Fast approaching retirement & worried.

jamesd

Dex58 said:

Maybe I’ve got it wrong but I thought UFPLS was a bit like using your dc pot as a bank account & 25% of each withdrawal was tax free. That would be a simple solution to bridge the two years till sp kicks in & then I could reassess.
I also thought drawdown meant taking 25% of the entire pot upfront (which I don’t really need to do) or moving chunks of the pot into drawdown as & when required which sounds a bit more complicated.

UFPLS is one form of drawdown.

The other common one is to take 25% of some portion of a pot and place the remaining taxable 75% into a flexi-access drawdown account from which it can be withdrawn as desired. It doesn't need to be the whole pot.

You could crystallise 120k from a 200k pot to get 30k tax free lump sum and 90k in flexi-access drawdown from which you take 12.5k taxable a year. 20k of the tax free part could be invested in a stocks and shares ISA as part of a plan to increase future flexibility of access.

jamesd

Dex58 said:

We were planning to use the “marriage allowance” facility to transfer 10% of my wife’s unused personal allowance (£1,260) to my own, thus giving me a personal annual allowance of £13,830. I would then use UFPLS to withdraw £18,440/year (£1,537/month) from my uncrystallised pensions, with 25% being tax free & the remainder falling within my personal allowance. So no income tax.

This would be approx 3.5% of my total pots which I hope will continue to grow. I think UFPLS would be preferable to drawdown as most of the 25% tax free entitlement would remain invested.

We would supplement our income by drawing an additional £10k per year from my wife’s DC pot of £21k. This would fall within her personal allowance (£11,310) & avoid income tax.

If my sums are correct this would provide a tax free income of £35,116 / year (£2962 / month) which is more than our current take home income.

Two years later when we receive our state pensions we can reassess the situation & probably reduce the rate of withdrawal. Our savings would also provide a safety net if the market dipped & we had to reduce it earlier.

You're planning to way underpay yourself. Research into safe withdrawal rates shows that for modest charges you can expect to draw 3.5% of a pot for a 30 year plan, increasing with inflation each year, and have around a 98% chance of dying after the 30 years with more money than you started with. That's because the 3.5% is based on the worst sequence of events in the last 120 or so years and you'll need to be very unlucky to experience something comparable.

3.5% increasing with inflation is commonly called the 4% rule, based on the US level before costs, or formally constant inflation-adjusted income.

Another popular way to plan is to use the Guyton-Klinger rules. Those would start at 5% for a 40 year plan and usually increase with inflation but sometimes skip it or take extra cuts or increases depending on the times you live through. The flexibility is why this can start higher. You need to make some calculations and adjustments once per year with this set of rules.

So what I suggest is that from when you stop work you pay yourself your state pension and from the remaining 500k - 2×9237 = I'll call it 480k for convenience. On top of that also draw either 3.5% or initially 5% and continue with the relevant rules for life. So either 16.8k or 24k a year. 24k and G-K is what I suggest.

Alternatively, you might use the approach that Guyton uses with his own clients, working out what is needed for all normal, spending including routine holidays and allocating the rest to a discretionary pot that you can spend whenever you like on whatever you like.

You've been very prudent and provided very well for yourselves. Work is now entirely optional and you have ample money to meet your needs and more.

Dex58

jamesd said:

Dex58 said:

We were planning to use the “marriage allowance” facility to transfer 10% of my wife’s unused personal allowance (£1,260) to my own, thus giving me a personal annual allowance of £13,830. I would then use UFPLS to withdraw £18,440/year (£1,537/month) from my uncrystallised pensions, with 25% being tax free & the remainder falling within my personal allowance. So no income tax.

This would be approx 3.5% of my total pots which I hope will continue to grow. I think UFPLS would be preferable to drawdown as most of the 25% tax free entitlement would remain invested.

We would supplement our income by drawing an additional £10k per year from my wife’s DC pot of £21k. This would fall within her personal allowance (£11,310) & avoid income tax.

If my sums are correct this would provide a tax free income of £35,116 / year (£2962 / month) which is more than our current take home income.

Two years later when we receive our state pensions we can reassess the situation & probably reduce the rate of withdrawal. Our savings would also provide a safety net if the market dipped & we had to reduce it earlier.

You're planning to way underpay yourself. Research into safe withdrawal rates shows that for modest charges you can expect to draw 3.5% of a pot for a 30 year plan, increasing with inflation each year, and have around a 98% chance of dying after the 30 years with more money than you started with. That's because the 3.5% is based on the worst sequence of events in the last 120 or so years and you'll need to be very unlucky to experience something comparable.

3.5% increasing with inflation is commonly called the 4% rule, based on the US level before costs, or formally constant inflation-adjusted income.

Another popular way to plan is to use the Guyton-Kljnger rules. Those would start at 5% for a 40 year plan and usually increase with inflation but sometimes skip it or take extra cuts or increases depending on the times you live through. The flexibility is why this can start higher. You need to make some calculations and adjustments once per year with this set of rules.

So what I suggest is that from when you stop work you pay yourself your state pension and from the remaining 500k - 2×9237 = I'll call it 480k for convenience. On top of that also draw either 3.5% or initially 5% and continue with the relevant rules for life. So either 16.8k or 24k a year. 24k and G-K is what I suggest.

Alternatively, you might use the approach that Guyton uses with his own clients, working out what is needed for all normal, spending including routine holidays and allocating the rest to a discretionary pot that you can spend whenever you like on whatever you like.

You've been very prudent and provided very well for yourselves. Work is now entirely optional and you have ample money to meet your needs and more.

Thank you, That’s very reassuring. Much appreciated.

MaxiRobriguez

jamesd said:

Dex58 said:

We were planning to use the “marriage allowance” facility to transfer 10% of my wife’s unused personal allowance (£1,260) to my own, thus giving me a personal annual allowance of £13,830. I would then use UFPLS to withdraw £18,440/year (£1,537/month) from my uncrystallised pensions, with 25% being tax free & the remainder falling within my personal allowance. So no income tax.

This would be approx 3.5% of my total pots which I hope will continue to grow. I think UFPLS would be preferable to drawdown as most of the 25% tax free entitlement would remain invested.

We would supplement our income by drawing an additional £10k per year from my wife’s DC pot of £21k. This would fall within her personal allowance (£11,310) & avoid income tax.

If my sums are correct this would provide a tax free income of £35,116 / year (£2962 / month) which is more than our current take home income.

Two years later when we receive our state pensions we can reassess the situation & probably reduce the rate of withdrawal. Our savings would also provide a safety net if the market dipped & we had to reduce it earlier.

On top of that also draw either 3.5% or initially 5% and continue with the relevant rules for life. So either 16.8k or 24k a year. 24k and G-K is what I suggest.

James - is there any research on success rates based on a flat withdrawal rate (like 3.5%) or G-K approach do you know?

Linton

MaxiRobriguez said:

jamesd said:

Dex58 said:

We were planning to use the “marriage allowance” facility to transfer 10% of my wife’s unused personal allowance (£1,260) to my own, thus giving me a personal annual allowance of £13,830. I would then use UFPLS to withdraw £18,440/year (£1,537/month) from my uncrystallised pensions, with 25% being tax free & the remainder falling within my personal allowance. So no income tax.

This would be approx 3.5% of my total pots which I hope will continue to grow. I think UFPLS would be preferable to drawdown as most of the 25% tax free entitlement would remain invested.

We would supplement our income by drawing an additional £10k per year from my wife’s DC pot of £21k. This would fall within her personal allowance (£11,310) & avoid income tax.

If my sums are correct this would provide a tax free income of £35,116 / year (£2962 / month) which is more than our current take home income.

Two years later when we receive our state pensions we can reassess the situation & probably reduce the rate of withdrawal. Our savings would also provide a safety net if the market dipped & we had to reduce it earlier.

On top of that also draw either 3.5% or initially 5% and continue with the relevant rules for life. So either 16.8k or 24k a year. 24k and G-K is what I suggest.

James - is there any research on success rates based on a flat withdrawal rate (like 3.5%) or G-K approach do you know?

The only data available comes from the models like https://cfiresim.com/.  Other than simulating how different withdrawal rates would have worked in the past it is difficult to see what other info there could be.