We’d like to remind Forumites to please avoid political debate on the Forum.
This is to keep it a safe and useful space for MoneySaving discussions. Threads that are – or become – political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
📨 Have you signed up to the Forum's new Email Digest yet? Get a selection of trending threads sent straight to your inbox daily, weekly or monthly!
Withdrawal strategy

Steve_666_
Posts: 235 Forumite

have a question, but will phrase with an example.
Have a SIPP with 800K and a 12570 SP(carefully chosen!). The SIPP is fully invested in Fund A, a balanced 60/40 offering.
the 4% rule states that I draw 32K per year, pay 6.4K tax and have an income of 38.1K per year, by chance exactly what my calcs say I need to live on.
However I have no rainy day reserve, so would a better strategy be to
draw 40K from the SIPP annually, pay 8k tax and have an income of 42.5K per year. The surplus of 4.4K would be invested into Fund A within a S&S ISA, specifically for that rainy day.
However I have no rainy day reserve, so would a better strategy be to
draw 40K from the SIPP annually, pay 8k tax and have an income of 42.5K per year. The surplus of 4.4K would be invested into Fund A within a S&S ISA, specifically for that rainy day.
The question being should I use up my 20% tax band every year and apply the 4% to my spending, and move excess into an ISA, where if needed I can make a large emergency withdrawal without having to pay 40% on part of it.
0
Comments
-
What’s the £12,570? Is it a SIPP account balance or an annual annuity?0
-
FIREDreamer said:What’s the £12,570? Is it a SIPP account balance or an annual annuity?
Sorry my bad, its state pension, I've edited the original to make it clear
0 -
Steve_666_ said:Have a SIPP with 800K and a 12570 SP(carefully chosen!). The SIPP is fully invested in Fund A, a balanced 60/40 offering.the 4% rule states that I draw 32K per year, pay 6.4K tax and have an income of 38.1K per year, by chance exactly what my calcs say I need to live on.
Also have you already drawn your tax free cash from the SIPP? If not then 25% of each withdrawal can be tax free, meaning tax of £4,800 on each £32K withdrawal.
Thinking further about your understandable desire for a war chest outside the pension, you could take all the tax free in one go for your rainy day fund.0 -
How does £40k less £8k tax plus £12.57k SP equal £42.5? I make it £44.57 or £44.6 to one place.Minimising tax sounds like a good idea. What is your maximum rainy day spending limit? Your contrived SP number is well above the standard SP of course so it may be that your hoped-for income is a stretch too far.
0 -
Steve_666_ said:have a question, but will phrase with an example.Have a SIPP with 800K and a 12570 SP(carefully chosen!). The SIPP is fully invested in Fund A, a balanced 60/40 offering.the 4% rule states that I draw 32K per year, pay 6.4K tax and have an income of 38.1K per year, by chance exactly what my calcs say I need to live on.
However I have no rainy day reserve, so would a better strategy be to
draw 40K from the SIPP annually, pay 8k tax and have an income of 42.5K per year. The surplus of 4.4K would be invested into Fund A within a S&S ISA, specifically for that rainy day.The question being should I use up my 20% tax band every year and apply the 4% to my spending, and move excess into an ISA, where if needed I can make a large emergency withdrawal without having to pay 40% on part of it.0 -
Few questions there. This is not my situation, it is a simplified example. As someone stated, I made a mistake, the surplus is about 6k+, and yes, I was working with a crystalized pension pot, again to keep it simple. The drawdown 4% was also made up for this reason."The question being should I use up my 20% tax band every year and apply the 4% limit to my spending, and move the excess that I've drawdown into an ISA, where if needed I can make a large emergency withdrawal without having to pay 40% on part of it.What I'm asking is about the strategy, does anyone see a downside to this, as I understand it the outcome is the same as long as the tax rates stay the same. If the basic rate of tax stays at 20%, then the outcomes are identical, if the the tax rate was to increase later than the ISA scenario would be a winner, if the basic rate of tax was to decrease later than the SIPP route would be the winner in terms of investment and withdrawal outcomes.there is also the "discipline" issue to consider, that is not using the excess but saving it!
0 -
Steve_666_ said:"The question being should I use up my 20% tax band every year and apply the 4% limit to my spending, and move the excess that I've drawdown into an ISA, where if needed I can make a large emergency withdrawal without having to pay 40% on part of it.What I'm asking is about the strategy, does anyone see a downside to this, as I understand it the outcome is the same as long as the tax rates stay the same. If the basic rate of tax stays at 20%, then the outcomes are identical, if the the tax rate was to increase later than the ISA scenario would be a winner, if the basic rate of tax was to decrease later than the SIPP route would be the winner in terms of investment and withdrawal outcomes.I generally agree with your analysis. My two observations are:4% drawdown may not be sustainable but you won't know until you've done it.Pensions are treated more favourably for IHT than ISAs are.
N. Hampshire, he/him. Octopus Intelligent Go elec & Tracker gas / Vodafone BB / iD mobile. Ripple Kirk Hill Coop member.Ofgem cap table, Ofgem cap explainer. Economy 7 cap explainer. Gas vs E7 vs peak elec heating costs, Best kettle!
2.72kWp PV facing SSW installed Jan 2012. 11 x 247w panels, 3.6kw inverter. 34 MWh generated, long-term average 2.6 Os.0 -
Might be an obvious point but the 4% rule is based on the original pot never depleting and on average would remain stable taking inflation into account. You are likely to leave a large legacy.
If using FAD, you can take as much of your need of your tax free allowance and leave the remaining crystallised untouched (and untaxed until you take it). This would enable you to use your 25% tax free as your emergency fund and take it only when needed and/or fill your ISA every year. Not sure I would do the latter unless you wanted to move it into lower risk investments.
0 -
Might be an obvious point but the 4% rule is based on the original pot never depleting and on average would remain stable taking inflation into account
That is not quite correct.
The 4% rule is based on minimising the chance of the pot running out over a 30 or 35 year period, there is no guarantee it will never run out. Also it is unlikely the pot would remain stable. The rule takes into account that the pot will be hit by bad times and grow in the good times.
It is only a theory, but can be useful as a rule of thumb. In reality not many are likely religiously to stick to such a strategy for 30 years anyway.
3 -
The point I was trying to make is that if you are of state pension age and have £800k in a SIPP you could easily end up with way more money aged 80 than you know what to do with and potentially have regrets for the money not spent.
For reference, assuming leaving a legacy behind is not a concern, current annuity rates for a Joint life 3% could give an income at 65 of over £38k + SP1
Confirm your email address to Create Threads and Reply

Categories
- All Categories
- 352.1K Banking & Borrowing
- 253.6K Reduce Debt & Boost Income
- 454.2K Spending & Discounts
- 245.1K Work, Benefits & Business
- 600.7K Mortgages, Homes & Bills
- 177.5K Life & Family
- 258.9K Travel & Transport
- 1.5M Hobbies & Leisure
- 16.1K Discuss & Feedback
- 37.6K Read-Only Boards