Status: Married, one adult child
Portfolio value: £326,000
Risk profile: 6 (moderately adventurous)
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Cynthia’s portfolio objectives
Primary: £12,000 pa income, adjusted for inflation
Secondary: Maximise legacy
Cynthia, 62, has a pension portfolio amounting to £435,000 which includes an earlier transfer in from a previous employers Defined Benefit (DB) scheme. She intends to use her 25% tax free cash to pay off the family mortgage and is looking to rely on her remaining portfolio (£326,000) to generate a lifetime inflation protected income of £12,000 pa.
Cynthia was considering retiring fully but the turbulent economic conditions caused her portfolio to fall by nearly 10% during 2022, has made her decide to move onto part time working as an executive PA, which her employer is happy to accommodate.
In addition to her part time income and the £12,000 from her pension portfolio, she feels she’ll need additional income until she can draw from her State Pension in four years’ time. In the meantime, to meet this need she’ll use her ISA portfolio to bridge the shortfall.
Although Cynthia understands the need to take an investment risk if she’s going to meet her retirement needs and hopefully leave some inheritance for her daughter, the volatility in the value of her portfolio recently has made her nervous. She is therefore keen to know if there’s anything that her adviser could consider for her that would make her portfolio more resilient, whilst still meeting her objectives.
Below is an illustration comparing a traditional drawdown SIPP portfolio and a new blended drawdown SIPP portfolio. It shows how long-term portfolio performance could be improved by including a fixed income guaranteed asset (FIGA) alongside equity and bond assets to achieve a better client outcome.
In the blended drawdown solution, 30% of the traditional SIPP portfolio is used to purchase FIGA which generates an income of £5,916 (6.05%). This enables the withdrawal rate on the remainder of the portfolio to be reduced from a rate of 3.68% to 2.67% whilst still securing Cynthia’s primary objective of £12,000 target annual income.
The blended drawdown solution also meets Cynthia’s secondary objective, to maximise legacy. For example, at the age of 92, when Cynthia has a 50% chance of still being alive, the new blended drawdown SIPP has a projected value of £278,164. This is £135,982, or almost double (97%) the traditional SIPP portfolio projected value of £142,182.
Key benefits of the new blended solution for Cynthia
- The new blended portfolio solution could achieve both the income Cynthia needed to maintain her lifestyle and significantly improving the legacy she wants to leave.
- By shifting a portion of the portfolio to FIGA, Cynthia could reduce her exposure to market risk. The recommendation to add a percentage of an uncorrelated asset like FIGA to a retirement investment portfolio could help diversify the portfolio’s risk and potentially reduce the impact of market volatility on her overall portfolio.
- Reallocating a portion of the portfolio to FIGA means Cynthia could reduce her withdrawal rate from her investment portfolio. This could help ensure that her portfolio lasts longer and help her achieve her secondary objective of maximising legacy.
FIGA is provided by Secure Lifetime Income (SLI).
Scenario numbers are illustrative only, to show how FIGA can be included alongside equities and bond assets in a drawdown SIPP portfolio.
Example based on a 62 year old female, in good health, non-smoker, with a £326,000 total portfolio value. Traditional drawdown SIPP portfolio scenario is based on 60% Global equity / 40% UK Aggregate bonds asset allocation. New blended drawdown SIPP portfolio scenario is based on £97,800 SLI purchase, this equates to a blended model of 60% Global equity / 10% UK Aggregate bonds / 30% SLI asset allocation, total fees of 1.75%.
Figures are generated via Timeline using median return from 800 scenarios from 108 years of historic data. The £12,000 income has been modelled to keep pace with inflation.