Draw from Pension or ISA ?

optoutDB

I built myself a pretty nifty forecasting spreadsheet that tells me how much discretionary spending I need to spend from age 55 (now) to get my assets down to zero at age 85 (at which point I go into a care home with just my pension).

This week I tweaked the model to suit my brothers (age 52) set-up, to see how it compared to what his pension advisor is telling him. I assume that his company DC pension is transferred to a SIPP once he stops work. Which gives three pots SIPP, S&S ISA, CASH that the model shifts funds between. An Inheritance comes into CASH and is then moved to ISA at 20k per year.  Note I assume that SIPP and ISA are equally risky/performant.

One very noticeable difference in methods is that after he stops work my model draws down his pension to cover his outgoings  (plus another £12570 *1.333 to get it out tax free), and then when that is empty it draws on the ISA.  Whereas the pension advisor model draws on the ISA to cover outgoings until that is empty, and then draws down the pension.

Seems self-serving and possibly detrimental to the client the way the pension advisor model works ??  But I haven't yet re-jigged my model yet to prove it is worse.

Seems obvious to drawdown pension during period when not earning and state pension is not using up most of tax allowance. 

Maybe it makes little difference after state pension age, which one you draw down. 

Have I missed something? 

Note: None of the income years or drawdown years put my brother across the 40% tax threshold, if that matters.

SVaz

I think the main thing is if he wishes to leave an inheritance.   ISAs lose their tax free status on death and form part of the estate, so are liable to IHT.
Pensions are outside the estate and don’t count towards IHT and are either inherited completely tax free ( for now)  under age 75 and at the beneficiary’s marginal tax rate after 75. 

Do neither of you own a home?  

I plan to leave my pension as my very last asset,  I would sell my house to pay any care fees,  my pension would only be used as a last resort,  to hopefully preserve it for my Daughter or Grandson. 

artyboy

SVaz said:

I think the main thing is if he wishes to leave an inheritance.   ISAs lose their tax free status on death and form part of the estate, so are liable to IHT.
Pensions are outside the estate and don’t count towards IHT and are either inherited completely tax free ( for now)  under age 75 and at the beneficiary’s marginal tax rate after 75. 

Do neither of you own a home?  

I plan to leave my pension as my very last asset,  I would sell my house to pay any care fees,  my pension would only be used as a last resort,  to hopefully preserve it for my Daughter or Grandson. 

My approach is likely to be the same, save for the fact that I would at least draw down from my pension up to my personal allowance each year - the kids will still get a decent inheritance!

optoutDB

He has a house, but no-one to leave it to so the plan is to spend it. Same with pension pot.

Having thought a bit more, my model sometimes empties the SIPP before SP age. I will change it so that there is always some to drawdown up to the tax free threshold. 

And if after that there is no difference between drawing from SIPP or ISA I will have to flip a coin.


His pension provider modelling does nothing with the house at present, which is the main reason I think he can retire at 55 while he has been thinking 60.

edit: made the change, well worth it to get about £40k out tax free. I have a DB pension, so after SP age there is no spare tax allowance (that's my excuse for getting that wrong)

Pat38493

I think as a general rule it’s fairly common practice to use up savings and ISAs before pensions, but for sure if there are years when there is no income at all, it’s useful to draw out at least the personal allowance from the pension, but not more than that.  In a long term decades long plan an IFA might see this as a short term planning issue that needs to be done but won’t make a material difference to the overall result - sequence of returns issue will probably make a much bigger difference.

Side question - how does your spreadsheet deal with growth and inflation - if you are using flat rates across the whole period you may want to stress test your plan using historical or Monte Carlo testing as a sequence of returns issue early in retirement could cause big issues.

Also - it seems a bit risky to me to assume that you will go into a care home at 85 and don’t need any more DC pension but you haven’t given enough detail to comment fully.

SouthCoastBoy

I have a 50:50 split between pensions and isa, I am planning to draw down personal allowance amount plus 25% tax free from my sipp once I stop working. Then at state pension age take money from isa plus top up to tax free allowance from isa.

optoutDB

Hi Pat, 

my spreadsheet started off with the ability to input inflation and returns year by year, but then I simplified it to show everything in 2023 prices (I guess everyone quickly finds that you have to do that or the number are impossible to comprehend) , and now I just input a constant yearly real return for several classes: house, SIPP, ISA, Cash.  

For my own run my default is to set everything to 0% real growth (my cash is mostly Gold so it tends not to lose to inflation).  I could do fancy scenario modelling but I'm not too bothered because whatever I assume/happens in real life I'll be OK, even if everything else got wiped out I could get by OK on just the State Pension + my DB pension.  

In reality I will find it hard to up my spending, and I will probably underspend in the early years. Doing this modelling was quite a shock as for the last 10 years I have been living on about  £12k pa because that's about what I was earning and my mindset was not to deplete my savings. But now I've reached 55 so I can access my pension, and I've done my first look forward. I have about £1M to spend in the coming 30years, which means I have to step my discretionary spending up from about £3k to £20k  ( +/- £1500 per % of stock market gain). 

For my brother he only has his DC pension, so it's more critical what returns are assumed. I started him off at 0%, and also for comparison ran the pension advisor values ( house +1%, ISA +3%, DC +3%, Cash -0.5%).


Running the DC pension down to zero at 85 was what my brother had in his model already. I also adopted it for myself, previously I was running it down earlier. I live on a street of bungalows, so I've seen a lot of old people come and go over the years, and really most of them would be better off in a home after 85.  From 80 to 85 I've assumed £24k rent for some sort of retirement apartment.

 

Albermarle

As an alternative view, with a very low expenditure of £12Kpa ( even if it increases a bit) and a One Million Pound warchest + state pension at 66, you can probably forget about all the spreadsheets and just get on with enjoying  retirement, as you are almost certainly never going to run out of money !

Qyburn

One point in favour of drawing from SIPP rather than ISA is that if for some reason you suddenly need a big lump sum, you could take everything out of the ISA tax free. 

af1963

optoutDB said:

I built myself a pretty nifty forecasting spreadsheet that tells me how much discretionary spending I need to spend from age 55 (now) to get my assets down to zero at age 85 (at which point I go into a care home with just my pension).

It's not the main point of your post, but planning to reach care home age with no assets probably means your local council placing you in the cheapest available home.

howeller_2

So I take from the comments that it´s better to use ISA savings for income rather than draw from a pension after retirement age as the personal allowance is used up by the state pension?