What is your trigger point to start spending from cash buffer?? + QE, Does it change the game?

DairyQueen

I received challenges on my decision to hold time-specific assets (buckets) when I first suggested this back in 2017 (I think).

In late 2019 I set-up the buckets, and in the intervening years I refined them. After working part-time for a few years, OH retired fully in Dec 2021 and the decumulation strategy kicked-in in April this year. It seems that we will be on the short end of SoR risk.

We hold 5 years of pension-wrapped drawdown in cash plus another 5 years in bonds/WP. The balance is held 100% equities. I rebalance annually.

Yes, we are exposed to inflation risk but we can afford to cut our expenses to match our budgeted drawdown. We don't need to calculate when (if?) to access our cash buffer as we have factored-in holding cash with an inflation risk.

Bottom line is that we will continue to drawdown up to tax allowance (max BRT threshold for OH and PA threshold for me) from cash held within pension wrappers.  Any income surplus will be spent or transferred to S&S ISA.

We are fortunate that OH's DB covers non-discretionary spends and, next year he will receive SP so will reduce drawdown relatively. OH is at risk of breaching 2016 LTA protection although that risk has receded somewhat courtesy of this year's market performance.

No regrets on this strategy. We know exactly what our income will be until such time as tax allowances are unfrozen.

Lots of discussion on the pension forum re: holding a cash buffer but, as Sea-Shell's thread suggests, rather less info available on when a cash buffer should be used.

I think we have a long way to go before markets recover so we are battening down the hatches. 

enthusiasticsaver

We decide at the beginning of the tax year whether we will be drawing from SIPPs or our S and S ISAs but if the market is in a slump as it is at the moment we do not take money out of our portfolio but take it from the cash buffer instead.  That is why we have it so we are not forced to sell and realise losses. I only have a few thousand spare from my personal allowance anyway and my husband is a tax payer so we are not losing out tax wise. 

cfw1994

Mothman said:

rjmachin said:

Mothman said:

I do a pension drawdown at the start of each tax year to my personal allowance. My growth target is 2.7%+RPI and if I haven't acheived that (like this year) then I will then immediately re-invest the money in the S&S ISA and will use my cash buffer for expenditure. Can probably last 4yrs doing this after which time I will be forced to start selling investments. Fingers crossed we are not into a lost decade of real returns.

When doing a pension drawdown at the start of the tax year, do you get charged a large amount of tax and then have to claim it back?

For example, if taking the personal allowance (with no other income), the MSE Income Tax Calculator shows that tax would be £4,403, where as £1048 per month would have no tax

Yes you do get a big tax hit, but I do a P55 tax reclaim straight away. This year I submitted the form online on 24th April and the refund was in my account on 9th June, so not really an issue.

Would it make more sense to take that drawdown at the *end* of the tax year?   Should avoid the hassle of P55 tax reclaims?

On the topic of cash buffer, we have been using ours since January due to falls from November.  

One notoriously gloomy contributor here chided me for not having a plan that allowed for such falls, & that the falls at that stage should not have impacted our drawdown: my view was that our plan was to do precisely that - kick into cash if markets looked iffy.  To not take action would be to ignore our strategy.

We will see how things stand early next year, before tax year end: I will want to drawdown at least the tax-free amount for the year, even if it only goes right back into ISA/GIA investments.  If markets are picking up, we might restart the drawdown.  

pensionpawn

SouthCoastBoy said:

If I was now in retirement I would be using my cash buffer, as currently inflation is eroding its real value and markets are down. Having said that I currently hold a 40% buffer so quite a sizeable chunk. If my cash buffer is smaller I may have a different strategy. Each to his own, its not one size fits all.

I agree, use your cash (we have a similar %age) buffer now. Yes, your pot (funds element) could shrink further however you're not selling funds and your cash is also losing buying power (varies on your personal exposure to a general inflation figure). The £2880 (£3k6) that's (hopefully) going into your SIPP can remain in cash. That's our plan. Also, nobody's really made a loss until you drawdown from the fund portion of your pot after it has fallen more than 20% 

Audaxer

pensionpawn said:

SouthCoastBoy said:

If I was now in retirement I would be using my cash buffer, as currently inflation is eroding its real value and markets are down. Having said that I currently hold a 40% buffer so quite a sizeable chunk. If my cash buffer is smaller I may have a different strategy. Each to his own, its not one size fits all.

The £2880 (£3k6) that's (hopefully) going into your SIPP can remain in cash. 

Once that tax relief is added, I would have thought it's better to take out the £3,600 and put into savings rather than leave it in the SIPP as cash?

zagfles

pensionpawn said:

SouthCoastBoy said:

If I was now in retirement I would be using my cash buffer, as currently inflation is eroding its real value and markets are down. Having said that I currently hold a 40% buffer so quite a sizeable chunk. If my cash buffer is smaller I may have a different strategy. Each to his own, its not one size fits all.

I agree, use your cash (we have a similar %age) buffer now. Yes, your pot (funds element) could shrink further however you're not selling funds and your cash is also losing buying power (varies on your personal exposure to a general inflation figure). The £2880 (£3k6) that's (hopefully) going into your SIPP can remain in cash. That's our plan. Also, nobody's really made a loss until you drawdown from the fund portion of your pot after it has fallen more than 20% 

Even ignoring tax relief very few people will be making a loss even if selling equities now, unless they've only bought them in the last year or so. I find it a bit worrying how people take so much notice of short term performance, equities are meant to be long term investments, if you look at the long term picture, even after the recent drops global equities are up about 25% over the last 3 years, 45% over 5 years, and well over 100% over 10 years. Is that bad? Are equities really" low" or "down" now just because they're lower than they were in November?

I think a common mistake to make is to check portfolio values every week (some might even do it every day!) because then all you'll remember is "down again this week" rather than "up 25% since 3 years ago".

Sea_Shell

zagfles said:

pensionpawn said:

SouthCoastBoy said:

If I was now in retirement I would be using my cash buffer, as currently inflation is eroding its real value and markets are down. Having said that I currently hold a 40% buffer so quite a sizeable chunk. If my cash buffer is smaller I may have a different strategy. Each to his own, its not one size fits all.

I agree, use your cash (we have a similar %age) buffer now. Yes, your pot (funds element) could shrink further however you're not selling funds and your cash is also losing buying power (varies on your personal exposure to a general inflation figure). The £2880 (£3k6) that's (hopefully) going into your SIPP can remain in cash. That's our plan. Also, nobody's really made a loss until you drawdown from the fund portion of your pot after it has fallen more than 20% 

Even ignoring tax relief very few people will be making a loss even if selling equities now, unless they've only bought them in the last year or so. I find it a bit worrying how people take so much notice of short term performance, equities are meant to be long term investments, if you look at the long term picture, even after the recent drops global equities are up about 25% over the last 3 years, 45% over 5 years, and well over 100% over 10 years. Is that bad? Are equities really" low" or "down" now just because they're lower than they were in November?

I think a common mistake to make is to check portfolio values every week (some might even do it every day!) because then all you'll remember is "down again this week" rather than "up 25% since 3 years ago".

But how do you define "long term" when you have had pension savings building up for many years, but have only just transferred a tranche of your funds into a SIPP to go into drawdown.

There are two ways of looking at it.   Either you're "up" on the money, if you take the long view, or you're "down" since buying those particular units in any given fund.

How you mentally split out units you bought "years ago" from units you bought just last year, within the same fund.


Take our 7IM fund, as an example.   We have held this since May 2010, and bought some of those early units for 100p.    The last units we bought in April 19 were at 165p.   They peaked at 195p and are now at 175p

So if we sold 100 units now, are we "mentally" selling 2010 units or 2019 units!?!    You can view it both ways, it seems.

Mothman

cfw1994 said:

Mothman said:

rjmachin said:

Mothman said:

I do a pension drawdown at the start of each tax year to my personal allowance. My growth target is 2.7%+RPI and if I haven't acheived that (like this year) then I will then immediately re-invest the money in the S&S ISA and will use my cash buffer for expenditure. Can probably last 4yrs doing this after which time I will be forced to start selling investments. Fingers crossed we are not into a lost decade of real returns.

When doing a pension drawdown at the start of the tax year, do you get charged a large amount of tax and then have to claim it back?

For example, if taking the personal allowance (with no other income), the MSE Income Tax Calculator shows that tax would be £4,403, where as £1048 per month would have no tax

Yes you do get a big tax hit, but I do a P55 tax reclaim straight away. This year I submitted the form online on 24th April and the refund was in my account on 9th June, so not really an issue.

Would it make more sense to take that drawdown at the *end* of the tax year?   Should avoid the hassle of P55 tax reclaims?
 

Depends how you define hassle. The P55 form only takes a few minutes to complete and submit online and any refunds have been in my account within 6 weeks. If in the future I was subject to the sort of refund delays that Sea Shell experienced I may have a rethink, but so far that's not been the case.

zagfles

Sea_Shell said:

zagfles said:

pensionpawn said:

SouthCoastBoy said:

If I was now in retirement I would be using my cash buffer, as currently inflation is eroding its real value and markets are down. Having said that I currently hold a 40% buffer so quite a sizeable chunk. If my cash buffer is smaller I may have a different strategy. Each to his own, its not one size fits all.

I agree, use your cash (we have a similar %age) buffer now. Yes, your pot (funds element) could shrink further however you're not selling funds and your cash is also losing buying power (varies on your personal exposure to a general inflation figure). The £2880 (£3k6) that's (hopefully) going into your SIPP can remain in cash. That's our plan. Also, nobody's really made a loss until you drawdown from the fund portion of your pot after it has fallen more than 20% 

Even ignoring tax relief very few people will be making a loss even if selling equities now, unless they've only bought them in the last year or so. I find it a bit worrying how people take so much notice of short term performance, equities are meant to be long term investments, if you look at the long term picture, even after the recent drops global equities are up about 25% over the last 3 years, 45% over 5 years, and well over 100% over 10 years. Is that bad? Are equities really" low" or "down" now just because they're lower than they were in November?

I think a common mistake to make is to check portfolio values every week (some might even do it every day!) because then all you'll remember is "down again this week" rather than "up 25% since 3 years ago".

But how do you define "long term" when you have had pension savings building up for many years, but have only just transferred a tranche of your funds into a SIPP to go into drawdown.

There are two ways of looking at it.   Either you're "up" on the money, if you take the long view, or you're "down" since buying those particular units in any given fund.

How you mentally split out units you bought "years ago" from units you bought just last year, within the same fund.


Take our 7IM fund, as an example.   We have held this since May 2010, and bought some of those early units for 100p.    The last units we bought in April 19 were at 165p.   They peaked at 195p and are now at 175p

So if we sold 100 units now, are we "mentally" selling 2010 units or 2019 units!?!    You can view it both ways, it seems.

IMO makes sense to take an average view, you wouldn't likely have been buying units in 2019 had you intended to sell them in 2021. So if you say bought over 10 years and intend selling over 10 years then the average hold length is 10 years so that's what you should be looking at, what's the gain/loss over 10 years.

Or even over 30 or so for a typical pension, and the whole portfolio rather than individual elements of it, for instance had you switched funds last November they're almost certainly down but what you had before was almost certainly up a lot so it's the whole picture that matters.

I've maintained a record of everything that's gone into my DC pensions over the last 15 years or so and upped it by inflation and it's way above the real value of what's gone in. That's what matters IMO, not how it compares to its value 6 months ago.

Sea_Shell

So in very simple terms you could just treat it like....

Save £1250 per month for 10 years = £150,000 "in".

Then withdraw £1250 per month for 10 years, and hope you're up on the deal overall.


Each £1250 has then been invested for 10 years.



(Inflation not withstanding)