Drawdown / pension approach

Daffodil1234

Drawdown / pension approach

After reading lots of the very useful contributions on this board, I think I’ve come to a decision about my proposed approach – but would value comments in case anyone spots something that could be done better about the proposed flexi drawdown approach.  Currently haven't used an IFA, due to their charges.

 

Proposed pension approach (for 2 of us as a couple);

Mr D will receive a regular DB pension plus a one off lump sum as from 2024, and will top up from savings as needed, plus will get full state pension.

Mrs D will withdraw from the DC pension pot of £400,000 the amount equating to tax threshold each year – so for this year it would be £12,570.  This is to be withdrawn in March each year in the hope that it makes it very simple with not having to pay tax.  This amount equates to around 3% of the pot, so should be well below safe withdrawal rate.   The remainder that Mrs D needs will come out of savings / ISA etc.  Mrs D will also get full state pension.  Mrs D is aiming to retire in 1 or 2 years’ time at age 54 / 55.

There could be unusual years where more is needed and then Mrs D would use flexi drawdown to take a bigger amount (and consequently pay tax on the relevant amount).

As a couple, Mr and Mrs D are living quite comfortably at present on £30,000 per year and wouldn’t expect that to suddenly change in retirement.   No debts, mortgage or major house improvements expected to be needed any time soon.

Mr and Mrs D between them have:

Cash savings inc Cash ISAs - £300,000  (* including the lump sum from Mr D's pension which will arrive 2024)

S&S ISA / GIAs  - £183,000

DC Pension Pot  £400,000

 

Is this flexi approach on the DC pot, combined with savings to top up, sensible or can anyone spot a better way to approach it ?

Pat38493

Daffodil1234 said:

Drawdown / pension approach

After reading lots of the very useful contributions on this board, I think I’ve come to a decision about my proposed approach – but would value comments in case anyone spots something that could be done better about the proposed flexi drawdown approach.  Currently haven't used an IFA, due to their charges.

 

Proposed pension approach (for 2 of us as a couple);

Mr D will receive a regular DB pension plus a one off lump sum as from 2024, and will top up from savings as needed, plus will get full state pension.

Mrs D will withdraw from the DC pension pot of £400,000 the amount equating to tax threshold each year – so for this year it would be £12,570.  This is to be withdrawn in March each year in the hope that it makes it very simple with not having to pay tax.  This amount equates to around 3% of the pot, so should be well below safe withdrawal rate.   The remainder that Mrs D needs will come out of savings / ISA etc.  Mrs D will also get full state pension.  Mrs D is aiming to retire in 1 or 2 years’ time at age 54 / 55.

There could be unusual years where more is needed and then Mrs D would use flexi drawdown to take a bigger amount (and consequently pay tax on the relevant amount).

As a couple, Mr and Mrs D are living quite comfortably at present on £30,000 per year and wouldn’t expect that to suddenly change in retirement.   No debts, mortgage or major house improvements expected to be needed any time soon.

Mr and Mrs D between them have:

Cash savings inc Cash ISAs - £300,000  (* including the lump sum from Mr D's pension which will arrive 2024)

S&S ISA / GIAs  - £183,000

DC Pension Pot  £400,000

 

Is this flexi approach on the DC pot, combined with savings to top up, sensible or can anyone spot a better way to approach it ?

One question - is the 400,000 pension pot already crystallised?  If not, are you planning to take the tax free cash up front?

If you don't need the tax free cash, you can withdraw around £16K (I think it's 16667 or thereabouts) without paying any tax via an UFPLS withdrawal.  

You have 2 options
- Move your £400K into drawdown and take £100K tax free cash up front, then pay tax on all future withdrawals.
- Take UFPLS withdrawals and 25% of each one will be tax free.

Also - you don't mention your ages or state pension situation, but assuming you have full state pensions, once they kick in, they will use up most of your personal allowance anyway.

Nevertheless it generally looks like a good plan to me.

dunstonh

Mrs D will withdraw from the DC pension pot of £400,000 the amount equating to tax threshold each year – so for this year it would be £12,570.

You would draw more than that as the 75% needs to match the personal allowance.  However, the 25% would be on top.

This amount equates to around 3% of the pot, so should be well below safe withdrawal rate.  

That would depend on your asset mix and how old you are

There could be unusual years where more is needed and then Mrs D would use flexi drawdown to take a bigger amount (and consequently pay tax on the relevant amount).

With a larger pot value, accessing more of the 25% to cover those years would like be better......

Mr and Mrs D between them have:
Cash savings inc Cash ISAs - £300,000  (* including the lump sum from Mr D's pension which will arrive 2024)
S&S ISA / GIAs  - £183,000
DC Pension Pot  £400,000

......So, accessing taxable pension above the personal allowance would not likely be a good idea with those assets.  ie.. why take money out of the pension and pay income tax and bring it into the estate that is above inheritance tax levels when you already have less tax efficient options to use.

Is this flexi approach on the DC pot, combined with savings to top up, sensible or can anyone spot a better way to approach it ?

I don't see what you are proposing as being optimal.     

Albermarle

Mrs D will withdraw from the DC pension pot of £400,000 the amount equating to tax threshold each year – so for this year it would be £12,570

As mentioned you can not take taxable income from a pension, without taking the linked amount of tax free cash.

Also as mentioned it makes sense if you need more income to take it from the Cash and S&S ISA's. Overall you are rather cash heavy, so would in addition make sense to leave investments alone, and use this cash pile for a few years at least.

You have 2 options
- Move your £400K into drawdown and take £100K tax free cash up front, then pay tax on all future withdrawals.
- Take UFPLS withdrawals and 25% of each one will be tax free.

Third option is to take the £100K tax free in stages as part of the drawdown, either with taxable income or not, assuming the provider is flexible on this ,

Daffodil1234

Thanks all for comments so far, really helpful.  Agree with being rather cash heavy across both of us (due to combination of odd circumstances).

To answer someone's question - the £400,000 pension pot is not already crystallised so all options are still possible (even including annuity though I don't think that's a likely choice). 

On reading your replies, the better choice (while keeping lots of flexibility) would seem to be to :

(stage 1) use up some of the cash and / or S&S ISAs initially for income;

(stage 2) move the £400K into drawdown and take £100K tax free cash up front, then pay tax on all future withdrawals.

Pat38493

Daffodil1234 said:

Thanks all for comments so far, really helpful.  Agree with being rather cash heavy across both of us (due to combination of odd circumstances).

To answer someone's question - the £400,000 pension pot is not already crystallised so all options are still possible (even including annuity though I don't think that's a likely choice). 

On reading your replies, the better choice (while keeping lots of flexibility) would seem to be to :

(stage 1) use up some of the cash and / or S&S ISAs initially for income;

(stage 2) move the £400K into drawdown and take £100K tax free cash up front, then pay tax on all future withdrawals.

I guess my first comment was a bit hasty.  In most situations, I think the advice would be to still take out whatever you can get without paying any tax from the pension each year.  In your case maybe it's not so clear cut because with that amount of cash outside of ISAs, you have to consider how much tax you will end up paying on investment or savings income on the cash.  If you end up paying 20% tax on the amount you take out anyway, maybe it won't make any difference in the long run.  With interest rates expected to remain higher (maybe not at current levels, but not going back down to 0.5%), your idea to not touch the pension at all might end up better.  

It kind of depends on how much you have in ISAs versus GIA/non ISA and how much tax you can avoid paying on the unwrapped money.

Albermarle

Daffodil1234 said:

Thanks all for comments so far, really helpful.  Agree with being rather cash heavy across both of us (due to combination of odd circumstances).

To answer someone's question - the £400,000 pension pot is not already crystallised so all options are still possible (even including annuity though I don't think that's a likely choice). 

On reading your replies, the better choice (while keeping lots of flexibility) would seem to be to :

(stage 1) use up some of the cash and / or S&S ISAs initially for income;

(stage 2) move the £400K into drawdown and take £100K tax free cash up front, then pay tax on all future withdrawals.

The main point is that you do not waste your personal tax allowance in any tax year, by not taking enough taxable income.
@Pat38493 makes a valid point about tax on savings interest, but if you take £12570 taxable income from a pension and have no other taxable income, then you can earn up to £6,000 in interest before paying tax. PLus of course any savings in a cash ISA ( or premium bonds ) are tax free.

Regarding stage 2, it is normally not recommended to take all the tax free cash unless you have something to do with it/spend it on. If some of it is left in the pension it is protected from dividend tax and CGT. Plus any money left in a pension pot when you die is not counted in inheritance tax calculations.
With most modern pension providers it is possible to crystallise the pot in stages, rather than all at once.
So you have uncrystallised and crystallised funds at the same time.

dunstonh

On reading your replies, the better choice (while keeping lots of flexibility) would seem to be to :(stage 1) use up some of the cash and / or S&S ISAs initially for income;(stage 2) move the £400K into drawdown and take £100K tax free cash up front, then pay tax on all future withdrawals.

I disagree.  That still leads to tax inefficiency.

Annual use of personal allowance makes sense
Annual use of pension allowance hasn't been mentioned
Estate planning and looking at your scenario holistically and not each tax wrapper in isolation.

Why the need to take tax free cash up front (at any stage)?

deano180

I would investigate leaving Mr Ds TFLS from the DB pension due to the amount of cash you hold to see what the alternative looks like? Something to consider.

Cus

How much does an IFA generally cost for a one off assessment?
I guess it's a trade off between that cost, and the cost of getting it slightly wrong based on asking strangers on a forum. You have £800k that you are making choices on.

Daffodil1234

Again, thanks to all who have commented - extremely useful.

For Cus who asked about the cost of an IFA - It could be in future I will decide to use an IFA but the intention right now is to gain as much knowledge as possible myself first. My aim is to create an approach that will work long term for us so I'd want more than just a one-off assessment.  

Out of interest, I'd previously looked up the estimated cost (using Which who state "The Financial Conduct Authority (FCA) says advisers charge an average of 2.4% of the amount invested for initial advice and 0.8% a year for ongoing advice (1.9% p.a with underlying product and portfolio charges factored in)".     The main area that I may make choices on (the DC pot) would therefore create an adviser charge of 2.4% = £9,600 -   that's a lot of fees.