Age: 70
Status: Widower, three adult children
Portfolio value: £400,000
Risk profile: 5 (balanced)
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GEOFF'S SIPP PORTFOLIO OBJECTIVES
Primary: £16,000 pa income, adjusted for inflation
Secondary: Maximise legacy
GEOFF'S STORY
Geoff has just turned 70 and had his annual review with his adviser last week, having been in flexi-access drawdown since he retired five years ago. He enjoys a modest Defined Benefit (DB) pension of £4,000 pa earned during a successful decade teaching and then went on to build up a SIPP portfolio from running his own training consultancy.
Attracted by the benefits of flexibility and choice introduced just before he retired, Geoff moved £475,000 into a drawdown portfolio. Due to a period of strong equity performance following his retirement, Geoff was able to withdraw the income he needed to fund his travel and other needs, whilst maintaining his portfolio value.
Having constantly heard the news about rising interest rates and increased volatility, Geoff calls his adviser for reassurance and asks to bring forward his annual review. He learns that his portfolio is now worth £400,000 despite being labelled moderately cautious.
As Geoff plans to continue taking income from his portfolio, this period of poor market returns can't be ignored. If Geoff continues with his existing plan, his success rate would fall from 85% to 65% by the age of 99. The median death benefit has fallen from £193,300 to £73,712 and his withdrawal rate has increased from 3.37% to 4.00%. This isn’t acceptable to Geoff, so he would like to discuss options with his adviser.
To maintain the sort of lifestyle he wants to lead, Geoff feels he needs £30,000 pa. So, in addition to his State Pension and the teachers’ pension, he now needs his £400,000 SIPP portfolio to sustain an inflation protected £16,000 pa, while leaving some for his children.
Geoff’s adviser has suggested a new retirement income proposition that could help him achieve a better portfolio outcome.
Geoff's options
Below is an illustration comparing a traditional drawdown SIPP portfolio and a new blended drawdown SIPP portfolio. It shows how long-term portfolio performance can 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, 20% of the traditional drawdown SIPP portfolio is used to purchase FIGA which generates an annual income of £5,657 (7.07%).
This has solved the problem identified earlier, as FIGA has reduced the withdrawal rate on the rest of the portfolio to 3.23%. This is below the 3.37% withdrawal rate that Geoff started with, without having to reduce his primary objective of generating £16,000 annual income and despite the period of poor market performance.
The lowering of withdrawal rate on the rest of the portfolio allows Geoff’s portfolio to take on slightly more growth assets in the form of equities. This also helps to improve projected long-term portfolio values in addition to improving the robustness of Geoff’s overall plan.
By recommending an optimised blended solution Geoff’s adviser has now improved the success rate of Geoff’s plan by 15%, with the median death benefit improved by £135,974 compared to continuing with the previous plan based on Geoff at age 99.
The blended drawdown solutions fulfils Geoff’s secondary objective, to maximise legacy. For example, at age 91, when Geoff has a 50% chance of still being alive, the new blended drawdown SIPP portfolio has a projected value of £271,227. This is £62,226 or 30%, higher than the traditional drawdown SIPP portfolio projected value of £209,001. The solution also improves the probability of successfully achieving the target outcome of the portfolio, in this instance moving from 92% to 95%.
As shown in the chart below, should Geoff live a longer than average life, the greater the legacy improvements are by using this blended drawdown approach.
Key benefits of the new blended solution for Geoff
- His success rates have improved, making him feel more confident that his plan can weather future market volatility.
- The income producing potential of the portfolio has actually improved despite the reduction in portfolio value due to market volatility. This is due to FIGA being able to produce almost 35% of the income Geoff needs from 20% of the portfolio.
- His plan is back on track because the portfolio withdrawal rate has been reduced and with equity allocations maintained, his legacy objective can still be achieved.
Notes:
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 70 year old male, in good health, non-smoker, with a £400,000 total portfolio value. Traditional drawdown SIPP portfolio scenario is based on 50% Global equity / 50% UK Aggregate bonds asset allocation. New blended drawdown SIPP portfolio scenario is based on £80,000 SLI purchase, this equates to a blended model of 55% Global equity / 25% UK Aggregate bonds / 20% SLI asset allocation, total fees of 1.75%.
Figures are generated via Timeline using median return from 900 scenarios from 108 years of historic data. The £16,000 income has been modelled to keep pace with inflation.