Drawdown Approach - Anything I am missing, are my assumptions correct?

JamTomorrow

In the process of helping a friend out as they are about to move into drawdown.  Can someone check my logic to make sure my assumptions are correct and flag any issues or additional things to consider.

 

Age : 66

SIPP with HL : ~£600k

ISA : £0

State Pension 2025/2026 : £11,042

Goal - £36k after tax income each year, whilst drawing down no more than up to top of 20% tax bracket each year.  Any surplus reinvested into SIPP (£2,880) and balance into an ISA.

 

Proposal for 25/26 is to put £52,304 into drawdown, of which £13,076 will be TFLS.  Leaves a taxable income of £50,270 including State Pension of £11,042.  After Income Tax of £7,540 leaves £55,806 net income (£42,370 from taxed income and £13,076 TFLS).

The surplus of £19,806 above desired income of £36k will be invested as £2,880 back into HL SIPP and £16,926 into ISA.

So as to avoid any emergency tax impact I was going to propose they put £4,358 into drawdown each month with HL (1/12 of the £52,304) but not sure how much of an admin burden this will be for them.  Are there alternatives options here or does the monthly drawdown with HL work well for people?

 

Thanks.

zagfles

I don't think you can set up monthly UFPLS with HL, so probably far easier to crystallise the whole ~£52k and take the year's TFLS up front, this could go straight into the ISA, then draw the taxable income monthly. 

DE_612183

If the goal is £36k - why are you drawing down £52k?

Surely it should be £30k - then with the SP £41 before tax, and after £5k tax you get £36k... 

Why not just leave the balance in the pension to grow

Triumph13

It should also be said that the 5% drawdown rate you are proposing, in order to reach £36k pa, is definitely on the more aggressive side of the typical range used.

JamTomorrow

zagfles said:

I don't think you can set up monthly UFPLS with HL, so probably far easier to crystallise the whole ~£52k and take the year's TFLS up front, this could go straight into the ISA, then draw the taxable income monthly. 

Thanks.  So when you take a UFPLS annually with HL this doesn't trigger income tax, you just get the tax free element.  Then you draw taxable income from what has been crystalised monthly and this triggers income tax calculation?

JamTomorrow

DE_612183 said:

If the goal is £36k - why are you drawing down £52k?

Surely it should be £30k - then with the SP £41 before tax, and after £5k tax you get £36k... 

Why not just leave the balance in the pension to grow

The thinking here, maybe incorrectly, was get as much out of the pension at 20% as quickly as possible so build investments out of a SIPP wrapper and into an ISA wrapper.  The ISA will likely be invested in the same fund as in the SIPP.  Assumptions is they are always going to take out of the pension at a level that will crystallise 20% tax so thought it was indeifferent to whether the surplus to requirements is invested in ISA or SIPP.

JamTomorrow

Triumph13 said:

It should also be said that the 5% drawdown rate you are proposing, in order to reach £36k pa, is definitely on the more aggressive side of the typical range used.

Understood.  This approach would exhaust the pension by about age 80, but all the surplus would be reinvested into ISA and be instantly accessible there.  Would they be better to let that surplus to continue to grow in theor SIPP rather than ISA?

DE_612183

JamTomorrow said:

DE_612183 said:

If the goal is £36k - why are you drawing down £52k?

Surely it should be £30k - then with the SP £41 before tax, and after £5k tax you get £36k... 

Why not just leave the balance in the pension to grow

The thinking here, maybe incorrectly, was get as much out of the pension at 20% as quickly as possible so build investments out of a SIPP wrapper and into an ISA wrapper.  The ISA will likely be invested in the same fund as in the SIPP.  Assumptions is they are always going to take out of the pension at a level that will crystallise 20% tax so thought it was indeifferent to whether the surplus to requirements is invested in ISA or SIPP.

Ah yes, that makes sense.

NoMore

You could be missing out on further tax free cash from growth in uncrystallised funds by taking more money out at 20% tax to put in isa. Up until you’ve withdrawn £268275 of tax free cash , I would only take out what you need from the pension not transferring excess to the isa. 

JamTomorrow

NoMore said:

You could be missing out on further tax free cash from growth in uncrystallised funds by taking more money out at 20% tax to put in isa. Up until you’ve withdrawn £268275 of tax free cash , I would only take out what you need from the pension not transferring excess to the isa. 

But if they take out more then they need and that is all invested in an ISA, in the same fund as the SIPP, then all that growth in the ISA wrapper is tax free anyway so shouldn't make any difference.

Exodi

Is there any particular reason you want all the money eventually in an ISA instead of the SIPP?

Your friend is not near the LSA so there is still a lot of additional tax free cash that can be generated staying in the pension.

If the pension was exhausted at 80, whereas the average life expectancy is around 85 for someone of your friend's age, then (so long as the state pension is less than the personal allowance) they would have paid 20% tax on money they didn't need that they could have withdrawn later at 0%.

Likewise what is the situation regarding their assets upon death? While tax changes are being made to bring pensions within the estate, in my opinion they are still favourable to ISA's (especially when passing directly to children) - though how favourable depends on the death benefit options offered by the pension provider. Is it part of the long term plan to have a great big ISA instead of a great big SIPP?