Flexible drawdown or take 25% on lump sum?

mjsmike

[FONT=&quot]I have about 100k in pension pot and plan to retire at 63 (my SPA is 66). Should I take 25% tax free on 100K lump sum or 25% tax free on each drawdown?
My idea is to drawdown 14K (3.5K tax free 10.5K taxable ) a year until my state pension kicks in then take variable smaller amounts to stay under 11K income tax band and so pay no tax. I will have no other taxable income and plan to use my ISA savings to supplement my expenses and spending.
Would this be workable as I understand Inland revenue automatically tax you when you take drawdown and you have to claim it back.[/FONT]
[FONT=&quot]Also what happens to your pension pot fund when you start drawdown is it typically more at risk from stock market ups and downs..[/FONT]

Ganga

If you take 14k a year from your pot you will surely get 11k tax free ( 2016/2017 tax free allowance ) and pay 20% on the remaining 3k ie £600 leaving £2400,total £13,400.
If you take the 25% tax free lump up front you could live off that for two years at £12,500 a year thats only £600 a year less or £11 a week the remaining year before your state pension kicks in you whould have to take some drawdown from the remaing pot.
Some other members with more knowledge of pensions/taxation will follow this up to give you better guidance

dunstonh

Should I take 25% tax free on 100K lump sum or 25% tax free on each drawdown?

Which fits your need and situation best?

It appears that Flexi-access phased drawdown is better based on the limited info you have posted.

Also what happens to your pension pot fund when you start drawdown is it typically more at risk from stock market ups and downs..

The risk of the assets does not change.
The only risk is if the withdrawals are of a size that is greater than the investment returns and you erode the capital and you fail to consider negative years and inflation.

Typically, people change their investment strategy on drawdown given the different objectives.

kidmugsy

In your shoes I'd take out enough TFLS each year to let me exploit high-interest current accounts and monthly savers, and perhaps to fill my ISA (and maybe contribute £2880 to a SIPP too). Then I'd draw £11k of taxable income to use my personal allowance.

green_man

mjsmike wrote: »

[FONT=&quot]I have about 100k in pension pot and plan to retire at 63 (my SPA is 66). Should I take 25% tax free on 100K lump sum or 25% tax free on each drawdown?
My idea is to drawdown 14K (3.5K tax free 10.5K taxable ) a year until my state pension kicks in then take variable smaller amounts to stay under 11K income tax band and so pay no tax. I will have no other taxable income and plan to use my ISA savings to supplement my expenses and spending.
Would this be workable as I understand Inland revenue automatically tax you when you take drawdown and you have to claim it back.[/FONT]
[FONT=&quot]Also what happens to your pension pot fund when you start drawdown is it typically more at risk from stock market ups and downs..[/FONT]

I'm interested in this as I am in a similar situation and have very similar thoughts to yourself. My pot is a bit bigger but must last longer as I will be drawing from 55. My plan (like yours) is to take £11k to stay under the tax free allowance along with approx £3k TFLS each year. I see no reason to take the full TFLS right at the start.

As dunstonh says, in theory investment strategy might need to change, but in my case my pot is £450k and has to last all my life so (I'm hoping) will still be in long term investments with an amount in cash to cover a couple of years worth of drawdown.

kidmugsy

"is it typically more at risk from stock market ups and downs": Yes. Google "sequence of returns risk". For example:
http://www.professionaladviser.com/professional-adviser/feature/2374787/understanding-that-silent-portfolio-killer-sequence-of-return-risk


That's why I pointed to the merits of taking your TFLS and keeping at least some of it in high-interest cash.

zagfles

kidmugsy wrote: »

"is it typically more at risk from stock market ups and downs": Yes. Google "sequence of returns risk". For example:
http://www.professionaladviser.com/professional-adviser/feature/2374787/understanding-that-silent-portfolio-killer-sequence-of-return-risk


That's why I pointed to the merits of taking your TFLS and keeping at least some of it in high-interest cash.

As one of the replies to the articles states - they've made the schoolboy error of using an arithmetic average rather a geometric average so they're not comparing like with like. The returns they use are equivalent to 4.14%pa average returns not 5.73%

Nevertheless, I've been playing with those returns figures with a variety of strategies in drawdown, and it's surprising how little difference any of the strategies makes. For instance a x% cash buffer with constant rebalancing, or a fixed cash buffer which you use for drawdown whenever equity returns are negative.

The best seems to be a fixed cash buffer which you use whenever returns are negative until it runs out - but I suspect this is related to the exact returns scenario - in a different sequence different strategies would prove more effective.

mjsmike

Thanks all for input.
Is the a best time of year to take the draw-down?
The other issue is 70K is with Standard life and 30K with Prudential should I keep separate or merge into one fund?

dunstonh

Is the a best time of year to take the draw-down?

Only if tax comes into the calculation.

The other issue is 70K is with Standard life and 30K with Prudential should I keep separate or merge into one fund?

Do either plans allow flexi access phased drawdown? (probably not if they are not recent plans)
If not, do you want to deal with either of their in-house sales forces to transfer it over? Or do you want something from the whole of market? Do you want to DIY or use an adviser?

jamesd

Your base plan is right but incomplete so probably not optimal.

Say you were to take 25% of the whole pot now and reinvest it. You would then have more years of things like capital gains tax allowance and reduced rate for savings interest as well as personal savings allowance (including P2P and bond interest) to use that you lose if you just wait. With over 15k income available tax free from those combined with the normal personal allowance you're missing a trick if you don't plan for them.

So a better plan is perhaps to take the whole 25% up front and then take taxable income only up to your personal allowance from the rest.

Pension income is taxable under PAYE and the first month's payment will normally be at the emergency rate unless you can provide a P60. You can notify HMRC of your plans for the year once you get the first monthly pay slip and ask them to adjust your tax code. That new tax code will eliminate the ongoing income tax and get you back what was paid during the first month.

A pension pot isn't directly more at risk from downturns but you should read about sequence of returns risk. This magnifies the effect of drawing on capital for spending if you do it during a downturn. No effect if you take money out and just reinvest it in the same assets. One effective way to reduce this risk is to keep a year of planned investment income in a savings account and draw from that, topping it up only with the normal yield from the investments. Do bigger topping up only when markets are not at low levels.