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

michaels

zagfles said:

Secret2ndAccount said:

MEM62 said:

I don't see the logic in draining the pension (and paying Tax) just to stick the money in an ISA.  Keep the money in the pension and the 20% you would have paid in tax stays invested and continues to grow.  Just take what is needed to meet the income requirement and leave the rest invested.   

MK62 said:

It can make a difference due to the 25% tax free element of SIPP withdrawals. 

It doesn't make any difference.

They need 40k from the pension. They choose to take out 50k.  That extra 10k is  2.5k (tax free) + 6k (7.5k x 0.8). So 8.5k goes into ISA. Let’s say this doubles. They now have 17k with no further tax to pay.

Leave that 10k in the pension. It doubles. Take it out. 5k tax free + 15k x 0.8 = 12k.  12k + 5k = 17k. Same as ISA.

So if the money is reinvested in the ISA it doesn’t cost any more tax. In the ISA they have instant access to the money if they need it. Could be lower fees too. I’ve seen free S&S ISA’s and a lot of people pay a percentage on their pensions. It’s only worse if they see the big pile of money and go and spend it (although that might be the right thing to do too - who knows?)

Exodi details a case where Pension could be the winner. IMO it's marginal - the tax saved probably doesn't justify the lockup and possible fees. However, he could turn out to be right depending on what the future holds.

Alternatively things could go the other way and investments do so well that OP won't be able to withdraw it all and stay within BR tax. So not using up BR tax band now could mean more tax in future. 

And that 'well' might actually just be lots of inflation rather than any real growth in the pension pot funds so unless the tax bands are indexed then it makes more sense to take out now and put into an ISA.