4% Drawdown If Preservation Of The Capital Is Not A Concern ?

MetaPhysical

Adding to some recent threads, I am getting my ducks in-a-line ready to retire early at 58.

I have some DB schemes, a pension for life from my late wife and also a DC scheme I am currently contributing to at the maximum rate of 60k per year (whilst it lasts).  My question refers to this DC scheme.

I hope to have a pot of about £500k - possibly 600k - in there when I pull the trigger on early retirement in a year or so.  My two kids are amply provided for with a legacy from my late wife.  I am not interested in the pension as an inheritance tax avoidance mechanism (Labour may change that anyway). The oft-discussed 4% rule seems to apply to those that want to preserve the capital sum.  I am not interested in doing that and want to enjoy my health (god willing) in my late fifties and sixties with my fiancee soon-to-be-wife whilst I am fit and active.  Of course I want this money to last as long as possible and I'd like to live well until the state pension kicks in nine years after I retire.   Of course, if the capital sum is preserved then great but it does not bother me if it isn't.

So my rationale is that I can draw much more heavily on the DC scheme than 4% with a view to keeping out of the higher rate tax band.  My DB and late wife's pensions amount to about £24000ish per annum as an income stream guaranteed for life and index linked.  So I was thinking of taking as much as 8% out of the DC at 58 (of which 25% will be tax free if I forgo the lump sum).  That would equate to a 40k withdrawal on 500k of which 30k would be taxable.  This, added to the DB money would total 54k per annum of income.   I would tweak the exact withdrawal percentage such that I keep below the [current] 50270 tax limit for the basic rate.  Market growth, on average, should put back at least 4% of that each year.  Agreed about stock market crashes etc early in retirement and I'd make withdrawals with that in mind - perhaps a year's worth when the market is "up".

Does the gist of what I am thinking make sense???  Is there any glaring gotcha in there perhaps?

Many thanks in advance and Happy New Year.

NoMore

The 4% rule is not based on preserving capital is based on not running out of money after 30 years 95% of the time, which could mean as little as a £1 left after 30 years. Granted lots of times in the past the 4% rule has resulted in a large pot of money after 30 years, but that was not the aim.

Whether the 4% rule should actually be used in retirement is endlessly debated here and elsewhere.

There is a popular book called Die with Zero by Bill Perkins that you may be interested in, alas I haven't read it so can't really comment if its any good or not.

El_Torro

As mentioned I wouldn’t get too hung up on the 4%. 

Your idea of holding some cash is sound to me. 1 year’s worth of cash may not be enough though. Looking at funds today many are at more or less the same level they were at in January 2022, almost 2 years ago. For someone in drawdown making no withdrawals at all over the last two years would have been wise (if avoidable). 

Taking 8% when you retire might be a good thing to do, it might not. Depends where markets / funds are at that time. 

Albermarle

The % figures are all based on past statistics and probabilities.
It is quite possible you could take 8% and still end up with more than you started with. On the other hand you could take 5% and run out in 15 years.

Hoenir

MetaPhysical said:

 Market growth, on average, should put back at least 4% of that each year.  

Markets will reflect the real global economy. Periods of high market returns are inevitably followed by fallow ones. Different people will experience different outcomes. As there's many variables in play. Not least the choice of investments at any given point in time. 

NoMore

There's a reason that deaccumulation in retirement is known as 'the nastiest, hardest problem in retirement' 

- You don't know how long you will need it (death!),
- You don't know future returns,
- You don't know future inflation.

In your case, with some guaranteed income, two of those are less of a problem (Depending on the inflation linking). Does this guaranteed income cover your basic spending needs (or perhaps even more) in which case you probably are a bit freer to draw down what and when you want from your DC pension.

michaels

As above, the 4% is not about capital preservation it is about not running out of money.  4% is generally considered too high especially if 30 years is too short for many. 3.25-3.5% is considered sensible in the UK.

An alternative which might be particularly attractive if you don't care about legacy would be to buy an index linked annuity then someone else runs all the market, inflation and longevity risk and you might be able to get somewhere close to the 3-4% range.

MK62

MetaPhysical said:

Does the gist of what I am thinking make sense???  Is there any glaring gotcha in there perhaps?

You'd need to model this plan using a spreadsheet or a retirement planning tool.......with the info given there's a high chance you'd deplete this DC pot at some point in your 70s, leaving you with your DB and SP pensions alone - you haven't said whether this would be acceptable to you or not though really. 

You might also need to consider provision for your fiance/new wife (congrats btw).......for instance, if your late wife's pension makes no provision for your new wife, your SP dies with you, and you've depleted your DC pot by say 78, then in the event of you going shortly after that, she could be staring at living on her own SP alone (plus any private pension provision she might have)........

stuhse

I believe your plan will work, it's similar to what I have in mind.

If you are happy with a 50k a year income I believe it will look like this.
From 58 to 67 top your 24k income up with 26k from your 500k pot.  This will use 9x24k= 226k.
From 67 onwards you will have 24k plus 10k state?..so going forward will only need 16k a year  from your remaining 274k pot....it will last well into your eighties at that rate, by which time 34k should be enough ?

Alternatively at around 67 you could use the remainder of your pot to buy an annuity.   226k currently would get you 10k ish a year, and you can sit back and relax with an index linked future of 24 k plus 10k state plus 10k annuity ?

ukdw

If you are not worried about IHT benefits, then  think it is fairly sensible to take full advantage of the 20% tax band - even if you just move some of the pension drawdown into ISAs - at least it is a bit more flexible than potentially having to pay 40% tax in the future.

Smudgeismydog

MetaPhysical, your thought process is very much aligned with mine, and so I shall follow your thread with interest.
A couple of things, firstly will your dependents pension continue in the event of you remarrying? (it’s something I double checked), and secondly, you stated you are looking to retire in a year or so, what will be the trigger for you?