Pension Drawdown Strategy
Discussion
I turn 55 later this year and one of my pension providers has written to me outlining the various options when withdrawing money.
I'd appreciate the thoughts and experiences of others who are in this situation.
I'm certain that I don't wish to purchase an annuity, nor do I wish to withdraw the entire pot. That leaves moving to a drawdown account or flexibly taking lump sums as and when (UFPLS). I'm leaning towards UFPLS - is there an advantage to a drawdown account or any other differences that I should consider?
Also, what overall strategy should I consider for withdrawal when considering the wider picture of funding my retirement and minimising tax payable.
I have four elements to my retirement income;
1. The SIPP referred to above.
2. A deferred DB pension from the earlier part of my career - I can access this at 55 too if I wish, but without any reduction factors from 60. It has the usual tax-free commencement lump sum provision with a reduction factor of approximately 19 (approximately, as it depends on the accrual dates as to what factor is applied, but roughly speaking for every £19 of lump sum taken, the annual income is reduced by £1). The early commencement penalty for the preserved benefit is 3.5% per year (so 17.5% if taken at 55). My current thinking is to leave this alone until I'm 60 (it does benefit from an annual inflationary increases - some capped at 5%, some at 2.5%, some discretionary).
3. An ISA currently 100% invested in equities (mostly a World Index fund). I've been unemployed (accidentally retired!) for a while now and been living on withdrawals from this.
4. State Pension which I will be eligible for at 67 (current legislation) or 68 (proposed legislation). I am 3 years short of the full NI contributions, but can buy these years for approximately £2532 for an extra £16pw. This seems good VFM and would mean only drawing state pension for approximately 3 years for it to repay me (ignoring inflation and taxation).
What I am struggling to decide is how much to withdraw from the SIPP and when?
I could, for example, withdraw £16760 per year and pay no tax and fund the rest of my outgoing by drawing down on my ISA. Alternatively I could withdraw £50270, pay about £5k in income tax (after Personal Allowance and Tax Free element) and keep the ISA for 'special' expenditure rather than regular outgoings. Somewhere inbetween may be the optimum, I just don't know?
Can anyone offer any experience as to how they have drawndown?
The other side to this, is how the funds within the SIPP should be invested (and the ISA I suppose) now that I'm moving to the drawdown phase.
Currently it is 90% equities (Global Index tracker). I am in the fortunate postion of having a DB Pension too, so I am not particularly focussed on making this pot last for the rest of my life. I will be comfortable with hitting zero sometime between 2030 and 2035 (when I will have had 5 years of DB Pension income and be close to State Pension age).
How have others transitioned the investments within their pension from the accumulation phase to the drawdown phase?
Sorry it's a long post, but pensions just aren't straightforward!
I'd appreciate the thoughts and experiences of others who are in this situation.
I'm certain that I don't wish to purchase an annuity, nor do I wish to withdraw the entire pot. That leaves moving to a drawdown account or flexibly taking lump sums as and when (UFPLS). I'm leaning towards UFPLS - is there an advantage to a drawdown account or any other differences that I should consider?
Also, what overall strategy should I consider for withdrawal when considering the wider picture of funding my retirement and minimising tax payable.
I have four elements to my retirement income;
1. The SIPP referred to above.
2. A deferred DB pension from the earlier part of my career - I can access this at 55 too if I wish, but without any reduction factors from 60. It has the usual tax-free commencement lump sum provision with a reduction factor of approximately 19 (approximately, as it depends on the accrual dates as to what factor is applied, but roughly speaking for every £19 of lump sum taken, the annual income is reduced by £1). The early commencement penalty for the preserved benefit is 3.5% per year (so 17.5% if taken at 55). My current thinking is to leave this alone until I'm 60 (it does benefit from an annual inflationary increases - some capped at 5%, some at 2.5%, some discretionary).
3. An ISA currently 100% invested in equities (mostly a World Index fund). I've been unemployed (accidentally retired!) for a while now and been living on withdrawals from this.
4. State Pension which I will be eligible for at 67 (current legislation) or 68 (proposed legislation). I am 3 years short of the full NI contributions, but can buy these years for approximately £2532 for an extra £16pw. This seems good VFM and would mean only drawing state pension for approximately 3 years for it to repay me (ignoring inflation and taxation).
What I am struggling to decide is how much to withdraw from the SIPP and when?
I could, for example, withdraw £16760 per year and pay no tax and fund the rest of my outgoing by drawing down on my ISA. Alternatively I could withdraw £50270, pay about £5k in income tax (after Personal Allowance and Tax Free element) and keep the ISA for 'special' expenditure rather than regular outgoings. Somewhere inbetween may be the optimum, I just don't know?
Can anyone offer any experience as to how they have drawndown?
The other side to this, is how the funds within the SIPP should be invested (and the ISA I suppose) now that I'm moving to the drawdown phase.
Currently it is 90% equities (Global Index tracker). I am in the fortunate postion of having a DB Pension too, so I am not particularly focussed on making this pot last for the rest of my life. I will be comfortable with hitting zero sometime between 2030 and 2035 (when I will have had 5 years of DB Pension income and be close to State Pension age).
How have others transitioned the investments within their pension from the accumulation phase to the drawdown phase?
Sorry it's a long post, but pensions just aren't straightforward!
I went into Chapter 2 ( I hate the word retirement ) in December 2021 at the age of 60 and took my first drawdown payment from my “CETV ‘d pot “ in May 2022.
Since then I have kept the dd the same per month until what will be April’s payment when I have organised a pay rise.
I think next year I will do the same.
I was sad and had always kept a spreadsheeted budget so I knew what we needed post working which I largely kept the same.
I for the first two years withdrew both the 25% TFC plus the balance of the sum chosen.
Shortfalls if applicable came from either existing other Investments or recycled investment in VCT’s.
The latter in effect reduced or will reduce my tax bill for 5 years ie by 20% per annum.
I have subsequently withdrawn the entirety of the 25% to use as early inheritance for my 3 children to add to their house purchase funds.
Each year I have redone my numbers to calculate the dd needed.
I think my highest year dd to date has been 2% ignoring the now removed 25% TFC removal.
Obviously at 67 the SP will kick in and then I can reduce my dd or investment income needed accordingly.
I had always seen my Pension pot as being used as income and with the recent changes in IHT still think that’s the right thing to do for me.
I also have the luxury of having decent other existing investments from both ISA’s and IIB ‘s so could take income from these if needed.
My budget covers all of our expenses but new car purchases / holidays are excepted from this which come from existing other investments / cash.
Since then I have kept the dd the same per month until what will be April’s payment when I have organised a pay rise.
I think next year I will do the same.
I was sad and had always kept a spreadsheeted budget so I knew what we needed post working which I largely kept the same.
I for the first two years withdrew both the 25% TFC plus the balance of the sum chosen.
Shortfalls if applicable came from either existing other Investments or recycled investment in VCT’s.
The latter in effect reduced or will reduce my tax bill for 5 years ie by 20% per annum.
I have subsequently withdrawn the entirety of the 25% to use as early inheritance for my 3 children to add to their house purchase funds.
Each year I have redone my numbers to calculate the dd needed.
I think my highest year dd to date has been 2% ignoring the now removed 25% TFC removal.
Obviously at 67 the SP will kick in and then I can reduce my dd or investment income needed accordingly.
I had always seen my Pension pot as being used as income and with the recent changes in IHT still think that’s the right thing to do for me.
I also have the luxury of having decent other existing investments from both ISA’s and IIB ‘s so could take income from these if needed.
My budget covers all of our expenses but new car purchases / holidays are excepted from this which come from existing other investments / cash.
The other side to this, is how the funds within the SIPP should be invested (and the ISA I suppose) now that I'm moving to the drawdown phase.
Currently it is 90% equities (Global Index tracker). I am in the fortunate postion of having a DB Pension too, so I am not particularly focussed on making this pot last for the rest of my life. I will be comfortable with hitting zero sometime between 2030 and 2035 (when I will have had 5 years of DB Pension income and be close to State Pension age).
How have others transitioned the investments within their pension from the accumulation phase to the drawdown phase?
Sorry didn’t answer this part of your question.
My pot is approx 76% equities and 24% bonds.
This hasn’t changed materially since first dd.
The ISA and IIB pots are pretty much similar.
My wife’s ISA’s and IIB ‘s are about a 80/20 split.
Currently it is 90% equities (Global Index tracker). I am in the fortunate postion of having a DB Pension too, so I am not particularly focussed on making this pot last for the rest of my life. I will be comfortable with hitting zero sometime between 2030 and 2035 (when I will have had 5 years of DB Pension income and be close to State Pension age).
How have others transitioned the investments within their pension from the accumulation phase to the drawdown phase?
Sorry didn’t answer this part of your question.
My pot is approx 76% equities and 24% bonds.
This hasn’t changed materially since first dd.
The ISA and IIB pots are pretty much similar.
My wife’s ISA’s and IIB ‘s are about a 80/20 split.
5pen said:
I could, for example, withdraw £16760 per year and pay no tax and fund the rest of my outgoing by drawing down on my ISA. Alternatively I could withdraw £50270, pay about £5k in income tax (after Personal Allowance and Tax Free element) and keep the ISA for 'special' expenditure rather than regular outgoings. Somewhere inbetween may be the optimum, I just don't know?
Can anyone offer any experience as to how they have drawndown?
Firstly, congratulations for being in a position to retire so early! Can anyone offer any experience as to how they have drawndown?
I retired recently at 55 and initially thought that drawing £16,760 pa and topping up from other investments and cash was the best idea. However, I too have a final salary pension and I came to the realisation that I’m going to have to pay tax somewhere down the line as I wouldn’t be able to get it all out of the pension before the DB and state pensions kick in and use up my personal allowance. So, I’ve opted to drawdown and pay tax while keeping in the basic rate band.
My wife is also retired, but at 53 she can’t access her pension yet. Once she can I may reduce my drawdown to £16760, she will do the same and we can top up as required.
I know there’s the argument that, for now at least, there’s a benefit to pensions in terms of of IHT, but this is only short term.
Cabbage Patch said:
I retired recently at 55 and initially thought that drawing £16,760 pa and topping up from other investments and cash was the best idea. However, I too have a final salary pension and I came to the realisation that I’m going to have to pay tax somewhere down the line as I wouldn’t be able to get it all out of the pension before the DB and state pensions kick in and use up my personal allowance. So, I’ve opted to drawdown and pay tax while keeping in the basic rate band.
Thanks for that. I think this is where I’m heading. Striking the right balance is the bit I need to work out.5pen said:
trickywoo said:
The joker in the pack to consider is what if the tax free amount gets reduced.
Good point. I can only plan with the known rules for now and hope there’s some transitional period if it happens.I'm taking UPFLS from my SIPP or however the letters are arranged but keeping to below the 40% PAYE limit.
Moving most of that into my S&S ISA
Skyedriver said:
I asked about this on here a few days ago and was told the TF of 25% wouldn't be reduced. Still not sure myself.
I'm taking UPFLS from my SIPP or however the letters are arranged but keeping to below the 40% PAYE limit.
Moving most of that into my S&S ISA
On the balance of probabilities the 25% won’t be reduced but given Rachel from accounts ability anything is possible perhaps. I'm taking UPFLS from my SIPP or however the letters are arranged but keeping to below the 40% PAYE limit.
Moving most of that into my S&S ISA
Fwiw when I made plans to withdraw all of it in June last year my FA said that out of the 9 clients “ potentially affected “ 3 had withdrawn the funds.
I took the pot as wanted to add to my childrens house purchase funds as early inheritance and didn’t want to take the risk that things may change.
If you have no need to take it then leaving it untouched is probably what I would I have done.
alscar said:
Skyedriver said:
I asked about this on here a few days ago and was told the TF of 25% wouldn't be reduced. Still not sure myself.
I'm taking UPFLS from my SIPP or however the letters are arranged but keeping to below the 40% PAYE limit.
Moving most of that into my S&S ISA
On the balance of probabilities the 25% won’t be reduced but given Rachel from accounts ability anything is possible perhaps. I'm taking UPFLS from my SIPP or however the letters are arranged but keeping to below the 40% PAYE limit.
Moving most of that into my S&S ISA
Fwiw when I made plans to withdraw all of it in June last year my FA said that out of the 9 clients “ potentially affected “ 3 had withdrawn the funds.
I took the pot as wanted to add to my childrens house purchase funds as early inheritance and didn’t want to take the risk that things may change.
If you have no need to take it then leaving it untouched is probably what I would I have done.
Who knows what might happen, but there'd be uproar from the public sector if they couldn't take their TFLS.
Sheepshanks said:
alscar said:
Skyedriver said:
I asked about this on here a few days ago and was told the TF of 25% wouldn't be reduced. Still not sure myself.
I'm taking UPFLS from my SIPP or however the letters are arranged but keeping to below the 40% PAYE limit.
Moving most of that into my S&S ISA
On the balance of probabilities the 25% won’t be reduced but given Rachel from accounts ability anything is possible perhaps. I'm taking UPFLS from my SIPP or however the letters are arranged but keeping to below the 40% PAYE limit.
Moving most of that into my S&S ISA
Fwiw when I made plans to withdraw all of it in June last year my FA said that out of the 9 clients “ potentially affected “ 3 had withdrawn the funds.
I took the pot as wanted to add to my childrens house purchase funds as early inheritance and didn’t want to take the risk that things may change.
If you have no need to take it then leaving it untouched is probably what I would I have done.
Who knows what might happen, but there'd be uproar from the public sector if they couldn't take their TFLS.
alscar said:
Sheepshanks said:
alscar said:
Skyedriver said:
I asked about this on here a few days ago and was told the TF of 25% wouldn't be reduced. Still not sure myself.
I'm taking UPFLS from my SIPP or however the letters are arranged but keeping to below the 40% PAYE limit.
Moving most of that into my S&S ISA
On the balance of probabilities the 25% won’t be reduced but given Rachel from accounts ability anything is possible perhaps. I'm taking UPFLS from my SIPP or however the letters are arranged but keeping to below the 40% PAYE limit.
Moving most of that into my S&S ISA
Fwiw when I made plans to withdraw all of it in June last year my FA said that out of the 9 clients “ potentially affected “ 3 had withdrawn the funds.
I took the pot as wanted to add to my childrens house purchase funds as early inheritance and didn’t want to take the risk that things may change.
If you have no need to take it then leaving it untouched is probably what I would I have done.
Who knows what might happen, but there'd be uproar from the public sector if they couldn't take their TFLS.
Or better still , some really complicated sliding rates /years applicable / diminishing allowance based on salary to work out TFLS to make sure any tax garnished is wasted in administration
PM3 said:
I have an idea for her . How about only State funded workers get to take the 25% TFLS ?
Or better still , some really complicated sliding rates /years applicable / diminishing allowance based on salary to work out TFLS to make sure any tax garnished is wasted in administration
Exactly.Or better still , some really complicated sliding rates /years applicable / diminishing allowance based on salary to work out TFLS to make sure any tax garnished is wasted in administration
It will be a bit simpler knowing that SIPP's are becoming liable for IHT, so there's no benefit in keeping funds there vs an ISA.
Never let a tax free entitlement go to waste, so make sure you have 12,570 of 'taxable income' every year as a minimum. Similarly, don't go too low in the early years only to be liable for a higher rate in subsequent years when drawing it down.
Also, you've got to have somewhere to put it or something to do with it. No point in just taking the money & then having it sit somewhere exposed to CGT.
So it then depends on how much you've got...... marital status etc. so can you take money out & fill 2 x ISA's ?
My personal view is that state pension will fill the tax free allowance in the future. Therefore, I can use the allowance between now & state pension age - no brainer. However, everything in my SIPP above that is likely to be taxed at 20% minimum, unless you think tax rates will come down.... so I might as well take the 50k and put what I don't need right now into an ISA. What I want to avoid is ever needing to withdraw more in the future at 40%+ tax when I could have withdrawn at 20%.
I hope that makes some sort of sense.
I also took the 25% tax free in the first couple of years - I retired at 55 - but used the money towards buying a holiday home. I view that as contingency funding - if I need to sell it later in life, then I will, but for the foreseeable, we just enjoy having it.
Never let a tax free entitlement go to waste, so make sure you have 12,570 of 'taxable income' every year as a minimum. Similarly, don't go too low in the early years only to be liable for a higher rate in subsequent years when drawing it down.
Also, you've got to have somewhere to put it or something to do with it. No point in just taking the money & then having it sit somewhere exposed to CGT.
So it then depends on how much you've got...... marital status etc. so can you take money out & fill 2 x ISA's ?
My personal view is that state pension will fill the tax free allowance in the future. Therefore, I can use the allowance between now & state pension age - no brainer. However, everything in my SIPP above that is likely to be taxed at 20% minimum, unless you think tax rates will come down.... so I might as well take the 50k and put what I don't need right now into an ISA. What I want to avoid is ever needing to withdraw more in the future at 40%+ tax when I could have withdrawn at 20%.
I hope that makes some sort of sense.
I also took the 25% tax free in the first couple of years - I retired at 55 - but used the money towards buying a holiday home. I view that as contingency funding - if I need to sell it later in life, then I will, but for the foreseeable, we just enjoy having it.
Jockman said:
Give away regularly any surplus income to kids or grandkids.
Good stuff from Carbon there - & this comment on handing down early.OP, you don’t mention your plans for your Stage 3 (Alscar - I still think stage 1 was pre work, 2 was work!).
Can you usefully use the TFLS early on, do you have family you can help now rather than once you’ve passed away, etc. It certainly isn’t all about money….but it is about the timing & expectations!
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