Drawdown - interested how people manage this month by month...

MrBobbins

My pension situation is simple - I have only one and it's DC. My provider (Standard Life work scheme) seem pretty flexible with drawdown, though I guess I may move my pot elsewhere once I leave work. I haven't decided exactly when I'll retire yet, but probably in the next couple of years, and I'm realising I don't fully understand how people manage the actual drawdown...

It seems like best practice is to have a cash reserve of at least 2 years income, and to take from that instead of the drawdown pot, when the funds are performing badly (please correct me if I've got that wrong).

The thing I'm not so sure about is how to transition from a salaried income to a pension one. I have no overtime or anything like that, so my net salary is exactly the same every month. I Salary Sacrifice quite a bit (including bonus) to my pension, but still leave somewhat more than I need for an average month. This means my current account & short term savings builds up for a while, then I have occasional large purchase which brings that down again.

I'm very fortunate in that I believe I should be able to retain roughly the same amount of net income from my pension as I do currently from my salary (helped by my net salary being relatively low after pension SS). In draw down though, there's obviously no need to take exactly the same sum every month. How do people do this? Do you replicate salary income and have a fixed monthly drawdown (or transfer from cash reserve)? Or do you take just what covers normal monthly spending, and then draw an occasional additional lump sum for luxury purchases? I guess the later makes more sense in that you can delay any luxury purchases when the stock market's falling, but wonder if people want to avoid being a slave to the market in that way....

Keen to hear how any retirees manage this (or plan to).

AlanP_2

Rather than take the equivalent of what you currently bring home most most people, I believe, look at what they need / want and take that - within the constraints of how large their pot is and being conscious of not running out.

Do you have an accurate(ish) idea of what you need / want?

Do you have a partner - joint planning is better than 2 individual plans?

Have you checked your State Pension forecast and considered that you could reduce withdrawals from DC when that starts thus smoothing income?

The 2/3 years cash reserve gets debated on here quite often. Logical / financial studies have shown it doesn't make a lot of difference but emotionally it's a different story. Feeling secure gives peace of mind even if in makes little difference in £ terms over 20-30 years of retirement.

Think about what risk level / asset mix you want for a pot that will not get additional money contributed. Again, emotionally, this could be different to when you know you will be adding more next month and have a couple of years until you need it so a bit of dip in pot vale (as in 2022) doesn't stress you.

dunstonh

Drawdown - interested how people manage this month by month...

Shouldnt be necessary to be that much.  Once a year should be fine.

It seems like best practice is to have a cash reserve of at least 2 years income, and to take from that instead of the drawdown pot, when the funds are performing badly (please correct me if I've got that wrong).

36 months worth for me with income units on the funds with income going into the cash float.  So, in reality, you are getting longer than 36 months because of the replinishment.   Only refloat back to 36 months when markets are not a low points.

In draw down though, there's obviously no need to take exactly the same sum every month. How do people do this? 

Most people take their annual costs and divide it by 12 and take it monthly.  However, if you are using phased drawdown/UFPLS, then monthly may not be an option available to you if you DIY.   So, you may need to do periodic ad-hoc UFPLS instead.

 Do you replicate salary income and have a fixed monthly drawdown (or transfer from cash reserve)?

Most people will take what they need to meet their spending needs in retirement.

coyrls

MrBobbins said:

It seems like best practice is to have a cash reserve of at least 2 years income, and to take from that instead of the drawdown pot, when the funds are performing badly (please correct me if I've got that wrong).

Keen to hear how any retirees manage this (or plan to).

Personally, I wouldn't describe a cash reserve that is used when funds are performing badly as "best practice" but it is one option.  If you choose that as an option you need to define what you mean by "performing badly", otherwise you will never know when to take money from your reserve, rather than from your pension.  As I have stated in another thread you are unlikley to find any published study that will define "performing badly" for you.

I manage my drawdown by taking one annual payment, that goes to a savings account.  I then top up my current account to a fixed amount every month, leaving the balance in the savings account.  In effect this gives me a variable monthly income depending on what I spend.

Albermarle

You may find that your pension provider is not 100% flexible in doing everything you want ( not just Standard Life but others too) For example if you set up a regular monthly payment and then keep stopping and starting it and taking ad hoc lump sums as well, it could get messy.  Especially with HMRC .
Nobody has mentioned tax yet, but this can also be an important factor in deciding what to do.
Firstly you always want to utilise your personal tax allowance as a minimum, even if funds are down and you have reverted to cash. 
I have not started drawdown yet, but reading a lot of posts on here, it seems the simplest choices are to set up a regular income and leave it like that. Or take ad hoc payments, once a year in March seems the favoured route as it stops you overpaying tax.

An alternative to stopping payments and using cash savings in a downturn, is to have cash actually in the pension and the regular payments from the pension can be maintained using this cash.  Which is what Dunstonh was mentioning. 

coyrls

Albermarle said:

An alternative to stopping payments and using cash savings in a downturn, is to have cash actually in the pension and the regular payments from the pension can be maintained using this cash.  Which is what Dunstonh was mentioning. 

Keeping 36 months worth of cash in a SIPP at 0% or close to 0% interest doesn't seem like a good strategy to me.  It would likely be more than 10% (with say a 3.5% withdrawal rate) of your portfolio with no prospect for growth.  I suspect such an asset allocation would reduce the SWR of a portfolio.

Linton

I hold >£10K in my current account from which all expenditure is paid.  The account receives all my pensions with a steady stream of dividends/interest automatically deposited from a reasonably large income portfolio.  At the moment this more than covers all ongoing expenditure.

In the background we hold PBs and a set of Wealth Preservation funds that can be used to top up the current account and pay for major one-off expenses.  Finally there is a Growth portfolio intended to provide for long term inflation which is rebalanced with the other portfolios once a year.

All investments are fairly arbitrarily held across his and hers S&S ISAs and SIPPs.  Drawdown from the SIPPs is purely when convenienient to use up the basic rate tax band and will not occur more than once per year.

ader42

My intent is to use the 25% lump sum to provide my cash buffer. I will then take £x a month, deciding how much each April.

If the pot has not performed well in the previous year I will likely use savings to live off instead of a monthly income and transfer a lump sum £12k to be invested in an ISA so out of the tax mans reach. 

So an annual decision will be made.

dunstonh

Keeping 36 months worth of cash in a SIPP at 0% or close to 0% interest doesn't seem like a good strategy to me.

What other low risk assets haven't lost value in the last 12 months?
What assets are not likely to suffer a loss that may need longer than 1-36 months to recover?

 It would likely be more than 10% (with say a 3.5% withdrawal rate) of your portfolio with no prospect for growth. 

It would also have no prospect for loss  with insufficient time to recover either.  It avoids the need to sell units on the risk-based investments during negative periods.

If someone was coming to this site and was saying that they have £x to invest that they intend to draw out in the next 3 years, nobody here would be telling them to invest the money in risk based assets.

My intent is to use the 25% lump sum to provide my cash buffer. I will then take £x a month, deciding how much each April.

Why take it up front and not on drip?  Taking it phased with each withdrawal is normally the most tax-efficient way.

coyrls

dunstonh said:

If someone was coming to this site and was saying that they have £x to invest that they intend to draw out in the next 3 years, nobody here would be telling them to invest the money in risk based assets.

Nobody here would tell them to put the cash in an account with 0% interest, either.

coyrls

ader42 said:

If the pot has not performed well in the previous year.......

How are you going to determine if the pot has not performed well in the previous year?