Drawdown

jolly790

Thanks all I’ve learnt more about risk management regarding my pension drawdown already, has anyone any experience of going all into equity’s ? As the bond /annuity rates are really low , I know it’s risky 

Thrugelmir

No different to standing on a desert island with the surrounding water full of sharks. Never become complacent. Look after every £ if your was your last. 

DairyQueen

jolly790 said:

has anyone any experience of going all into equity’s ? As the bond /annuity rates are really low , I know it’s risky 

Other than the cash required for the first 5 years of drawdown, Mr DQ (retiring at the end of this year) is very high equities. Not 100% as he also has a smallish percentage in bond and wealth preservation funds sufficient to cover his very low projected withdrawal rate from retirement years 5 through 10. Note the emphasis.

He can afford the sequence of returns risk associated with high equities as we will not be dependent on drawdown from his portfolio after the first five years. The current allocation to equities will not be required for at least ten years although, when appropriate, I will replenish the lower risk investments in order to sustain the low drawdown rate throughout retirement without force-selling equities.

OTOH my portfolio is more cautiously invested. I also have 5 years of drawdown in cash but have a higher bond allocation to contain volatility on the regular drawdown I plan from years 5 thru 10. Even so, by most standards, I am also high equities.

Our combined pension portfolio is currently 74.5% / 7.5% / 2% / 17% equities, FI, wealth preservation, cash, respectively. From year 5 the allocation is planned to be in the region of 84% / 8.5% / 2% / 5.5%.

By year 5, all DBs and SPs will be in payment and we have a healthy cash buffer so we will be able to suspend drawdown indefinitely without any pain during bear markets from that point forward. Thus the high allocation to equities can be justified. 

I think you would be well-advised to check out the consequences of force-selling equities when markets are down. It would also assist you to understand sequence of returns risk. I would not consider such a high allocation to equities if we were dependent on drawdown as a bear market could well outlast a 2/3 year cash buffer. 

Bonds do not offer the protection they once did against market crashes as they no longer offer returns relative to the risk (corporate bonds), or inflation protection (gilts), and it seems that the inverse correlation to equities no longer applies. Even so, they reduce volatility and smooth returns. Force-selling bonds rather than equities is likely to result in lower losses. Also, perhaps consider wealth preservation funds as another option.

Audaxer

jolly790 said:

I was hoping by taking a lower drawdown to avoid any tax ,and use my 25% to supplement until I get SP , thus providing  an average of 20k tax free , not sure how to split into equity/bonds ,I believe the equity market maybe due a correction in the future ,but who knows when . My concern is ,if I keep working I may not recieved the full benefits in my life time and I could live quite easy on 20k tax free I think 

By my calculations, if you drawdown £20k per year, increasing by say 2.5% inflation per year over 12 years, that amounts to around £276k in total. If £125k of that was taken as a tax free lump sum, it would still mean another £151k drawn down over 12 years. If there are a few equity crashes or a bad sequence of returns over the next 12 years, it might not leave enough invested to provide you with £13k per year income to drawdown from age 67 when you get your State Pension.  

jolly790

Thanks for your responses guys , god there’s so much to consider , if anyone has any other suggestions please put all advice is grateful 

DHT

SonOf said:

I was hoping by taking a lower drawdown to avoid any tax ,and use my 25% to supplement until I get SP , thus providing  an average of 20k tax free
But then you will be taxed more later on.

Sorry to be ignorant but why taxed more later on?
jolly790, thank you for raising this topic. I am on the same boat.

SonOf

DHT said:

SonOf said:

I was hoping by taking a lower drawdown to avoid any tax ,and use my 25% to supplement until I get SP , thus providing  an average of 20k tax free
But then you will be taxed more later on.

Sorry to be ignorant but why taxed more later on?
jolly790, thank you for raising this topic. I am on the same boat.

1 - When the state pension becomes payable, that will eat most of the personal allowance.  So, the income draw from the pension will only have a small amount of personal allowance to use up before it is taxed.   As the 25% has been taken up front, it cannot be used for the income draw (i.e. £1000pm being £750pm taxable, £250pm tax free).   So, the tax "saved" at the front end would still be paid later on.
2 - phasing the 25% with income should pay out more tax free over your lifetime than taking it up front.   e.g. a £400,000 fund drawing £1,000 per month using phased drawdown (so £750 taxable, £250 tax free) should see the fund value grow over time as the draw is sustainable.   If in 10 years time the fund is £500,000 then the potential tax free cash at that point is £125k plus there has been £30,000 tax free cash already paid in the previous 10 years making £155k tax free cash.  If it had been taken at the start then only £100,000 would have been available.  (repeat example over 20 or 30 years)
3 - Inheritance tax.  Pensions are outside of the estate of IHT.    Bringing a large lump sum into your ownership from the pension could increase the IHT bill on death.  If left in the pension, it avoids that.

Ultimately, the different methods should be modelled to see which comes out the most effective.  It could vary depending on the amounts involved and the investment strategy being used and the requirements for the money (i.e. requirement is an issue as many just plonk it in a savings account to sit there for many years earning pittance).

DHT

Thank you, SonOf for the quick response and detailed clarification.