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Withdrawal strategy

Steve_666_
Steve_666_ Posts: 235 Forumite
100 Posts Second Anniversary Name Dropper
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.


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Comments

  • FIREDreamer
    FIREDreamer Posts: 1,124 Forumite
    1,000 Posts Second Anniversary Name Dropper Photogenic
    What’s the £12,570? Is it a SIPP account balance or an annual annuity?
  • Steve_666_
    Steve_666_ Posts: 235 Forumite
    100 Posts Second Anniversary Name Dropper
    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
  • Qyburn
    Qyburn Posts: 3,748 Forumite
    Fifth Anniversary 1,000 Posts Name Dropper

    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.

    Are you assuming that 4% is a "safe" withdrawal rate, which won't exhaust your funds too soon? Many seem to think you shouldn't bank on more than 3 or 3.5%.

    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. 
  • squirrelpie
    squirrelpie Posts: 1,470 Forumite
    Eighth Anniversary 1,000 Posts Name Dropper
    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.
  • Audaxer
    Audaxer Posts: 3,547 Forumite
    Eighth Anniversary 1,000 Posts Name Dropper
    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.


    That seems to me like a good idea to use up your 20% tax limit, but also increase the SIPP withdrawal further to take out the tax free portion. If you are putting the excess into similar investments in an S&S ISA, and only spending say 3.5% of your total investments, I don't think it matters if you take more than 4% out of the SIPP.
  • Steve_666_
    Steve_666_ Posts: 235 Forumite
    100 Posts Second Anniversary Name Dropper
    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!









  • QrizB
    QrizB Posts: 19,729 Forumite
    10,000 Posts Fourth Anniversary Photogenic Name Dropper
     "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.

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  • Pipthecat
    Pipthecat Posts: 122 Forumite
    100 Posts Second Anniversary
    edited 3 August 2023 at 11:10AM
    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.
  • Albermarle
    Albermarle Posts: 28,980 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    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.

  • Pipthecat
    Pipthecat Posts: 122 Forumite
    100 Posts Second Anniversary
    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 + SP
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