800k CETV Figure, is £28k p.a. sensible

Linton

gibbo888 wrote: »

GSP
I have similar figures to you, as already discussed on other posts, albeit i am 10 years younger.

I have ran all the calculations alluded to above, basing my starting amount at 46 years old, and a withdrawal of 36k.(i know its not possible to do this, but for the calculation it was)
and the money doesn't run out until i am nearly 85.(95 for you)

So 36K + 3% inflation = 39 years. with a 95% success (assuming 4% growth on investments)(very little tax paid)
Then.
Add in full SP x2 @ 67 and a 25% reduction @ 75 and any potential inheritance monies and there is a significant pot of money left over.
So it looks doable historically!!

You dont seem to have used cfiresim which carries out a large number of simulations based on starting retirement on different dateswhere the return and inflation are based on actual values over the past 140 years.

When I run it I get a success rate in terms of not running out of money of 75% for taking 36K, inflation adjusted from an 800K pot for 40 years. 75% seems a bit low to me since you dont get a second chance. 28K shows a 98% success rate.

It's not clear to me exactly what we are talking about on this thread. Is it as the title suggests a safe drawdown from 800K or is it what annual expenditure/gross income the OP could reasonably live on including SP, inheritances etc. I am assuming the former.

CFrog

Although my wife and I are a few years older, our situation has some similarities; our joint 'pot' is of a similar size but I do have the added benefit of a DB pension that provides some guaranteed income. I have used an excel model (including a few assumptions on inflation, growth etc) to help me think about / model the various options but I would make the following pointers / comments:

- You say £28k should be enough for your needs. You need to get a better understanding of your outgoings and how they are likely to change over time. There are a number of threads on this, particularly "the number" thread. I don't know your circumstances (kids / mortgage etc) other sources of income (working part-time?) but you need to factor this into your thinking / model too.
- Don't forget your income requirement will be nett of tax. Drawing £28k (GROSS) pa off £800k seems reasonable as it's less than the much quoted 'safe' figure of 4%. As recommended by Linton, look at Jamesd's thread on drawdown.
- If modelling income / outgoings, don't forget your SP income will be taxed alongside any income you take from your drawdown funds. For me, I have anticipated reducing the income I'll take from my SIPP / ISAs as our SPs start so as to keep us in the low tax bands.
- If you find the £28k is sufficient, why go for the £35k? See if you can live comfortably off this and increase your income if required.
- Need to think about whose pot is providing the £28k. Is the £800k CETV your combined amount? When thinking about income from your drawdown 'pot' don't forget that any monies taken out will be taxed. There is therefore a tax consideration as the taxable income is split across you and your wife.
- You suggest you don't have any other savings other than the DC pensions? I'd consider putting some of the pot into drawdown and taking some tax free cash. Some of this could provide a cash 'buffer' or possibly topping up ISAs to provide some tax free income or top up your SP entitlement.
- I've adopted a strategy of having my 'pot' split across a number of 'buckets': c. 3 years income requirements in a cash 'buffer', c. 7-8 years income in wealth preservation / lower risk funds and the balance of my pot in growth / higher risk funds. I aim to rebalance the buckets each year by transferring growth / income as appropriate. I haven't considered other things such as P2P, VCT etc; you may wish to.
- Don't rely on inheritances (or downsizing). If this happens then it's a bonus and provides some funds that can go to help children or provide a few luxuries. For me, if / when that happens I'm going to use inheritances to top up ISAs.

TBC15

Linton wrote: »

And another bit of advice....

Once you take your SP , if you go for some of the higher drawdown estimates you will be paying higher rate income tax. Therefore I suggest you consider drawing down all the money you can from your SIPP, keeping within the basic rate tax band before you take your SP. Anything you dont need immediately you can put in an S&S ISA, possibly invested in the same way as your SIPP.

Why would income tax come into it if he was cashing in investments? Would CGT not be the worry?

TBC15

CFrog wrote: »

Although my wife and I are a few years older, our situation has some similarities; our joint 'pot' is of a similar size but I do have the added benefit of a DB pension that provides some guaranteed income. I have used an excel model (including a few assumptions on inflation, growth etc) to help me think about / model the various options but I would make the following pointers / comments:

- You say £28k should be enough for your needs. You need to get a better understanding of your outgoings and how they are likely to change over time. There are a number of threads on this, particularly "the number" thread. I don't know your circumstances (kids / mortgage etc) other sources of income (working part-time?) but you need to factor this into your thinking / model too.
- Don't forget your income requirement will be nett of tax. Drawing £28k (GROSS) pa off £800k seems reasonable as it's less than the much quoted 'safe' figure of 4%. As recommended by Linton, look at Jamesd's thread on drawdown.
- If modelling income / outgoings, don't forget your SP income will be taxed alongside any income you take from your drawdown funds. For me, I have anticipated reducing the income I'll take from my SIPP / ISAs as our SPs start so as to keep us in the low tax bands.
- If you find the £28k is sufficient, why go for the £35k? See if you can live comfortably off this and increase your income if required.
- Need to think about whose pot is providing the £28k. Is the £800k CETV your combined amount? When thinking about income from your drawdown 'pot' don't forget that any monies taken out will be taxed. There is therefore a tax consideration as the taxable income is split across you and your wife.
- You suggest you don't have any other savings other than the DC pensions? I'd consider putting some of the pot into drawdown and taking some tax free cash. Some of this could provide a cash 'buffer' or possibly topping up ISAs to provide some tax free income or top up your SP entitlement.
- I've adopted a strategy of having my 'pot' split across a number of 'buckets': c. 3 years income requirements in a cash 'buffer', c. 7-8 years income in wealth preservation / lower risk funds and the balance of my pot in growth / higher risk funds. I aim to rebalance the buckets each year by transferring growth / income as appropriate. I haven't considered other things such as P2P, VCT etc; you may wish to.
- Don't rely on inheritances (or downsizing). If this happens then it's a bonus and provides some funds that can go to help children or provide a few luxuries. For me, if / when that happens I'm going to use inheritances to top up ISAs.

At what level of annual investment growth do you replenish the day to day 3yr cash bucket?

phillw

TBC15 wrote: »

Why would income tax come into it if he was cashing in investments? Would CGT not be the worry?

The SIPP is a pension. No capital gains tax & only income tax on withdrawals.

CFrog

At what level of annual investment growth do you replenish the day to day 3yr cash bucket?

I am assuming c.4% overall return on my lower risk funds and c.6% on the remainder.

Thrugelmir

ex-pat_scot wrote: »

Frankly, my initial stab before going into any calculations or models is that a £800k pot, invested in equities, can yield 4% (£32,000 pa gross) without significant risk of long term depletion of capital.

4% could be considered high in the current market.

ex-pat_scot

Thrugelmir wrote: »

4% could be considered high in the current market.

He should be looking at a 40 year timeframe, and over that time the long term return will be frankly nearer 5%

Even in the short term, since 2007 the return has been better than 5%.

The key is with the investment strategy - mine is to look at a global diversified portfolio ie VRWL.

Frankly, with the overall level of assets under their control, they can afford to be flexible and have the option of throttling up or down as portfolio values move. They will have the 2 x state pension as a floor, ie £16,000 (assuming they ensure they have full entitlement), so once they reach SP age they will only need to produce £12,000 to give a continued total of £28,000 gross pa.

Linton

ex-pat_scot wrote: »

He should be looking at a 40 year timeframe, and over that time the long term return will be frankly nearer 5%

Even in the short term, since 2007 the return has been better than 5%.

The key is with the investment strategy - mine is to look at a global diversified portfolio ie VRWL.

Frankly, with the overall level of assets under their control, they can afford to be flexible and have the option of throttling up or down as portfolio values move. They will have the 2 x state pension as a floor, ie £16,000 (assuming they ensure they have full entitlement), so once they reach SP age they will only need to produce £12,000 to give a continued total of £28,000 gross pa.

The difficult problem with steady drawdown isnt the long term, what can kill it is low equity values in the short/medium term.

You cant predict as certain a long term return over the next 40 years of 5%, and presumably that's a long term return after inflation. Over that length of time things can change considerably. In my records I have a pension illustration from 1993. That was based on a low annual return estimate of 8.5% and a high one of 13.5%.

However I agree that the OP has more than sufficient other income beyond the £800K DC pot for them not to be worried about their finances in retirement and to be able to take prudent risks with their investment strategy.

GSP

A belated thank you for all your responses. Because he is the one to listen to, I expect my IFA to provide me with the best advice at all times. But I can appreciate with so many instruments out there, one IFA's recommendations could be quite different to another and trust is a big factor when choosing one. Only history will prove you made the right choice.

A lot here still to digest thanks and interesting views.

Joecrystal, its still in DB. My pension here taken now would be £15.5k. With no job prospects, taken the decision now to start my pension. The high CETV figure is past the tipping point in favour of transferring out.

Ex-pat Scot, I'll leave the investing etc to the IFA and trust the people he deals with know what they are doing. Be interesting to compare strategies on here to how my money is invested.

Molerat, yes topping up our pensions to receive the full amount is a priority.

Linton, yes tax and how this affects decisions will be an ongoing discussion with the IFA I assume.

CFrog, I intend to keep as much money in the fund rather than drawing out excess amounts to leave in a current account. I have worked out my expenses with a little buffer added in, but this can be reviewed. Until we actually go through a couple of years relying on this money we won't know where we are and can adjust accordingly.

Again I will rely on my IFA and his investment contacts to make the choices on investing. It is good however to read all your advice and was seeking "a what would you do if starting out in my position if anyone can provide.
Is it dangerous to have too much faith in my IFA? Once the investment decisions have been made initially I will see and understand better how it all works. But charged with ever growing knowledge on the subject won't be a bad thing as we go on where I can question the decision making.

Are there bad IFA's in that the fund managers they deal with are more carefree with clients money than others? Is it a luck of the draw who you choose? Can it be like going into a shop and receiving two different types of service and depends who you speak to? As you are usually dealing with just one IFA, how do you know what service and return you are getting if you can't really compare it against another.