De-risking a drawdown fund

Gulfv

I currently have £85K in four medium risk pension funds with Old Mutual & Standard Life.

My issue is that I'm planning to retire in just over three years and use this to provide around £10K per year to top-up my final salary pension via drawdown prior to receiving my State Pension. However, I'm inclined now to seriously reduce risk as any crash could derail my retirement plans!

What would be my best low-risk option to protect the current capital going forward but giving some growth to at least come close to dealing with inflation?

Thanks in advance

Linton

I suggest you start by putting £30K of your pension into cash now, keeping the rest fully invested as previously. If you take the tax free lump sum you can put most of what you need for the first 3 years into 3,4 and 5 years fixed rate savings accounts or you could play clever games with multiple higher rate current accounts. This will give you guaranteed, hopefully close to inflation matching, income for your first 3 years of retirement.

What you do then depends on your tax position in the early years of retirement. Is your DB pension more than your tax allowance? If so you will be paying at least basic rate tax on your further drawdowns. So you may as well drawdown say a further 2 or 3 years of cash (or as much as you can keeping within the basic rate tax band) as soon as you retire, assuming that you are not in the middle of a major crash. Again put the money into fixed rate savings accounts due to pay out when you need the money. If you are in the middle of a major crash you can afford to wait 3 years for some recovery.


Continue in this was until you get your SP.

Gulfv

Many thanks for the reply Linton....I should have mentioned I'll hopefully be retiring at 60 in three years time (but it looks like you guessed that!)

The current split of funds over the two platforms is approx £35K/£50K. So, it would make sense to transfer the £35K to cash now as you suggest and leave the £50K invested. If I do this how can I get a decent tax free lump sum now?

I will be paying basic rate tax on on my DB pension when I start drawing it.

Linton

Gulfv wrote: »

Many thanks for the reply Linton....I should have mentioned I'll hopefully be retiring at 60 in three years time (but it looks like you guessed that!)

The current split of funds over the two platforms is approx £35K/£50K. So, it would make sense to transfer the £35K to cash now as you suggest and leave the £50K invested. If I do this how can I get a decent tax free lump sum now?

I will be paying basic rate tax on on my DB pension when I start drawing it.

Assuming that the DB pension is your current one and that the DC pensions dont have any valuable benefits such as Guaranteed Annuity Rates...


In principle you can take 25% tax free from every DC pension now as you are over 55, whilst keeping the rest invested. This would make sense to guarantee most of your first 3 years retirement income. However taking a lump sum payment in this way may or may not be supported by your particular pension schemes. If not you would need to transfer them into a single modern Personal Pension or SIPP which should provide full flexibility. This could be a good idea anyway before you retire to simplify the admin.


You probably dont want to drawdown more than the tax free 25% whist you are working because this would cause your annual allowance (including employers contribution) to be reduced to £4K. Though you could move some of the investments to cash within the pensions at a cost of a number of years' growth/interest. Cash in pensions generally attracts no more than a pittance in interest.

Thrugelmir

Gulfv wrote: »

However, I'm inclined now to seriously reduce risk as any crash could derail my retirement plans!

You are part of the market. Not an outsider. Trades for whatever reason also dictate volatility.

Gulfv

Thanks again...no the DC funds don't have any benefits

kidmugsy

As Linton says it may be best to withdraw the TFLS from each now (and not a penny more!), first transferring to a new provider if necessary. In your shoes I'd probably prefer to transfer as cash as that ought to be quicker than hoping to transfer funds, say. Cashing everything in would also make it easier to be confident of the 25% being truly 25%.

The 75% left behind: you could, if you wanted to, invest in something approximately cash-like e.g. a fund or ETF of short-dated corporate bonds. Maybe your existing pensions offer such an option?

Once you've retired and got your DB pension in payment I would aim to drawdown the remaining "pot" as quickly as possible consistent with avoiding higher rate tax. The point of that would be to avoid being caught by a future increase in the basic rate of income tax.

You could invest any short-term surplus in S&S ISAs if that took your fancy, or just use Cash ISAs, savings accounts, regular savers, Premium Bonds, or whatnot - whatever seems attractive at the time. Heavens, gold sovereigns if you like.