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Can I grow my Sipp by 40 per cent in 4 years?

Our reader wants to achieve a goal of £1m in his self-invested personal pension (Sipp) by 2019 to enable him to draw retirement income of £35,000 a year.

Mr B is 56 and has been investing for more than 30 years. He has investments held in self-invested personal pensions (Sipps) and individual savings accounts (Isas) worth £777,600 in total.

He says: "I would like to achieve an investment goal of £1m in my Sipp within four years to allow me to take a 25 per cent lump sum and to start generating income of approximately £35,000 a year (in real terms) from the remaining investments. When I retire from full-time employment I expect to do part-time work that will generate about £20,000 per year, and my wife has income of about £25,000 per year. We have a small mortgage remaining on our principal residence, which will be paid off either by part of the lump sum or savings within the next four years."

His priorities are to protect his wealth and grow it steadily since the earnings from the portfolio will provide the majority of his income in retirement.

"I want to maintain the Isa as a vehicle for growth," he says. "I also want to simplify my portfolio and make it easier to manage over the coming years.

"I am willing to invest internationally, understand the importance of lowering fees and costs wherever possible, and am happy to do my own research.

"I am considering the sale of all direct share holdings that are worth less than 5 per cent of the portfolio and moving the funds into a Vanguard global dividend yield exchange traded fund (ETF) or lifestyle fund. I am also considering topping up my existing investments in Fundsmith Equity (GB00B41YBW71) and Personal Assets Trust (PNL)."

Reader Portfolio
Mr B 56

Sipp and Isa


£1m in Sipp within four years, enabling income of £35,000



Name of share or fundValue £%
Sipp portfolio (£675,100) 
3i Infrastructure (3IN)25,0003
Aberdeen Emerging Markets Fund A Acc (GB0033309310)26,0003
Anpario (ANP)29,0004
Battle Against Cancer Investment Trust (BACT)11,0001
Barratt Developments (BDEV)9,0001
Bloomsbury Publishing (BMY)3,5001
British American Tobacco (BAT)45,0006
CF Lindsell Train UK Equity Acc (GB00B18B9X76)31,0004
Carclo (CAR)5,0001
Compass Group (CPG)68,0009
Diverse Income Trust (DIVI)7,0001
ETFS Physical Gold GBP (PHGP)13,0002
Fundsmith Equity I Acc (GB00B41YBW71)25,0003
GKN (GKN)17,0002
ETFS S-Network Global Agri Business GO UCITS ETF (AGRP)12,0002
Henderson Smaller Companies (HSL)14,0002
iShares UK Property UCITS ETF (IUKP)16,0002
Marlborough UK Micro Cap Growth P Acc (GB00B8F8YX59)14,0002
New Capital Wealthy Nations Bond Fund GBP (IE00B40Z9H20)11,0001
Pantheon International Participations (PIN)17,0002
Personal Assets Trust (PNL)52,0007
RIT Capital Partners (RCP)11,0001
River & Mercantile UK Equity Smaller Cos B Acc (GB00B1DSZS09)16,0002
Taylor Wimpey (TW.)5,6001
Unicorn UK Income Acc (GB00B9XQFY62)14,0002
United Utilities (UU.)30,0004
Vodafone Group (VOD)25,0003
WPP (WPP)39,0005
Cash GBP84,00011
ISA (£102,500) 
Diverse Income Trust (DIVI)11,0001
Provident Financial Bond 7% (PFG7)8,0001
Aberdeen Emerging Markets Fund A Acc (GB0033309310)17,0002
Fidelity Special Situations (GB00B88V3X40)11,0001
Henderson Smaller Companies (HSL)8,0001
Lyxor UCITS ETF MSCI World Energy (NRGG) 7,0001
Lyxor UCITS ETF Commodities Thomson Reuters/Jefferies CRB Ex-Energy (CRNL)9,0001
Marlborough UK Micro Cap Growth P Acc (GB00B8F8YX59)8,0001
River & Mercantile UK Equity Smaller Cos B Acc (GB00B1DSZS09)8,5001
Nutmeg Growth Portfolio (80% eq; 20% fixed)15,0002

Source: Investors Chronicle


Chris Dillow, the Investors Chronicle's economist, says:

First, some bad news. It's unlikely that your £675,100 Sipp will grow to £1m within four years. Achieving this would require a return of over 40 per cent. This is unlikely, especially as low-returning safe assets (cash, a gold ETF and a bond fund) account for almost a sixth of the Sipp.

Even if you were to take on more risk by shifting your cash into equities, I reckon there'd only be around a one-in-three chance of you achieving your £1m objective: this is based on the assumption that equities on average return 5 per cent per year in real terms.

That one-in-three chance isn't to be ruled out. It's quite possible that the euro area equities will benefit from both stronger-than-expected real growth and quantitative easing - which the European Central Bank has promised to do until September 2016. Given the high correlation between euro-denominated and UK equities, this should give UK shares a big lift. But while a reasonable possibility, this is not a probability.

Your problem here is one we all face: a sharp trade-off between growth and wealth preservation. Real returns on safer assets - cash and bonds - are negative, and could remain so for some time. That means we can only achieve decent returns by buying equities. But these are risky. The possibilities of a renewed euro crisis or a sell-off - especially in emerging markets - as the Federal Reserve raises interest rates are the most salient risks. But there are many others.

You can tweak things in your favour a little by shifting out of some of your fee-charging funds and into lower-cost ETFs: you're right to want to simplify your portfolio. But this won't suffice to greatly boost your returns. Instead, you should think about other possibilities.

One is to work longer. Doing so helps in three ways. It should allow you to make bigger contributions to your Sipp: it gives you an extra year or two of returns, and the shorter retirement means you need less capital.

Another possibility is to revise down your income expectations. Do you really need £80,000 a year when you no longer need to save?

There is, though, a third possibility: be prepared to run down your capital in retirement. Let's say your Sipp grows to £800,000, which I think is a reasonable expectation and you take the 25 per cent lump sum, leaving you with £600,000. Your target income of £35,000 is less than 6 per cent of this. While this is higher than the likely real annual returns on the Sipp, which I'd assume to be around 4 per cent, it is not very much higher. This implies that, with average luck, you'll be running down your capital only slowly. Unless you live well past 100, this should be sustainable - especially as you have over £100,000 in an Isa as a back-up.

Herein, though, lies a paradox. The standard economic theory of consumer spending - the life-cycle hypothesis - says that dis-saving in retirement is exactly what we should do. Yet many of us are loath to do this. I don't think this is simply because we feel that we are depriving our children of an inheritance. I suspect it's also because it requires a big psychological change. Having spent decades focusing on increasing our wealth, it's uncomfortable to see it dwindle.

This, however, might be the least bad way of coping with a world of low returns.



Alan Steel, chairman, Alan Steel Asset Management, says:

You plan to grow your Sipp by being more conservative over the next four years, with the aim of getting to £1m. Then you plan to remove 25 per cent tax-free and produce £35,000 in real terms from what's left of the investments. First obvious question is why remove the 25 per cent? What do you plan to do with it? Make it liable potentially to taxes, including inheritance tax (IHT), in contrast to the current situation where it's in a capital gains tax-free (CGT) and IHT-free wrapper? Are you still contributing to it? Or have you gone for fixed protection at £1.25m or higher? If not why not? Have you considered drawing less tax-free cash at 60 to enjoy more 'tax-free income' and keeping most of the Sipp free of IHT? And keeping your income tax down in drawdown?

From 6 April, if you remove your tax-free cash the balance of your pension fund will continue to be free of IHT, unlike now. However, with successive governments changing the rules 565 times since 1987 before the latest changes, breaking previous promises, what certainty is there that a future government will stand by this move? After 42 years as an independent financial adviser I don't trust them.

Mortality statistics say that the average 60-year-old man will live for 18 years. It would be better to say that almost half of 60-year-old men will see 80 (20 years) and, if they're married to a 60-year-old, half of their wives will live to 85. That highlights the need for income to be available for longer and the need for income growth, hence our concerns over this new pensions freedom and the expectation that many people will run out of money before they die.

I'd seek experienced professional help. A 15-minute conversation with an unskilled theorist on the end of a phone isn't enough in your circumstances. And you should bear in mind you'll be accumulating State Pension, payable from 67.



Alan Steel says:

You seem to have built up a pension fund of £675,000, which is no mean feat, as well as more than £100,000 in Isas. In four years you intend to turn the growth into income. Your plan is to become more conservative. You also worryingly say you're happy to achieve your aims by focusing on lowering costs and doing your own research.

A few points on this. The Dalbar study, a US report on investor returns and behaviour, finds in its 2014 edition that the average private investor significantly underperforms equity and bond benchmarks over 20 and 30 years. The Dalbar report's conclusion is that: "This continued and worsening gap is down to behavioural problems... selling, buying or switching at the wrong times, and chasing what seems to be working." The report says higher charges on funds cannot explain the big difference.

In the UK, 20 years ago, the Institute of Actuaries calculated that, over the long term, investment performance was 10 times more important than charges. Platforms have recently allowed private investors to reduce costs while allowing easy access to funds run by a clutch of outstanding managers. In your Sipp, individual share holdings account for 55 per cent, and of them only five make up 31 per cent of the Sipp total. One is 10 per cent of the Sipp, which I'd say is high-risk.

There's a wide spread of assets, so it's hard to see what the strategy is. And 17 out of 29 investments (including £84,000 in cash) are below 2.5 per cent of the total invested. I'd find it hard to invest like this.

You are very underweight the US, Asia, Japan and European equities, where the best performance numbers have come from over the past year. Fundsmith Equity is currently 67 per cent invested in the US. It doesn't bother me what this charges given its outperformance of the FTSE over the past one and three years. The same goes for managers with superb short- and long-term numbers such as First State's Angus Tulloch, Schroder's Jenny Jones, who invests in US mid-caps, and Neil Woodford with his income funds.

I'd listen to those that see us in a commodity and bond secular bear market, and equity secular bull market, although I'd reduce individual holdings to reduce possible volatility. I like a fantasy football team strategy with a squad of key managers that include defenders such as Sebastian Lyon with his Personal Assets Trust to stop own goals, and a line in front that includes funds run by managers such as Neil Woodford, Carl Stick at Rathbones and James Harries at Newton. The midfield could include internationals such as Jenny Jones, Angus Tulloch and Terry Smith, even if they demand higher wages, although I accept a US tracker makes sense.

Your strikers would include funds in growth areas such as small-caps, which have been disappointing recently, but I wouldn't bet against them over the next four years.

In terms of achieving growth in your Isa, commodity ETFs are likely to hold performance back, so you could consider areas such as Japan and India, if you can invest for around 10 years. I'd certainly stick by small-caps, and the smaller the better. Funds run by managers such as Gervais Williams at Miton and Giles Hargreave (Marlborough UK Micro-Cap Growth) are good options.

Another well-trodden path for Isas over the long haul is to fill them with equity income funds and roll up net dividends until income is needed. Do not underestimate the value of reinvested dividends or the rising yields. In the US, long-term S&P 500 buy-and-hold investors who bought in 1980 are now receiving a net 29.3 per cent a year income return. Isas are free of personal income tax, too, so it does not subtract from these returns.