DIY plan review on the eve of crystallisation

gm0

From my reading and the valuable experience sharing I found here.  I am about to make the jump into DC drawdown in practice vs the theory of it.
2020 slowed things up as with so much else. 

So final thoughts on this DIY plan are most welcome.

Scenario: Couple mid-50s. 2xSP later @67 One small DB 5-6k (value now) - (this is to be taken as guaranteed indexed income later at scheme NRA or close to it). 
This guaranteed income ~40% desired income from mid-60s onwards.  Drawdown flexes down then (by 75) spend pension last applies on current rules.
Spouse DC still in accumulation to non-earnings limit.  ~100k pot by access mid-60s (another 10x2880 added meanwhile all being well).  Main pension is a DC frozen to contributions (FP2014). Will consider topics like desirability or otherwise of SP deferral later. And also validate that "full" SP contribution years is reached for both. 

Drawdown - proposed wrappers/platforms

Platform 0 - Existing occupational DC. This largely migrates to LTA to 2x drawdown platforms. Residue (over LTA) is retained in the occupational wrapper.  No drawdown possible here. Residue stays in an ethical global equities tracker. @ 0.06% costs all in.  20+ year horizon. This is to be left until age 75.
Pay 25% LTA charge on full amount then or otherwise as rules then dictate. 

Drawdown platforms

50% of LTA moves to DC Platform 1 - L&G Master Trust. Insured basis (100% protection).  L&G passive global tracker - 0.18% costs all in (Platform+Fund)
25% is taken. On the 75% draw nominal growth age 55-75.  L&G PMC World Ex UK Equity Index Fund 3, L&G PMC UK Equity Index Fund 3 UK passives.
Option to diversify equities and add 10% EM and 10% Small Cap indexers. Raising the drag to 0.2% for 80% global large cap and 10% of each. Or can do that element in the  SIPP with more fund choices.

Other 50% of LTA moves to DC Platform 2 - Retail SIPP - 85k protection basis. iWeb  
Costs are variable and higher with active, wealth preservation and specialist funds - e.g. SMT.
Passive global + small + em + cash meanwhile until portfolio design is finished.
25% is taken, On the 75% draw nominal growth age 55-75 as above.

Income drawdown via equity sales is suspended for a correction.  SORR buffer of two years full income / 3 years essential income in cash (held somewhere, cash fund pension, isa, on deposit, PB - mostly via TFC early on).  There is more cash initially pending use of TFC in projects, PET and completion of S&S ISA recycling.
Fixed term life cover (in run off) offsets early death pre-60 while this happens.

Overall asset allocation. Across ISA/Pensions/General aiming for ~70% equities portfolio wide.
Currently 75% global ethical passive, 25% cash (lowered from 100% equities in preparing to do this).

Bonds (not B corporate or junk) to be used selectively for inflation offset of losses) in the "cash buffer" bit. And some via multi-asset (mainly in ISA).
ISA's can also be risk flexed in terms of fund choice to cap the equities and introduce some bonds via a couple of funds or multi-asset (Vanguard ISAs currently can move to iWeb later)

WR calculation - target drawdown income range under Extended Mortality table method is WR 2.5% floor to a 3.5% target WR. CPI indexed. Some supplement from TFC early years + retained small business profits.  But in reality for 20 years nominal growth below self-assessment HRB will be drawn annually to manage penalised growth of the 75% crystallsed funds) so this calculation is mostly a crosscheck on drawdown sustainability.

IHT issues (from TFC and more generally) are managed with PET, gift out of regular income and inheritance bypass (deed of variation) and a retirement property downsizing later which may cost/yield money based on destination.  Non-trivial but manageable. There is a period of exposure (IHT bulge) in early 60s after life cover but ahead of property downsizing. (This is arguably the bit where my DIY "research" has come up short on effective risk management). 

Everyone mostly says "don't fully crystallise your pension as it is usually wrong".  But my analysis of this edge case suggests that I should in order to take 25% of the 20 year capital growth outside the 25% rake (some to S&S ISA) on the clear understanding it is consumed or gifted and thus not hit with a 40% rake (IHT).

I still have more work to do to design the SIPP wealth preservation and active investment side of the portfolio.  But it can of course go into passive equities, em, small and cash or a middling multi-asset like my core holdings while I do the work on more specialist options.

Final thoughts especially weaknesses of the approach and plan - before the "crystallisation to 100%" button(s) are pressed ? 

JohnWinder

Perhaps write yourself an IPS, explaining your reasoning, so you're not tempted into bad moves in 10 years when the world throws another curve ball at us. Looks good, although the detail is beyond me.

Thrugelmir

What's plan B if global equities were substantially to undeliver for a decade. 

gm0

Thanks Thrugelmir.  Good helpful "stress test" challenge.  Potential answers are a combination of 1) stretch SORR buffer/clip discretionary spend 2) Early property downsize  3a) borrow from family with stable income  3b) Don't vary possible inheritance to the kids and consume it instead.  4) Liquidate business and liberate 2 years income.  Not watertight but several options to materially scale up SORR buffering progressively

JohnWinder

Good thoughts. You might add to that: consult the bogleheads' 'variable percentage withdrawal' spreadsheet which you update with the current equities crisis, to see how much you can safely withdraw, because the question you're answering doesn't address how close you are to dying, but the spreadsheet does.

From memory SORR in drawdown is particularly bad the earlier it hits, the longer it lasts, the deeper it is, and less obvious how bad inflation is. Remember the latter is one of Bernstein's 'deep risks' - make sure you're aware of those.

This fellow is no fool, and part 38 is on the subject too: https://earlyretirementnow.com/2017/05/17/the-ultimate-guide-to-safe-withdrawal-rates-part-14-sequence-of-return-risk/

shinytop

Looks very well thought out.  I won't/can't comment on the investment choices but in terms of the LTA you're doing the same as I have so I have to agree with your approach there.  

I don't know what your 'number' is nor how much you have.  But if a variable WR of 2.5-3.5% needs another Plan B then we're all in trouble!  You can't plan for everything; there comes a point when you have to accept that s&*t happens and you just have to roll with it;  Plan B becomes simply "spend less money".  What's your Plan C if your investments return significantly more that 3.5%?   

Unlike mine, your plan seems very focused on IHT/leaving a legacy.    Make sure you spend enough money on yourself to enjoy your retirement.  IMO that should be the priority rather than leaving a legacy but I appreciate not everyone shares that view.
  

Linton

Some thoughts....
1) You mention:

WR calculation - target drawdown income range under Extended Mortality table method is WR 2.5% floor to a 3.5% target WR. CPI indexed. 

How does Extended Mortality data come into your calculation?  The reason I ask is that some newbie retirement planners who come onto this forum start off with basing their plans on average life expectancy.  Clearly that is not sensible since there is a 50% chance of living too long, a risk which is far, far higher than the investment return risk they are prepared to accept when choosing a withdrawal rate.

2) Does your buffer of 2-3 years also cover large one-off expenses?  If it does I think it is too small.  I assume that if you are in LTA territory and are happy with a 2.5%-3.5% WR then you have the assets for example to take an occasional expensive holiday or perhaps major work on the house.  It would be nice to have a buffer large enough to have the flexibility to make that sort of choice, possibly at the last minute,  irrespective of the state of the global economy.

3) Do you have plans if you die early - eg would your spouse be able to manage the ifnances?

Robert_McGeddon

A fascinating read - thank you for posting.

Have you worked out how much income on top of existing pension provision do you need for (a) recurring living expenses and (b) discretionary expenditure? You appear to have 12 years or so to SP age with only £5K pa guaranteed. After that you'd have around £23K pa pension so if your recurring necessary expenditure was not much more than that then you'd be at low risk of running out of funds from that point on. You have two very different time periods to consider.

You might also want to consider care home costs - hypothetically £60K pa (in today's terms) for two people for 3 years is a fair wedge of money.

Albermarle

I think you have probably planned ahead in detail more than 99.9% of the population do . Certainly a lot more than I have with my drawdown/retirement plans !
Maybe you could bring in extra income as a freelance drawdown planner 

gm0

All good suggestions for considerations. Will address in turn

1) VPW and EM.  No negativity or particular issue with VPW.  I had picked out Extended Mortality as my chosen variable income approach from McClung Living Off your Money. I also bought into the variable with an income floor idea.  I then realised that I wouldn't be doing this in practice as I was likely to be largely tax driven to take nominal growth at basic rate tax for 20 years. First approximation.  Second approximation with better GI data is to profile it within basic rate band for 20 years and allow for the drawdown falling when SP+GI cuts in 67-75 i.e more drawdown sooner, less later and still aiming for around zero nominal growth in the 75% with that draw based on returns (real and inflationary as the LTA value is unindexed) net draw.

2) Spouse management plan is to leave a plan in place and aim to get confidence and comfort with DIY operations over a few years early on. If not or health does not permit then there is always an IFA for 0.5% pa if this is needed from a later point or one of the kids might be ready for support or for a POA as circumstances dictate.

3) Care costs is part of the thinking but hard to spreadsheet meaningfully at the far end of the plan.  Weekly rate variance around the country is huge towards 100%. Our planning approach is pension income redirected (whole or part for one or two - GI+Drawdown).  Speed reduced by ISA buffer depleted. Then by property sale.  Rules will likely change anyway from a lottery of 0 to a possibly ruinous number (both, early, very long stay) to a definite demand for say ~75k-100k meanstested against all assets regardless of need.  So cash and S&S  ISA assets will be held at a level for this and risk levels kept under control on it.  Retirement flat + those financial assets may drive a small (but not excessive) IHT bill but avoids a stressful situation for the kids.  This very issue came up prior generation and because they had been very prudent there was no financial crisis to accompany and add to the already high emotional charge of handling the events.

4) Discretionary and Essential.  Getting a grip iteratively on this was essential to successful confidence in planning. 
My GI = 40% was a very vague posting.  About to revisit the "essential" one based on 2020. Not much discretionary spending going on there - travel, restaurants etc.   

5) Recurring spending - anticipated house redecoration and car refresh likely come from TFC. (Family cars range from 9 to 16 years old so a "new" car is a *relative* concept for us - a 1 year old low mileage smaller hybrid/electric at a keen price is most likely).  I like to have an "emergency cash" buffer anyway (another year income) or to be able to see some as retained profits in the business which could be drawn.

6) Plan B (slump) I have covered off in my earlier comments.  So the opposite - Plan C (excess returns) / pot growth. 
No plan. Just do the basic tax management - drawing to self assessment higher rate band threshold.  Or indeed more in that lucky scenario in order to spend and or gift it away to family and charity early.  i.e. listening to Carnegie on the topic (There is a good In Our Time about him and the libraries, music venues and philosophical and religious backdrop to philanthropy.

coyrls

I am not sure what is happening to your 25% PCLS in your description above.  It will be a significant amount of money and should be included in your plans.  I can see your reference to "consumed or gifted" but I would have expected it to have been included in your income calculations.