How a real £2m income portfolio behaved through Covid + Ukraine
Back-tested from 1979, but reality-tested in the last three years.
by Doug Brodie
This week we have been running annual updates and valuations for all our clients – the updates include the month by month record of the actual income, and these annual tables are stacked with the prior years to provide clients with the reassurance of just how reliable the income is in reality. You can’t pay bills with optimistic asset allocation.
“Dear Santa – all I want for Christmas is a gold-plated, inflation-linked, never to worry about, final salary pension please. ”
Ok, well it might not be appropriate to write that out and send it up the chimney – the smoke police would no doubt be knocking on our door if we did. Over 9 million people above the age of 45 have money purchase pensions instead.
The key difference between the two is that one is a stream of income, whilst the other is a pot of capital. One might say the money purchase item is a ‘raw, uncooked’ pension that needs to be baked before it’s ready to eat.
Chancery Lane does this conversion all day, every day.
I thought for this week it would be helpful to show you a real annual update table of a client (we’ll say it’s “M”) with a portfolio that is currently £2.2m. I’m not suggesting this is where our work is centred, and M’s pension is materially larger than the average, however what is relevant is that the maths works no matter the size of the pension pot.
The annual update takes on average 22 hours to collate and prepare. It is a meeting to update the cashflow plan for the coming years, and specifically to confirm how much income is needed for the next twelve months, and where that income is best taken from. Remember we are independent advisers, and we use pensions, cash accounts, ISAs, general broking accounts, bonds and trusts to hold client money where appropriate. It’s our job to advise on how to hold money with optimal tax efficiency.
The update is centred on the cash flow plan, which you can see below.
Most clients start each meeting with the income record – this is the table that shows the income paid by each asset, month by month, and over the years it allows M to see the steady increases coming through.
This is M’s tables since 2019 so covering both Covid and Ukraine market upsets; the assets have been anonymised because this blog is available to the public, and our research is for the benefit of our clients.
2019
2020
2021
2022
We have made alterations to M’s portfolio over the last few years which is why the income varied from 20 to 21 – the changes were because the Perpetual Trust was merged into Murray Income so there was an exceptional income payment from them in November 2020.