 

Apart from receiving a full State Pension of £203.85 a week, Annabel has no other sources of income. Guarantees are very important to her as she needs an additional stable and sustainable £10,000 pa adjusted for inflation.


Annabel's options

In a planning exercise with her adviser, Annabel discussed the fact that she has no other source of income other than £203.85 a week from the State Pension and that guarantees are of paramount importance. Any additional income generated needs to be adjusted for inflation. She likes the idea of leaving some funds to help with ad hoc expenditure. So the question is, will an on-platform fixed income guaranteed asset (FIGA) within the portfolio be appropriate in meeting Annabel’s objective? 

In this case, her adviser believes that FIGA is not the best solution because Annabel has a low capacity for loss and her primary need is guaranteed income, not flexibility or legacy. Also, to meet this need, it requires around 55% of her SIPP assets.

With her adviser’s guidance, Annabel considered many of the features an off-platform annuity can offer. She wants a guaranteed income that’s adjusted for inflation and leaving some funds to help with ad hoc expenditure.

Below are some of the annuity examples she considered:

The top four options were considered too binary and didn’t fulfil her needs. The last option allows Annabel to use £201,909 from her retirement portfolio to purchase a £10,000 guaranteed income which increases 2% each year with a 25-year guarantee period. This meets her objective of £10,000 additional income. It also means that £201,909 investment in the annuity will guarantee to pay at least £320,301 over the 25-year period.

The balance of £48,091 is left in Annabel’s drawdown SIPP portfolio to be invested to match her risk appetite. This would allow her to draw from the portfolio to cover any ongoing needs in retirement as shown in the chart below:

Death Benefits

Annabel chose an annuity with a 25-year guarantee. This means if she dies during the guaranteed 25-year period, her beneficiaries will receive the balance of the guaranteed payments. The chart below shows the value of her drawdown SIPP portfolio, investment and guaranteed income at 2% escalation if she dies aged 72.

The difference between the payments Annabel’s beneficiaries will receive upon her death at various ages if she chose the blended option compared to drawdown alone is shown in the chart below. The orange column represents the balance of her guaranteed payments plus the value of her investments.

If she dies at the age of 72, her beneficiaries would receive a total of £320,650 which is made up of the balance of her guaranteed income payment (£268,261) and the investment value (£52,389).

Ongoing value on death at various ages

This solution fulfils Annabel’s objective of generating an additional income of £10,000 pa adjusted for inflation.

Key benefits of the new blended solution for Annabel

  • The new blended portfolio solution could achieve a better outcome for Annabel, as well as reducing overall risk.
  • Annabel’s income objective has been achieved. This plan takes all the strain from the long-term portfolio. Also, it enables higher projected long-term portfolio values to help achieve Annabel’s secondary objective of having a discretionary pot to cover any future ad-hoc expenditure and spikes in inflation.

Notes:

Scenario numbers are illustrative only.

Example based on a 68 year old female, in good health, non-smoker, with a £250,000 total portfolio value. Traditional drawdown SIPP portfolio scenario is based on 50% mature equity / 50% investment grade bond asset allocation. New blended drawdown SIPP portfolio scenario is based on £201,909 annuity purchase / 50% mature equity / 50% investment grade bonds asset allocation, total fees of 1.75%.

Portfolio figures are generated via Timeline using median return from 800 scenarios from 108 years of historic data. The annuity rates are Just annuity rates. The £10,000 income has been set to increase by 2% (government target inflation).