How does Income Drawdown actually work?

Gatser

I know that I can take 25% tax free lump sum
then take an amount as defined by GADD (Govt Actuaries Dept)
BUT... if that amount is (say) £15,000pa, would it be up to me
to ensure that there was always £15k available in my Cash account?
(earning 0.25% interest probably!)

If that's the case, and I was paying in a further £10,000 of CASH
contributions to my pension, could that cash be used to pay out
my drawdown?

Thanks for any advice

EdInvestor

Gatser wrote: »

I know that I can take 25% tax free lump sum
then take an amount as defined by GADD (Govt Actuaries Dept)
BUT... if that amount is (say) £15,000pa, would it be up to me
to ensure that there was always £15k available in my Cash account?
(earning 0.25% interest probably!)

The amount of income you can take from a drawdown fund is calculated every 5 years by the actuary and is based on 120% of the income you would get from an annuity purchased with the fund.So you would need to have a substantial amount of money in the drawdown fund (say 250k for a 15k annual pension) - you can't fund it on a 'cashflow' basis.

You don't need to keep all the money in the cash account of course, just the pension income amount at the time it is payable.You would invest the rest.

Gatser

EdInvestor wrote: »

... you can't fund it on a 'cashflow' basis.

But in practical terms I still wonder how that works because at a point in time the SIPP bank account may have (say) £3400 in it ( its paying out £1250/month drawdown), further contributions could go in for (say) £1600.
How will contributions money going into the account, be separated from monies allocated for drawdown payout?
(Sorry if I am getting too technical... its my curiousity!)

EdInvestor wrote: »

You don't need to keep all the money in the cash account of course, just the pension income amount at the time it is payable.You would invest the rest.

There are still practical issues of exactly when (and how much) of the investments are liquidised to cover future drawdown requirements...is there a standard approach to this?

EdInvestor

Gatser wrote: »

But in practical terms I still wonder how that works because at a point in time the SIPP bank account may have (say) £3400 in it ( its paying out £1250/month drawdown), further contributions could go in for (say) £1600.
How will contributions money going into the account, be separated from monies allocated for drawdown payout?
(Sorry if I am getting too technical... its my curiousity!)

Ask the SIPP provider: they will be required to keep the two types of funds separately identified so that allowable income can be calculated, see above.Not all providers will allow additional contributions into funds in drawdown.

There are still practical issues of exactly when (and how much) of the investments are liquidised to cover future drawdown requirements...is there a standard approach to this?

Not AFAIK.Some people keep a portion of the total fund in cash as part of their asset allocation and pay income from that.Some people take their whole annual income in one payment. It is obviously sensible to avoid excessive transaction charges.

Debt_Free_Chick

At a simple level, let's say that you have £250k spread across a number of different funds and you want to drawdown £15k pa (I have no idea if that's realistic or not, just using it as an example).

There is no need for any of the capital to be held in cash - it can all be in equities, gold or spread across different asset classes, but assume it's all invested in funds.

As you've chosen to receive £1,250 per month, then the SIPP manager simply sells units in your funds to the value of £1,250 per month. That cash goes into the bank account and is then paid out to you.

How the units are sold across the funds and when is fine detail that you sort out with the SIPP manager, but in principle, the manager just sells investments (units) to provide the income stream.

As you can imagine, there are a number of more sophisticated methods of achieving the income stream, but at a high-level, they all start with this basic principle.

HTH

EdInvestor

Debt_Free_Chick wrote: »

As you've chosen to receive £1,250 per month, then the SIPP manager simply sells units in your funds to the value of £1,250 per month. That cash goes into the bank account and is then paid out to you.How the units are sold across the funds and when is fine detail that you sort out with the SIPP manager...

At the low cost SIPP providers, you will be expected to make sure the £1,250 is in the cash account when it is due to be paid out to you.The provider will not get involved in selling your investments.

Gatser

EdInvestor wrote: »

At the low cost SIPP providers, you will be expected to make sure the £1,250 is in the cash account when it is due to be paid out to you.The provider will not get involved in selling your investments.

Thanks folks...
Its making sense now.
On a practical level, I can see that it will be a challenge to guess the best time to convert investments into cash for future drawdown.
Also, if its best to do it in "one hit" per year rather than faffing about selling investments every month.
All part of SIPP fun I guess!