Guidance on what to do with funds at point of retirement

LV_426

It's probably come up before, so apologies if this is a repeat, but I'm looking for guidance on what to do with your pension funds when you retire.
I've read the John Edwards book, but he doesn't really go into this in any detail. I'm planning on using flexi drawdown btw.

What I'm looking for is an idiot's guide on certain things when transitioning into retirement. Stuff like:-

- Where to put your money? Does it stay in the currently running plans, or something else? Do you combine them all into one fund?
- How to initiate drawdown?
- How is tax handled?
- A timeline of what to do, when. Such as, any preparation I need to do.

Ideally I'd like to get hold of some useful books that will explain this. There are a few on retirement planning, any recommendations?

Dazed_and_C0nfused

The tax bit is relatively simple, you pay tax just as you would with any other PAYE source of income.

The first payment should always have the emergency tax code operated on a non cumulative basis so you only pay tax if it exceeds £1,048 and then HMRC will send the pension company whatever they believe the correct tax code to be for any future payments.

With pensions flexibility it is important to keep HMRC informed of the annual amount of taxable income you expect to take from the pension as the flexibility allowed nowadays means it is impossible for HMRC to guesstimate your pension income with any accuracy.  You can provide updates through your Personal Tax Account (gov.uk).

Linton

ajfielden said:

It's probably come up before, so apologies if this is a repeat, but I'm looking for guidance on what to do with your pension funds when you retire.
I've read the John Edwards book, but he doesn't really go into this in any detail. I'm planning on using flexi drawdown btw.

What I'm looking for is an idiot's guide on certain things when transitioning into retirement. Stuff like:-

1) - Where to put your money? Does it stay in the currently running plans, or something else? Do you combine them all into one fund?
2) - How to initiate drawdown?
3) - How is tax handled?
4\) - A timeline of what to do, when. Such as, any preparation I need to do.

Ideally I'd like to get hold of some useful books that will explain this. There are a few on retirement planning, any recommendations?

I assume you are just talking about DC pensions.

1) The money can be left invested where it is.  However if you wish to move to drawdown old pensions may not provide that facility and so you would have to transfer to one that does.

Having all your drawdown pensions merged minimises hassles so I suggest you do merge into a SIPP unless there is some good reason not to.

2) Generally if drawing down from a SIPP you simply fill in a form available on the provider's website.

3) Tax on pensions is paid under PAYE in exactly the same way as your salary when working.  The first taxable drawdown payment will be taxed under an emergency tax code and will probably lead to a tax refund.  Subsequently HMRC will allocate a tax code.

4)  Nothing much beyond the pretty obvious...
Prior to retirement you need to know in some detail how you intend to manage your finances:

 - How much income do you need?
How are going to provide your ongoing income?  Obviously that depends on your detailed requirements and circumstances.

 - if you have a partner what happens when one of you dies?

 - As part of that you may wish to modify your portfolio asset allocation, possibly reducing risk and/or setting up a cash or very cautious invest pot to cover emergencies and market crashes.

Beyond the purely financial aspect you should have a well considered list of activities, aims, bucket list etc of how you are going to spend your time.  Are you going to spend your final years in your current home or do you plan to move?

dunstonh

- Where to put your money? Does it stay in the currently running plans, or something else? Do you combine them all into one fund?

Sometimes they can stay in the same plan (if that is best and it allows it). Sometimes they have to be transferred.   Sometimes they should be transferred as a modern option is better.

you also need to consider the investment strategy.

- How to initiate drawdown?
- How is tax handled?

Both bits depend on which method of drawdown you are using.

Basically, you need to look at this the other way around.  Look at your objectives first, then tax position etc.   That should then lead to which drawdown method is likely to be most suitable and then look at the pensions and investments needed to achieve that.

Albermarle

If you are happy with your investment portfolio/risk level  before drawdown, there is no specific need to change it at the point of starting drawdown. You can do and may want to ,but you can just leave it as it is or change it later if you want .

gm0

Sadly no such decently simple yet accurate and comprehensive book for UK. 
Simple guide and accurate coverage of the full population are in conflict.  


Example - there are at least *four groups of people looking at net worth upon commencement. i.e. the Tax Free cash and setting initial drawdown level decisions.   *OK it's more but let's not go there

So if the "book" says - Do X unless it doesn't apply to you
Then how would you know whether that situation does apply to you ?
If the author then goes on to explain the variations and the criteria then it is quickly no longer achieving simple as a list of instructions.

Resources:

FAQ here, monevator on drawdown, ERN (to debunk various ideas circulating), Edwards per OP.
McClung Living off your Money - if you can face it (it is a tough worthwhile read) that can help you with what history backtesting tells us about what to hold and mechanisms for taking sustainable variable income - useful whether or not you buy into his final conclusions or pick something simpler that is good enough for your purposes.

Opinion - all you can do in the end is make choices about which risks to manage and which you accept - platforms/products, portfolio, sustainable draw.  Decisions as informed as *you* need them to be for your comfort with the choices and consequence.

The future then does what it does.

LV_426

gm0 said:

The future then does what it does.

This is what my Mrs was getting worried about last night.
She's concerned about my plans to burn through the DC pension until DB + SP becomes available. She said what if the market crashed. The value of your investments isn't guaranteed.
I said well I could work a bit longer and leave more of the DC pot intact. 
But there are other possibilities to mitigate the situation. Like a) she was talking about getting a job herself (up to now she's been full time educator of our children, but in 4 years that changes), and b) we have an ISA worth about £100k. But I was planning to leave that cash as an emergency fund.

dunstonh

She's concerned about my plans to burn through the DC pension until DB + SP becomes available. She said what if the market crashed. The value of your investments isn't guaranteed.

You adjust your risk to meet your objectives and timescale.  Therefore reducing the impact of a market crash.

OldMusicGuy

dunstonh said:

She's concerned about my plans to burn through the DC pension until DB + SP becomes available. She said what if the market crashed. The value of your investments isn't guaranteed.

You adjust your risk to meet your objectives and timescale.  Therefore reducing the impact of a market crash.

What dunstonh said. I retired 3 years ago and am wholly reliant on savings and a DC pot (no DB pensions). I have set my DC portfolio up on a lower risk basis than I would have done when accumulating (pre-retirement) so that the impact of any market crash is reduced (this worked well during the short Covid drop). I also hold a large chunk of cash in my SIPP to provide drawdown funds in the early years of retirement and to reduce sequence of returns risk.

This strategy works for me as I am risk averse. If you (and/or your wife) are very risk averse, you could just convert your DC pot to cash if you plan to burn through it in a few years (note that not all DC schemes may offer this capability). The only risk you face then is inflation, which won't be a massive risk IMO over a short time scale.    

LV_426

OldMusicGuy said:

dunstonh said:

She's concerned about my plans to burn through the DC pension until DB + SP becomes available. She said what if the market crashed. The value of your investments isn't guaranteed.

You adjust your risk to meet your objectives and timescale.  Therefore reducing the impact of a market crash.

What dunstonh said. I retired 3 years ago and am wholly reliant on savings and a DC pot (no DB pensions). I have set my DC portfolio up on a lower risk basis than I would have done when accumulating (pre-retirement) so that the impact of any market crash is reduced (this worked well during the short Covid drop). I also hold a large chunk of cash in my SIPP to provide drawdown funds in the early years of retirement and to reduce sequence of returns risk.

This strategy works for me as I am risk averse. If you (and/or your wife) are very risk averse, you could just convert your DC pot to cash if you plan to burn through it in a few years (note that not all DC schemes may offer this capability). The only risk you face then is inflation, which won't be a massive risk IMO over a short time scale.    

I guess converting to cash is safe, but you'd then lose the potential growth you would have had?

gm0

What they said.  Here is an approach.. 

Work out essential income (not full desired - the keep the lights on version).  And consider how much of the period to DB is covered off by cash, gilts, non-equities assets from anywhere in your overall portfolio inside or outside pension.

If you have a short investment time horizon and you do (as bridging with these funds) then sequence risk aka SORR matters to you.  So a portion of your money (emergency cash (maybe), deposit accounts, even other family assets perhaps, and funds within pension) needs to cover off this minimum cashflow to mitigate the *impact* of the ill timed 60-80% PE stock market correction and its subsequent potential 5-7 year crawl back up. 

You could *choose* this to be 100% coverage of essential income or a lesser figure but understand what that reduced cover "means" to your lifestyle or the additional contingencies should that occur in the early years of the plan.

Tweakery to the calculation can be done with some what would I do questions -  to reduce the size of cash holdings and the associated inflation drag thereon

You could choose to add in *already established* credit lines to "get to the DB line" (minor impact <1 year for current and credit cards most likely but an offset mortgage could be more substantial offering perhaps several years "contingent" cover at known cost.

You could consider a *contingency* of early scheme DB (if allowed) despite the reduced income which can reduce the length of the bridge by a few years

You might consider property downsizing an acceptable contingency (doing this earlier than planned) - if you own a house and plan to retire out of it later.

Another factor is how much over provisioning is in the DC pot - ie the % equity correction size that screws up successful completion of the bridge via asset sales to complete depletion. This doesn't help with impact but it does with likeliehood.  If the calculation says failure at 40% dip - ouch.  If the calculation says 95% dip then things are a lot more comfortable.

These factors can be used to move the investment risk dial down or up to settle on a bridge plan that works for you in extremis in an understood fashion.  Clearly higher returns, desired not essential income level, a small residual pot not depleted as you approach the end is what you are looking for.