Further Pension Musings

(This is a follow on post from: So how is this pension thing going to work...?)

Last week, while I was away walking the South Downs, my 25% tax free lump sum came through and was credited to my account.  So this week, I've had to actually decide how to allocate the funds from my IBM pension pot, to investments that I'm confident will see me through the next few decades.

First, where's the money?

I've got four distinct pots within which I hold investments.  The largest is a SIPP, which now contains the IBM pension money plus various investments that I'd also built up in the SIPP outside of the IBM plan.  I'd already consolidated two other plans into this SIPP that had been started before I'd joined the IBM scheme.  Then I have an ISA, which I've been building up over the past decade.  I also have some funds invested in VCTs.  And finally I have some shares that are not in any kind of investment wrapper at all.

Snapshot at retirement start

The Cunning Plan

Ideally, I'd like to just put all the investments I have into the ISA pot - then I'd have no restrictions on what I can do with the money and all the income would be tax free.  However two things prevent that.  First, I'm limited on how much I can put in an ISA each year.  Second, I get taxed on what I take out of the SIPP - so too much in one year and I'm giving 40% or more to HMRC.

So the plan is to move the funds from the SIPP and the Other pot, into the ISA over time - putting off actually drawing any income from the ISA as long as possible, hoping that by the time I've emptied the SIPP, the ISA will be big enough to take over.

Therefore, I've decided to draw down from the SIPP as much as I can each year without hitting the 40% tax bracket, live on what I need to live and add what's left over into the ISA.  I will also transfer the shares in the Other pot into the ISA - as I can, up to the annual ISA limit.

At the moment, the only income I have that is taxable is what I draw down from the SIPP - VCT and ISA income is tax free and the dividend income from the Other shares is below the current dividend income threshold for tax.

If the cunning plan works, then eventually, the amount I have invested should stay constant (or even better - go up) and I will have all my investments in the ISA and be living off the dividends, tax free.

The Investments Bought

The IBM Pension cash has been split between six investments.  Together, these six investments make up the largest proportion of my retirement pot and I regard it as my core portfolio.  This is what I've gone for:

Investment Name	%	Ticker	Comments
Vanguard FTSE All World High Div. Inc. ETF	30%	VHYL	An ETF, tracking a world index of high dividend paying shares. Good international diversification.
Vanguard FTSE UK Equity Inc.	30%	VVUKEI	A low cost fund, tracking the index of UK dividend paying shares
Phoenix Group	10%	PHNX	Closed book, life insurance consolidator.  Reliable, solid, multi year income projection available.
Henderson Far East Inc.	10%	HFEL	A regional investment trust, focusing on dividend paying shares in the Far East region.  Multi year record of growing dividend.
Merchants Trust	10%	MRCH	A UK focused Investment Trust, focusing on generating income.  Has been running for over a century with 30+ years record of increasing dividend
BMO MSCI UK Inc. Leaders	10%	ZILK	A UK focused ETF, tracking dividend paying companies, with algorithmic filter to exclude potential poor performers.

To help visualise this, I've created a virtual portfolio, which I can track.  So with a £100K spend, it would look like this:

Spending the cash 30%, 30%, 10%, 10%, 10%, 10%

Now because I can't stand money sitting around, not working for me - that £23.34 left over can get me two extra Phoenix shares and one each of Henderson and Merchants:

Final investments for virtual portfolio (Prices from 12/07/2019)

I'll review this portfolio regularly to see how it's performing.  Obviously I hope that over time the income will gradually increase and I will see an increasing valuation.  We will see.

My core portfolio represents about 85% of my SIPP, the remainder being a mix of high yield individual company shares and high yield bond funds.  It is those that I plan to sell first as I start to draw down income from the SIPP.  It is my intent that as I sell investments in the SIPP, I will be able to buy equivalent value investments in the ISA - so as to not erode overall capital value.

Within the ISA and Other shares, there are a mixture of over thirty different funds and individual company shares, all paying dividends (except one - but that's a story for another post) and covering a diverse range of industries (I wont invest in tobacco or gambling stocks).  The largest holding is less than 8% of the total, most are about 3%.  I'll post about the other companies I've invested in, later this year.

Overall my income from investments looks like this:

Significantly better than I could get from an annuity - but will it prove to be as safe?