Drawdown Strategy for early retirement. could this work?

sunnyjim1234

Hi,
I have been an avid reader of this forum board for quite some time and have found it invaluable.I'd like to run a drawdown strategy past you guys for some opinions on its feasibility.
Me:
54 yrs old
Looking to retire at 55
SPA 67 yrs
35 yrs NI Contributions
Full New SP amount
Investments:
SIPP £600,000 Multifund Diversified
Cash ISA £144,000
With Profits Pension GMP £4,000 from age 65.
So 12 yrs between giving up work and SPA.
I would like to achieve a net annual income of £36,000.
What I propose to do is to think of the SIPP as 12 Tranches of £50,000.
Each year I crystallise 1 tranche, and take 25% TFLS £12,500 and£11,500 Personal Allowance, leaving £26,000 invested.
Switch the cash in the ISA to a S&S ISA and drawdown £12,000
Giving me the desired £36,000 effectively tax free!
Repeat each year for next 11 yrs.
I realise this will mean I will be limited to a maximum £10,000 annual pension contribution going forward, but I don't see that as being a problem.
If I reach SPA, the SP and GMP will give me £12,000 p.a, so going forward I will only require £24,000 drawdown from what is left of the SIPP. I realise that by this point there will be no more TFLS available on further withdrawals, unless I have been able to build up some more pension by then.
How can I calculate at what age the income will dry up?
I know I have not taken inflation into account but I hope that investment returns will at least keep pace with inflation.
Would really appreciate any comments/opinions/advice from anyone.
Thanks in anticipation.

Sunny

zagfles

Th state pension and "with profits" pension would use up your personal allowance after SPA, so you'd need to draw down about £30k to get the extra £24k net you want for a £36k net total.

If investments rise with inflation, then you'll have £26k x 12 = £312k crystallised at SPA, so would last a bit over 10 years ie till about 77.

Of course if your investments rise faster than inflation they'll last a lot longer...

sunnyjim1234

zagfles wrote: »

Th state pension and "with profits" pension would use up your personal allowance after SPA, so you'd need to draw down about £30k to get the extra £24k net you want for a £36k net total.

If investments rise with inflation, then you'll have £26k x 12 = £312k crystallised at SPA, so would last a bit over 10 years ie till about 77.

Of course if your investments rise faster than inflation they'll last a lot longer...

Thank you very much for that.
I knew there had to be a flaw in my cunning plan!
Actually, now I come to think about it, my mortgage will be paid off at that point, so I will probably only need an extra £12,000 net,
on top of SPA/GMP so that'll hopefully buy me a few more years:)


Regards
Sunny

Thrugelmir

zagfles wrote: »

If investments rise with inflation, then you'll have £26k x 12 = £312k crystallised at SPA, so would last a bit over 10 years ie till about 77.

Investments fluctuate rather than serenely rise with inflation. With any drawdown model. The problem arises if there's a sizable fall in value in the early years of redemption. As the lost capital is never fully recovered.

sunnyjim1234

Thrugelmir wrote: »

Investments fluctuate rather than serenely rise with inflation. With any drawdown model. The problem arises if there's a sizable fall in value in the early years of redemption. As the lost capital is never fully recovered.

About this,
I have been looking at jamesd's excellent thread about using Guyton & Klinger's safe withdrawal rate strategy and keeping 1 yrs worth of anticipated investment returns in cash to avoid having to sell assets during a market downturn. Do you consider 1 year sufficient, or would this be the bare minimum?
Regards
Sunny

Triumph13

Assuming the mortgage is paid off at the point you hit SPA and if you think a 4% withdrawal rate is sustainable (and are prepared to reduce your spending in a downturn to keep it so), then I might be inclined for something a little more like the following:

1. The £144,000 in cash ISAs I would be tempted to keep there, sticking it on a combination of long term fixed rates to hope to match inflation and withdraw steadily to give you a 'fixed' £12k per year to reduce income volatility.
2. The £600k I wouldn't muck about with taking in tranches, I'd just take the £150k TFLS, put it straight back into the same funds you were using inside the pension, and continue to consider the whole £600k as providing your £24k pa drawdown. You might want to shuffle some of the TFLS funds into ISAs over time to avoid the slight risk of breaching the £5k limit for dividend income.
3. Proceed to take your 4% drawdown of £24k pa each year, But take it as £11,500 from the pension and £12,500 from the S&S ISA to avoid paying any tax. That all adds up to your £36k pa tax free
4. By the time you are drawing your SP, the cash ISA is exhausted and there would be little left in the S&S ISA so both your pensions and pretty well all your £24k pa drawdown would now be taxable, giving you around £31k net pa - which should be plenty now that your mortgage is paid off.

sunnyjim1234

Triumph13 wrote: »

Assuming the mortgage is paid off at the point you hit SPA and if you think a 4% withdrawal rate is sustainable (and are prepared to reduce your spending in a downturn to keep it so), then I might be inclined for something a little more like the following:

1. The £144,000 in cash ISAs I would be tempted to keep there, sticking it on a combination of long term fixed rates to hope to match inflation and withdraw steadily to give you a 'fixed' £12k per year to reduce income volatility.
2. The £600k I wouldn't muck about with taking in tranches, I'd just take the £150k TFLS, put it straight back into the same funds you were using inside the pension, and continue to consider the whole £600k as providing your £24k pa drawdown. You might want to shuffle some of the TFLS funds into ISAs over time to avoid the slight risk of breaching the £5k limit for dividend income.
3. Proceed to take your 4% drawdown of £24k pa each year, But take it as £11,500 from the pension and £12,500 from the S&S ISA to avoid paying any tax. That all adds up to your £36k pa tax free
4. By the time you are drawing your SP, the cash ISA is exhausted and there would be little left in the S&S ISA so both your pensions and pretty well all your £24k pa drawdown would now be taxable, giving you around £31k net pa - which should be plenty now that your mortgage is paid off.

Thank you for your input. That does sound like a better plan.
The reason I thought about a phased drawdown of TFLS was that it might result in a potentially higher TFLS due to investment growth of the tranches over time.
Regards
Sunny

tacpot12

One year is the bare minimum to keep in cash, as investments rarely recover within 12 months. But one year is sufficient to avoid the worst of the worst.

The problem of excessive capital depletion in the early years is one reason that flexi-drawdown is safer than UFPLSs - you have to take less capital out if you don't have to pay tax on any of the withdrawal. But this is only a concern if you expect to have to sell assets to fund withdrawals. A portfolio that produces sufficient natural income to meet you needs doesn't require assets to be sold.

westv

But won't a portfolio where you solely use the natural yield only produce a sub 3% income if you also want real growth. That seems rather low and is nudging index linked annuity rates.

kidmugsy

Your plan of avoiding 20% tax at age 55, but being prepared to pay income tax at 65 or 67 seems to me to be a bet on the basic income tax rate falling below 20% in the next dozen years. I might in your shoes bet the other way.

Similarly, your notion of not drawing the TFLS right away is a bet on the 25% TFLS surviving for a dozen years. Is that a bet you want to make?

jamesd

tacpot12 wrote: »

One year is the bare minimum to keep in cash, as investments rarely recover within 12 months. But one year is sufficient to avoid the worst of the worst.

The natural yield/dividends of the investments means that the one year's pot gets topped up without capital selling so it is likely to last many years. Say the natural income is 3% and the drawdown rate is 6% that's around two and a half years of the extra over natural being funded.

If using Guyton-Klinger it's also quite likely that cash inside the investment mixture was topped up by those rules before the downturn: "If anything had a positive return and is now at an overweight allocation, sell the overweight amount and put that in cash" as I paraphrased it.