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    • Gallygirl
    • By Gallygirl 14th Sep 17, 2:33 PM
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    Gallygirl
    Help with drawdown strategy
    • #1
    • 14th Sep 17, 2:33 PM
    Help with drawdown strategy 14th Sep 17 at 2:33 PM
    My OH and myself are approaching retirement in the next few years. Ahead of that I am trying to understand which method to use to access our SIPP's either Flexi–access drawdown or Uncrystallised Funds Pension Lump Sum (UFPLS).

    Our SIPP's are approaching £300,000 each and we have ISA's of 250,000 each. We would like to ideally live off the natural yield from the mixture of funds, IT's, REITs we have until we hit State pension age and then either use that and reduce how much we are taking from our SIPP so we can leave something for our children or perhaps defer SP for a few years and then reduce withdrawals from SIPP.

    What I cannot get my head round is how to take the yield from the SIPP's. We do not need a tax free lump sum ( mortgage free) and will have 2-3 years of planned annual spending in cash (£30,000 pa is our target) Do I crystallise them in one go? , in stages? How do I maintain the % allocation to funds if some are crystallised and some are not. We are currently with Interactive Investor but would consider moving if it makes managing this easier.

    What method, flexi-drawdawn or UFPLS would suite our requirements best and how do we put these into practice.

    TIA

    Gallygirl
    Last edited by Gallygirl; 14-09-2017 at 2:34 PM. Reason: punctuation
Page 1
    • dunstonh
    • By dunstonh 14th Sep 17, 2:44 PM
    • 89,435 Posts
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    dunstonh
    • #2
    • 14th Sep 17, 2:44 PM
    • #2
    • 14th Sep 17, 2:44 PM
    What I cannot get my head round is how to take the yield from the SIPP's.
    You will take a fixed regular income (or ad-hoc) rather than natual income. Typically, get the natural income paid into the cash account of the SIPP and then draw a figure that you know is sustainable from the cash account.

    You would do this using flexi-access drawdown or phased flexi-access drawdown. Latter sounding more likely suitable given what you are written.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • maximumgardener
    • By maximumgardener 14th Sep 17, 4:03 PM
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    maximumgardener
    • #3
    • 14th Sep 17, 4:03 PM
    • #3
    • 14th Sep 17, 4:03 PM
    Its a consideration for you to think about drawing down your gains from ISA funds rather than the SIPP funds?

    i.e. leave the SIPP's to grow (up & down) and be drawn down later by you or future generations?
    • kidmugsy
    • By kidmugsy 14th Sep 17, 4:27 PM
    • 9,595 Posts
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    kidmugsy
    • #4
    • 14th Sep 17, 4:27 PM
    • #4
    • 14th Sep 17, 4:27 PM
    Our SIPP's are approaching £300,000 each and we have ISA's of 250,000 each. ... how much we are taking from our SIPP so we can leave something for our children.
    Originally posted by Gallygirl
    If you are set on letting inheritance questions intrude on your strategy then you might like to consider drawing so little from your SIPPs that you pay no income tax (currently an annual £11,500 plus corresponding TFLS of £3833 if we ignore the interest on your savings) and thereafter live off your ISAs. To get a joint £30k you need take nothing from the ISAs or Emergency Cash except in years when some unusual expenditure arises. (And they do arise; in our case, more often than we expected.)

    However (merry wheeze) take a bit from the ISAs or Emergency Cash and annually each contribute £2880 net to your SIPPs. This is a tax-effective way of avoiding having the SIPPs run down so quickly.

    Once your state pensions begin then reduce your take from the SIPPs so that you still pay no income tax. At that point your SIPPs might hardly be running down at all. Your ISAs and EC will still be covering you from unusual expenditure and the grim prospect of care in old age.

    If you are really keen to use SIPPs to avoid inheritance tax ask yourselves whether you can contribute more while you are still both working e.g. by withdrawing money from ISAs or your cash reserve. After all, if you are already 55 the money in SIPPs is about as easily accessible as the money in your ISAs.
    • Gallygirl
    • By Gallygirl 14th Sep 17, 5:51 PM
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    Gallygirl
    • #5
    • 14th Sep 17, 5:51 PM
    • #5
    • 14th Sep 17, 5:51 PM
    So are you saying just crystallise the dividends from the funds?
  • jamesd
    • #6
    • 14th Sep 17, 6:04 PM
    • #6
    • 14th Sep 17, 6:04 PM
    It looks as though the flexi-access drawdown approach is likely to be most suitable. That's because you can easily take just the tax free lump sum from all or part of one of the pots at the start and put the 75% into income drawdown. You can then put the tax free lump sum 25% into the ISA and have it grow there with no income tax cost if you take money out. This no tax way to get money into the ISA so it can generate tax free income is one of the nicer uses of the tax free lump sum.

    From the taxable 75% you can draw out enough to at least use your income tax personal allowance each year, so you're getting it out tax free.

    There is further income tax optimisation possible by learning about Venture Capital Trusts. Those provide income tax relief of 30% of the amount purchased that has to be repaid if you sell within five years. Also tax exempt dividends and no CGT. the one I tend to suggest to beginners here pays 7% dividend. What you can do to support this is taking out your full basic rate band of income from the taxable pension 75% for a few years early on and just move it into the ISAs as the five years expire. Or you can hold for the ongoing tax exempt dividend.

    You appear to be considering taking far less than your actual income potential, which is probably more like £40-50,000 each. To learn more about that sort of potential have a read of the examples linked from this post in the Drawdown:safe withdrawal rates topic. A ley thing you need to know about income drawdown is that the amounts from safe withdrawal rates are cautious, assuming you live through some of the worst investing times when retired. In effect the inheritance ends up reduced mainly in cases where your children would be wanting you to look after yourselves first. To give some idea of how cautious, the old fashioned 4% rule would be 6.5% of pot as annual income if average results happened instead of worst and two thirds of the time when drawing 4% in the US the final amount would have been more than twice the starting amount, 96% of the time at least as much. Really big differences there between worst case and average or better that you can exploit if you're willing to adjust based on how your investments really do while retired.

    There's one fairly easy way to still take natural yield and increase the income you take at the moment: peer to peer lending. The sort of places normally suggested here, Ablrate, Collateral and MoneyThing, normally pay about 12% raw interest rate with perhaps 10% if a loan defaults and the security has to be sold for less than the amount borrowed. 10% natural yield can greatly boost yield without exposing you to stock market risks and without any long term tie-in since you can offer to sell non-defaulted loans whenever you like and that doesn't normally take an excessive time. If you were to use the £325,000 you have from ISA now and the pension tax free lump sum in this way you'd generate around £32,500 a year (at 10%) of interest each from about 60% of your total investment pot. You should add more places to get to at least five platforms, some would pay less but £25,000-£30,000 a year each is easy enough.
    Last edited by jamesd; 14-09-2017 at 6:43 PM.
  • jamesd
    • #7
    • 14th Sep 17, 6:12 PM
    • #7
    • 14th Sep 17, 6:12 PM
    UFPLS is a fixed 25% tax free and 75% taxable from each amount drawn. It makes it harder to do the tax planning and still take the income you want so it's not a particularly great option when you will be drawing money over many years. You can use a mixture of the two, though.

    Where pensions can do well under current rules is as an inheritance tax dodge. If you die before age 75 your nominated beneficiaries get a pension pot of their own that they can take tax free money out of whenever they like, any age. After age 75 the same but each portion of their pot is added to their taxable income whenever they take it. You can leave it to a baby and for the child's maintenance and skip the parents to save them tax, because money to a child can be used to pay for the child's needs. Particularly useful if you die after age 75 because the child won't have any other taxable income, probably, but still has an income tax personal allowance to use. While the parents are probably getting other income and already using their allowances. If someone dies while they still have one of these "beneficiary pension"s their own beneficiaries get a "successor pension", same tax treatment.

    On the other hand, pension gifting by inheritance has a big disadvantage: you're dead so you can't see them enjoying the benefits of the gift. For this reason I tend to favour taking lots of income while alive and using that for gifting, something you can adjust if it turns out that you do live through unusually bad times, or increase if you do well. Gifts out of income like this are outside inheritance tax as soon as they are made. So you can do things like regular giving to the junior ISA's or pensions of grandchildren to set them up nicely for later life and know that you've done this well before you are dead.

    With careful planning and some light VCT use you should be able to arrange things so that you never pay any more than a trivial amount of income tax in your future and nor do your beneficiaries.
    Last edited by jamesd; 14-09-2017 at 6:21 PM.
  • jamesd
    • #8
    • 14th Sep 17, 6:17 PM
    • #8
    • 14th Sep 17, 6:17 PM
    Dividends from funds don't pay out regularly the same amounts so they aren't great for easily managed income provision. Instead what you'd look to do is leave some cash in the pensions and have that topped up by the dividends as they arrive. That cash then funds the regular payments and you top it up from time to time with more selling if needed. If you set the drawing monthly payments to about the natural yield you won't end up having to do selling because it won't be drained, though in reality bad dividend years will gradually deplete the cash.
    • kidmugsy
    • By kidmugsy 14th Sep 17, 6:34 PM
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    kidmugsy
    • #9
    • 14th Sep 17, 6:34 PM
    • #9
    • 14th Sep 17, 6:34 PM
    So are you saying just crystallise the dividends from the funds?
    Originally posted by Gallygirl
    No. I didn't mention dividends.
    • Gallygirl
    • By Gallygirl 14th Sep 17, 6:45 PM
    • 8 Posts
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    Gallygirl
    It looks as though the flexi-access drawdown approach is likely to be most suitable. That's because you can easily take just the tax free lump sum from all or part of one of the pots at the start and put the 75% into income drawdown. You can then put the tax free lump sum 25% into the ISA and have it grow there with no income tax cost if you take money out. This no tax way to get money into the ISA so it can generate tax free income is one of the nicer uses of the tax free lump sum.

    .
    Originally posted by jamesd
    So you are saying crystallise the whole ISA of 325000 and take the 25% tax free lump sum of 130,000. Its going to take me a few years to put that into ISA's. If I just crystallise a 100,000 each year that would give me a tax free lump sum of 25000 but I need the income from the 75,000 AND the remaining uncrystallised 225,000. I'm assuming a conservative yield of 3% so £300,000 should give me £9000 a year, add that to OH 9000 plus 3% from the 450,000 in the ISA's of 13,500 gives £31,500 per year. But how do we get that 3% from ALL of the SIPP, crystallised and uncrystallised?
  • jamesd
    Either all at once or enough extra to fund £20,000 a year each into the ISA. All at once makes it easier to manage the investments because there won't be a chance of two pots to look at. More income tax potential on the bit not in the ISA yet so if you're willing to do a bit more work the 20k on top of what else you need each year is a bit more efficient.

    If using VCTs it doesn't matter much because you'd just adjust the VCT to deal with whatever the tax bill is and get rid of most of it. At basic rate you'd make a tax profit as well as the likely investment gains.

    If you crystallise £100,000 a year you'd take the taxable income solely out of the 75% of that by doing a bit of selling and let the dividends accumulate in the uncrystallised portion. You can't take income out of the uncrystallised except via UFPLS. You could juggle the two that way but it's not worth it. Just sell enough in the crystallised 75,000 so that the cash in it is enough to fund the regular income from the whole pot value. If that's to be £15,000 taxable each year, put £15,000 of the £75k into cash and none of the uncrystallised pot.
    Last edited by jamesd; 14-09-2017 at 6:58 PM.
    • Triumph13
    • By Triumph13 14th Sep 17, 6:59 PM
    • 1,028 Posts
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    Triumph13
    So you are saying crystallise the whole ISA of 325000 and take the 25% tax free lump sum of 130,000. Its going to take me a few years to put that into ISA's. If I just crystallise a 100,000 each year that would give me a tax free lump sum of 25000 but I need the income from the 75,000 AND the remaining uncrystallised 225,000. I'm assuming a conservative yield of 3% so £300,000 should give me £9000 a year, add that to OH 9000 plus 3% from the 450,000 in the ISA's of 13,500 gives £31,500 per year. But how do we get that 3% from ALL of the SIPP, crystallised and uncrystallised?
    Originally posted by Gallygirl
    It makes no difference what wrapper the investments are in, just take 3% of everything! Anything drawn from outside the pension is tax free, anything from crystallised pensions funds is taxable - but as others have said you can easily stay below your PA. Anything from uncrystallised pension is 25% tax free 75% taxable.
    Investment growth on the other hand is tax free in the pension or the ISA, taxable as either income (dividends) or capital gains if outside waiting to go into the ISA - but the annual allowances should cover that easily enough.
    • Triumph13
    • By Triumph13 14th Sep 17, 7:12 PM
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    Triumph13
    Life is much simpler if you just think in terms of total investment earnings rather than dividends. If you think about it, if all your investments were in a fund that returned x% every year and you could either have that as an Inc fund which paid out the dividends or an acc fund that reinvests the dividends, then you end up in exactly the same place. Try an example.
    Fund has a value of £100M. The underlying investments pay a dividend of £3M and so their own values drop by £3M accordingly. The fund now has £97M of investments and £3M of cash . An Inc fund pays out a dividend of £3M to it's investors and so the unit price drops from say £100 to £97. If you held 100 units you now have £300 cash dividend and units worth £9,700. An Acc fund instead uses the £3M of cash to buy more of the underlying investments so it goes back to having £100M of investments. You sell 3% of your holding and you end up with exactly the same £300 of cash and £9,700 of investments.
    If you try and manage everything based on having inc funds and only drawing the dividends then you are landing yourself with a whole heap of unnecessary difficulty because the dividends are sitting in each and every pot and so you have to draw your 3% or whatever from each and every pot, every time. Nightmare.
    If instead you just sell 3% of your acc units each year then all the investments are fungible - you just take your drawings from wherever is most convenient / tax efficient.
    • BLB53
    • By BLB53 14th Sep 17, 7:36 PM
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    BLB53
    So you are saying crystallise the whole ISA of 325000 and take the 25% tax free lump sum of 130,000. Its going to take me a few years to put that into ISA's. If I just crystallise a 100,000 each year that would give me a tax free lump sum of 25000 but I need the income from the 75,000 AND the remaining uncrystallised 225,000. I'm assuming a conservative yield of 3% so £300,000 should give me £9000 a year, add that to OH 9000 plus 3% from the 450,000 in the ISA's of 13,500 gives £31,500 per year. But how do we get that 3% from ALL of the SIPP, crystallised and uncrystallised?
    I would forget about 'crystallised and uncrystallised' and focus on flexi-drawdown.

    Yr 1 convert £100K to FD, take 25% tax free and put £20K in ISA and then forget about 'income' and just take whatever you need from remaining £75K.

    Repeat yrs 2 & 3.

    You may get more from an article on drawdown by DIY Investor
    http://diyinvestoruk.blogspot.co.uk/2016/08/a-look-at-sustainable-drawdown.html
    If you choose index funds you can never outperform the market.
    If you choose managed funds there's a high probability you will underperform index funds.
    • dunstonh
    • By dunstonh 14th Sep 17, 8:31 PM
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    dunstonh
    So you are saying crystallise the whole ISA of 325000 and take the 25% tax free lump sum of 130,000. Its going to take me a few years to put that into ISA's. If I just crystallise a 100,000 each year that would give me a tax free lump sum of 25000 but I need the income from the 75,000 AND the remaining uncrystallised 225,000. I'm assuming a conservative yield of 3% so £300,000 should give me £9000 a year, add that to OH 9000 plus 3% from the 450,000 in the ISA's of 13,500 gives £31,500 per year. But how do we get that 3% from ALL of the SIPP, crystallised and uncrystallised?
    Originally posted by Gallygirl
    I wouldnt crystallise the whole lot. I would use phased flexi-access drawdown as that seems to be the most efficient method. However, that is only based on the limited info available.

    Forget the dividends. Have them paid into the cash account (assuming you have inc units) Then draw the income on a fixed monthly amount from the cash account at a level that is sustainable from the dividends. This assumes you actually need that level of income.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • Gallygirl
    • By Gallygirl 15th Sep 17, 9:54 AM
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    Gallygirl
    "I wouldnt crystallise the whole lot. I would use phased flexi-access drawdown as that seems to be the most efficient method. However, that is only based on the limited info available.

    Forget the dividends. Have them paid into the cash account (assuming you have inc units) Then draw the income on a fixed monthly amount from the cash account at a level that is sustainable from the dividends. This assumes you actually need that level of income."

    So, say I crystallized 100,000. That would give me a tax free lump sum of 25,000 and 75,000 that would say at 3% give me £2250. If my ISA gave me £7000 a year in income, the shortfall for my 15,000 would be £5750 which I could take from the tax free lump sum of 25,000? So this could last me approx 4 years before crystallizing another 100,000. The only thing is the tax free lump sum either sitting earning no interest with interactive investor or I suppose putting it into the ISA.

    When you crystallize part of your SIPP is it in specie? Do I have to choose which funds are transferred or which to sell, transfer over in cash and repurchase funds for the £75000 ?
    • dunstonh
    • By dunstonh 15th Sep 17, 10:53 AM
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    dunstonh
    o, say I crystallized 100,000. That would give me a tax free lump sum of 25,000 and 75,000 that would say at 3% give me £2250.
    You say you have lump sums elsewhere and dont need the lump sum. So, why would you crystallise £100k?
    That £2250 would be 100% taxable income, subject to personal allowance as you used the 25% as a lump sum.

    If my ISA gave me £7000 a year in income, the shortfall for my 15,000 would be £5750 which I could take from the tax free lump sum of 25,000? So this could last me approx 4 years before crystallizing another 100,000.
    Alternatively, you use phased flexi-access drawdown to pay you the monthly amount you need where 75% is taxable and 25% is tax free. You dont waste your 25% in a lump sum that is not needed (but it reamins available to you at a future date should you want to).

    When you crystallize part of your SIPP is it in specie?
    yes. However, your fund is split between the two.

    Do I have to choose which funds are transferred or which to sell, transfer over in cash and repurchase funds for the £75000 ?
    Yes you do. However, the options you have available will vary with providers.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • Gallygirl
    • By Gallygirl 15th Sep 17, 11:11 AM
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    Gallygirl
    The 100, 000 was from James' suggestion.

    "Alternatively, you use phased flexi-access drawdown to pay you the monthly amount you need where 75% is taxable and 25% is tax free. You dont waste your 25% in a lump sum that is not needed (but it reamins available to you at a future date should you want to)."

    That makes more sense to me. So if I need 8000 from my SIPP per year I would crystallize that amount either monthly or once or twice a year making sure I had enough cash to do so or sell sufficient funds to cover?
    • Gallygirl
    • By Gallygirl 15th Sep 17, 11:14 AM
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    Gallygirl
    "You dont waste your 25% in a lump sum that is not needed (but it reamins available to you at a future date should you want to"

    Do you mean phased flexi-access doesnt include the lump sum but I can accumulate all of the 25% lump sum allowances for a future date or that purely the lump sum remains invested in the SIPP?
    • dunstonh
    • By dunstonh 15th Sep 17, 11:29 AM
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    dunstonh
    That makes more sense to me. So if I need 8000 from my SIPP per year I would crystallize that amount either monthly or once or twice a year making sure I had enough cash to do so or sell sufficient funds to cover?
    If you needed £8000 from the SIPP. That is 666pm. You would crystallise £666pm and 75% would be taxable and 25% would be tax free.

    If there was no other income, you could crystallise enough to use up the personal allowance with the 75% chunk. That way you can draw £11,500 tax free under your personal allowance and the 25% part would be on top of that and not taxable. You can then put any excess you dont spend into the S&S ISA.

    Do you mean phased flexi-access doesnt include the lump sum but I can accumulate all of the 25% lump sum allowances for a future date or that purely the lump sum remains invested in the SIPP?
    Phased flexi-access drawdown only crystallises what you draw each month. So, everything left behind is uncrystallised. And that uncrystallised pot has all options open to it in future.

    By far the most common method we use as advisers is phased flexi-access drawdown. Yet most of the consumers we deal with know nothing about that method.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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