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Jo asks: I have just passed by mid-60s and have a SIPP (£250,000) and an ISA (£100,000), but have not withdrawn from either yet.
My state pension and a small company pension total £25,000, so whatever I take from my SIPP will be taxable income. I think I can draw £8,000 once a year without affecting the capital too much.
Is it better to have funds that have good yield income (say, 5.7%, for example) and low capital growth that reinvests, or to choose funds where capital growth has gone up between 10% and 25% each year for the last five years, but with a low income yield, again set to reinvest and to be taken once a year?
If I could do this using my ISA, I thought I could withdraw from my SIPP only occasionally, when purchasing something big. I think with my SIPP, I am able to take out lump sums, getting 25% tax-free from each transaction and 20% tax on the rest, as long as I’m not going into a higher tax bracket.
Also, what are the differences between the same fund where one is accumulation and the other income, and what are the benefits of choosing one over the other?
Becky O’Connor (pictured above), head of pensions & savings, interactive investor, says: this is a really good question. As you are in your mid-60s, you probably don’t want to be over-exposed to too much risk, for example, the risk of a decline in the value of global stock markets, so a lower growth, income-focused selection would make sense from the point of view of minimising the risk of loss.
At £8,000 a year, your withdrawal rate is about 2% of your SIPP and ISA balance, which should be sustainable, without eating into the capital. To make a withdrawal rate sustainable, your portfolio has to have grown by enough over the year to cover the amount you want to withdraw.
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If only withdrawing from your ISA, the withdrawal rate would be 8%. It would be harder to achieve capital growth sufficiently higher than this amount to make withdrawals of £8,000 a year from the ISA sustainable unless you are invested in relatively higher risk/higher growth funds. If only withdrawing from your SIPP, the withdrawal rate is about 3%, which should be sustainable provided you don’t suffer investment loss.
The difference between an accumulation and an income fund is that the income fund will pay you the income from dividends so that you can use it, while the accumulation fund will re-invest any income, boosting returns through the effect of compounding. You can switch from the accumulation to the income version of funds, but you don’t have to. You can choose to remain in the accumulation version of the fund and instead of relying on the income paid out, sell a number of units as and when you want to take some cash.
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Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.