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Drawdown Investment Strategies

It has been noticeable that some pension funds have suffered in drawdown due to the economic circumstances since 2008. It is essential to select the right investment strategy. Ideally you should have at least a medium investment risk profile, unless there is an overriding feature or benefit you require that can only be provided by a SIPP pension withdrawal scheme. You also need to ensure that the income you take from the portfolio is realistic over the long term.
     

One of the most common methods for generating an income is by selling units to create your monthly, quarterly or annual income. Great care needs to be taken with this strategy.

For example:

If the price of 1 unit = £1.00 then you would have to sell 100 units each month to provide you with a £100 income.
However, if the unit price was to fall by 20% to 80 pence, you would have to sell 125 units to achieve the same income.

This is not a major problem if the market has a short down turn periods. However, selling any investments during a low point is never a good long term strategy and could damage your financial wellbeing.

We therefore recommend that a SIPP withdrawal plan should be large enough to create a separate earmarked fund to provide income and the remainder is invested with growth in mind. This reduces the likelihood of being forced to sell investments during a period of downward volatility.

The earmarked fund

The objective of this is to provide 3 to 5 years of steady and reliable income.

Cash Pool

This contains cash and is used as a float to make income payments to you. The interest and dividends produced by the fixed interest and equity based investments are drip-feed into the cash pool. This is further topped up by planned maturities from your fixed income bond ladder. We agree a level of cash in the pool and review this at every bond maturity or annual review. If the cash in the pool becomes too great we can consider whether some of this should be reinvested. Typical investments within the cash pool would include money market funds and cash.

 

Bond Ladder

In order to avoid forced selling to provide cash; we arrange a ladder of fixed rate bonds with regular maturities. This includes 1, 2 and 3 year bonds and so on. Depending on market conditions we usually work towards planning ahead for five years of income. The pension fund will then benefit from a stable income from the bond interest payments and a regular maturing cash injection. Typical investment would include UK Gilts, index-linked Gilts and investment grade corporate bonds.

The Growth Pot

As the earmarked fund has stabilised the income requirement for the first 3 to 5 years, the remaining funds can be invested with capital growth and increasing dividends in mind. These types of investment give greater potential for capital appreciation than fixed rate investments over the longer term. However, with greater potential for return comes higher investment risk and volatility. Many income investors become nervous when the value of their investment fall and they have to sell more units to provide the same income. Having the earmarked fund with 5 years of income planned reduces the risk of having to sell investments at a lower price. Typical investments would include equities, Unit Trusts, OEICs, Investment Trusts and ETFs covering differing asset classes, geographical areas and industrial sectors.

We will sit down with you on a regular basis to review, discuss and recommend investments as part of our advisory portfolio service. At the regular meetings you will be able to participate in all investment decisions made on your behalf and understand why they are suitable to meeting your financial objectives.

 

 
 
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