Tapering drawdown: - frontloaded whilst still young

NeilC1965

Hi ,first post, but thought I would see if there is anything fundamentally wrong with my logic here.
I have a DB pension that will pay out around £21,000 from the age of 55 (actuarily reduced from NR age of 65) .
I also have around £220,000 in dc pensions + around £55,000 AVC's linked to my DB scheme.
Although I have received a very reasonable CETV for my db pension , I plan to leave it as a db pension with the added security and peace of mind that will bring when I'm in my 70's , assuming I get that far!.
I'm 53 , in good health , don't smoke and drink around 28 units/week(ok , so I'm still working to the old rules!).
My master plan is as follows: - Whilst still young enough to be able to enjoy it , Take my dc pension as drawdown , exhausting it fully until I'm around 72. That's around £13k pa assuming growth is similar to inflation. I should exceed that.I figure at 72 , I won't be as active or be able to spend as much money!
Assuming the dc pot is empty at 72 , I then still have my db pension + state pension which together will be around £29k pa or so based on my pension forecast(in today's monetary terms).
I can live very comfortably on this amount in retirement.
Between 55 and 72 I will have an income of around 21k+13k=£34k to the age of 67 and a whopping £42k between 67 and 72.
All of this sound like I planned it carefully , which i have , but having a db pension for 20+ years has really put me in a fortuitous position.
With no debt, no mortgage and £55k of AVC's planned to take as my tax free lump sum from my associated db scheme, I feel like front loading my pension makes sense whilst I'm still young enough and fit enough to enjoy it.
Or am I missing something ? I can't see any other references to this line of thought anywhere else on the internet.
Is there a better strategy to use?

atush

i would aim to have some cash savings (or cash and S&S isas) held back after exhausting your DC pension to pay for capital items like car replacements and home maintenance etc.

NeilC1965

Yes, of course . I already have around 20k in cash ISA's for that purpose . And I should have perhaps mentioned a wife who will also contribute her state pension at 67 plus an already active db pension of £6500 pa.

shinytop

Between 55 and 72 I will have an income of around 21k+13k=£34k to the age of 67 and a whopping £42k between 67 and 72

I too have a decent DB pension plus a DC but I am planning on evening income out pre and post SP or even having more income when I'm younger.

Mr_EDATD

I can see the logic but how much is the actuarial reduction? For taking it 10 years early i assume it is significant. Would it be worth using some of the DC pot to fund your initial retirement to reduce the impact of the AR?

£34k (less tax) plus your wifes £6.5k is a fair amount. If you don't need it all to enjoy you retirement it would be a shame to have reduced your DB that you have worked hard to build up.

If you give it a go for a year before pulling the trigger on the DB scheme you will only be impacting on the 5 years when you'd get the £42k.

NeilC1965

The actuarial reduction is 4% pa from 65, so at 55 a 40% reduction.I'd like to understand the best route forward to maximise early retirement funds whilst guaranteeing long term income when I won't need as much.I thought i had worked out the most efficient option , but perhaps not?

MK62

NeilC1965 wrote: »

The actuarial reduction is 4% pa from 65, so at 55 a 40% reduction.I'd like to understand the best route forward to maximise early retirement funds whilst guaranteeing long term income when I won't need as much.I thought i had worked out the most efficient option , but perhaps not?

To calculate the most "efficient" option, you also have to consider your tax position.
As you no doubt already know, there are many ways to withdraw retirement funds, but working only with gross figures can sometimes be misleading....you also have to consider the net position for each option (after all, this is really the more important figure of the two).
If you want to maximise income in the early years of retirement, you need to formulate an "income plan", and then apply the most efficient withdrawal method to that plan. It will of course require several assumptions, so you'd need to run numerous scenarios, using different levels for inflation and investment returns etc....and you also need to factor in sequence risk (while not really a factor in the accumulation phase, it suddenly becomes very real once into withdrawal.....you can't really just assume say a 4-5% average return per year over say 30 years, as if the bad years all come at the start of the period, the results can be skewed quite dramatically - if you are planning on higher withdrawals at the start, then sequence risk planning is even more important).

Johnnyboy11

NeilC1965 wrote: »

The actuarial reduction is 4% pa from 65, so at 55 a 40% reduction.I'd like to understand the best route forward to maximise early retirement funds whilst guaranteeing long term income when I won't need as much.I thought i had worked out the most efficient option , but perhaps not?

That 40% reduction in your DB could be offset by paying no income tax on the first £12.5k personal allowance, which would help a bit?


Do you get a Lump Sum when you start your DB?

NeilC1965

I should be able to get 4 times my pension as a tfls , so from the db scheme around 80k. But I have AVC's linked to my db scheme, worth approx 55k. I believe it is advantageous to take my AVC's as my tfls, leaving my db pension untouched.

Mr_EDATD

Without taking into account the impact of tax (inc TFLS of DC pot) by delaying taking your DB pension for the first 3.5 years (assuming that you can take the hit in half years but you could use the ISA / tax benefit if not) and increasing the £21k to £25.9K and using your DC you could achieve the £34k per year, £39.2k between 67 and 72 (not quite the £42k), and then £33.9k from 73 onwards instead of the £29k that you had in your original plan - I think that would be what they call having your cake and eating it :rotfl:

Not easy to put the calcs down on here (at least not in the way my mind works) but I'll give it a go:

Use of DC pot of £220k:

3.5 years at £34k = £119k
8.5 years of the difference between £25.9k and £34k (i.e. £8.1k) = £68.9k
balance over the next 6 years (if you really want to), £5.3k p.a. = £31.8k
Total spend = £219.7

DB fund is better as at 4% reduction (£1.4k) per annum x 3.5 = £4.9k + £21k = £25.9k taken from age 58.5 onwards

State pension £8k from 67

I'm not saying that this is necessarily the best way of doing it, like others have said you need to take tax into account as well as what your DC pot is invested in (taking it sooner may mean that you need to de-risk it faster but then the risk of higher levels of inflation reduce also). However I think that it shows that you can do better with the same.

You are in a good position though. The above doesn't take into account your cash reserve or your AVCs.

HappyHarry

I figure at 72 , I won't be as active or be able to spend as much money!

That's not my experience from advising a large number of retired clients. At 72, they seem to be just as active as at 55, with the added benefit that they know what they want to be spending their money on.

I would suggest that planning a significant pay cut for yourself at age 72 is something you could well regret.