Status: Married, two adult children, retired
Portfolio value: £380,000
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.
JOHN'S SIPP PORTFOLIO OBJECTIVES
Primary: John is looking for his portfolio to provide £13,300 pa of inflation adjusted income. In addition to their State Pensions, this will provide a total inflation adjusted household income of £32,000 pa.
Secondary: Maximise legacy
John, born in January 1958, is now retired. At age 65, John and his wife, Jean also 65, will not start to receive their State Pension of £21,200 pa until they turn 66.
In the short term, to help cover expenditure, John’s prepared to sell down a general investment account portfolio (GIA) which makes use of his Capital Gains Tax (CGT) allowance of £6,000.
They no longer have a mortgage and live a simple life in the midlands countryside, close to their married sons. John and Jean plan to spend a lot of their retirement time with their three grandchildren.
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 SIPP portfolio is used to purchase FIGA which generates an annual income of £4,807 (6.33%) that is guaranteed for life. This enables the withdrawal rate on the remainder of the portfolio to be reduced to 2.79% (equating to £8,493 income, adjusted for inflation). And this combined approach helps secure John’s primary objective of £13,300 target annual income.
Lowering the portfolio withdrawal rate reduces the sequence risk within the remaining portfolio as a result of not having to generate as much income. More of the remaining portfolio could then continue to generate long-term growth, leading to higher portfolio values later in retirement as shown in the chart below.
The blended drawdown solution fulfils John’s secondary objective, to maximise legacy.
For example, at age 91, when John has a 50% chance of still being alive, the new blended drawdown SIPP has a projected value of £257,388. This is £73,633, or almost 40%, higher than the traditional SIPP portfolio projected value of £183,755. The blended drawdown solution also improves the probability of successfully achieving the target outcome from the portfolio, in this instance moving from 96% to 97%.
Key benefits of the new blended solution for John
- The new blended portfolio solution could achieve a better outcome for John whilst continuing to be in line with his ‘balanced’ attitude to risk.
- The FIGA is uncorrelated to other portfolio assets which helps to dampen portfolio volatility and improve the probability of successfully achieving John’s and Jean’s goals.
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 65 year old male, in good health, non-smoker, with a £380,000 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 £76,000 SLI purchase, this equates to a blended model of 50% Global equity / 30% UK Aggregate bonds / 20% 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 £13,300 income has been modelled to keep pace with inflation.