Status: Married, two adult children
Portfolio value: £500,000
Risk profile: 6 (moderately adventurous)
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PETER'S SIPP PORTFOLIO OBJECTIVES
Primary: Leave as much legacy as possible and minimise inheritance tax
Secondary: Ad-hoc income of £10,000 pa income, adjusted for inflation
Peter, 68, a retired civil engineer, is in good health and married to Alice. They have two adult children. They have a jointly owned portfolio of investments which includes a couple of residential buy-to-lets and have other assets structured to make the most of all available investment allowances. They both have individual ISA holdings and Peter has a drawdown arrangement, which he views as a key part of their inheritance tax planning, currently valued at approximately £500,000.
Allowing for his other sources of income, Peter plans on withdrawing no more than £10,000 pa on an ongoing, inflation adjusted basis from his drawdown.
He also wants to protect as much of the portfolio as possible to pass on to his children and future grandchildren. So, he’s asked his adviser to review what investment opportunities he has within his SIPP as part of their annual review meeting.
On the face of it, everything looks good for the future. With a modest withdrawal rate the portfolio looks very sustainable over the longer term and projecting out to age 99, an age Peter has only a 10% chance of reaching, average market conditions could see a residual portfolio value of approximately £735,000.
But Peter wants to know if that can be improved, without taking on any more risk within the portfolio.
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 help maximise the future value of the portfolio.
In the blended drawdown solution, 20% of the traditional SIPP portfolio is used to purchase FIGA which generates an annual income of £6,732 (6.73%). This enables the withdrawal rate on the remainder of the portfolio to be reduced to just 0.82% collectively securing all of Peter’s required income of £10,000 while leaving more of the SIPP drawdown portfolio to grow over time rather than provide income.
The blended drawdown solution fulfils Peter’s primary objective, which is to maximise legacy. At age 99, an age Peter has a 10% chance of reaching, the traditional SIPP drawdown plan is modelled to be worth approximately £735,000. With the new blended drawdown approach that projected value has increased to approximately £935,000, an increase of over 25%.
The lower withdrawal rate enables significantly higher long-term portfolio values to be projected as the chart below illustrates:
Key benefits of the new blended solution for Peter
- The new blended drawdown solution could achieve an enhanced outcome for Peter whilst continuing to be in line with his ‘moderately adventurous’ attitude to risk.
- FIGA could produce 67% the income Peter needs from 20% of the portfolio. This means most of the income is being generated from the defensive allocation (FIGA). By doing this, the equity allocation of the portfolio could grow unrestricted by the requirement to generate income. All supporting Peter’s objectives.
- FIGA income can be rolled back into the invested portfolio if the ad-hoc income is not needed in a particular year. This will provide Peter with greater flexibility.
- Peter’s income objective could be achieved with less strain on the portfolio, whilst enabling higher projected long-term portfolio values to help achieve his primary 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 68 year old male, in good health, non-smoker, with a £500,000 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 £100,000 SLI purchase, this equates to a blended model of 60% Global equity / 20% 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 £10,000 income has been modelled to keep pace with inflation.