Please help me think through how to combine drawdown, mortgage, SIPP and savings!!

_pete_

I'll be 55 next March and am semi-retired already.

I have about £450k in a SIPP. I would classify myself as a medium risk investor with my SIPP broadly invested in a 60/40 mix of shares and bonds/cash

I have £81k in my savings/current account.

I'll be getting about £4k pa in an index linked pension from age 60, and hopefully state pension from age 67.

I need about £18k pa net to live on.

I expect to earn about £3k pa for the next few years on small bits of work.

I have a £100k mortgage at a 1.94% rate.

Home renovations will cost about £40k

I have done my sums in terms of drawdown rates etc and as far as I can see, my money should last until I die.

The reason for my post is that I would very much appreciate people's thoughts on how to handle the next few years in terms of drawdown, paying off the mortgage, using ISAs for tax advantages etc.

Thank you.

drumtochty

Seems to me a bit tight.


Assuming an emergency fund of say £40k to be kept safe until you die, I reckon you will be running out of income in your early eighties maybe.


If you live into your ninties that will be an issue, if you pop off nearer your early eighties that is OK.


I reckon you need to earn say £15k a year or so into your sixties to bulk out your pension pot.

marlot

_pete_ wrote: »

...I'll be getting about £4k pa in an index linked pension from age 60, and hopefully state pension from age 67...I expect to earn about £3k pa for the next few years on small bits of work.......

Have you checked that you're entitled to a full state pension? If not, then you may be able to use class 2 National Insurance contributions to buy additional years (assuming you register as self employed for the £3k).

Linton

You need a proper financial plan - here is an over-simplified example to demonstrate the thought process:


The first step is to make out a plan at current prices showing the regular income you need from your assets...


What is your forecast SP? Assume £8K/year to keep the numbers simple

Income need:

55-59: £18K-£3K=£15K/year
60-66: £18K-£4K=£14K/year
67-96: £18K-£8K-£4K=£6K/year



Totalling
55-59: £15K/year X 5=£75K
60-66: £14K/year X 7=£98K
67-96:£6K/year X 30=£180K


This provides a frame work. To work out how you deal with your mortgage pay-off and renovations you would need to make assumptions on investment return etc.


How to manage SIPP
Lets look at the tax: For the first 12 years of your retirement you will be a non-tax payer. So you should get as much as possible out of your SIPP tax free whilst you can.



Assume you drawdown each year up to your tax allowance by UFPLS whereby you get your 25% tax free with each drawdown...
55-59: £8850 X 5 X 1.3333=approx £60K
60-66:£7850 X 7 X 1.3333=approx £73K


You could take the extra you needed for income out of your SIPP and pay some tax or use your savings.


After you start getting SP you will be a basic rate tax payer anyway. I would be tempted to withdraw £20K/year from the SIPP and put it in an S&S ISA.


Savings



If you are reliant on drawdown you need say 3-5 years in cash to cover emergencies and periods when low prices make it inadvisable to sell your SIPP assets. So in the long term you dont need more than £20K-£30K in your savings and so could use the rest perhaps for your renovations.


Mortgage
Assuming that this is a repayment mortgage having say another 10 years to go I would just keep up with the normal repayments unless the interest rates rise significantly. You should make an average investment return of more than 1.94%


I suggest if your Excel skills ae up to the job you make a proper plan, 1 row (or column) peryear showing the annual exspenditure, income, tax etc with assumptions on Rate of Return and inflation so you can model various different strategies and assumptions.

kidmugsy

_pete_ wrote: »

I'll be 55 next March ... about £450k in a SIPP. I would classify myself as a medium risk investor with my SIPP broadly invested in a 60/40 mix of shares and bonds/cash

I'll be getting about £4k pa in an index linked pension from age 60, and hopefully state pension from age 67. I expect to earn about £3k pa for the next few years on small bits of work. I need about £18k pa net to live on.

I have £81k in my savings/current account.

Home renovations will cost about £40k. I have a £100k mortgage at a 1.94% rate.


I have done my sums in terms of drawdown rates etc and as far as I can see, my money should last until I die.

I would very much appreciate people's thoughts on how to handle the next few years in terms of drawdown, paying off the mortgage, using ISAs for tax advantages etc.

Let's work backwards. You need £18k p.a. net, index-linked: I shall take it that that figure is based on the assumption that you will have paid off the mortgage so that you no longer have to make repayments each month? Your State Retirement Pension and DB pension will together pay you around £12.5k p.a. which should be about tax-free. So you will need a further £6k or so p.a., after tax. For the gap 60-67 you'll need a replacement for the SRP, so a farther £8.5k or so. For the gap 55 - 60 you'll need £15k, allowing for your £3k earnings.

You make no mention of a wife/widow nor of bequest motives, so I'll assume you are single and childless, and without dependants.

In March '19 you'll want to draw some tax-free lump sum (TFLS) plus enough taxable drawdown to use up your Personal Allowance, so approx. £11,850 - £3k = approx £9k. (You'll know more precisely by March.) Along with the £9k you would have to have £3k in TFLS, though you might want to take an extra £20k TFLS and bung it into an ISA before the tax year ends. You might also want some more TFLS to put into, say, high interest accounts that would pay interest in tax year 19/20. If you really want to squeeze out every last drop from your assets you might also take enough TFLS to let you contribute £3600 gross = £2880 net to a pension (so that you get more TFLS in the future).

All that assumes that your pension is with a provider who will let you do this: since it's a SIPP that should be OK. But are you happy to have all £450k with just one provider? I wouldn't be. You are horribly exposed to risk from fraud and theft and IT foul-ups. I'd want to transfer parts to other providers. Who is your current provider? I ask because apparently some insurance company pension investments are 100% covered for fraud (though they still presumably leave you vulnerable to IT disasters). But most mass market SIPPs are covered only to £50k, rising to £85k in April.

After April 5th, you will again take out TFLS and some taxable income that you should not need to pay tax on. Perhaps your provider has a cheap system of paying out a monthly income to you (would that suit you well?).

The big question, I suppose, is whether you should aim to take all your TFLS in one swoop, with a view to paying off the mortgage and paying for the building works.

Total TFLS = approx £110k. Add £80 savings, = £190k.
Versus £100k + £40k = £140k.

So you could afford to do it while still keeping a useful emergency cash fund available outside the SIPP. It would mean that all future drawings from your pension would be taxable after the Personal Allowance is used up. So be it.

The case I see for doing this is that it would give you a fair bit of insulation from stock market ups-and-downs - very desirable, especially if you think downs are a lot more likely than ups for the next few years. If I were in your shoes and wanted to be rid of the mortgage I would move a large of my SIPP investment out of equities/bonds and into cash now. Then I could be confident that the money will be available if I want access in March/April.

I'd go further. My own feeling is that it's not just equities that are overvalued: so are bonds. So in the short to medium term I'd rather have cash as my low-risk investment rather than bonds. The place to get good interest on cash at the moment is outside tax-shelters. So I might also plan to take more money out of the SIPP in March and April - but not so much that I was exposed to higher rate tax - and bung it into suitable unwrapped accounts.

These thoughts - i.e. paying off the mortgage and keeping lots of your capital as cash - would be classed as very cautious or conservative. That's how I'd feel in your shoes, with the markets in their current state. Of course if there's a mighty crash you might then put a bit more into equities just in case you prove to be long-lived.

One other thing: on the subject of bonds, I might like a bit of inflation-protection. I'd be looking at "funds" or ETFs of TIPS - the US equivalent of our index-linked gilts. I'd keep those in the SIPP or in ISAs.

I think a portfolio consisting of cash, TIPS, equities, and a mortgage-free house might be a good idea. (A bit of gold might be a good idea too.) Others might reasonably feel otherwise. In view of "... as far as I can see, my money should last until I die" I'd be keen not to take risks that might put that in jeopardy. Assuming that you are right, of course.

westv

Unless I’m missing something I see:-

Total savings £ 531,000
Less mortgage £100,000 and renovation £40k = £391,000

Less Bridge to SP £8815 x 12 = £105,780
Less Bridge to DB £4,000 x 5 = £20,000

Net amount = £ 265,220 @ 3% drawdown = £7,956.60
Plus SP bridge + DB bridge = £20,771.60 Gross Income

pointdexter

Good Afternoon, i have approached 3 ifa's and asked them to write me an optimal drawdown plan.

This being in the round for my wife and myself . Total pot 1.1M.
2 s&s isas and 2 Sipps.

I am reasonably content to DIY our ivestments myself (HL) 0.25 fee's. I am 59 and wish to stop work in around 18 months.
Mortgage free , no debt , kids long gone , 35K cash buffer.
The problem seems to be ifa's want to take me off HL and on to their platform and select investments for me.
I am not confident which approach is optimal ie UFPLS, phased, crystalized, flexi, etc, etc, not withstanding getting taxation minimised.
Can any body point me in the right direction for me to do some research. Cheers Pointdexter.

kidmugsy

pointdexter wrote: »

Good Afternoon, i have approached 3 ifa's and asked them to write me an optimal drawdown plan.

You'd be wiser to start your own thread.

drumtochty

westv wrote: »

Unless I’m missing something I see:-

Total savings £ 531,000
Less mortgage £100,000 and renovation £40k = £391,000

Less Bridge to SP £8815 x 12 = £105,780
Less Bridge to DB £4,000 x 5 = £20,000

Net amount = £ 265,220 @ 3% drawdown = £7,956.60
Plus SP bridge + DB bridge = £20,771.60 Gross Income

You missed inflation that is a not in your numbers and needs added.

westv

drumtochty wrote: »

You missed inflation that is a not in your numbers and needs added.

With only 5 years to the index linked DB I can't see it makes much difference.
With 12 years until SP I'm sure the right investment can take care of that.
Everything else is covered in the 3% drawdown.

_pete_

Thank you very much to everyone who offered advice and insights. I've done my retirement income calculations to death, so I think I'm OK on that front. It's more the tactics of minimising tax by using ISAs, drawdown, cash savings etc that I need to get my head round.

Also, whether I should put some of my savings into my SIPP as cash - my understanding that this in effect generates an immediate 20% return? Is that right? Would I need to do this before I start drawdown?