I am 52 and do not expect to want to take all the proceeds for at least another 10 years. How should I invest the fund of some £300,000 for best effect?
If you wish to take any of the fund as tax-free cash, you will have to take it now. Once you have started to take an income from the fund, you will not be allowed to take any further tax-free cash. The only exception is if you have arranged your Sipp as a cluster of policies, where you may be able to phase the taking of tax-free cash.
As you wish to draw down only the minimum income at this stage, you need to organise the fund to produce capital growth over the next decade. Where you invest will depend on your attitude towards risk/ reward and volatility, as well as the needs of your fund.
Ultimately, the fund will have to be used to purchase an annuity so it is important that it maintains its purchasing power. To do this, it will have to outstrip the future returns on gilt yields, which are the basis on which annuity rates are calculated, with a little more growth each year to cover the ongoing costs of the Sipp management fees and the loss of mortality profit as a result of not buying the annuity today.
This means the bulk of your Sipp will need to be invested in equities. Some of it, however, may be invested elsewhere. The first three years' worth of income that you intend to draw might be invested in an interest-earning cash deposit so you can take income from the fund without the need to cash in some of the longer-term investments at an inappropriate time.
The worst thing that could happen is that you invest all of the fund in equities at the outset and draw income by encashing these investments as their market value falls.
You may then wish to invest some of the fund, say, 15 per cent, into fixed-interest securities. While the capital value of these can fall, the volatility of them in the short term should be lower than for the equity element. You can invest directly in gilts and corporate bonds or perhaps choose to buy a portfolio of these inside a collective investment such as a unit trust.
Some of the fund might be invested in a commercial property fund. Again, this should be seen as a medium- to long-term investment providing the prospect of growth through an increase in property values and a stream of rental income. You might put up to 10 per cent of the fund in this type of asset.
The bulk of the fund should certainly be in equities. Do not fall into the trap of putting all your eggs in the UK basket. The UK economy is obviously important but represents only a small part of the world economy and we ignore investing outside the UK at our peril.
The goal should be to create a low correlation growth fund, by which I mean that, as some elements of the invested fund are going down in value – and they will – other parts are going up. In the longer term, however, we are looking for growth.
You can either create a direct equity fund or go for collectives such as unit trusts, investment trusts and Oeics. You may wish to appoint a stockbroker to manage the fund on an advisory basis but if you want to execute transactions yourself, that is perfectly possible.
One type of collective to consider is the trustee investment plan, available from insurance companies. This allows you to move between various investment funds without incurring the costs of buying and selling.While this type of product tends to have quite high upfront charges, it is not necessarily more expensive than some of the other collectives.
If you deal through a fee-based IFA, reinvestment of the initial commission will go a long way to wiping out entry costs.
It is important to review your investment portfolio at least yearly.