Help with drawdown strategy

jamesd

dunstonh wrote: »

Are you sure? I don't know the DIY providers as well as you but the IFA side of things sees virtually all providers offer that option. So, that would be a surprise as generally, the DIY providers have newer software and are able to code changes easier than the bigger companies.

Yes, at least for the ones I've looked at. Not exhaustive but it doesn't seem anything like as easy to do regular monthly UFPLS or PCLS plus taking only part of the taxable without requesting it every month. Not surprised that it's common in the IFA part of the market. I was pleasantly surprised at how flexible the Standard life product was when it comes to mix and match of ways to do things.

dunstonh wrote: »

Shouldnt be any difference in charges. Not with the IFA providers. However, I will those who know more about the DIY providers verify that side of things.

How they charge for it is one of the ways they differentiate. In general it's easiest and cheapest to do the PCLS then regular income out of the taxable 75% from the DIY providers.

jamesd

zagfles wrote: »

Or is it just an admin thing - some providers allow you to set up monthly phased crystallisation but not monthly UFPLS?

It's more of an income tax tweak, particularly interesting where there's a desire to also keep money in the pension for inheritance. Say there's a desire for higher rate range income but a desire to avoid income tax at 40%, a blend of UFPLS or PCLS and taxable money can be used to get there, with the taxable residue being left in the drawdown pot. Phased drawdown in essence refers to doing gradual crystallising over many years in this sort of arrangement.

Where it fits it's an efficient way to get things done.

If I recall correctly the SL product allows setting up regular monthly payments of any blend of PCLS and taxable income taken. In the DIY products you'd just do a PCLS at the start of the year and regular taxable monthly payments because that's how the DIY platforms are normally set up to do things most easily. About the same end result aside from having the PCLS portion outside the pension for a bit longer.

zagfles

jamesd wrote: »

It's more of an income tax tweak, particularly interesting where there's a desire to also keep money in the pension for inheritance. Say there's a desire for higher rate range income but a desire to avoid income tax at 40%, a blend of UFPLS or PCLS and taxable money can be used to get there, with the taxable residue being left in the drawdown pot. Phased drawdown in essence refers to doing gradual crystallising over many years in this sort of arrangement.

Yes, if you want to minimise tax while leaving some pot as an inheritance, you're better off taking more tax free and leaving crystallised funds for your beneficaries.

For instance, say a £800k pot and you want to leave £400k for your children. If you crystallised regularly and took out all crystallised funds each time, then 75% of what you've withdrawn would have been taxable. You'd have got £100k tax free and £300k taxable, leaving £400k uncrystallised for your children..

However if you regularly crystallise but just took the TFLS and a third of the taxable part, eg you crystallise £80k, take £20k tax free and £20k taxable, leaving £40k crystallised, and do that 10 times, you'd have got the same £400k out but only £200k of it would have been taxable. You'd get £200k tax free instead of just £100k using the "withdraw all crystallised funds" method.

You'd then be leaving your £400k crystallised for your children.

But it makes no difference to your children whether the funds you leave them are crystallised or uncrystallised. Whether it's taxable to them or not depends on the age you die, not whether it's crystallised or not. In fact crystallised could be better as there'll be no LTA test on death under 75.

So this "withdraw all crystallised funds" is not a good option for those who want to leave part of their fund as an inheritance.

jamesd

Just depends on objectives and things like income tax and inheritance tax potential.

I'm generally inclined to think that P2P lending is the best fixed interest option at the moment* so that causes me to favour higher PCLS to get more into P2P either inside or outside an ISA and avoid the current equity and bond risks.

*Options from 12% or so secured before bad debt through 8.5% or 10.5% with protection fund at Unbolted on to RateSetter with its protection fund can hit a fair range of risk tolerances, without equity volatility. Next year I'm expecting something over £30k of income from this source using a range of P2P platforms.

Jerben

Hi Gallygirl,


Your situation has similarities with mine and the thoughts of 'exactly' how to do this are often in my mind.
So, to give you some 'ideas' and for others to critique, here are my latest thoughts...
(Note- lots of the parts of my plan are interlinked, adjustable, attempt to lower costs and use the personal allowance, etc.).


I'm late 50's and currently working part time.
My SIPP is also with II, current value £350k. I also have an S&S isa value 100k. Other cash (doubling as emergency fund), about £40k is in my myriad of current accounts, regular savers and (basic!) P2P.


When I finally pull the plug, (probably in the next year or two?), I require an income of say, £20k.


I will probably stop work part way through a financial year, (having already used the personal allowance for that year). For the remainder of that year, I will use (say, £10k) of my cash.


At this point, I aim to have about £40k in cash in my SIPP.
Early in the first full financial year of retirement I aim to take a UFPLS of about £20k. (From what I can gather, this costs £40+VAT with II). Of the £20k, £5k will be tax-free and the other £15k will be subject to tax, (But mainly will use my personal allowance!).
I will use this to top up my cash/emergency monies and give myself a monthly income, (my wage!).


Within the SIPP, the dividend income from my funds, ETF's, IT's should add about £7k to my cash over each year.
Towards the end of each financial year I would pay £2880 into my SIPP. This would be increased to £3600, (courtesy of HMRC!), and would roughly offset the income tax paid on the SIPP withdrawal.
I also aim to use the II trading credit of £80 to sell some investments, (part of my re-balancing process), to top up the cash within the SIPP back up to the £40k level by the end of each financial year.


Generating £1k from my cash/emergency cash, and withdrawing about £3k (natural yield - dividends), from my £100k ISA, should mean I have the total of £20k required income, (With no net tax paid). RESULT!
Rinse and repeat each year.


At age 66, I will start to get over £8k from the NSP, so my SIPP UFPLS would reduce to £12k. (Figures in today's money for simplicity).
(I'm not sure if I would reduce the 'cash' within the SIPP to £36k (3 years requirement) or £24k (2 years), at this time - May depend on my attitude??).


Obviously there are quite a number of assumptions!! (Growth? Inflation? Tax free lump sum? Costs of provider?)... But I would look at these a couple of times a year and make appropriate adjustments.
To me a one-off UFPLS per year is a simple, cost effective, user friendly solution.

Triumph13

Jerben wrote: »

I aim to take a UFPLS of about £20k. (From what I can gather, this costs £40+VAT with II). Of the £20k, £5k will be tax-free and the other £15k will be subject to tax, (But mainly will use my personal allowance!).
......
Towards the end of each financial year I would pay £2880 into my SIPP. This would be increased to £3600, (courtesy of HMRC!), and would roughly offset the income tax paid on the SIPP withdrawal.
I also aim to use the II trading credit of £80 to sell some investments, (part of my re-balancing process), to top up the cash within the SIPP back up to the £40k level by the end of each financial year.
.....
I have the total of £20k required income, (With no net tax paid). RESULT!

Without wishing to be unduly picky, tax paid on a £20k UFPLS = £700 (15k-11.5k x 20%). Tax gained by paying £3,600 into SIPP is £180 (£720 going in less £540 coming out)

Jerben

Sorry Triumph, that's not how I see it. (Unless I've made a basic mistake?)
During the example year I quoted there is no £540 tax to pay on the £3600, there is only the £720 gain.
If you are saying that 'eventually' there will be £540 tax to pay you may have a point, but... this would be part of the £700 tax on the next £20k UFPLS! You are effectively counting it twice!


My general point for this thread was that the 'part crystallising' of the SIPP over complicates things in my mind. (More esteemed colleagues may get their head around it easier than I!). UFPLS seems the best way to go for me. (Provided the 25% tax free element continues in its present form?). Also the costs of other forms of drawdown appear more expensive, (when looking at the II charge information).
All I then have to do is transfer £1666 per month (£20k / 12), into my 'spending' current account from the other cash/emergency buffer accounts.

Gallygirl_2

maximumgardener wrote: »

to OP .
you have heard a range of responses and your options are hopefully clearer!

your target of 3% drawdown from 1.1 million total fund should prove straightforward and not onerous. As others have said , use up your respective allowances before tax , then drawdown as required to meet your income needs.

In your shoes, I would see an IFA who would map this out for you and meet your objectives?

You don't say your ages or exactly when you will both stop work but "several years away" suggests you are in your 60's now with perhaps 3 or 4 years to go? obviously you both need to factor in when your State Pensions start. (and any other Pensions you may have?)

me and Mrs MG did a similar exercise a couple of years back and so far so good!
we are with fidelity and we just draw down untaxed funds from a cash account.
we have 5 accounts (two personal pensions , two ISA's and one Cash/investment account)
Its all managed by our IFA and we have reviews annually . I have confidence in them and the returns basically speak for themselves . there is a cost but you ask yourself could i do better ? do I want the hassle?

good luck ! you are well set up for the future.get a good IFA in place

We are in our mid 50's but would like to reduce to part time in the next couple of years and see how that goes rather than just stopping all work suddenly. If we like it we may retire fully more quickly, it would be nice to have the options.
As for and IFA, I would be happy to pay a one off fee with an IFA who could go over the options , check my assumptions and write me out a plan, but all seem to want a yearly fee for continuing advice and I am trying to keep my costs down. Thank heavens for this forum.

Gallygirl_2

Jerben wrote: »

Hi Gallygirl,


Your situation has similarities with mine and the thoughts of 'exactly' how to do this are often in my mind.
So, to give you some 'ideas' and for others to critique, here are my latest thoughts...
(Note- lots of the parts of my plan are interlinked, adjustable, attempt to lower costs and use the personal allowance, etc.).


I'm late 50's and currently working part time.
My SIPP is also with II, current value £350k. I also have an S&S isa value 100k. Other cash (doubling as emergency fund), about £40k is in my myriad of current accounts, regular savers and (basic!) P2P.


When I finally pull the plug, (probably in the next year or two?), I require an income of say, £20k.


I will probably stop work part way through a financial year, (having already used the personal allowance for that year). For the remainder of that year, I will use (say, £10k) of my cash.


At this point, I aim to have about £40k in cash in my SIPP.
Early in the first full financial year of retirement I aim to take a UFPLS of about £20k. (From what I can gather, this costs £40+VAT with II). Of the £20k, £5k will be tax-free and the other £15k will be subject to tax, (But mainly will use my personal allowance!).
I will use this to top up my cash/emergency monies and give myself a monthly income, (my wage!).


Within the SIPP, the dividend income from my funds, ETF's, IT's should add about £7k to my cash over each year.
Towards the end of each financial year I would pay £2880 into my SIPP. This would be increased to £3600, (courtesy of HMRC!), and would roughly offset the income tax paid on the SIPP withdrawal.
I also aim to use the II trading credit of £80 to sell some investments, (part of my re-balancing process), to top up the cash within the SIPP back up to the £40k level by the end of each financial year.


Generating £1k from my cash/emergency cash, and withdrawing about £3k (natural yield - dividends), from my £100k ISA, should mean I have the total of £20k required income, (With no net tax paid). RESULT!
Rinse and repeat each year.


At age 66, I will start to get over £8k from the NSP, so my SIPP UFPLS would reduce to £12k. (Figures in today's money for simplicity).
(I'm not sure if I would reduce the 'cash' within the SIPP to £36k (3 years requirement) or £24k (2 years), at this time - May depend on my attitude??).


Obviously there are quite a number of assumptions!! (Growth? Inflation? Tax free lump sum? Costs of provider?)... But I would look at these a couple of times a year and make appropriate adjustments.
To me a one-off UFPLS per year is a simple, cost effective, user friendly solution.

UFPLS was my initial way of thinking of going but now I'm not so sure, I will have to look at II's charges more. I wonder why you feel it necessary to keep 2 years worth of cash in the SIPP, surely thats money not earning any interest/dividends ?

Jerben

Gallygirl wrote: »

UFPLS was my initial way of thinking of going but now I'm not so sure, I will have to look at II's charges more. I wonder why you feel it necessary to keep 2 years worth of cash in the SIPP, surely thats money not earning any interest/dividends ?

First reason is to avoid some of the uncertainties you outline in your original post!
I always will know that my next two years 'pay' is sat waiting and will not disappear. Half of it is always within 12 months of being required.
Cash is an important part of a whole portfolio, (even though this part will not earn interest).
A lot of the advice on this and other forums says 'don't invest what you need in the near future as it could go down in value'.
Also I won't have to 'sell' investments in a hurry if there is a major market drop. I might even top up some of the funds with the some cash if there was a substantial crash. (Sort of rebalancing - but non of us are exactly sure how we'll act in these circumstances). I've written some 'notes to myself' on this sort of thing which I will try to stick to!