Using up a DC pot

Moonwolf

The basic question is, if I am happy to plan to use up my DC pot by say 85 what are the ways to maximize the income?
I’m 55 in a couple of months. My partner is 69 and already retired with a DB pension paying £9K a year which I would get half, and old style basic state pension.
I have two DB pensions that will between them pay £9K from 60 and a DB that will pay £6K from 65 which is growing by about £1K each year I carry on working. These will give my partner £6K a year if anything happens to me. All grow by CPI. I already have enough NI already to get full state new pension. 
I also have a DC pot of £250K which I still pay additional contributions into, at the moment I am working from home and putting in savings from my commute as extra, temporarily it is £500 a month gross. I also have savings of £50K (although £20K of that is BT employee shares from when I worked for them, in an ISA and quite volatile at the moment)
We have no dependents, only about £15K left to pay on the mortage and are happy to leave nothing.
I realise this is a good position to be in. By my reckoning if I lost my job tomorrow, by drawing down on my DC pot until my pensions kick in I could manage about £28K a year for life (using investment growth of 2% above inflation) which is a reduction in lifestyle but not uncomfortable.
My target is £38K a year or £2750 a month after tax and I’m keen to go as soon as possible. This is £500 a month less than current take home which seems reasonable looking at how much I am saving and assuming the mortgage will be paid off.
Given the DB pensions will cover basics, I have spreadsheets that estimate drawdown with running out when I am 85 and my partner is 99. In the unlikely event we are both still around we could then take equity on the house if we needed anything above the DB pensions. I don’t think this is too irresponsible but estimates clearly get shakier as the pot reduces and volatility has a bigger impact. I have to make some dodgy assumptions like the tax rate will remain the same and the personal allowance will keep pace with inflation.
The question is, is there a better way to use the DC pot, perhaps get a guaranteed income given I am willing to set an end date and spend it all. Can I go earlier, it is looking like 58 to 60 at the moment. The big problem is of course bridging the years until the pensions kick in. Other thoughts.

Albermarle

You can do it the old fashioned way and buy an annuity , where you exchange your pot for a guaranteed income . At the moment annuity rates are pretty poor though. It depends a lot on the terms of the annuity . Is is for a fixed term ( cheaper of course for say 10 or 20 years  ) or until you die ? is there a spouse income if you die ( adds cost ) ? Is it inflation linked? ( pretty much halves the income available) 

mark55man

A common plan is to use the DC pot to avoid having to take any reductions in the DB by taking early.  Then at a time of your choosing convert the remaining DC pot into an annuity for better rates (as you by then older).

A parallel plan also common is to defer the state pension to act as extra inflation protection - it increases by 5. something percent per year you defer, so if you were happy using up the DC for a bit longer then that could be reassuring.

Your BT shares are a little unusual as part of a conservative retirement portfolio - nothing wrong with a bit of spice in your investments, but if you want a balance and cautious approach you might consider converting them into something with a lower risk profiles

Moonwolf

Albermarle said:

You can do it the old fashioned way and buy an annuity , where you exchange your pot for a guaranteed income . At the moment annuity rates are pretty poor though. It depends a lot on the terms of the annuity . Is is for a fixed term ( cheaper of course for say 10 or 20 years  ) or until you die ? is there a spouse income if you die ( adds cost ) ? Is it inflation linked? ( pretty much halves the income available) 

If I look at standard annuity rates from 70 ( my partner would be 84) and put in 50% spouse cover it makes almost no difference. One option has me taking the 25% lump sum at 58, hopefully the pot will be approaching £300K by then so I’d get £75K. Live off that for two years then my first pensions kicks in at 60. Use savings and draw down the extra to 70 by which time the rest of my pensions have kicked in then it is either draw down or annuity with 50% cover from then. The advantage is my spouse then has a flexible pot to their mid 80s if I do die early. I’ve not found a fixed term calculator that gives me a ball park in today’s money that doesn’t get confused by me not wanting any cash back at the end or me putting in my current DOB.

I’ve also modeled where I drawdown using uncrystallized funds and taking 25% tax free each draw. If I retire at 58 as above I think I get the benefit of the full personal allowance to 60 and a bit of it to 65 but I don’t understand how that impacts an annuity. Do I have to crystallize an annuity or can I take one with 25% tax free.

Moonwolf

mark55man said:

Your BT shares are a little unusual as part of a conservative retirement portfolio - nothing wrong with a bit of spice in your investments, but if you want a balance and cautious approach you might consider converting them into something with a lower risk profiles

The BT shares were part of sharesave and cost 61p a share. Most were cashed in at £3.50 but I had to wrap some in an ISA to avoid CGT. Left them as shares as I was feeling flush. Some of the rest went to buy additional pension and on a house extension. I did sell a few in the ISA and bought Persimmon, Experian, Next and Whitbread to spread the risk a bit. After Whitbread I stopped as I wasn’t sure I was making the right decisions. Technically I’m still ahead but it always feels the wrong time to sell.

[Deleted User]

Yes. This takes you to 100 but you can adjust the formula to spend the pot earlier

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal#How_to_use_variable_percentage_withdrawals_during_retirement

Albermarle

If you start wit an uncrystallised pot , you can take 25% tax free and buy an annuity with the rest .
If you have already taken the 25% before and you only have crystallised funds left then you can take any more tax free whatever you do . That would be having your cake and eating it .

pamalpass

I looked at it slightly differently. I feel a selection form all of the advice is the real answer. But my thoughts..

I am not too sure of the value of buying an annuity at the moment.

Ideally pay off the debts. 
Remember on Pensions earnings you only pay tax. E.g. no NI payments. So £38k pension income is worth more than £38k job earnings.
As mentioned above 25% of the DC pot drawdown is tax free. So 12,500 is only 10k to the tax man.  The DB pensions can be taken early. They still increase annually as well.

Try a spreadsheet with a DB pension taken early and see what it looks like with an increase and what you actually need from the DC pot. Just calculate tax paid and ignore NI. Then when you draw the State pension you could reduce the DC drawdown.

On death the remaining  DC pot goes to your spouse tax free.

Might sound a bit confusing but 

pamalpass

....forgot to say. If your BT Pension is a DB then you will get a lump sum and pension at 60.  (Mine just did).
If possible i would pay more into the current DC. Pot. Its taken pre tax so that’s £60 for £100 in your pension. Or £80 per £100 if you are 20% tax. Even if it isn’t rising rapidly that’s at least 20% compared to savings earning nothing.