£900,000

Linton

I am a bit confused by your statement that you are going to be paying higher rate tax in retirement - presumably that means you have other major sources of income than the savings/pensions you listed. If that is the case I would have thought that retirement at 55 would be no problem.

Have you put together a plan? If not, its the essential first step. Excel is fine for this. You need to know your required income and then with parameterised estimates of inflation and investment return its pretty straightforward to work out your annual cash flow from say, retirement at 55, through to death at 90 or beyond.

Once you have a plan that works with adjusted required income, retirement age etc to ensure you are nowhere near running out of money before you die you will be in a much better situation to decide how to proceed.

Just maxing our everything and hoping for the best isnt the way to manage retirement.

gadgetmind

Linton wrote: »

I am a bit confused by your statement that you are going to be paying higher rate tax in retirement

I guess I might be borderline. It all depends on how HMG move the 40% tax threshold. I expect them to move it upwards very slowly to continue to catch more and more workers and pensioners in the 40% tax bracket.

presumably that means you have other major sources of income than the savings/pensions you listed.

No, nothing significant. Some unpredictable royalties, but these can probably be gifted to my wife. However, if I pack in my regular work, there are loads of ways I can earn a few extra bob by consulting and/or taking on some non-exec work, but this assumes I choose to remain in the UK.

Have you put together a plan? If not, its the essential first step. Excel is fine for this. You need to know your required income and then with parameterised estimates of inflation and investment return its pretty straightforward to work out your annual cash flow from say, retirement at 55, through to death at 90 or beyond.

I've got spreadsheets galore for pre-retirement but don't (yet) understand the rules enough to go post-retirement. For instance, I've done a lot of searching around to see my options regards taking a 25% lump sum but continuing to contribute to my private pension, but haven't found a clear summary. Everything either assumes you;re retiring when taking the sum of have one of these gold-plated public sector pensions where different rules apply.

Just maxing our everything and hoping for the best isnt the way to manage retirement.

Perhaps not, but my last encounter with an IFA resulted in some old PEPs getting moved to ISAs with a different provider, and - golly, how odd - 5% of the money seems to now be elsewhere. Oh, and I have a SIPP that seems to be paying someone trail commission.

I'm now wiser but sadly I learned my lesson the hard (and expensive) way.

jamesd

Yes, money into a pension for your wife would be a good idea, though ignore the CAT standard, it just doesn't matter these days.

Taking the full 25% lump sum will make it easier to stay under higher rate tax.

Hopefully by cash investments you mean mostly unwrapped funds and shares not cash savings accounts.

You can take the 25% lump sum and continue making contributions to pensions and getting tax relief. There's an anti-recycling rule that limits how much of the lump sum you can pay into a pension. If you concluded that you couldn't retire at 55 one of the best things you can do is take the lump sum and invest it, then take the maximum permitted income from the remaining 75% and put that income into another pension so you get a second chunk of tax relief. Or you could take and save the income so that at say 57 you have two years of saved taxed income to increase the money you have to above the GAD limit.

Income drawdown will surely be better than buying an annuity at 55 unless your health is poor, so you should forget annuities unless you want to try for flexible drawdown that allows you to exceed the GAD limit but then bars you from getting tax relief on pension contributions. There's expected to be a £20,000 income from annuities and workplace pensions requirement to use flexible drawdown. If it's after state pension age you can count the state pensions as well.

Nothing wrong with the trail commission if you got or are getting something for your money. If not you might consider moving it elsewhere. You seem to have a large enough pot for pension and non-pension to make getting an IFA-only product on fee instead of commission basis worthwhile.

The level of income you want and the investments you're choosing to use plus the amount you're adding each year will be the key factors in when you can manage it. It's worth looking at all of those factors.

Don't be keen on putting more of your income into the pension that higher rate tax. You'll need non-pension money as well as the lump sum to draw down the capital at a fast enough rate to cover the state pension income you aren't getting and produce a level income before they start.

You might consider some use of VCTs since those get 30% tax relief, up to the total tax paid in the year, and pay interest tax free. After allowing for the tax relief a yield in the 8-10% is achievable, though capital values can be uncertain to poor. It's a tool to start switching to income that can help to keep you away from higher rate tax when retired. Around £21,000 a year would get you back almost all of your basic rate tax (assuming you put all of your higher rate tax into a pension). Since that would leave you short of living money you could use savings that aren't in any tax wrapper to help to gradually get everything in some sort of tax wrapper.

While VCTs are nice for basic rate taxed income, the 30% relief isn't so different from 40% so you might consider some use of them with higher rate money to try to avoid the pension income getting into higher rate tax.

The limited life VCTs aren't so good for this because the idea is to get long term untaxed income, and to have the lump sum available after the five year holding period for VCTs that avoids the need to repay the 30% tax relief. Then, if necessary, you could sell some VCT capital during drawdown.

gadgetmind

jamesd wrote: »

Yes, money into a pension for your wife would be a good idea, though ignore the CAT standard, it just doesn't matter these days.

I haven't given it massive amounts of research, but Aviva via Cavendish is the best option I've found so far.

Taking the full 25% lump sum will make it easier to stay under higher rate tax.

Yup, that bit seems easy, but what to do with the money is less so. Perhaps it initially needs to go into unwrapped capital growth funds and then get moved into wrapped income funds as fast as the ISA limits will allow. Anyway, there is plenty of time to decide on that, and I'm sure all the relevant rules will have changed ten times by then.

Hopefully by cash investments you mean mostly unwrapped funds and shares not cash savings accounts.

Currently a 50:50 mix of funds/shares and cash with the latter earning 4% and locked in until October this year. We don't need any more rainy day cash, so we'll be putting about £10kpa into unwrapped funds - ISA allowances and CGT allowances will be used in parallel in a rather complex way, which I have had sanity checked by an accountant.

You can take the 25% lump sum and continue making contributions to pensions and getting tax relief. There's an anti-recycling rule that limits how much of the lump sum you can pay into a pension. If you concluded that you couldn't retire at 55 one of the best things you can do is take the lump sum and invest it, then take the maximum permitted income from the remaining 75% and put that income into another pension so you get a second chunk of tax relief. Or you could take and save the income so that at say 57 you have two years of saved taxed income to increase the money you have to above the GAD limit.

Yes, I'd seen those anti-recycling rules. They seem drafted such that a mind probe is required to see whether you worked within the rules rather than broke them as it's all down to intention.

Income drawdown will surely be better than buying an annuity at 55 unless your health is poor, so you should forget annuities unless you want to try for flexible drawdown that allows you to exceed the GAD limit but then bars you from getting tax relief on pension contributions.

I used an annuity calculator as I wanted to see worst case. I have also not included any capital growth over the next 7-10 years in my calculations of what pension, ISAs and unwrapped funds will be worth, not any increase in value of our property. Yes, I could include 5% pa, so 40% growth of existing stuff over 7 years, but that's not really something I can rely upon.

There's expected to be a £20,000 income from annuities and workplace pensions requirement to use flexible drawdown. If it's after state pension age you can count the state pensions as well.

State pension age seems to be receding into the future faster than I am approaching it. Regards £20k pa, my only pensions are those I have funded myself - what size of pot is required at 55 to get £20kpa? Does this include income from ISAs and spouse or is it per person and just on pensions?

Don't be keen on putting more of your income into the pension that higher rate tax.

I'm aiming to avoid the new 50% and 61% bands, but will be hitting my head on the new contribution limits. Getting out of the 40% band is the stuff of dreams nowadays!

You might consider some use of VCTs since those get 30% tax relief, up to the total tax paid in the year, and pay interest tax free. After allowing for the tax relief a yield in the 8-10% is achievable, though capital values can be uncertain to poor.

I read a rule-of-thumb that said you shouldn't put more than 5% of your portfolio into VCTs.

assuming you put all of your higher rate tax into a pension

Not an option under the new rules.

Anyway, thanks for all of that. I'll go off and do more research.

jamesd

Annual bed and breakfasting via a fund switch or into an ISA is a useful technique to reduce the accumulation of a capital gain. Likely the sort of thing in your plan.

For the anti-recycling rules you may have a simple answer. If you establish a pattern of putting in £50,000 a year you can't be tripped by the anti-recycling rules if you continue that pattern. The same applies to those with a habit of putting in all of their higher rate income. No significant increase in contributions other than the usual pattern, so not a problem. The other easy threshold is being an increase of no more than 1% of the Lifetime Allowance, so under £15,000 from 2011/12 tax year.

The £20,000 includes annuities currently being paid, work pensions currently being paid and the state pensions currently being paid. It does not include any form of investment income, interest or any pension that isn't being paid out yet. No pot size is sufficient to pass the £20k test, the pots are ignored and just the income used. The cheapest way to get it is to buy a level annuity with no guarantees or other special features. That's still expensive compared to using drawdown but that's the rule.

You clearly will have a large pot and know what you're doing and want to do well enough, so don't pay undue respect to a fixed 5% rule for anything. Instead you can use a better rule: don't put enough into any single investment that losing it will hurt badly. That tends to mean no more than 5% or per investment but you can exceed it for investments of a single type provided you diversify within them.

cyclonebri1

murgord wrote: »

I am hoping to reach £900,000 in my sipp by the time I am 55 and am hopefully on target to retire then...I am looking for an income of circa £50,000 a year after tax is this acheivable through income drawdown on these figures??

Why do you want/what will you do with £50k per annum??

How does that figure with what you earn now.

And I'll hate myself later for this, but what happens if you die at 56??:A:A, sorry, and sorry again.

gadgetmind

jamesd wrote: »

unless you want to try for flexible drawdown that allows you to exceed the GAD limit but then bars you from getting tax relief on pension contributions.

Ah, I've now done some reading and understand the difference between "income drawdown" and (proposed?) "flexible drawdown". I'm not sure I need to look at this too hard, and no doubt all the rules will keep changing, but it's worth bearing in mind. An annuity certainly holds little appeal, but I do need to look at annuity rates as they would seem to be a sensible guide to what I could/should be drawing from a pension.

Ian

jamesd

Still just proposed, though that will probably change to law in a few months.

Annuity rates aren't a sensible guide to what you could or should be drawing from a pension. They tend to be based around 15 year inflation-linked gilts that few sensible people would use as the largest component of their own pension investments. But insurance companies don't have any flexibility at all in what they pay out so they have to get the relatively strong guarantees that gilts offer, in spite of their poor investment return.

Anticipated investment returns and life expectancy are the best guide for drawdown income.

Linton

jamesd wrote: »

...

Anticipated investment returns and life expectancy are the best guide for drawdown income.

If one is using drawdown for a significant part of ones income I must disagree with this.

Surely the object of any pension is to provide sufficient income for the rest of ones life. To base all your planning on life expectancy figures raises the risk that you live too long. So I would suggest that rather than any statistical figure you should use something well in excess of that - perhaps in the range 90-100.

Similarly using anticipated returns is IMHO too much of a risk. You need to be much more than 50% sure that you will actually make the gains you are basing your planning on.

So I would take the view that anyone (again assuming that it is the major part of your retirement income) using drawdown purely on the expectation of higher income than an annuity may be taking a significant risk. To advocate drawdown as the right answer for all or most people is irresponsible.

jamesd

Linton, using anticipated returns and life expectancy is the prudent way to do it. But you read too much and too little into those phrases.

Life expectancy isn't life expectancy of the population but of the individual and should also have a high probability that in the case of unexpected long life the income still won't fall to an unacceptably low value.

I agree that you need to be very sure that you won't run out of money. But that's a very poor test. Sensible planning is for not getting income below the lower safety margin level, not just running out. Even in the long life contingency case.

Anticipated returns has to include such things as variability and a decent safety margin. It's also possible to plan to vary the income level from the pot, something that conventional annuities don't allow. One obvious good use of the flexibility is to use an unsustainable drawdown rate until the state pensions start, to make up for the lack of state pension income, then drop back to a sustainable for life level. Accepting variable income is also good to allow for the possibility of worse than anticipated investment returns, without unnecessarily limiting income in the non-extreme cases. Someone who wants £50,000 of income might plan with a safety margin target of £60,000-70,000 at normal returns and willingness to drop to £40,000 in extreme bad cases.

Nobody who wants a prudent drawdown plan should use annuity payout values to set their income level. Annuities are likely to:

1. Have much too low an income at younger ages.
2. Have too high an income at older ages.
3. Benefit from a cross-subsidy based on life expectancy and early deaths of other annuitants that is not present for an individual in drawdown.
4. Understate safe income for males once the recent ruling is incorporated into annuity rates.
5. Possibly understate safe income levels for females for the same reason.

There's also good reason to think that at some point between the ages of 75 and 85 a person in good health might want to seriously consider buying an annuity with some of their pension pot, because around this age range is where the death rates can make annuities a good deal when providing for the long life expectancy risk.

Annuities seem likely for men to become even more uncompetitive than they are now at younger ages, and not efficient until older ages than now. For women the European Court ruling might counteract some of the other negative changes and keep them relatively competitive compared to rates for men.

But annuities will still be the way to go for those who want very low risk or who have no experience with investing and no interest in learning or paying a professional to do the work. They can also be a good tool to provide some level of critical income, perhaps with regular buys as you get older. That's particularly interesting as a thing to consider in boom market years, when it's a way to lock in long term some of the high market return.

You give the impression that you're thinking that someone who has been prudent enough to think of their retirement planning and arrange sufficient money is going to suddenly cease to do prudent planning and adjusting of circumstances in retirement. I don't think that: I think that someone who has been prudent for decades is going to continue to be prudent and make adjustments as required.

Sadly governments can get this wrong. In the guise of prudence this government is planning to set the flexible drawdown required annuity income limit too high and drop the GAD capped income limits too low. So those making prudent planning for early retirement or contingency retirement cases now have a strong incentive to put significant retirement income outside a pension, just to get the prudent income levels. Early meaning before state pension age, though it's worse at younger ages. Same for those with life expectancy lower than average who can prudently take out a higher income.