Draw down - why is it so hard?

michaels

SO I intend to retire at the end of April, at which point between self and DW we will have:

DW - DB about 200pa and full state pension starting in 2033, DC about 85k available immediately
Self - DB about 31k pa starting in 2037, DC about 850k available immediately

300k mortgage IO, fixed to Oct 25, 200k in mostly unwrapped 'cash' assets (should be 300k but 100k loaned to a child that is not performing so likely to be 'early inheritance') Basically this means at some point 100k of TFLS will need to pay of mortgage so below I model the DC pot as 750k.

Children at uni for next 5 years (1,1,2,1,1 one for year starting Sep 25 then another starting 2027, assume both do 3 year courses)

Desired annual spend after tax 50-55k and then 40-45k on first death (ie household income should only fall by value of lost state pension).  Could be made up of:

a) 8 x 12k + 12 x 12k (240k) from DC pot to bridge till state pension is available plus either another bridge of 8 x 200 + 12 x 31k (374k) from DC pot to bridge until DB is available leaving 221k DC for SWR drawdown of 7.2k pa (3.25%) for life - total 62.4k gross
b) Same bridge for state pension but DB taken early with actuarial reduction @17k pa leaving a DC pot of 595k supporting 19.3k pa for life - total 60.3k gross

Questions:

1) Is it worth keeping taxable drawing to 25k while children are at uni to maximise student grant eligibility while still using full personal allowance and then funding the rest of spending via TFLS which is not counted as income for student loan purposes - risk is that my income post state pension age could be higher rate band due to fiscal drag in which case paying more tax to allow a larger loan seems counter productive.

2) Mortgage - currently the 200k is 'stoozed' earning 6.3% whilst paying 4.5%, this is profitable as the interest is tax free for DW using allowances.  Rolling this over post September fix end has the downside that the interest will be considered income for student loan purposes and DW needs to start using her personal allowance for draw down so she has cleared her DC by state pension age to avoid income tax.  Alternative is to pay off at least the 200k that is stoozed and possibly also use 100k of TFLS to clear completely.

3) Draw from DB or DC.  Assuming you believe that the commutation rate for taking the DB early is fair then there are potentially two advantages to taking the DB immediately:  Inheritance and assignment (for a small reduction in DB, survivors benefits can be increased from 35% of the uncommuted pension amount to 100% of the commuted amount so avoiding the need for life insurance to cover any gap.  The downside is this swaps 'guaranteed rpi indexed income' for DC - ie at pension eligibility age rather than having 31k DB and say 3k pa of DC drawdown from the remaining DC pot instead I would have perhaps 17k of DB and 13k of DC drawdown

Brie

Must admit I found your post a bit confusing so will only address what I can easily tease out.....

I hope you realise you cannot take drawdown from a DB pension.  You are either getting the pension or you're not.  So you can normally get a TFLS up front but after that it's a monthly or perhaps annual amount paid until you die and then perhaps there's an amount paid monthly or annually to a nominated spouse.  

Triumph13

You are definitely looking at 40% tax eventually if 3.25% is sustainable and you go the £25k route.  I feel your pain as someone who currently has two at Uni meaning effectively  an extra 28% marginal 'tax' on me in terms of increased parental contribution.

The good news is that you seem to have plenty of headroom.

incus432

michaels said:
a) 8 x 12k + 12 x 12k (240k) from DC pot to bridge till state pension is available plus either another bridge of 8 x 200 + 12 x 31k (374k) from DC pot to bridge until DB is available leaving 221k DC for SWR drawdown of 7.2k pa (3.25%) for life - total 62.4k gross
b) Same bridge for state pension but DB taken early with actuarial reduction @17k pa leaving a DC pot of 595k supporting 19.3k pa for life - total 60.3k gross

I too found your post a bit confusing but just on the bridging question, have you considered using some of the DC pot to buy a fixed term annuity for this purpose?  These products are not well known but with annuity rates very high right now, well worth a look. Recently researched and bought 8 yr one for my wife to take her to SPA andf it was an excellent deal - guaranteed and better than I could do with drawdown.   Getting an income of 12k pa for 8 years would cost considerably less than 96k.   

Use Moneyhelper for illustrative quotes - options for guarantee periods, flat or escalating, etc.   Buy through an IFA or broker (eg Retirement Line)  or direct (with some insurers)

Dazed_and_C0nfused

 (should be 300k but 100k loaned to a child that is not performing so likely to be 'early inheritance')

Children at uni for next 5 years (1,1,2,1,1)

I was lost there.  Is the child that is not performing at University?  If so maybe a theatre course was the wrong choice?

And I can only guess that 1,1,2,1,1 means.  I started at the number of children at uni each year but not sure that makes sense.

QrizB

Dazed_and_C0nfused said:

And I can only guess that 1,1,2,1,1 means.  I started at the number of children at uni each year but not sure that makes sense.

One child goes to Uni next year for three years, one in two years time for three years. So the number of children at university in each of the next five years will be 1, then 1, then 2, then 1, then 1.

incus432

Like Bletchley Park this thread.

michaels

incus432 said:

Like Bletchley Park this thread.

Which is sort of the point, so many options....

It is not a uni kid who is failing to repay a property loan but the funds were pencilled in for repaying the mortgage but are not likely to be available in the foreseeable.

This Oct I should have one child at uni for the next 3 years then 2 years later a second goes so I will have uni students for 5 years.

michaels

incus432 said:

michaels said:
a) 8 x 12k + 12 x 12k (240k) from DC pot to bridge till state pension is available plus either another bridge of 8 x 200 + 12 x 31k (374k) from DC pot to bridge until DB is available leaving 221k DC for SWR drawdown of 7.2k pa (3.25%) for life - total 62.4k gross
b) Same bridge for state pension but DB taken early with actuarial reduction @17k pa leaving a DC pot of 595k supporting 19.3k pa for life - total 60.3k gross

I too found your post a bit confusing but just on the bridging question, have you considered using some of the DC pot to buy a fixed term annuity for this purpose?  These products are not well known but with annuity rates very high right now, well worth a look. Recently researched and bought 8 yr one for my wife to take her to SPA andf it was an excellent deal - guaranteed and better than I could do with drawdown.   Getting an income of 12k pa for 8 years would cost considerably less than 96k.   

Use Moneyhelper for illustrative quotes - options for guarantee periods, flat or escalating, etc.   Buy through an IFA or broker (eg Retirement Line)  or direct (with some insurers)

I like to protect from inflation so would probably use an index linked bond ladder or a fully indexed fixed term annuity but suspect costs are similar either way.

michaels

One big question is do I 'bridge' the start date using DC like for the state pension or take it early with the reduction. Overall it should make little odds but it would impact the size of any heritable pot on early second death, taking the DB earlier means a smaller bridge and hence a bigger DC pot left.

Triumph13

You could split the difference and take the DB part way along rather than now or at NRA?  I'm normally a big fan of waiting until NRA, but the survivorship issue is a big one in your case so I would be tempted to go early, unless you can find another solution.

I worked out your cryptic code, but then I have kids two years apart too   Take a good look at which tax years are used for loan assessment - normally the one ending 18 months before the start of the uni year, but you can use a more up to date one if your income has dropped a lot.  I think that means it would only be three years you would be looking at making your income artificially low, which might make it more attractive.  It would also mean being able to get all of DW's SIPP out tax free without impacting student loans, if I have my sums right.

Having been through all of this, my most important advice is don't sweat it too much.  You can go absolutely crazy trying to optimise these things, but most of the savings you achieve through clever planning will pale into insignificance compared to the variability in market returns, spending, and maybe even future earnings.