Retired plan - Advice required

Chadders2009

The plan is to retire at 55 when I will have a DC pot of approximately £400,000.00, I plan to work the first 3 months after April 6th to benefit of my 0 tax rating of £12570.00 based on current banding.

My thoughts are to start drawing down on my DC pension from 56, utilising my annual 0% tax banding so drawing £12570.00 plus taking 25% as the tax free amount (£4190) giving a annual income of £16760.00 to mitigate paying tax until my state pension kicks in at 66.

From threads I have read, the advice is to take up to 3.5% per annum and leave the balance invested, this would be £14000.00 so I am being slightly aggressive taking 4.2% but this is mainly to mitigate tax and I have other savings to make up any shortfall in income requirements.

a couple of questions, this seems simplistic, am I missing anything here and also if I need a lump sum in the future, can I take 25% of the remaining balance?

is there anything else I have missed to minimise tax payments?

Albermarle

a couple of questions, this seems simplistic, am I missing anything here and also if I need a lump sum in the future, can I take 25% of the remaining balance?

Yes , It is easier if you understand the concept of uncrystallised and crystallised funds in  a DC pension .

In your case you have an uncrystallised pot of £400K . To take the amount you want each year you have to crystallise £16760. 25% is tax free and 75% is taxable but in your case you will not actually pay any tax . This leaves £383, 240 uncrystallised.

You can crystallise any part of this ( or all of it ) at any time . So if you wanted a tax free lump sum of £20K , you would have to crystallise £80K and £60K would be left crystallised ( taxable when you took it as income ) So you would end up with a mixture of crystallised and uncrystallised funds . You can only take 25% from the uncrystallised part.

If the uncrystallised part increased or decreased in size due to investment performance , this will affect what you can take .So the final amount you take tax free,  would not necessarily be exactly 25% of £400K, it could be a bit more or less.

From threads I have read, the advice is to take up to 3.5% per annum a

That is 3.5% of the original pot + inflation increases and not related to how the pot is doing investment wise.

However that is a pretty safe figure and many would say 4.2% is not too much , if you have some flexibility to adjust spending or use cash during market downturns .

Personally I would pay more attention to how the pot is invested ( uncrystallised and crystallised ) , rather than focusing too much on avoiding paying any tax .

AlanP_2

Chadders2009 said:

The plan is to retire at 55 when I will have a DC pot of approximately £400,000.00, I plan to work the first 3 months after April 6th to benefit of my 0 tax rating of £12570.00 based on current banding.

My thoughts are to start drawing down on my DC pension from 56, utilising my annual 0% tax banding so drawing £12570.00 plus taking 25% as the tax free amount (£4190) giving a annual income of £16760.00 to mitigate paying tax until my state pension kicks in at 66.

From threads I have read, the advice is to take up to 3.5% per annum and leave the balance invested, this would be £14000.00 so I am being slightly aggressive taking 4.2% but this is mainly to mitigate tax and I have other savings to make up any shortfall in income requirements.

a couple of questions, this seems simplistic, am I missing anything here and also if I need a lump sum in the future, can I take 25% of the remaining balance?

is there anything else I have missed to minimise tax payments?

If you were to average out the pre-SP amount and the post SP amounts required over say 20/30 years you probably wouldn't be that far off the 3.5% I would think.

Yes you can take 25% TFLS from the remaining pot.

Yes, even with no earned income you can contribute £3600 gross, £2880 net, to a pension until age 75. Once TFLS and BR tax are paid when you withdraw you are still 6.25% ahead of the game. Not a fortune but every little helps.

Other thing to consider is paying all of those last 3 months salary into your DC scheme and paying £0 tax on £0 taxable income but still getting tax relief. Once retired start to draw from DC at appropriate rate to avoid / minimise tax.

One other thing, is there a spouse / partner, as joint planning / contributing / withdrawing can be beneficial.

I am retiring end of this month and starting on DC withdrawals at a level that is just below the start of HR tax. My wife is continuing to work and she will increase her pension contributions to mop up the unused amount, after living costs, from my DC withdrawals. As she is a HR taxpayer my withdrawals will be effectively tax free.

RoadToRiches

I was looking on this too but think it's rather risky as the investment pot is prone to stock market volatility/crash and so would want a pot of cash that is safe and sitting outside of pension for this first, also would need to take into account mortgage, though rates are low at the moment and investment returns can drawf that it makes sense to keep the mortgage going until such time interest rates go north.  Have you thought about that as assuming you have some time to build that contingency pot up probably in a cash ISA, I have just over 3 years until I hit 55.

jamesd

Chadders2009 said:

From threads I have read, the advice is to take up to 3.5% per annum and leave the balance invested, this would be £14000.00 so I am being slightly aggressive taking 4.2% but this is mainly to mitigate tax and I have other savings to make up any shortfall in income requirements.

There are many different approaches that can be used.

The one you have described starts at 3.5% of your initial capital and increases with uncapped inflation until the 30 year end of the plan at which point payments stop with no money left if you live through the worst case times that set this limit and didn't adjust. In the US the average rate that would have worked is 7% with 4% the worst case that sets the 100% success rate limit. In current conditions the author of that rule recons that 1% higher will work and is taking 5% himself. Your plan is actually below what is likely to work with this rule if you trust the main expert on it.

Another popular rule is Guyton-Klinger. In the UK this one starts at 5.5% before costs, say 5% after 1.5% costs (costs reduce the rate by about a third of costs because the capital value declines below original level). This set of rules normally increases with uncapped inflation but skips the increase or adds extra cuts or increases depending on how good or bad the conditions that you live through turn out to be. Again given current conditions it wouldn't be unreasonable to start around 1% higher in current conditions. It's the flexibility built in that allows this one to start closer to average, it's not less safe. Rate is for 40 years in the UK.

Since spending tends to decrease as people get older, the excess being saved, the GK rules have the advantage of better matching normal needs instead of starting very low and likely increasing by manual adjustment later.

Since you haven't reached your state pension age yet it would be sensible to plan for replacig that in teh early years. Assuming 10k a year and 10 years to go deduct 100k from the assumed value of your 400k pot and use 300k for your safe withdrawal rate. Depending on rule used you might then start on:

4% rule: 10k + 10.5k = 20.5k at 3.5% or at 4.5%: 10k+13.5k = 23.5k

GK rules: 10k + 15k = 25k at 5% initial or at 6% initial: 10k + 18k = 28k

At state pension age you can stop paying the 10k out of your pot and start the state pension instead.

The rules are comparably safe and the higher amounts only very marginally less so in current conditions.

You should normally include all other investments including non-pension ones in the calculation. A year or two in cash is OK, treat it as part of the bonds piece. If these sorts of rules get into trouble you normally have plenty of notice and don't need a reserve to allow for that, you just tweak income a little - but remember that for that to be needed you'd need to live through something worse than we've seen in the last 120 years so it's not very likely.

Secret2ndAccount

Your plan looks good. Should work fine. I have a couple of thoughts.
1. The biggest concern for people gradually drawing from an invested pot is poor stock market performance in the first few years. Since you are starting with 17k withdrawals, then reducing (when SP kicks in) to 7k, you are super-double exposed to early stock market risk. You are not shooting for a high withdrawal rate, and all things being equal you will be fine, but you are more at risk than the average joe if the stock market were to tumble next year, then spend 5-10 yrs recovering. If your 400k turned into 280k would you be happy to have spent 185k of that, and have 100k left when you were 66 yrs old?
2. Are you sure you can live on 16760?  Every single year (increasing with inflation)? Even the year when the roof needs replacing, or you really want to pay to go privately for that minor surgery? If 16.7k is only a typical year, then you need to figure out how to set aside a pot for emergencies. If stocks do well, that pot can be the growth in your pension.
So yes, I think you'll be fine and I wish you well. I just want to make sure you've stress-tested your plan for the 1 in 50 worst case scenario, because 2 people out of every 100 get to live through that.

jamesd

Secret2ndAccount said:

1. The biggest concern for people gradually drawing from an invested pot is poor stock market performance in the first few years. Since you are starting with 17k withdrawals, then reducing (when SP kicks in) to 7k, you are super-double exposed to early stock market risk. You are not shooting for a high withdrawal rate, and all things being equal you will be fine, but you are more at risk than the average joe if the stock market were to tumble next year, then spend 5-10 yrs recovering. If your 400k turned into 280k would you be happy to have spent 185k of that, and have 100k left when you were 66 yrs old?

The money need a few years ahead needs to be in cash, not investments. Usual five years at least not invested is prudent for the state pension replacement portion. The safe withdrawal rates take care of the other portion and big drops in the first few years are not important because they are already allowed for. The correct response to such an event is for at least five years to carry on drawing money from the bond/cash portion of the investments, not make any income adjustments.

The amounts in the initial post don't exceed what safe withdrawals provide for so as long as no more than 50% not counting the state pension replacement portion is normally in bonds/cash the plan should be fine.

Provided the investment and cash mix is appropriate this case is not any worse than the average joe and there is no super-double stock market exposure.

While a big drop early on is very worrying and has often been thought of as the greatest threats the real greatest threats to the 4% rule and most others are many years of high inflation or decade plus stagnation.

arnoldy

If you have a non/low earning married OH you can use the married (wo)mans allowance to take more out tax free

RoadToRiches

Wondering what funds / percentages people who are drawing down are using here in retirement 

Decision_Time

"Wondering what funds / percentages people who are drawing down are using here in retirement  "

I've been early retired for a few years now and I'm in approx 30% cash / 70% global equities/ 0% bonds - the equities are in funds such as VWRL which is basically the types of fund that I was in during my accumulation stage.

I'm drawing out less than 3% per year.

pip895

I'm at about 70% "pure equity" 30% other (including cash, gold + Targeted return/wealth preservation, and some bonds).  If we have a stock market crash I may increase the equity to >80%. 

Currently drawing about 4.2%/year but this will drop when I start getting SP.