Help for newbie considering drawdown pension

Fretful

Apologies if I am going over old ground, the trouble is if I had a week to go through all the relevant posts I might find the advice I am looking for but would have forgotten most of it by the time I got all the answers. 

I'm a sole trader, have been for almost 12 years now, and over the last few years there has been a significant downturn in my income. Even if the factors that have caused this (basically the three big ones that have affected nearly everyone in UK) abate, I have some health issues that mean I might not be able to do all the things I used to do. I am just over 6 years away from getting a defined benefits pension from when I was last an employee (15 years contribution, so won't be massive) and 8 away from state pension. Mrs Fretful is closer to her (even smaller) DB pension, but 11 years from state pension, and is now a full time unpaid carer for a younger family member.

My thinking is that once I reach state pension age, we will be fine, and definitely fine when Mrs F gets there, but in the meantime we probably need to have some additional income, and that that could come from my private pension pot. This stands at about £160k today. I feel like the best thing to do is put 75% of that into a drawdown fund now and take the other 25% tax free, just because it is the only way to get that money back without it being taxed, not because we need to spend it right now. Then even if the drawdown investment doesn't make anything, and we take 10k out of it per year, together with other income we should be fine. Basically, I don't think we need this drawdown to last beyond (at the latest) Mrs F reaching state pension age.

I have looked around and found a whole mass of products, advice, platforms, etc., and I am not sure what to do. After having received poor to downright awful advice from "professional" FAs for about 35 years now, I feel drawn to some degree by DIY approaches like Vanguard, though I haven't gone into a great deal of depth into whether their low fees are outweighed by something else, or if a managed fund or flat fee fund of some kind would be better for our circumstances. I am open to any ideas that seem like they will work better for us.

Is there a DIY platform out there that will better suit our needs than Vanguard? Would some other approach be better? The only thing I am ruling out right now is annuities, as I would have to live to 110 to just get back the money that is in the pot using the offer from the company that has the pot (I know I could shop around for something better, but I am sure it would never work out as a good deal). Other than that, any and all advice is welcome.

Thanks in advance, hope that I am not asking too much!

Dazed_and_C0nfused

I am just over 6 years away from getting a defined benefits pension from when I was last an employee (15 years contribution, so won't be massive) and 8 away from state pension.

The contributions aren't the most important thing with DB pensions, it's the scheme rules which matter.

You could get one scheme where 10% contributions built up say 1/80th each year and another where 7% built up 1/60th.

Have you got a statement from when you left the scheme?

Alos, you should check your State Pension forecast on gov UK.  You fall under transitional rules so better to understand your position now rather than get an unwelcome surprise at State Pension age.  It's important you read past the headline figure, probably £185.15/week, and see what you have accrued so far.

My thinking is that once I reach state pension age, we will be fine, and definitely fine when Mrs F gets there, but in the meantime we probably need to have some additional income, and that that could come from my private pension pot. This stands at about £160k today. I feel like the best thing to do is put 75% of that into a drawdown fund now and take the other 25% tax free, just because it is the only way to get that money back without it being taxed, not because we need to spend it right now.

If you don't need it now why would you take it out now?  That would mean you have crystallised the whole fund and if the remaining 75% grew from say £120 to £150k then the whole £150k would be taxable income.

Fretful

Dazed_and_C0nfused said:

I am just over 6 years away from getting a defined benefits pension from when I was last an employee (15 years contribution, so won't be massive) and 8 away from state pension.

The contributions aren't the most important thing with DB pensions, it's the scheme rules which matter.

You could get one scheme where 10% contributions built up say 1/80th each year and another where 7% built up 1/60th.

Have you got a statement from when you left the scheme?

Alos, you should check your State Pension forecast on gov UK.  You fall under transitional rules so better to understand your position now rather than get an unwelcome surprise at State Pension age.  It's important you read past the headline figure, probably £185.15/week, and see what you have accrued so far.

My thinking is that once I reach state pension age, we will be fine, and definitely fine when Mrs F gets there, but in the meantime we probably need to have some additional income, and that that could come from my private pension pot. This stands at about £160k today. I feel like the best thing to do is put 75% of that into a drawdown fund now and take the other 25% tax free, just because it is the only way to get that money back without it being taxed, not because we need to spend it right now.

If you don't need it now why would you take it out now?  That would mean you have crystallised the whole fund and if the remaining 75% grew from say £120 to £150k then the whole £150k would be taxable income.

I have a statement from when I left the scheme, but that was 12 years ago and I don't know what inflation factors they have used. I am assuming it will be quite a bit more 21 years after leaving. The administrators are pretty unhelpful in this too, they basically said they can't forecast more than three years ahead (might be a statutory limitation, I don't know) but when the statement came it assumed I would be taking the pension three years early, so the amount was reduced by some unknown early retirement factor.

I have checked the state pension thing too, for some reason I have a few years missing, don't know why, but it is not a massive drop and I should make them back anyway by the time I fully retire.

As for taking 25% now, the idea would be to move the rest of the pot to a new investment platform where it could continue to grow and the fees are lower. There are three pensions in that pot, two of which are inactive (not paid into since the 1990s) and are bleeding money on fees without any meaningful growth.

QrizB

So, just so we all know where we are:

• 2022 - Mr F working, Mrs F unpaid carer.
  
• 2026 - Mrs F's reaches Normal Pension Age (NPA) for her DB pension.
• 2028 - Mr F reaches NPA for his DB pension.
• 2030 - Mr F reaches State Pension Age (SPA).
• 2033 - Mrs F reaches SPA.
  

Fretful said:

I'm a sole trader, have been for almost 12 years now, and over the last few years there has been a significant downturn in my income.

Have you been earning enough that you've paid NI, or at least made voluntary contributions?

I am just over 6 years away from getting a defined benefits pension from when I was last an employee (15 years contribution, so won't be massive) and 8 away from state pension.

Do you know how much the DB will pay out (subject to any uplift over the next 6 years), and what the reduction would be if you took it early? Have you checked your State Pension forecast at https://www.gov.uk/check-state-pension ?

Mrs Fretful is closer to her (even smaller) DB pension, but 11 years from state pension

I have the same questions re. Mrs F's DB and State Pension.

... and is now a full time unpaid carer for a younger family member.

Does Mrs F qualify for any benefits (eg. Carer's Allowance / Carer's Credit) that will ensure she gets her NI paid?

I feel like the best thing to do is put 75% of that into a drawdown fund now and take the other 25% tax free, just because it is the only way to get that money back without it being taxed, not because we need to spend it right now.

You don't need to take the full 25% upfront; you could take what's known as UFPLS where you carve a slice off your pension and get 25% of that slice tax-free. The rest remains invested inside the pension.

Then even if the drawdown investment doesn't make anything, and we take 10k out of it per year, together with other income we should be fine. Basically, I don't think we need this drawdown to last beyond (at the latest) Mrs F reaching state pension age.

With UFPLS, you could take eg. £14k a year, of which £3500 would be tax-free and £10500 taxable.

This is just a start; there will be more knowledgeable forum members along shortly to dig into the second half of your question.

xylophone

What exactly does your  State Pension Forecast say?  And your wife's?

I have a statement from when I left the scheme, but that was 12 years ago and I don't know what inflation factors they have used. 

Do you not have a scheme guide? If not, your administrator should be able to provide one - there may even be one on the internet.

What does your statement of deferred benefits on leaving say?

When exactly were you an active member of the scheme?

Fretful

Thanks for the replies QrizB and xylophone. I have a meeting with Pension Wise lined up next week, and I hope they will look at the nitty-gritty of our occupational and state pensions. What I am really after is advice on drawdowns. It is my understanding that they are still active investments, so the pot can grow if you don't take anything out, but what I don't know is whether I could expect them to perform better than (or at least as well as) the existing personal pension plans. I am pretty sure that there are things available that will have lower fees, which is important as the some of the personal pension plans are very small and seem to be being eaten up by admin fees.

dunstonh

Is there a DIY platform out there that will better suit our needs than Vanguard?

Most modern platforms support drawdown.  Vanguard don't have the best trackers in all areas.  So, going with any one fund house (Vanguard or any other) means you need to compromise on your investments by only having funds from that fund house.

After having received poor to downright awful advice from "professional" FAs for about 35 years now, 

The choice should be to either DIY or use an IFA.  Not to use an FA.   And to be honest, 35 years ago is a long time.  IFAs didnt exist back then.  Nor did FAs.  It was insurance agents linked ot a provider with no real training and no qualifications.    It was stepped up in the mid 90s and again by 2013.   That was followed up by the FMAR and MiFIDII.   it is difficult to compare standards with 5 years ago.  Let alone 10-35 years ago.

The only thing I am ruling out right now is annuities, as I would have to live to 110 to just get back the money 

That is highly unlikely.  Whilst I am not saying annuities are ready again (could be in a few years time), we are beginning to see in excess of 6% rates with value protect at state pension age.   That is around 16 years to get your money back.    So, I don't know where you are getting your rates information from. 

using the offer from the company that has the pot 

And that was getting a proper annuity quote from them?  That doesn't seem right.    Or was this from the projection on the statement? (which would show really rubbish figures as well as putting them into today's terms rather than actual terms).

As for taking 25% now, the idea would be to move the rest of the pot to a new investment platform where it could continue to grow and the fees are lower. 

Why take it up front when you don't need it?  That just reduces what you can draw tax free over your lifetime.  Although with the fund being relatively small, it may not make that much difference.

 I have a meeting with Pension Wise lined up next week, and I hope they will look at the nitty-gritty of our occupational and state pensions.   What I am really after is advice on drawdowns. 

They won't.  Pensionwise do not give advice and do not look at your personal situation.  

Fretful

dunstonh said:

Is there a DIY platform out there that will better suit our needs than Vanguard?

Most modern platforms support drawdown.  Vanguard don't have the best trackers in all areas.  So, going with any one fund house (Vanguard or any other) means you need to compromise on your investments by only having funds from that fund house.

After having received poor to downright awful advice from "professional" FAs for about 35 years now, 

The choice should be to either DIY or use an IFA.  Not to use an FA.   And to be honest, 35 years ago is a long time.  IFAs didnt exist back then.  Nor did FAs.  It was insurance agents linked ot a provider with no real training and no qualifications.    It was stepped up in the mid 90s and again by 2013.   That was followed up by the FMAR and MiFIDII.   it is difficult to compare standards with 5 years ago.  Let alone 10-35 years ago.

The only thing I am ruling out right now is annuities, as I would have to live to 110 to just get back the money 

That is highly unlikely.  Whilst I am not saying annuities are ready again (could be in a few years time), we are beginning to see in excess of 6% rates with value protect at state pension age.   That is around 16 years to get your money back.    So, I don't know where you are getting your rates information from. 

using the offer from the company that has the pot 

And that was getting a proper annuity quote from them?  That doesn't seem right.    Or was this from the projection on the statement? (which would show really rubbish figures as well as putting them into today's terms rather than actual terms).

As for taking 25% now, the idea would be to move the rest of the pot to a new investment platform where it could continue to grow and the fees are lower. 

Why take it up front when you don't need it?  That just reduces what you can draw tax free over your lifetime.  Although with the fund being relatively small, it may not make that much difference.

 I have a meeting with Pension Wise lined up next week, and I hope they will look at the nitty-gritty of our occupational and state pensions.   What I am really after is advice on drawdowns. 

They won't.  Pensionwise do not give advice and do not look at your personal situation. 

Depressing, but much appreciated.

Specifically though:-

• I am certain that when I first started looking at pensions and/or mortgages in the late 80s there were people around who called themselves financial advisers. I can remember that by the early 90s there were people who called themselves independent financial advisers too. In fact at the end of 1990 or very early 1991 we consulted a man in a big tower block in London about our first mortgage, and got royally shafted by him - basically forced to buy an endowment product that we didn't need or pay him a very substantial fee that was not previously mentioned for his 30 minutes of time, which we could not really afford. I will not name names, but the gentleman in question was, for at least the next 20 years, wheeled out at regular intervals on national TV and radio shows as "the independent financial expert ___ _______." After a long process I finally got some reasonable compensation for that particular "mis-selling" but I found it galling that he was still lauded by the BBC for years as some kind of mortgage guru.
• I looked at the latest statement of my biggest personal pension, divided the total value by their stated annual pension payout with retirement at 60, and the figure was 57 and something, i.e. 57 years. This is Aviva by the way. I am soon to be 59. From what they said it suggests I would be 115 years old when I break even. I know this is not exactly how things work, but does getting £1800 a year from a £93,000 pot look attractive to anyone?
• "Why take it up front when you don't need it?  That just reduces what you can draw tax free over your lifetime.  Although with the fund being relatively small, it may not make that much difference." This is interesting to me. How does it reduce what I can draw tax free over my lifetime? I am not being negative here, just really want to understand how that works.
• Pensionwise - I know won't give any kind of recommendations for products or investments, but they request that you have all your pension information available for the meeting. Not saying you are wrong, I have never used them before, but why would they need all the details if they are not going to give at least some reflection on your personal situation?

dunstonh

I am certain that when I first started looking at pensions and/or mortgages in the late 80s there were people around who called themselves financial advisers. 

Regulation of financial services started in 1988.  Anything prior to that was open season on titles with no qualifications required.

 I can remember that by the early 90s there were people who called themselves independent financial advisers too. 

IFAs came into existence with polarisation in 88.

In fact at the end of 1990 or very early 1991 we consulted a man in a big tower block in London about our first mortgage, and got royally shafted by him - basically forced to buy an endowment product that we didn't need or pay him a very substantial fee that was not previously mentioned for his 30 minutes of time, which we could not really afford. I will not name names, but the gentleman in question was, for at least the next 20 years, wheeled out at regular intervals on national TV and radio shows as "the independent financial expert ___ _______."

Nowadays, most IFAs don't do mortgages.  Many FAs do.   The days of being a jack of all trades are largely over apart from a few stragglers.   You tend to find its mostly dedicated mortgage and insurance brokers/advisers that do them.  

After a long process I finally got some reasonable compensation for that particular "mis-selling" but I found it galling that he was still lauded by the BBC for years as some kind of mortgage guru.

I think that extends to a number of TV personalities in various areas.

• I looked at the latest statement of my biggest personal pension, divided the total value by their stated annual pension payout with retirement at 60, and the figure was 57 and something, i.e. 57 years. This is Aviva by the way. I am soon to be 59. From what they said it suggests I would be 115 years old when I break even. I know this is not exactly how things work, but does getting £1800 a year from a £93,000 pot look attractive to anyone?

That is why you have duff figures.   Projections are shown in today's terms.  Not actual terms.   They have either a 2.0% reduction per annum (or 2.5% depending on age) factored into all the figures.   The annuity rate used is the most expensive type and a synthetic figure rather than a real-world one.   It will be indexed too.      So, you would need to convert it back to actual terms and factor indexation.

It still wont be that attractive at your age but the breakeven point will be somewhere in your 80s.   It is possible annuities could return to being attractive in the future and should not be ruled out fully.  Just something that should be investigated periodically to see if things have improved.

• "Why take it up front when you don't need it?  That just reduces what you can draw tax free over your lifetime.  Although with the fund being relatively small, it may not make that much difference." This is interesting to me. How does it reduce what I can draw tax free over my lifetime? I am not being negative here, just really want to understand how that works.

You have access to 25% of your uncrystallised fund at any time after 55.   That fund is invested and will continue to grow.    If you draw it all one day one, you have no further tax free cash available.     If you draw it in 10 years time and your fund has doubled, then the amount of tax free cash you can take out will double.

e.g. Lets say your draw rate is £500pm.  Each regular payment is made with 25% tax free and 75% taxable (£125 tax free and £375 taxable)   What is left in the fund is fully uncrystallised and continues to have 25% TFC available.    The fund may start at £160k but in 10 years time you may have £200k.   As you still have 25% on the whole amount available that is £50k..  You have also have £15k tax free over the 10 years.    If you had taken the full tax free cash up front, the figure would have been £40k

• Pensionwise - I know won't give any kind of recommendations for products or investments, but they request that you have all your pension information available for the meeting. Not saying you are wrong, I have never used them before, but why would they need all the details if they are not going to give at least some reflection on your personal situation?

They talk generic information only. They are unqualified and trained to a low standard.  By having some information available, they can at least identify broadly what type of pension is and not waste hours talking about something that doesn't apply to you.

In my experience with new clients that saw pensionwise first, they came to us with an idea of what they wanted to do but ended up doing something different as pensionwise didnt cover things that were specific to their situation.

HeyYeah

It's a good idea to speak with Pensionwise. I'd also recommend reading up on the different pension types before you speak to them. They key point is do you want the 25% tax free all at once as a lump sum, or do you want to take it as 25% of a series of withdrawals from the pot. There are different ways to take either approach, and it sounds like you want to make sure that you do not end up paying additional tax unnecessarily (by withdrawing all of your funds you will pay tax as it is classed as income).

https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/your-options-for-using-your-defined-contribution-pension-pot

Vanguard have a good explanation of THEIR flexi-drawdown process, however not all providers are so flexible:
https://www.vanguardinvestor.co.uk/investing-explained/flexible-income

Different pension providers do things differently, so you'd have to check how to achieve what you want with the provider you choose (or if you need to find another provider). 

gm0

@Fretful.  Your basic choice is learn enough to DIY or find a reputable IFA and get categorised and placed on an adviser introduced platform. Both roads should lead to similar places. One is more work for you.  One is a service you pay for.

With DIY.  After you have worked out what your in retirement investments are going to be - from a single multi-asset fund to something more complex. You then pick a reputable but lowish cost platform company - that gives enough investment choice for what you want.  Could be Vanguard (but limited fund choice).  Could be someone else - iWeb, Fidelity International (especially if ETFs are used).  What each one costs varies with what you do - how often you trade or add money, what you invest in, how big the pot is.  So picking the platform arguably comes *after* deciding what you are intending to do.

With advised - the platform and portfolio are recommended to you as an outcome of the advice and then implemented for you if you agree.  The investments and platform part will largely cost the same as DIY (sometimes a bit more, sometimes a bit less - this depends so much upon the comparison points chosen.  Massive overlap.  It won't be the cheapest but if you stick to IFAs not wealth management/FA it will likely be OK.  Then you pay the adviser for their setup work (one off fee) and ongoing managment and review (typically fee of  0.5%/pot value each year on top).  That adds up long term and so the effort avoided of DIY needs to be worth it or not worth it to you and your family

There is some negativity upthread. Pensionwise are fine viewed as an early step to help you get to grips with the language of pension freedoms options. To ask questions you have about your understanding from reading the provider packs you are sent or from web content.  If you compare them to full advice they fall way short.  But that's like complaining that a bicycle is not a train. 
They don't set out to give advice.  Not set up for that.  Not intended to crowd out paid for advice.  They don't do the regulated fact find.  They are just an attempt to plug a gap where

1) pensions freedoms are complex to understand

2) Formal advice is not (in practice) available to all comers at a sensible price - just to the higher net worth group. 

Goverment created the complexity.  Then created this service to explain it a bit for an hour on the phone and signpost you to investigate further yourself or to go and seek paid advice which they harp on about a lot.