Have 10% inflation and falling markets affected your drawdown plan?

NoMore

eric4395 said:

I have just retired I am 68 in December. We have no debt or mortgage to pay and keep in good health.
I have had a pension lying since I was 60 in Royal London( set up for  flexible income drawdown) that I haven't  touched. Over the past year it has lost more than  £20,000..it currently has approx £305,000   in it
My current pension with Aegon has approx £185,000  left in it at the moment down approx £40,000 in the last 12  months.  My income now is I receive the government pension of approx £800  per month which i have had for last 2 years and  which was getting taxed at 40 %  (so I sensibly put 12000 extra contribution into my Royal London pension and got tax relief on it making it 15,000 however it has disappeared in the figures in the last 12 months) and my wife  receives about  £750  per month gov and ex works pension. 
My question is should I combine both my pensions by putting current Aegon one in with the Royal London and set up for flexible income drawdown. We are in the fortunate position of having savings to fall back on for the next few years so really don't have to touch it. Bearing in mind our ages and 75 year old the cut off for taking 25 % tax free from  my pension pot I believe) . I'm not sure what the best plan off action is. Would really like to protect as much as I can with regards to my son and daughter and 3 grandchildren benefitting out of this for there futures. Is it just a case off  handing over lump sums to them on a regular basis  before it all gets taxed or who knows goes to care home fees eventually although I believe there are limits on that as well. Any advice appreciated.

I would create your own post as this is likely to be lost in the weeds in this thread and its a suitably big topic to deserve its own thread. 

Albermarle

NoMore said:

eric4395 said:

I have just retired I am 68 in December. We have no debt or mortgage to pay and keep in good health.
I have had a pension lying since I was 60 in Royal London( set up for  flexible income drawdown) that I haven't  touched. Over the past year it has lost more than  £20,000..it currently has approx £305,000   in it
My current pension with Aegon has approx £185,000  left in it at the moment down approx £40,000 in the last 12  months.  My income now is I receive the government pension of approx £800  per month which i have had for last 2 years and  which was getting taxed at 40 %  (so I sensibly put 12000 extra contribution into my Royal London pension and got tax relief on it making it 15,000 however it has disappeared in the figures in the last 12 months) and my wife  receives about  £750  per month gov and ex works pension. 
My question is should I combine both my pensions by putting current Aegon one in with the Royal London and set up for flexible income drawdown. We are in the fortunate position of having savings to fall back on for the next few years so really don't have to touch it. Bearing in mind our ages and 75 year old the cut off for taking 25 % tax free from  my pension pot I believe) . I'm not sure what the best plan off action is. Would really like to protect as much as I can with regards to my son and daughter and 3 grandchildren benefitting out of this for there futures. Is it just a case off  handing over lump sums to them on a regular basis  before it all gets taxed or who knows goes to care home fees eventually although I believe there are limits on that as well. Any advice appreciated.

I would create your own post as this is likely to be lost in the weeds in this thread and its a suitably big topic to deserve its own thread. 

Then you should delete the post on this thread to avoid dual replies. In the right top corner of the post you will see a little cog. Click on this and it will give you the option to delete it.

bostonerimus

eric4395 said:

I have just retired I am 68 in December. We have no debt or mortgage to pay and keep in good health.
I have had a pension lying since I was 60 in Royal London( set up for  flexible income drawdown) that I haven't  touched. Over the past year it has lost more than  £20,000..it currently has approx £305,000   in it
My current pension with Aegon has approx £185,000  left in it at the moment down approx £40,000 in the last 12  months.  My income now is I receive the government pension of approx £800  per month which i have had for last 2 years and  which was getting taxed at 40 %  (so I sensibly put 12000 extra contribution into my Royal London pension and got tax relief on it making it 15,000 however it has disappeared in the figures in the last 12 months) and my wife  receives about  £750  per month gov and ex works pension. 
My question is should I combine both my pensions by putting current Aegon one in with the Royal London and set up for flexible income drawdown. We are in the fortunate position of having savings to fall back on for the next few years so really don't have to touch it. Bearing in mind our ages and 75 year old the cut off for taking 25 % tax free from  my pension pot I believe) . I'm not sure what the best plan off action is. Would really like to protect as much as I can with regards to my son and daughter and 3 grandchildren benefitting out of this for there futures. Is it just a case off  handing over lump sums to them on a regular basis  before it all gets taxed or who knows goes to care home fees eventually although I believe there are limits on that as well. Any advice appreciated.

What jumps out at me is your combined pensions are 490k and last year you withdrew 40k which is 8% and that is very high even for someone who's 68. Gifting money is a good tax strategy to get money to your heirs as long as you live long enough, but IHT doesn't look like it will be an issue for you and if you are spending 8% of the pot each year and it is also being reduced by market losses and maybe fees then you have more important things to consider than tax. I would try to reduce your spending.

Audaxer

bostonerimus said:

eric4395 said:

I have just retired I am 68 in December. We have no debt or mortgage to pay and keep in good health.
I have had a pension lying since I was 60 in Royal London( set up for  flexible income drawdown) that I haven't  touched. Over the past year it has lost more than  £20,000..it currently has approx £305,000   in it
My current pension with Aegon has approx £185,000  left in it at the moment down approx £40,000 in the last 12  months.  My income now is I receive the government pension of approx £800  per month which i have had for last 2 years and  which was getting taxed at 40 %  (so I sensibly put 12000 extra contribution into my Royal London pension and got tax relief on it making it 15,000 however it has disappeared in the figures in the last 12 months) and my wife  receives about  £750  per month gov and ex works pension. 
My question is should I combine both my pensions by putting current Aegon one in with the Royal London and set up for flexible income drawdown. We are in the fortunate position of having savings to fall back on for the next few years so really don't have to touch it. Bearing in mind our ages and 75 year old the cut off for taking 25 % tax free from  my pension pot I believe) . I'm not sure what the best plan off action is. Would really like to protect as much as I can with regards to my son and daughter and 3 grandchildren benefitting out of this for there futures. Is it just a case off  handing over lump sums to them on a regular basis  before it all gets taxed or who knows goes to care home fees eventually although I believe there are limits on that as well. Any advice appreciated.

What jumps out at me is your combined pensions are 490k and last year you withdrew 40k which is 8% and that is very high even for someone who's 68. Gifting money is a good tax strategy to get money to your heirs as long as you live long enough, but IHT doesn't look like it will be an issue for you and if you are spending 8% of the pot each year and it is also being reduced by market losses and maybe fees then you have more important things to consider than tax. I would try to reduce your spending.

I read the post from @eric4395 that his Aegon pension has lost approximately £40,000 in value over the last 12 months, not that he withdrew £40,000. Maybe I've read it incorrectly?

OldScientist

bostonerimus said:

OldScientist said:

Albermarle said:

MK62 said:

OldScientist said:

 Since all of our expenditure (essential and everyday discretionary) is currently covered by a (partly inflation capped) DB pension, then this variability doesn't matter too much to us at the moment.

In that case, pretty much any "reasonable" drawdown plan will work for you, since the consequences of plan failure are nothing like as severe as they'd be for someone totally reliant on investments, such as DC pensions etc, and hence you could probably accept more plan risk.

I suppose we'll nearly all have at least some level of "DB" type pension in the end, in the form of the state pension - but for many that won't even cover essential spending, let alone everyday discretionary.

Even if a DB pension is nowhere near large enough to cover essentials, it still reduces pressure on the DC pension/SWR significantly, unless you are walking a very tightrope.  Then if you add in later one or two state pensions, it reduces the pressure even more of course,

Agreed. For example, a UK couple at state pension age with £1m requiring an income of £40k, are (historically) in trouble with their 4% withdrawal. Factor in two state pensions (approx 20k) and the withdrawals drop nicely to a conservative 2%. If instead, they use half their portfolio to buy two single life inflation protected annuities (one each) at 4.2%, they have an income of £41k and a residual portfolio of £500k. Even an early death of one of the couple, once any guarantee period expires, will leave the survivor with an income of just over £20k and the potential for up to another £15k on a 3% portfolio withdrawal. One downside is the reduction in legacy if both of them die young (before the, now unneeded, portfolio has a chance to grow).

Everything old is new again. This sort of hybrid approach seems pretty obvious and with annuity rates creeping up it looks more and more attractive. An interesting question is now what asset allocation you have for the DC money left over after you have bought your annuities. My approach has been to think of the DB/annuity as a fixed income allocation and so 90% of my DC and other investments is in equities. 

Of course the problem is easy with 1M and only needing to generate 20k. If you start with a big pot and a low need for income then everything is sweetness and light. The same old issues would come into play if you needed to generate 20k from 500k or less.

Asset allocation is an interesting one - in his book, Pfau goes for the same approach you do - treat the annuities (he doesn't deal with DB pensions) as bonds and maintain the overall stock and bond proportions. He calculates it in two ways one using a fixed allocation (based on the initial purchase) and one on the present value of the annuity (which means the asset allocation changes with time). In my own case, I've actually used half the value of the DB pension (i.e., I've assumed I'm dead!) since this then leaves a more sensible asset allocation for my OH (there is also a slowly rising glidepath that will, once our state pensions kick in end up around 80% stocks - I'm unwilling to go further than that).

The bottom line is that for a UK retiree, generating 20k from 500k requires a bit of luck and a willingness to accept that risk - a hard look at expenditure might be a more prudent option - or a willingness to accept that the income will need to decline with time (e.g. see https://www.kitces.com/blog/safe-withdrawal-rates-with-decreasing-retirement-spending/ for US cases). For a UK retiree with a 60/20/20 portfolio, a decline in portfolio income of 3% per year would allow an initial withdrawal of 4% (i.e. the first withdrawal would be 4%, the second withdrawal in real terms 0.97*4=3.88%, etc. - see bottom panel of figure) without historical failures.



You'd start by withdrawing £20k from the portfolio, but 30 years later you'd be withdrawing just under £10k. Combined with £20k of state pension for a couple, this may not be so bad (and the overall decline is closer to 1.5% per year when the income sources are combined).

NedS

OldScientist said:

Agreed. For example, a UK couple at state pension age with £1m requiring an income of £40k, are (historically) in trouble with their 4% withdrawal. Factor in two state pensions (approx 20k) and the withdrawals drop nicely to a conservative 2%. If instead, they use half their portfolio to buy two single life inflation protected annuities (one each) at 4.2%, they have an income of £41k and a residual portfolio of £500k. Even an early death of one of the couple, once any guarantee period expires, will leave the survivor with an income of just over £20k and the potential for up to another £15k on a 3% portfolio withdrawal. One downside is the reduction in legacy if both of them die young (before the, now unneeded, portfolio has a chance to grow).

Question - we are in a situation were the vast majority of our DC assets are in one name - if we wanted to purchase such an annuity arrangement, would OH's annuity have to be purchased out of taxed income, or can I purchase an annuity for OH out of my DC pot? I assume not? I had considered two joint life policies ensuring a net 75% payment to either survivor (full on self plus 50% on partner's). Or maybe the solution would be for me to buy a joint life with 100% for partner. I'd not given this too much thought until recently with rising annuity rates - but as we are only mid 50's, a lot can change in the next 10-15 years!

bostonerimus

Audaxer said:

bostonerimus said:

eric4395 said:

I have just retired I am 68 in December. We have no debt or mortgage to pay and keep in good health.
I have had a pension lying since I was 60 in Royal London( set up for  flexible income drawdown) that I haven't  touched. Over the past year it has lost more than  £20,000..it currently has approx £305,000   in it
My current pension with Aegon has approx £185,000  left in it at the moment down approx £40,000 in the last 12  months.  My income now is I receive the government pension of approx £800  per month which i have had for last 2 years and  which was getting taxed at 40 %  (so I sensibly put 12000 extra contribution into my Royal London pension and got tax relief on it making it 15,000 however it has disappeared in the figures in the last 12 months) and my wife  receives about  £750  per month gov and ex works pension. 
My question is should I combine both my pensions by putting current Aegon one in with the Royal London and set up for flexible income drawdown. We are in the fortunate position of having savings to fall back on for the next few years so really don't have to touch it. Bearing in mind our ages and 75 year old the cut off for taking 25 % tax free from  my pension pot I believe) . I'm not sure what the best plan off action is. Would really like to protect as much as I can with regards to my son and daughter and 3 grandchildren benefitting out of this for there futures. Is it just a case off  handing over lump sums to them on a regular basis  before it all gets taxed or who knows goes to care home fees eventually although I believe there are limits on that as well. Any advice appreciated.

What jumps out at me is your combined pensions are 490k and last year you withdrew 40k which is 8% and that is very high even for someone who's 68. Gifting money is a good tax strategy to get money to your heirs as long as you live long enough, but IHT doesn't look like it will be an issue for you and if you are spending 8% of the pot each year and it is also being reduced by market losses and maybe fees then you have more important things to consider than tax. I would try to reduce your spending.

I read the post from @eric4395 that his Aegon pension has lost approximately £40,000 in value over the last 12 months, not that he withdrew £40,000. Maybe I've read it incorrectly?

Doh, yes I agree looking back at it.

bostonerimus

OldScientist said:

bostonerimus said:

OldScientist said:

Albermarle said:

MK62 said:

OldScientist said:

 Since all of our expenditure (essential and everyday discretionary) is currently covered by a (partly inflation capped) DB pension, then this variability doesn't matter too much to us at the moment.

In that case, pretty much any "reasonable" drawdown plan will work for you, since the consequences of plan failure are nothing like as severe as they'd be for someone totally reliant on investments, such as DC pensions etc, and hence you could probably accept more plan risk.

I suppose we'll nearly all have at least some level of "DB" type pension in the end, in the form of the state pension - but for many that won't even cover essential spending, let alone everyday discretionary.

Even if a DB pension is nowhere near large enough to cover essentials, it still reduces pressure on the DC pension/SWR significantly, unless you are walking a very tightrope.  Then if you add in later one or two state pensions, it reduces the pressure even more of course,

Agreed. For example, a UK couple at state pension age with £1m requiring an income of £40k, are (historically) in trouble with their 4% withdrawal. Factor in two state pensions (approx 20k) and the withdrawals drop nicely to a conservative 2%. If instead, they use half their portfolio to buy two single life inflation protected annuities (one each) at 4.2%, they have an income of £41k and a residual portfolio of £500k. Even an early death of one of the couple, once any guarantee period expires, will leave the survivor with an income of just over £20k and the potential for up to another £15k on a 3% portfolio withdrawal. One downside is the reduction in legacy if both of them die young (before the, now unneeded, portfolio has a chance to grow).

Everything old is new again. This sort of hybrid approach seems pretty obvious and with annuity rates creeping up it looks more and more attractive. An interesting question is now what asset allocation you have for the DC money left over after you have bought your annuities. My approach has been to think of the DB/annuity as a fixed income allocation and so 90% of my DC and other investments is in equities. 

Of course the problem is easy with 1M and only needing to generate 20k. If you start with a big pot and a low need for income then everything is sweetness and light. The same old issues would come into play if you needed to generate 20k from 500k or less.

Asset allocation is an interesting one - in his book, Pfau goes for the same approach you do - treat the annuities (he doesn't deal with DB pensions) as bonds and maintain the overall stock and bond proportions. He calculates it in two ways one using a fixed allocation (based on the initial purchase) and one on the present value of the annuity (which means the asset allocation changes with time). In my own case, I've actually used half the value of the DB pension (i.e., I've assumed I'm dead!) since this then leaves a more sensible asset allocation for my OH (there is also a slowly rising glidepath that will, once our state pensions kick in end up around 80% stocks - I'm unwilling to go further than that).

The bottom line is that for a UK retiree, generating 20k from 500k requires a bit of luck and a willingness to accept that risk - a hard look at expenditure might be a more prudent option - or a willingness to accept that the income will need to decline with time (e.g. see https://www.kitces.com/blog/safe-withdrawal-rates-with-decreasing-retirement-spending/ for US cases). For a UK retiree with a 60/20/20 portfolio, a decline in portfolio income of 3% per year would allow an initial withdrawal of 4% (i.e. the first withdrawal would be 4%, the second withdrawal in real terms 0.97*4=3.88%, etc. - see bottom panel of figure) without historical failures.



You'd start by withdrawing £20k from the portfolio, but 30 years later you'd be withdrawing just under £10k. Combined with £20k of state pension for a couple, this may not be so bad (and the overall decline is closer to 1.5% per year when the income sources are combined).

I read the Pfau research papers on this, but It's been my plan since the early 1990s to avoid having to generate income from volatile investments like stocks and bonds and the Pfau papers gave some nice mathematical rigor to various scenarios. When investment company reps were selling us on DC pensions I always looked at the long tail on the "success distribution". After I retired my DB pension and rental income more than cover my spending and so I just went 90% in equities with my DC component without much regard for asset allocation because I can take the risk. If I was to include the cash value of my pension and the rental apartment I think I'd still be around 75% to 80% equities. Once you have income met by pretty much guaranteed sources then you can do two things with whatever remains: invest it for growth and throw caution to the wind because you don't need the income; or put it in a saving account that will get small but guaranteed gains because...you don't need the income.

OldScientist

NedS said:

OldScientist said:

Agreed. For example, a UK couple at state pension age with £1m requiring an income of £40k, are (historically) in trouble with their 4% withdrawal. Factor in two state pensions (approx 20k) and the withdrawals drop nicely to a conservative 2%. If instead, they use half their portfolio to buy two single life inflation protected annuities (one each) at 4.2%, they have an income of £41k and a residual portfolio of £500k. Even an early death of one of the couple, once any guarantee period expires, will leave the survivor with an income of just over £20k and the potential for up to another £15k on a 3% portfolio withdrawal. One downside is the reduction in legacy if both of them die young (before the, now unneeded, portfolio has a chance to grow).

Question - we are in a situation were the vast majority of our DC assets are in one name - if we wanted to purchase such an annuity arrangement, would OH's annuity have to be purchased out of taxed income, or can I purchase an annuity for OH out of my DC pot? I assume not? I had considered two joint life policies ensuring a net 75% payment to either survivor (full on self plus 50% on partner's). Or maybe the solution would be for me to buy a joint life with 100% for partner. I'd not given this too much thought until recently with rising annuity rates - but as we are only mid 50's, a lot can change in the next 10-15 years!

I don't think you can buy an annuity for someone else with your own pension pot (I found an old article from 2013 at https://www.thisismoney.co.uk/money/experts/article-2502725/Can-I-transfer-pension-wife-buy-annuity.html), so joint life with 100% may be an option. There are also purchased life annuities (i.e. out of taxed income as you said)

You're definitely right about uncertainty - who knows what interest and annuity rates will be in 10 years time?

Albermarle

There are also purchased life annuities (i.e. out of taxed income as you said)

I guess that they could also be bought with money that had not been taxed, such as a gift or inheritance? Then presumably the income from the annuity would still not be taxed either.
It was mentioned in another post/thread that purchasing an annuity with money not in a pension pot, means you get a worse deal. Seems to be because it is relatively unusual/niche to do it this way.