Almost embarrassed to ask... 12 January at 9:56PM in Pensions, annuities & retirement planning 25 replies 4.3K views

bakedbeans2045

I am trying to build my understanding of pensions and there is one thing I don't understand.  If you have a SIPP, of say £200,000 at your desired retirement age and you put it in drawdown, most things I have read guide you to take 4% of your pot as your income.  Would this mean that you never really touch the £200,000?  Most people on the forum seem super focused on preserving the actual pot and living on the profit from it.
Is this because people try to leave the actual pot value to relatives/their estate?
If you didn't plan to leave an inheritance, would you factor in using some of the actual pot too for your retirement?
I'm sorry if this is really obvious and I have just missed it, but if someone can help clear this up I'd be very grateful.

barnstar2077

Although it would be great if we could all save up monster pots and only spend a few percent a year, I don't think that is the reality for most people that will be retiring with a DC pension in the near future.

Personally, I will be aiming to retire early, eating into my private/company pensions capital until state pension age.  At which point my private/company pension will only need to provide top up money.  I will probably run out of this top up money in my eighties at some point, if I live that long!

In the end it is whatever is right for you though.

Audaxer

Unless you are just taking dividends, you will be selling some of the capital to get your 4% income. If there is a year of poor returns you may want to take less from your pot and make up the difference from a cash buffer. It may be you end up with a bigger pot than the initial £200k, that you leave as an inheritance, but you may end up with less than you started with if you have a bad sequence of returns, especially in the first decade of retirement. 

Mutton_Geoff

The 4% "rule" is predominantly an American thing, it's also out of date but the selling point that it was a safe withdrawal rate that left the pot intact for beneficiaries.

Have a play around with this modeller - https://www.2020financial.co.uk/pension-drawdown-calculator/#calculator

bakedbeans2045

Thank you for your answers.  I also think I would need to eat into the capital/pot a little as otherwise, I could have a very limited/insufficient income but a preserved pot in old age which I don't necessarily need.
So the whole "take 4percent-ish but preserve the post at all costs" is a personal choice as people may want to leave an inheritance...that makes sense too.
thank you.

TadleyBaggie

I started in 2015 with a £225K SIPP, I initially took around %4.5 until 2020. Due to dropping markets I dropped down to 3.5%. I'm currently taking about 4.8% since December. My SIPP is currently at around £232K. My income has been purely based on growth.

Audaxer

bakedbeans2045 said:

So the whole "take 4percent-ish but preserve the post at all costs" is a personal choice as people may want to leave an inheritance...that makes sense too.
thank you.

No, the talked about 4% safe withdrawal rate is not to preserve the pot, it is the rate than is deemed to be safe to withdraw from  the pot without running out of money. If however you had a really bad sequence of returns, you could run out of money if you keep drawing out 4% plus inflation. However in many cases historically the pot has been preserved or increased over a 30 year retirement, but it is not in any way guaranteed that it will last 30 years.

bakedbeans2045

TadleyBaggie said:

I started in 2015 with a £225K SIPP, I initially took around %4.5 until 2020. Due to dropping markets I dropped down to 3.5%. I'm currently taking about 4.8% since December. My SIPP is currently at around £232K. My income has been purely based on growth.

Thank you - and would you consider a point in your retirement where you might take a higher % because the pot didn't need to last as long. I wondered if you might take 3-4% in the first x number of years but it could increase as time went on, albeit at the expense of the pot

dunstonh

  If you have a SIPP, of say £200,000 at your desired retirement age and you put it in drawdown, most things I have read guide you to take 4% of your pot as your income.  

Those guides dont appear to be teaching you much. You may wish to revist.  Some people draw more. Some draw less.   Some people stagger their draw (start higher to fund an income gap and then drop lower  - sometimes to nothing).

Some people dont invest at a level that makes 4% sensible.  Some do.

Would this mean that you never really touch the £200,000?  Most people on the forum seem super focused on preserving the actual pot and living on the profit from it.

If it makes 3% and you draw 4% then it will go down.  If it goes down 10% and you draw 4% then it goes down even more.

Is this because people try to leave the actual pot value to relatives/their estate?

Pensions are not part of your estate.   This is what makes them very attractive as a legacy option.

If you didn't plan to leave an inheritance, would you factor in using some of the actual pot too for your retirement?

If that is what you want, then yes.  

Focus on your objective and meeting your objective. Don't focus on generic information that may not be suitable for you.

Secret2ndAccount

There is a wide range of outcomes. Stocks go up and down. If they go up first, then down, you will probably be left with a large pot. If they go down first then up, then you might run out of money. That's for the same plan with the same pot over the same number of years - just a different start date. This is based on a fixed plan where you draw your number (3-4% of your pot) in year 1, then increase with inflation every year, regardless of the stock market. The 3-4% comes from simulating this plan with historic data. It's the number that gets you to 30 years most of the time without running out.
Because you sometimes end up with a large pot left over, there are numerous alternative plans which start with a higher withdrawal, but have to be flexible and lower the withdrawals if investment returns don't live up to your hopes. 3% is safe enough that you are unlikely ever to have to cut back. However, if you are able to make substantial cutbacks if needed, you could start out at 5% or more.
Your pot needs to be properly invested to generate the necessary returns. Can't just sit in cash, or even all in bonds.

Albermarle

bakedbeans2045 said:

TadleyBaggie said:

I started in 2015 with a £225K SIPP, I initially took around %4.5 until 2020. Due to dropping markets I dropped down to 3.5%. I'm currently taking about 4.8% since December. My SIPP is currently at around £232K. My income has been purely based on growth.

Thank you - and would you consider a point in your retirement where you might take a higher % because the pot didn't need to last as long. I wondered if you might take 3-4% in the first x number of years but it could increase as time went on, albeit at the expense of the pot

It is probably best just to see 4% ( or 3%) as a guideline/rule of thumb.
So for example if you estimate that you will have a £200K pension pot, at age 60, you could say that it would be sustainable to take around £7K pa from it. So at least you have some figure to work around.
Than as explained in other posts, you maybe could take more, or less as your need for income/investment performance pans out. One common thing to do is to take more before getting your state pension and less afterwards, but you have to be careful that the 'more' is not too much and set the value of your pot into a downward spiral.