Question on flexible drawdown mechanism

GazzaBloom

Our current retirement plans are as follows and I have a question on the mechanics of how flexible drawdown works to see if it does what I want. We plan to retire in around 4-5 years, we will be mid-late 50s and hope to be in this position:

• Debt and mortgage free
• 6 months emergency fund held as cash - £12K
• 2 years day to day annual expenses (not luxuries) also held as cash separate from the emergency fund - £50K (this will be used in market downturns if we need to suspend pension drawdown) 
• Circa £350K in a private DC pension held as follows:

                  £100K in low risk/low volatility/low fee bonds index fund (4 years worth of day to day annual expenses)
                  250K held in 100% equities split equally between Global large Cap/Global Mid Cap/UK Small Cap mutual funds. 

• £50-60K held in stocks and shares ISA in higher risk/higher growth mutual funds such as Polar Capital Global Technology/Baillie Gifford American B - this will our luxury spend pot, holidays, new car, new computer/iPad etc. In good years we'll top slice profits and withdraw/spend, in downturns we'll leave it to recover.

The drawdown from the private DC pension will be designed to be enough to cover day to day living expenses and a monthly pocket money allowance each after tax. We won't need to take the 25% tax free lump sum but will prefer to take 25% tax free during drawdown as we go. I have calculated that we will need to drawdown around 5-6% in the first years dropping to 2%, then less than 1% once full state pensions kick in at age 67. I also have a final salary pension that will be paying out around £6K a year.

My questions are on how flexible drawdown from the £350K works. Can I take a monthly amount as drawdown, adjusting the amount at the end of each year as required? Will 25% of each monthly amount be tax free? Can I instruct our pension provider which of the funds to take the drawdown from? For example, in good years I would want to take the gains from the equity growth and leave the £100K in the bonds index fund, in a downturn when the equities have dropped I would want to switch the drawdown to take from the bonds index fund and leave the equity funds to recover to a year or 2. Can I do that? 

zagfles

You'll have to ask your pension provider, the problems with the new flexibilities are there are 1000 ways to skin a cat and some providers will prefer some methods and others will prefer others. For instance, my SIPP provider won't do the 75% taxable/25% tax free with each withdrawal as an automated facility, (you can take one-off UFPLSs which are the same thing but have to apply each time), they prefer phased drawdown (where you crystallise in chunks, eg crystallise a year's worth, take 25% tax free and drawdown from the 75% over the year).

Whereas my workplace pension provider offers either the 75% taxable/25% tax free each withdrawal or full crystallisation only, I don't think they offer phased.

Same for assets to use, some will expect you to sell enough assets so the cash is ready for your payment date, others will automatically sell, usually in proportion to your existing assets, although you can of course rebalance. Some may allow you to specify in advance which assets you want to be sold for next drawdown payment

MK62

Check your provider too.....there may be significant cost differences between the approaches depending on the charging structure in place....(though you can always move to a provider where there's little or no difference)

Linton

On the last question - where can the cash for drawdown come from.  For the providers I use it is your responsibility to sell sufficient investment from whichever fund you want so that the cash is sitting in the account when the provider wants to access it.

For that reason I find it easiest just to make a one-off drawdown into a cash buffer once a year freeing up the money required as part of annual rebalancing.  Having to make a decision on what to sell every month is an unnecessary hassle.  Also there is a charge for changing the amount of a fixed monthly withdrawal. I want the flexibility of drawing down whatever money I choose which will depend on circumstances eg future large expenses or whatever is available within the basic rate tax band.  Excess cash is transferred to an S&S ISA.

GazzaBloom

OK ta. I'm currently with Standard Life and info on their website about their flexible drawdown is limited.

GazzaBloom

Linton said:

On the last question - where can the cash for drawdown come from.  For the providers I use it is your responsibility to sell sufficient investment from whichever fund you want so that the cash is sitting in the account when the provider wants to access it.

For that reason I find it easiest just to make a one-off drawdown into a cash buffer once a year freeing up the money required as part of annual rebalancing.  Having to make a decision on what to sell every month is an unnecessary hassle.  Also there is a charge for changing the amount of a fixed monthly withdrawal. I want the flexibility of drawing down whatever money I choose which will depend on circumstances eg future large expenses or whatever is available within the basic rate tax band.  Excess cash is transferred to an S&S ISA.

Ah OK, if I understanding you correctly, with your provider, by way of example I would need to sell from either of the equities or bonds funds as I see fit, say at the end of December, a years worth of money to move to the cash wrapper that they will take the monthly drawdown from, rinse repeat the same at the end of the next year and so on? I guess I could do that quarterly or bi-annually as required? Is that done online or do you have to call them with your instructions?

Do you mind sharing what provider you are with?

GazzaBloom

I'm sent SL an email asking for more details on how their Flexible Drawdown works.

The thought of spending our retirement pot rather than paying into it with salary is scary...!

Albermarle

GazzaBloom said:

I'm sent SL an email asking for more details on how their Flexible Drawdown works.

The thought of spending our retirement pot rather than paying into it with salary is scary...!

On the first point , I do not think SL offer UFPLS payments ( 25% tax free/75% taxable ) .
On the second point , probably why a lot of people are tempted to do 'one more year ' ( or three )

Linton

GazzaBloom said:

Linton said:

On the last question - where can the cash for drawdown come from.  For the providers I use it is your responsibility to sell sufficient investment from whichever fund you want so that the cash is sitting in the account when the provider wants to access it.

For that reason I find it easiest just to make a one-off drawdown into a cash buffer once a year freeing up the money required as part of annual rebalancing.  Having to make a decision on what to sell every month is an unnecessary hassle.  Also there is a charge for changing the amount of a fixed monthly withdrawal. I want the flexibility of drawing down whatever money I choose which will depend on circumstances eg future large expenses or whatever is available within the basic rate tax band.  Excess cash is transferred to an S&S ISA.

Ah OK, if I understanding you correctly, with your provider, by way of example I would need to sell from either of the equities or bonds funds as I see fit, say at the end of December, a years worth of money to move to the cash wrapper that they will take the monthly drawdown from, rinse repeat the same at the end of the next year and so on? I guess I could do that quarterly or bi-annually as required? Is that done online or do you have to call them with your instructions?

Do you mind sharing what provider you are with?

My SIPP is with BestInvest, MrsL's, which I manage, is with AJBell.  Generally for drawdown changes BestInvest requires a snail mail request and AJBell has an online form.  Both charge for changes.

In both cases you can ask for a fixed monthly drawdown.  That will then happen automatically as long as there is cash in the account a couple of weeks before payment date.  How and when the cash gets there is irrelevent.  It doesnt need to be moved elsewhere since both platforms can hold cash directly in their SIPPs.  

I, and MrsL dont use that option because of the monthly hassle of ensuring that sufficient cash is available.  In any case most of our normal expenditure is covered by guaranteed pensions and by dividends/interest automatically paid out from an S&S ISA held with II, Also, we keep a lot of cash in our current accounts and have cash or near to cash held in PBs etc that can be used if necessary for large payments.  So we have no need for a monthly drawdown income.  Yearly we make a request for a one-off drawdown to replenish our cash.

NottinghamKnight

Isn't Bestinvest quite expensive as a percentage charge provider?

garmeg

Linton said:

GazzaBloom said:

Linton said:

On the last question - where can the cash for drawdown come from.  For the providers I use it is your responsibility to sell sufficient investment from whichever fund you want so that the cash is sitting in the account when the provider wants to access it.

For that reason I find it easiest just to make a one-off drawdown into a cash buffer once a year freeing up the money required as part of annual rebalancing.  Having to make a decision on what to sell every month is an unnecessary hassle.  Also there is a charge for changing the amount of a fixed monthly withdrawal. I want the flexibility of drawing down whatever money I choose which will depend on circumstances eg future large expenses or whatever is available within the basic rate tax band.  Excess cash is transferred to an S&S ISA.

Ah OK, if I understanding you correctly, with your provider, by way of example I would need to sell from either of the equities or bonds funds as I see fit, say at the end of December, a years worth of money to move to the cash wrapper that they will take the monthly drawdown from, rinse repeat the same at the end of the next year and so on? I guess I could do that quarterly or bi-annually as required? Is that done online or do you have to call them with your instructions?

Do you mind sharing what provider you are with?

My SIPP is with BestInvest, MrsL's, which I manage, is with AJBell.  Generally for drawdown changes BestInvest requires a snail mail request and AJBell has an online form.  Both charge for changes.

In both cases you can ask for a fixed monthly drawdown.  That will then happen automatically as long as there is cash in the account a couple of weeks before payment date.  How and when the cash gets there is irrelevent.  It doesnt need to be moved elsewhere since both platforms can hold cash directly in their SIPPs.  

I, and MrsL dont use that option because of the monthly hassle of ensuring that sufficient cash is available.  In any case most of our normal expenditure is covered by guaranteed pensions and by dividends/interest automatically paid out from an S&S ISA held with II, Also, we keep a lot of cash in our current accounts and have cash or near to cash held in PBs etc that can be used if necessary for large payments.  So we have no need for a monthly drawdown income.  Yearly we make a request for a one-off drawdown to replenish our cash.

I thought AJ Bell no longer charge for drawdown withdrawals?

How much do tney charge for changes?