Income questions

k6chris

The FTSE 100 is yielding (from dividends) just over 4% at the moment, so you could invest in a low cost, income (dividend) paying FTSE 100 tracker and live of the yield. Something like this


http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P00000IQX


Not a recommendation, just an idea to investigate!

Pat_Fleming

Thanks for the help so far. The consensus seems to be that 3% would be about right. On rough figures, that's about £500 per month.


Can someone now suggest the "best" way of actually achieving this?


It sometimes feels like saving/investing was the easy part...

TadleyBaggie

I'm taking 4.5% from an initial pot of £225K and after 3 1/2 years I'm still up. I might need to drop the percentage as for 19/20 I will be getting a full state pension and might be pushed into the 40% tax band.

maximumgardener

Pat_Fleming wrote: »

Thanks for the help so far. The consensus seems to be that 3% would be about right. On rough figures, that's about £500 per month.


Can someone now suggest the "best" way of actually achieving this?


It sometimes feels like saving/investing was the easy part...

Well....one strategy might be just to drawdown your 500 /month from ISA 's first ?
That limits tax as isa's income drawdown is tax free.
That defers any tax from the Pension element and allows it to go up/down with the markets
until you feel like drawing that down , say 10 years or more , later
You can also pay in to SIPP 2880 per year (3600 gross) till age 75 if you have funds to do that

good luck

Pat_Fleming

maximumgardener wrote: »

Well....one strategy might be just to drawdown your 500 /month from ISA 's first ?
That limits tax as isa's income drawdown is tax free.
That defers any tax from the Pension element and allows it to go up/down with the markets
until you feel like drawing that down , say 10 years or more , later
You can also pay in to SIPP 2880 per year (3600 gross) till age 75 if you have funds to do that

good luck

Thank You for this. However, (and certainly not wishing to argue) now you've got me thinking about the tax element of this, would it not make more sense to access the pension part first while I still have some basic rate allowance left? If the pension grew too much (:eek:) & I also got an increase at SP age, might I risk running into the Higher Rate Tax band?

kidmugsy

Pat_Fleming wrote: »

I am almost 60 & already receiving a Final Salary pension after taking redundancy/early retirement.

Will that Final Salary pension plus your eventual State Retirement Pension give you enough to live on? If so your problem boils down to bridging the gap before the State Pension begins

Does the FS pension occupy the whole of your Personal Allowance against income tax (£12,500 p.a. for tax year 19/20)? If it doesn't then you might as well drawdown enough from your SIPP to use up the whole of the Personal Allowance. That would bring with it part of your tax-free lump sum.

For example, if your Final Salary pension is £10k p.a. for 19/20, you'd want to drawdown a taxable £2,500 p.a. from your SIPP, bringing with it tax-free lump sum of £2,500/3 = £833 p.a. Would that be enough for you i.e. £13,333 p.a. tax-free? If not you'd probably want to supplement it e.g. with money from the ISAs.

So you need to know how much you'd be burning through until you reach your state pension. For that you presumably need to calculate how much you need/want to live on.

bostonerimus

maximumgardener wrote: »

Well....one strategy might be just to drawdown your 500 /month from ISA 's first ?
That limits tax as isa's income drawdown is tax free.
That defers any tax from the Pension element and allows it to go up/down with the markets
until you feel like drawing that down , say 10 years or more , later
You can also pay in to SIPP 2880 per year (3600 gross) till age 75 if you have funds to do that

good luck

Tax free items like ISAs are usually withdrawn from last. For tax purposes you should first withdraw from your pension up to the limit when you start paying tax.

Pat_Fleming

kidmugsy wrote: »

Will that Final Salary pension plus your eventual State Retirement Pension give you enough to live on? If so your problem boils down to bridging the gap before the State Pension begins

Does the FS pension occupy the whole of your Personal Allowance against income tax (£12,500 p.a. for tax year 19/20)? If it doesn't then you might as well drawdown enough from your SIPP to use up the whole of the Personal Allowance. That would bring with it part of your tax-free lump sum.

For example, if your Final Salary pension is £10k p.a. for 19/20, you'd want to drawdown a taxable £2,500 p.a. from your SIPP, bringing with it tax-free lump sum of £2,500/3 = £833 p.a. Would that be enough for you i.e. £13,333 p.a. tax-free? If not you'd probably want to supplement it e.g. with money from the ISAs.

So you need to know how much you'd be burning through until you reach your state pension. For that you presumably need to calculate how much you need/want to live on.

My Final Salary pension already gives me enough to live on. Also, as stated earlier, the SP won't make much difference due to to "smoothing" given by a higher FS pension which reduced at SP age.
I am paying basic rate tax on part of my FS pension. I think I have about another 12K before I would reach the HR band.


I am currently living a fairly frugal lifestyle despite having what a lot of people would consider to be a high level of assets. I would like to perhaps "move up a gear" as I drift off into the sunset. I am finding myself having to ask how to do it as it is something that does not necessarily come naturally.

kidmugsy

Pat_Fleming wrote: »

My Final Salary pension already gives me enough to live on. Also, as stated earlier, the SP won't make much difference due to to "smoothing" given by a higher FS pension which reduced at SP age.
I am paying basic rate tax on part of my FS pension. I think I have about another 12K before I would reach the HR band.

There are various ways you could approach this that are likely to make better use of your money than the inefficient 4% rule. I like the sound of this:

(1) The paper by Sun and Webb that I've linked to below shows a rational approach, whereby the amount you drawdown is (a) linked to your remaining life expectancy (assuming average health), (b) the success or otherwise of your investing policy, and (c) the assumption that you'd probably like to have a higher income early in retirement than at the end. The authors report that under assumptions that they think reasonable this is far more efficient than the 4% rule nonsense. It's also easy to see how you might adapt it for your desire to keep some capital back (presumably for bequests?).

(2) Here's what Sun and Webb recommend. Each year, at most:
(i) Draw all the dividends and interest from your portfolio, but not the capital gains.
(ii) In addition draw a proportion of the capital value of the portfolio. Amusingly, a table of percentages drawn up by the US tax authorities for a rather different purpose tells you how much to take of the capital each year. Thus you'll see that the table in the Appendix reports that at age 65, for example, you should withdraw 3.13% of the capital, with that percentage increasing each year, but of course the actual cash flow perhaps decreasing as you slowly deplete the pot.

(3) Now, you tell us that you'll get a slight "pay rise" when your SRP begins. Fine: if that pay rise were to be (say) £1k p.a. you could supplement the Sun and Webb rules by taking an extra £1k p.a. (inflation-linked if you like) until your SRP begins, and then stop. Adapt the rest of the calculation accordingly.

(4) Look at Sun and Webb's measure of merit - or rather de-merit - called Strategy-Equivalent Wealth (SEW). The way it works is that they compute (mathematical details not shown) an optimal strategy. Suppose a couple starts with, say, $100,000. The optimal strategy gives them benefits in the most efficient possible way. They report that their simple rule of thumb, the one I've described in (2), gives the same benefit for a starting sum of $103,000. (See their figure 3.) Given the radical uncertainty of the future that 3% difference is trifling; in other words, their rule of thumb is awfully good. They also report that for the couple to get the same benefits with the 4% rule they'd have had to start with $149,000. That 49% difference is not trifling; the 4% rule is - as many other authors have concluded, by a variety of calculation methods - an awfully expensive way to fund your retirement. Moreover, if it doesn't succeed you end up penniless; if it over-succeeds you end up with heaps of capital when you don't need it i.e. are decrepit or dead.

Judging by what I've read the conclusion that the 4% rule is a poor thing is not tied to the idiosyncrasies of the US tax system - it's intrinsic to the foolish project of trying to take a fixed income from a fluctuating portfolio while ignoring the life expectancy of the pensioner(s).


http://crr.bc.edu/wp-content/uploads/2012/10/IB_12-19-508.pdf



P.S. I predict that this post will be "answered" by further posts that will show the poster has either

(i) Failed to grasp the point, or

(ii) Is outraged at the very idea that something he's never heard of could possibly be better than whatever he does at the moment, or

(ii) Makes an objection that is factually reasonable but betrays a complete absence of a sense of proportion i.e. that worries away at a trivial detail.

Betcha!

Thrugelmir

kidmugsy wrote: »

The much-quoted 4% p.a. is based on a period of good performance of the US stock market. A UK equivalent might be 3%.

Not just good performance. But a yield well in excess of 4% on US Treasuries held. No options to obtain a yield of that nature from UK Gilts at the current time. Substituting for other "fixed income" stocks totally changes the risk. As exposes one to capital loss.