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SIPPing on PruFund income

3 minutes read
Last updated on 21st Apr 2022

Income drawdown has become the retirement income vehicle of choice for many, especially since the introduction of pension freedoms. However over recent years it has been challenging for many advisers to satisfactorily meet client income requirements with all of the global challenges and market volatility that we have seen.

Front and centre of an advisers dilemma will be how to make robust cashflow modelling plans, and how to take account of risks such as sequencing of return risk with the markets so volatile.

Though there’s no one panacea that can deal with all risks, one option is for advisers to use PruFund for income purposes, given its low volatility and high predictability. We’ve recently lifted both the regular income limit and first year restriction on income on our Trustee Investment Plan (TIP), assuming there is no level of With Profit Investment in the plan. However, investments in PruFund via TIP do qualify for these enhancements and therefore not limited to the income limits or first year restriction on income.

This gives an opportunity for advisers to plan their income strategy in a Self-Invested Personal Pension (SIPP) using PruFund as a core proposition.

Let’s look at a simple example

This isn’t a real life example or a recommendation.

Fiona has £600,000 in a SIPP, from which she would like to take 5% income – i.e. £30,000 pa. Her adviser has warned her that this could eat into her capital, which she understands.

The adviser uses the Prudential TIP modeller to calculate that based upon an investment in PruFund Growth, and assuming that the Expected Growth Rates (EGRs) are maintained and there are no downward Unit Price Adjustments (UPAs) a fund of £243,879 is required to secure £30,000 p.a. for ten years, assuming the parameters are met.

Her adviser warns Fiona though of the importance of having a ‘safety net’ in the event that either the long term return assumption is not met, or alternatively short term downward pressure on the markets and fund would have a negative impact if income was taken at this time. Fiona’s adviser therefore recommends a years’ worth of income - £30,000  is held in cash in the SIPP as a buffer if returns aren’t as predicted.

This strategy enables the adviser to invest the remaining fund – around £326,000 in a fund or portfolio where there is no immediate pressure on the fund to supply an income. On that basis longer term investment decisions can be made, knowing Fiona’s immediate income requirements should be secured.

Key Points
  • Recent enhancements to out TIP product has fully enabled the use of PruFund within SIPPs and SSASs to be used to generate income for the client.
  • The EGRs can be used in the TIP modeller to show how much fund is required to pay ongoing income over a given time period.
  • This enables an adviser to invest the remaining fund without consideration for short term income requirements.
  • There is no guarantee that these long term assumptions will be met, so having an alternative source of income in place that can be used for a short time is often considered desirable.

The value of any investment (and any income taken from it) can go down as well as up so your client might not get back the amount they put in.

See below for more information on PruFund in pension:

https://www.pruadviser.co.uk/pdf/PRUF100124906.pdf

https://www.pruadviser.co.uk/pdf/GENM100061715.pdf

Prudential’s TIP modeller can be accessed via the following link:

https://www.pruadviser.co.uk/xpf_calculators/tip-modeller/

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company. The Prudential Assurance Company and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.