Dennis is 58 and has recently retired. His wife is 64 and receives a former employer pension of £4,000 a year. They jointly own their home, which is worth £600,000, and a holiday home worth £400,000, neither of which have a mortgage on them.
Sipp and Isas invested in funds, VCTs, cash, residential property
Income from investments of £35,000 a year, £200,000 gift to children, preserve capital value of Sipp, pass on assets to children, invest in renewable energy, environmental and social impact investments
"We want to withdraw about £35,000 a year from my self-invested personal pension (Sipp) for living costs while largely preserving its capital value,” says Dennis. “We might also withdraw a lump sum of about £200,000 from it to help one of our two grown-up children buy a property.
“We would also like our children to inherit the potential for a decent pension because although they have satisfying jobs they are likely to have very modest pensions. So when I initially retired I transferred a £900,000 final-salary pension into my Sipp as I was being offered a 45x multiplier and felt that this was attractive given the inheritance tax (IHT) benefits. This means the Sipp is now worth about £2.1m.
"I also have £105,000 in an individual savings account (Isa) and about £425,000 in 20 venture capital trusts (VCTs) which provide an income of over £20,000 per year.
"I have been investing for 30 years and, although I have ridden through bear markets while largely invested in equity income, I would now be more comfortable with a greater emphasis on capital protection. So I would be prepared to lose up to 15 to 20 per cent of the value of my investments in any given year and hope that the current asset allocation of my Sipp might provide this level of downside protection.
"I aim to have a relatively diverse portfolio with significant downside protection, which I hope to get by holding funds such as Ruffer Investment Company (RICA), Capital Gearing Trust (CGT) and Personal Assets Trust (PNL).
"I also want to be significantly invested in renewable energy and environmental funds. Although renewable energy infrastructure investment trusts trade on high premia to net asset value, which I think makes them riskier, I bought them when they were trading at lower premia.
"I have invested in Impax Environmental Markets (IEM) for a number of years, which provides some US exposure, a region I otherwise avoid because it seems overvalued. I also recently invested £29,800 in Gresham House Energy Storage Fund (GRID) and £20,200 in Gresham House (GHE), an asset manager that runs alternative investments and renewables.
"I would like to increase my exposure to impact investing investments which have environmental and social benefits, and am looking for funds that are similar to Impax Environmental Markets. I have also tried to ditch funds that hold tobacco companies, and a benefit of this has been that I was not invested in the Woodford funds.
"I have a significant allocation to funds that invest in debt issued by companies involved in asset finance, social housing, energy efficiency and infrastructure, and infrastructure income. Recent investments in this area include £33,500 in SQN Asset Finance Income (SQN), which has been through a rough period, but may be over the worst and offers a high income.
"However, I have avoided gilts – UK government bonds – as I fear they will suffer a major capital loss.
"My Sipp increased in value by about £100,000 between April and November last year because some of my investments made very good returns over that period. For example, Assura (AGR) made a share price total return of 25 per cent and Primary Health Properties (PHP) and the renewable energy infrastructure investment trusts also did well.
"However, much of this may be a rerating of reasonably secure income investments in a challenging climate. So I wondered whether I should change any of my investments to better meet my objectives, and is the Sipp’s asset allocation in particular less balanced than I think?
Dennis and his wife's portfolio
|Holding||Value (£)||% of the portfolio|
|Ruffer Investment Company (RICA)||200007||5.94|
|Jupiter Asian Income (GB00BZ2YND85)||104309||3.1|
|Impax Environmental Markets (IEM)||102622||3.05|
|BNY Mellon Real Return (GB00BSPPWT88)||101556||3.02|
|TM CRUX European Special Situations (GB00BTJRQ064)||99793||2.97|
|Stewart Investors Global Emerging Markets Leaders (GB0033874545)||97060||2.88|
|Primary Health Properties (PHP)||96700||2.87|
|Asia Dragon Trust (DGN)||94101||2.8|
|Capital Gearing Trust (CGT)||84392||2.51|
|Mid Wynd International Investment Trust (MWY)||69351||2.06|
|Renewables Infrastructure Group (TRIG)||68278||2.03|
|First State Global Listed Infrastructure (GB00B24HJL45)||63277||1.88|
|Real Estate Credit Investments (RECI)||59642||1.77|
|JPMorgan Global Core Real Assets (JARA)||52500||1.56|
|GCP Infrastructure Investments (GCP)||52000||1.55|
|Sanlam Multi Strategy (IE00B4QNLR45)||50746||1.51|
|Foresight Solar Fund (FSFL)||50209||1.49|
|Civitas Social Housing (CSH)||49728||1.48|
|Troy Trojan (GB00BZ6CNS31)||49262||1.46|
|Acorn Income Fund (AIF)||49016||1.46|
|Aberdeen Diversified Income And Growth Trust (ADIG)||43063||1.28|
|SDCL Energy Efficiency Income Trust (SEIT)||42800||1.27|
|Legg Mason IF RARE Global Infrastructure Income (GB00BZ01WV25)||33815||1|
|SQN Asset Finance Income (SQN)||33516||1|
|Gresham House Energy Storage Fund (GRID)||29843||0.89|
|CC Japan Income & Growth Trust (CCJI)||21210||0.63|
|Gresham House Strategic (GHS)||20739||0.62|
|RIT Capital Partners (RCP)||20615||0.61|
|Gresham House (GHE)||20195||0.6|
|Oakley Capital Investments (OCI)||33731||1|
|Alpha Real Trust (ARTL)||13262||0.39|
|First Property (FPO)||10193||0.3|
|Personal Assets Trust (PNL)||174087||5.17|
|BioPharma Credit (BPCR)||9298||0.28|
|Monks Investment Trust (MNKS)||37,440||1.11|
|Scottish Mortgage Investment Trust (SMT)||32,781||0.97|
|GCP Asset Backed Income Fund (GABI)||19,878||0.59|
|JLEN Environmental Assets Group (JLEN)||13,441||0.4|
|Real Estate Investors (RLE)||11,570||0.34|
|Mercantile Investment Trust (MRC)||40,222||1.2|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.
THE BIG PICTURE
Chris Dillow, Investors Chronicle's economist, says:
You should be easily able to take £35,000 a year from your Sipp and still leave its capital value intact – even with average luck.
Whether you should hold so many renewable energy and environmental investments may come down to how efficient equity markets are. If markets are efficient, the price of green equities already embodies all the reasons to suppose that they'll do well. So their total returns won’t be any better than those of other equities, except to the extent that they might be riskier so offer higher returns to compensate for this.
However, many investors want to hold such shares to get a feeling that they are doing good for the environment. This means that some of their returns will not come in the form of financial rewards but rather the sense of doing good. This means that financial returns on such stocks will, on average, be lower than those on other stocks. By the same reasoning, financial returns on tobacco shares should be higher than average to compensate for the guilt you may feel for holding them. So if markets are efficient holding green stocks and funds could mean that overall your investments underperform.
However, markets might not be efficient in this context. If you adopt green investing before other investors you will benefit from them jumping onto the bandwagon. And if you dump vice stocks before other investors you will get out before their prices fall.
The problem here is timing. For example, ethical investors missed out by avoiding tobacco stocks for much of the noughties when these rose nicely. But since 2017 ethical investors have done better because during this time British American Tobacco (BATS) and Imperial Brands (IMB) have fallen.
To manage such timing risks you can use the 10-month or 200-day average rule. Following this would mean buying green funds when their prices are above this average and selling them when they fall below it. Following this rule would have worked well during the tech boom and bust, and I think it will help you navigate through the waves of sentiment towards green funds.
Rosie Bullard, partner and portfolio manager at wealth manager James Hambro & Partners, says:
Holding the majority of your assets in Isas and Sipps has tax advantages and allows flexibility in terms of the assets you hold. Withdrawing £35,000 after tax per year from your Sipp seems prudent, and I would expect the portfolio to continue to be able to support this level of withdrawal over the long term.
You want a balanced return and greater emphasis on capital preservation, so you may want to reduce your weighting to equities. You should also ensure that you really understand the downside risks of your investments, such as asset price volatility and liquidity.
In view of your overall asset base I would not suggest adding more money to VCTs – unless you have a compelling reason to do so. These tend to be higher-risk investments and increasing your allocation to them would further distort your plan for a balanced asset allocation.
When you withdraw cash from your investments for your own expenditure or to help your children purchase a property, seek advice from a financial planner on whether it is best to draw from the cash, Isas or Sipps. Each of these accounts has tax advantages which need to be fully understood.
[You can find independent financial advisers at www.unbiased.co.uk]
Ben Yearsley, director at Shore Financial Planning, says:
Taking £35,000 a year from a £2m pot and maintaining the capital is straightforward. But you need to be aware of pension rules. For example, if you die before the age of 75 the tax treatment of those who receive your Sipp will be very different from their treatment if you die after age 75. For example, if you are drawing from your Sipp and you die after age 75 it will still be IHT-free, but the beneficiaries who inherit it will pay income tax at their marginal rate when they draw on it.
You and your wife's Isas have a combined value of over £200,000, so these could form part of your income requirements if they had a different asset allocation. And then more of the money in your IHT-efficient Sipp could be left to your kids.
You also need to consider the pensions lifetime allowance and fixed protection.
Due to the complexities of pension rules, and the different ways in which you could take your income and the tax implications, you should get professional advice on the best course of action to ensure that you do not pay unnecessary tax as the penalties can be stringent. But it’s fair enough to look after your investment strategy yourself.
You are in a very sound financial position with more than sufficient assets to meet all your goals. You could withdraw £200,000 from your investments and still get an income from them of £35,000 a year. You also have a nice tax-free income stream from your VCTs. However, VCT dividends are likely to become more volatile, or not as consistent, because the investment risk of VCTs is increasing due to rule changes a couple of years ago. VCT dividends will become more reliant on the successful realisations of underlying assets, so their current average yield of about 5 per cent may well drop. But VCTs are still a worthwhile investment for higher-risk investors.
I’m slightly surprised that neither of you has NS&I Premium Bonds as the tax-free returns on these can be good for higher-rate taxpayers.
Capital protection is an important part of your portfolio and you are also sensible in being prepared to sit through falls of around 15 per cent.
HOW TO IMPROVE THE PORTFOLIO
Chris Dillow says:
You many not have as much downside protection as you think. Ruffer Investment Company and Personal Assets Trust look to mitigate downside by holding UK and US index-linked bonds. But this exposes you to the risk that their prices will fall if real interest rates rise. And the brute maths of bond markets means that even a small rise in rates would cause a large fall in the prices of these securities.
One reason to fear such a rise would be if the global economy picks up. A good lead indicator – growth in the narrow money stock – suggests that the Chinese and eurozone economies will pick up this year. But this isn’t your biggest worry because such a recovery would probably increase share prices and offset losses on bonds.
Greater dangers are that the savings glut that has forced down real interest rates recedes or central bankers raise interest rates without any pick-up in growth. We can’t quantify these risks, but they mean that you should not presume that index-linked bonds are safe.
However, I commend you for holding VCTs. Their virtue is not so much their tax breaks but rather their exposure to growth companies – something that listed equities, increasingly, do not offer.
However, growth companies can be hard to sell at a good price and this matters because your property and perhaps infrastructure funds also face similar liquidity risks. But these risks should, in theory, be worth taking if you are a longer-term investor. Just ensure that you never have to be a forced seller.
Rosie Bullard says:
We are wary of investments in asset finance, social housing, energy efficiency, renewables and environmental protection. Make sure you have full transparency on the investments you are making. You should weigh up your objectives of preserving capital and achieving a balanced return with your desire to put money into environmental investments.
It is likely that more funds associated with sustainability, environmental, social and governance considerations, and ethical policies will be launched. When choosing which of these to invest in, make sure you understand and agree with the investment criteria that the managers of those funds apply when screening for potential investments. Also check the experience of the managers of these funds, and their ability to meet the stated objectives.
We like equity allocations to be spread across geographic regions and sectors. You have limited exposure to the US and make a fair comment about the valuation of the US equity market relative to its history. But don't write off the US – it has a significant technology sector in which there are many investment opportunities. In the latter stages of a bull market, we often see leaders continuing to lead, and at a greater rate.
Ben Yearsley says:
I have a focus on alternative sources of income in my own portfolio because this makes it less reliant on external factors.
You are keen on impact investing, a newish area encompassing investments that aim to do some environmental or social good. Your investment in Foresight Solar Fund (FSFL) – something I’ve held since launch – is a good example.
The proportion of your overall investments that each of your 30-plus Sipp holdings account for mostly ranges between 1 and 10 per cent. This seems reasonable as you want to preserve the capital value by spreading risk.
Your Sipp investments encompass a number of themes, but have you ever considered what these are to get a top-down view of where you are invested? Roughly, your investments fall into the following categories: capital preservation, renewable energy, infrastructure, real assets, social and global equities.
Are you comfortable with the mix and the weightings to each area? This isn’t a normal mainstream portfolio, so there is no right or wrong. I am a big fan of many of the investments you hold, for example First State Global Listed Infrastructure (GB00B24HJL45) has been one of my core holdings since its launch in 2007. But why do you hold this and Legg Mason IF RARE Global Infrastructure Income (GB00BZ01WV25)? Also do any of the multi-asset funds you hold have some of the same investments in which you invest directly? For example, what renewable energy exposure does Sanlam Multi Strategy (IE00B4QNLR45) have?
I agree that some renewable energy infrastructure investment trusts appear to be on high valuations as they are trading on premiums to NAV. However, the income from these is still attractive and largely inflation-linked.