After Crystallisation & During Drawdown

[AsleepInYorkshire]

I've been trying to put together a plan to retire for many years. I've inched forward.

My original plan has been amended after feedback on this board. I'm grateful.

The new plan has some "what if's" that I need to overcome. I don't think they are insurmountable and I think they should happen.

If the new plan works me and my good lady will have a joint pension pot of £615K by March 2023. We will need £3K per month to live on. I know this seems high but we are dropping £9K per year in our daughters junior ISA and don't want to stop that before she's 18.

We are proposing to crystalise the pensions and draw down 25% tax free. Which is £154K. At a monthly burn of £3K per month this will allow us 4 years and a couple of months income allowance. During this time we are proposing to draw down £12.5K each per year in line with our PAYE tax thresholds. We will put this money into ISA's or possibly use up £3.6K per annum on new pensions. So over 4 years we will put £100K into ISA's. The pension pots will have grown to £560K (assessed). The plan would then be to draw down from the ISA's giving another 3 years income and the draw down for the pensions would continue at £25K to go into ISA's. Noting that when we stop adding to our daughters JISA we will use this money to offset inflation etc.

None of our planning relies on state pensions. Mine is due in 2029 and my good ladies is due in 2034.

Can I ask if the above "outline" conceptual plan of drawdown looks rational please?

Thank you

AiY

[swill453]

You say "joint pension pot", but obviously no such thing exists so you must be referring to two separate ones?

Given the difference in ages of you and your wife, will you be able to crystallise both at the same time?

Scott.

[TedSwippet]

We are proposing to crystalise the pensions and draw down 25% tax free. Which is £154K. At a monthly burn of £3K per month this will allow us 4 years and a couple of months income allowance.

What do you plan to do with the £154K during the four and a bit years that you are spending it? Keeping it in an interest bearing account would be safe, but with low return.

Have you considered instead using UFPLS to gradually take your tax-free money? The usual reasons for taking it all up-front are for a large outlay, say paying off a mortgage, or to mitigate LTA issues. As far as I can tell from your post, neither of these applies to you. By leaving money in the pension you allow your 25% to effectively grow tax-free over the withdrawal period.

[AsleepInYorkshire]

You say "joint pension pot", but obviously no such thing exists so you must be referring to two separate ones?

Given the difference in ages of you and your wife, will you be able to crystallise both at the same time?

Scott.

Yes. Sorry I should have said two separate pension pots Yes to crystallisation at the same time - both over 55. Split between pots is roughly 60/40.

AiY

[AsleepInYorkshire]

We are proposing to crystalise the pensions and draw down 25% tax free. Which is £154K. At a monthly burn of £3K per month this will allow us 4 years and a couple of months income allowance.

What do you plan to do with the £154K during the four and a bit years that you are spending it? Keeping it in an interest bearing account would be safe, but with low return.

Have you considered instead using UFPLS to gradually take your tax-free money? The usual reasons for taking it all up-front are for a large outlay, say paying off a mortgage, or to mitigate LTA issues. As far as I can tell from your post, neither of these applies to you. By leaving money in the pension you allow your 25% to effectively grow tax-free over the withdrawal period.

Thank you for your reply. The plan to take the maximum tax free lump sum was effectively a hedge against any downturns in the market. Also we want to give our daughter a gift, albeit we don't know what size yet. That's more dependant upon circumstances closer to R-Day. Possibly £10-£30K.

If R-Day is say 1st April 2023 and the US and China go to war the day before causing a 50% drop in the value of the pension pot then we can

1 ) Remain in work until the pension pot recovers
2 ) Take a much smaller cash sum (highly unlikely)
3 ) Consider UFPLS - which I'd not remembered was an option

Sorry I don't wish to sound disingenuous about your response. I had genuinely forgotten I could draw down in "bits". But I'm concerned that would be too high a risk to pay if the market fell for a prolonged period. May I ask if you feel I have understood this or am I still missing something please?

Thank you

AiY

[swill453]

I'd tend to think in terms of having a cash buffer of, say, 2-3 years expenditure and keeping the rest invested. That way you're reasonably safe from the risk of having to liquidate investments when the market is low.

You top up the cash buffer with drawdown from the pensions.

That doesn't answer the question of whether to crystallise or not, since you could just as easily crystallise the whole pensions and re-invest in the same things outside the pension. ISAs would obviously be preferable, but tax allowances on dividends mean that income tax wouldn't be much of an issue at your (joint) levels of income.

So I don't think there's much long with your plan, I would just come at it from a different angle.

Scott.

[TedSwippet]

The plan to take the maximum tax free lump sum was effectively a hedge against any downturns in the market. Also we want to give our daughter a gift, albeit we don't know what size yet. That's more dependant upon circumstances closer to R-Day. Possibly £10-£30K. ... But I'm concerned that would be too high a risk to pay if the market fell for a prolonged period. May I ask if you feel I have understood this or am I still missing something please?

Understood. However, hedging against market downturns and fully crystallising a pension are not necessarily connected. You could move a chunk of your pension into much safer assets, but just leave it in the pension until needed. This has the added advantage of keeping it outside of your estate for IHT purposes.

Obviously you'll want to take the £10k-£30k for the gift, but the rest of the money you want to keep safe for spending down could be invested within your pension into something that is either cash-like, or if your pension provider offers this, actual interest-paying cash. In times of ordinary interest rates this would work quite well. However, money market funds are yielding virtually (if not, actually) zero, whereas with a bit of work you can probably find north of 1% (taxable, unfortunately) fairly easily for a building society or bank 1 year or longer term bond.

Given the disparity in interest rates between what you can get from funds held in a pension and what you could get outside (and assuming that you are happy that you might miss out on some decent market gains if you move to safety and armageddon does not materialise!) your plan is probably fine. Just worth understanding the trade-offs, I think.

[xxd09]

I would say that a 60/40 portfolio of £100000 generates £3000 pa as a rough guide in today tough times
Ideally therefore a income of £36000 pa would need a portfolio of £1200000
Anything less than that would mean the possibility of running out of income is very likely
It is always a surprise to me how large the sums are that are required for a successful pension!
xxd09

[MickR]

I'd tend to think in terms of having a cash buffer of, say, 2-3 years expenditure and keeping the rest invested. That way you're reasonably safe from the risk of having to liquidate investments when the market is low.

You top up the cash buffer with drawdown from the pensions.

That doesn't answer the question of whether to crystallise or not, since you could just as easily crystallise the whole pensions and re-invest in the same things outside the pension. ISAs would obviously be preferable, but tax allowances on dividends mean that income tax wouldn't be much of an issue at your (joint) levels of income.

So I don't think there's much long with your plan, I would just come at it from a different angle.

Scott.

I think another advantage of the plan is to do with inheritance tax. If you both die before you are 75, then the whole of the pension pot can be transferred to your daughter totally tax free. My plan is to take all of my tfls as soon as I retire and reinvest in ISA's, leaving only the taxable element in the pot. If we do cop it before we're 75, then we've maximised the tax free allowance, and I've had my 25% to spend on a campervan or something. After this, I will then draw down enough annually to cover my tax free allowance. When I reach 75, I'll see where I'm at regards finance and inheritance tax, and make a decision then on what to do with the remainder

[DrFfybes]

As xxd09 says, that is a lot of drawdown.

It doesn't matter how you massage the takedown, your're after £3k/month £36k/year on £650k which is nearly 6%, and at that rate it will not last. Even dropping by £9k you are still at 4.4% which is a bit toppy, although it would presumably drop in 8 years as the SP kicks in?

After the lump sum you will have £450k left, taking £25k/year from it which is stil 5.5%.

You say...

So over 4 years we will put £100K into ISA's. The pension pots will have grown to £560K (assessed)

Over 4 years you will have taken £100k from the remaining 450k, and expect it to have grown to 560k? That is an expectation of about 10% pa growth. That might have been the case for VWRL over the last 10 years, but I wouldn't stake my retirement on it continuing.

Probably not what you want to hear, but I would say you are being a little optimistic.

Paul