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How Much Can I Drawdown and For How Long?

Just trying to sense check figures from various online calculators.

Current DC pot is £225k, plan is to pay £13.5k into this from salary for another 6 years.  

Contributions will stop at this point and the pension will have a further two years to 'grow' before I commence drawdown at 57.

Aim is to drawdown £19k for 11 years until SPA, at which point I'm hoping for at least £100k to be left in the pot for occasional top up spends.

I think this is cautious (it essentially assumes no growth at all).

I would really appreciate your thoughts please on what I could realistically have in pot value at 57 and at 68 after drawdown?

This is in a medium risk default fund (no lifestyling).
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Comments

  • Moonwolf
    Moonwolf Posts: 409 Forumite
    Tenth Anniversary 100 Posts Name Dropper Combo Breaker
    edited 5 February at 9:30AM
    It is very difficult and you also have to account for inflation  Any prediction will be wrong and there could be a market crash at the wrong moment.

    Personally I would be ignoring inflation and using a growth rate of 2% over inflation.  That is just plot forward that my pot grows by 2% a year. Growing your pot by 2% a year, adding £13.5 a year for 6 years and growing the result.  Just growing for 2 years then taking £19k a year off and growing the remainder for each of 11 years. Using that I get a figure of £200,000.  

    However averages can be messed up by big changes in value, particularly when you first start drawing down.

    What are you doing in the middle two years.  If you aren't earning and living off other savings, from a tax perspective you might be better of drawing down £16,670 a year which would then be all tax free.

    Also look at some of the threads on paying in £2880 a year after you stop earning as you get the tax back on that, so effectively £720 of free investment.  After basic rate tax, with the 25% tax free element when you draw it down it is £612 of free money.


  • Dazed_and_C0nfused
    Dazed_and_C0nfused Posts: 16,193 Forumite
    10,000 Posts Fifth Anniversary Name Dropper
    Moonwolf said:
    It is very difficult and you also have to account for inflation  Any prediction will be wrong and there could be a market crash at the wrong moment.

    Personally I would be ignoring inflation and using a growth rate of 2% over inflation.  That is just plot forward that my pot grows by 2% a year. Growing your pot by 2% a year, adding £13.5 a year for 6 years and growing the result.  Just growing for 2 years then taking £19k a year off and growing the remainder for each of 11 years. Using that I get a figure of £200,000.  

    However averages can be messed up by big changes in value, particularly when you first start drawing down.

    What are you doing in the middle two years.  If you aren't earning and living off other savings, from a tax perspective you might be better of drawing down £16,670 a year which would then be all tax free.

    Also look at some of the threads on paying in £2880 a year after you stop earning as you get the tax back on that, so effectively £720 of free investment.  After basic rate tax, with the 25% tax free element when you draw it down it is £612 of free money.
    Isn't is £180 of free money?
  • OldScientist
    OldScientist Posts: 732 Forumite
    500 Posts Third Anniversary Name Dropper
    Just trying to sense check figures from various online calculators.

    Current DC pot is £225k, plan is to pay £13.5k into this from salary for another 6 years.  

    Contributions will stop at this point and the pension will have a further two years to 'grow' before I commence drawdown at 57.

    Aim is to drawdown £19k for 11 years until SPA, at which point I'm hoping for at least £100k to be left in the pot for occasional top up spends.

    I think this is cautious (it essentially assumes no growth at all).

    I would really appreciate your thoughts please on what I could realistically have in pot value at 57 and at 68 after drawdown?

    This is in a medium risk default fund (no lifestyling).
    Assuming 0% real growth as you have done is a good starting point since a) it is historically realistic over periods of up to about 20 to 30 years and b) it makes the calculations easy!

    If you want to try other growth rates then the easiest way is to use a spreadsheet although it can be done with pen, paper, and a calculator. For example, with 3% real growth, the amount in your pot after finishing contributions would be 225*1.03^6+13.5*(1.03^5+1.03^4+1.03^3+1.03^2+1.03^1+1.03^0) (where ^ means raised to the power of), i.e. a total of about £356k (if I've done my sums right). Two further years of 3% growth would mean the initial pot was £378k in today's money.

    Of course, the future growth rates are unknown, but, IMV, planning for relatively poor conditions, as you have done, is sensible because a) good conditions can look after themselves and b) you can periodically review your plans.

  • Retireinten
    Retireinten Posts: 260 Forumite
    Fourth Anniversary 100 Posts Name Dropper
    Thanks for the response. A £200k estimate is still much higher than my pessimistic calculations. I don't think this will change our plans, but it might give us some flexibility to pull the plug a few months earlier if we decide to or give us a bigger pot for occasional big spends.

    We have a fairly detailed retirement plan underpinned by a £25k DB payable £10k at 57 and a further £15k from 60. Plan is for us to retire in 5 years at 55 and use ISA savings to plug the gap to 57, then use ISAs to top up as and when needed when our pensions kick in. By 68 we shouldn't need to drawdown anything, so any pots will form a contingency lump sum.

    I will pay £2880 into our pensions too once retired.
  • Retireinten
    Retireinten Posts: 260 Forumite
    Fourth Anniversary 100 Posts Name Dropper
    I won't be adding any growth into our figures. Our plan works with zero growth, with around a £250k pot 'spare' by the time we get to 68. 
    Anything extra will be a very nice bonus.

    Our pensions at 68 are guaranteed. If hubby dies first I'd lose his state pension  but I would still have £35k ish coming in after tax which should be plenty. Hubby would lose around £25k of guaranteed income if I go, which I've addressed with a life insurance policy payable into my old age.  
  • Moonwolf
    Moonwolf Posts: 409 Forumite
    Tenth Anniversary 100 Posts Name Dropper Combo Breaker
    Moonwolf said:
    It is very difficult and you also have to account for inflation  Any prediction will be wrong and there could be a market crash at the wrong moment.

    Personally I would be ignoring inflation and using a growth rate of 2% over inflation.  That is just plot forward that my pot grows by 2% a year. Growing your pot by 2% a year, adding £13.5 a year for 6 years and growing the result.  Just growing for 2 years then taking £19k a year off and growing the remainder for each of 11 years. Using that I get a figure of £200,000.  

    However averages can be messed up by big changes in value, particularly when you first start drawing down.

    What are you doing in the middle two years.  If you aren't earning and living off other savings, from a tax perspective you might be better of drawing down £16,670 a year which would then be all tax free.

    Also look at some of the threads on paying in £2880 a year after you stop earning as you get the tax back on that, so effectively £720 of free investment.  After basic rate tax, with the 25% tax free element when you draw it down it is £612 of free money.
    Isn't is £180 of free money?

    Yes, £180 if it is your tax you are getting back.

    I was thinking of just the two years when if the OP isn't paying tax. 

    I thought if you weren't earning £2880 net was £3600 after tax so £720 of "tax" that you haven't paid. 

    Of this, when you draw it down, 25% or £180 is tax free and £540 is taxed at 20% so you pay £108 of tax on that.  So in total you get £612 back after tax.  More if you have allowed it to grow.

  • Moonwolf
    Moonwolf Posts: 409 Forumite
    Tenth Anniversary 100 Posts Name Dropper Combo Breaker
    Thanks for the response. A £200k estimate is still much higher than my pessimistic calculations. I don't think this will change our plans, but it might give us some flexibility to pull the plug a few months earlier if we decide to or give us a bigger pot for occasional big spends.

    We have a fairly detailed retirement plan underpinned by a £25k DB payable £10k at 57 and a further £15k from 60. Plan is for us to retire in 5 years at 55 and use ISA savings to plug the gap to 57, then use ISAs to top up as and when needed when our pensions kick in. By 68 we shouldn't need to drawdown anything, so any pots will form a contingency lump sum.

    I will pay £2880 into our pensions too once retired.
    I would consider at drawing down the £16,760 in the two years until you are 57 instead of the ISAs unless it is too faffy as you are drawing down money that would be taxable once you are receiving DB, saving you £2,500 tax each year.
  • Retireinten
    Retireinten Posts: 260 Forumite
    Fourth Anniversary 100 Posts Name Dropper
    I won't be able to access to pension money until I'm 57 unfortunately.

    The plan is to drawdown up to the tax allowance each year plus the 25% tax free lump sum, then a few thousand extra of the tax free lump sum element to get to £19k. I'm assuming this is possible and I appreciate I will be crystalling more of the pot doing it this way.
  • Albermarle
    Albermarle Posts: 25,911 Forumite
    10,000 Posts Sixth Anniversary Name Dropper
    I won't be adding any growth into our figures. Our plan works with zero growth, with around a £250k pot 'spare' by the time we get to 68. 
    Anything extra will be a very nice bonus.

    Our pensions at 68 are guaranteed. If hubby dies first I'd lose his state pension  but I would still have £35k ish coming in after tax which should be plenty. Hubby would lose around £25k of guaranteed income if I go, which I've addressed with a life insurance policy payable into my old age.  
    You have to be clear on the difference between nominal and real growth.

    If your pot grows 5% but inflation is 5% , then that is zero real growth, but it at least means the value/spending power of your pot is maintained.

    If you are thinking your pot will not grow at all, then every year your pot will lose value/spending power and your calculations will not work. For example you say you want to have at least £100 K left at SPA. However if inflation is just 3% pa for 10 years, then that £100K will only be worth around £70K in real terms.

    So you need at least growth that will keep up with inflation ( which historically should be OK, even in a relatively pessimistic scenario) .
  • Retireinten
    Retireinten Posts: 260 Forumite
    Fourth Anniversary 100 Posts Name Dropper
    I currently assume no real growth, in other words, the pot grows to match inflation and its value is maintained.

    I find the various pension calculators confusing when it comes to growth rates. So if the assumed inflation rate is 2% and the growth rate is 5%, is the real growth rate 3% (less a % for fees) applied to the pot?
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