The problem:
Interest rates are likely to remain low for a number of years. Obtaining attractive returns is going to be much more difficult and increasing risk is potentially dangerous. So what should you be doing?
1. The most important objective in investing for pension income is actually capital growth. Why? Because in a period of low interest rates, decumulation i.e. drawing down capital, is the only viable solution. But decumulation comes at a price and that is, depleting capital values due to unsustainable capital redemptions.
2. In an ideal world it would be great to be able to withdraw capital for living expenses in good years and defer withdrawals during the bad. But this creates significant challenges. For example, withdrawals from pensions are taxed as income and at the highest rate. So, investors could lose valuable tax concessions in one year and exacerbate their tax position in the next.
3. Long-term statistics prove that a consistent withdrawal of 5% and above from any source, almost always results in a loss of capital value.
The solution:
There is a simple solution that has demonstrated a proven result: the “4-4-4” approach. That is a 4% annual withdrawal, a 4% income into the investment to compensate, and a 4%* capital appreciation within the fund. In good years you are withdrawing the income and allowing the capital to grow and in bad years you are withdrawing the income and not the capital.
The strategy:
The vehicle is a Self Invested Personal Pension (SIPP) consisting of top performing income OEICS/investment trusts with managers who are focused on creating above average capital returns and a sustainable level of income . The individual funds are structured to create a balance between smaller companies and larger companies and depending on market conditions the overall weighting will move in either direction.
There are a number of funds to choose from and the managers of these funds are more focused than larger income fund managers, because they are striving to produce above average returns. For example, there is no question of tracking an index or being 20% active and 80% passive, as some have become. The management incorporates an all out commitment to above average growth .
* This assumes 4% average annual capital appreciation which of course cannot be guaranteed!