Pension Drawdown - Annual or Monthly ?

SVaz

‘Usually’  is a dangerous word.

It might be perfectly fine for those with massive pots to take that risk,  those of us with a lesser amount, not so much.
I know what I’ll need for 5 years of early retirement, it’s around 30% of my current total pot -   why wouldn’t I protect half of it at least?  

I would be reckless to assume that leaving it invested will see it grow as it was.  It may well end up costing me £20k+ ( the difference between the guaranteed growth as it stands and  the potential growth of say 8%)  I don’t know because I’m not psychic.  The rest of my main pot is 100% equities and my other Sipp is in 70/30 mixed asset which I will leave fully invested until I decide to take the tax free cash in 6/7 years. 

We are offsetting the potential loss of growth by having my Wife build a similar amount in a S&S Isa,  which she’s taking tax free from her Sipp over the next few years. 

It’s all carefully thought out and will help me sleep at night,  I’m done taking risks.

segovia

Ciprico said:

SouthCoastBoy said:

when I come to drawdown, if I do, currently moving towards an annuity, I'm planning on taking the full amount the preceding March, for the following tax year. For the first year of retirement I will live of cash savings.

For example if I retire Jan 2026, live off savings until Mar 27, withdraw 12 mths spending Mar 27 live off that until Mar 28 etc.

It took HL well over a month to put my sipp into drawdown. You might be advised  to put sipp into drawdown much earlier and get the main admin done in slow time.

 Even when drawdown is set up there are date thresholds for withdrawing. 

I processed at the beginning of the year, I took about three weeks, and then I pulled it before the first payment due to TRUMPECONOMICS   

gm0

My 2p.

The analysis which says "it's better" to leave it wholly in the market and only sell at the moment of income has two features - one being that it is only "slightly better" (how much being very compared scenarios and assumptions dependent - I accept this is true for some scenarios. As with the lump sum investment vs drip feed discussion.  Time in. Vs timing the market.  True per scenario. But does it matter.

More importantly that this is "on average".  The answer for a given cohort and an individual experiencing a specific sequence vs their sales. Can be a long way from "the average".  To the good. Or to the Bad.   And yet the data can still be accurate to the conclusion across all people.  But what matters to the individual is the unknown in advance individual experience. Not the average one.  

Just as SWR often results in underdrawn income and a huge pot at the end - as it is levelled to prevent "worst timed cohort" in the historic data series from actually failing (or the fail prematurely population reaching a failure percentile 1%,5% etc). So a lot of the time this represents income foregone (hence the need for variable income methods vs fixed indexed methods - VPW, GK, Amortisation etc.).  A good chance (not a certainty) of significant excess residue at end of plan.  For all that lucky you or unlucky you - doesn't get the average.  You get your sequence on your asset mix net withdrawals.

If you *can* receive a bad sequence of events.  And thereby sell too much low  for income and early in deaccumulation era.  And then returns - reappear later - but you are shorter of assets to benefit from it - so your outcomes remain in the lower deciles.   You now don't own as many assets to get the above market average return (returning it to it's average norm over the cycle). Impaired retirement.  This is our old friend pound cost ravaging - disliked cousin of the more popular pound cost averaging in accumulation on the way in - through volatility and corrections and recoveries.   You naturally cannot control whether this happens to you early in retirement.

But you *can* design your asset allocation to your circumstances, and can consider a sequence risk buffer as mitigation against this sequence risk. So should you.  

It depends.

It is impossible to hedge entirely if 10 year plus slump/recovery cycles can assail you.  This problem also existing does not invalidate having more room to think before essential income is threatened.  And time to consider next actions (lifestyle - downsizing primary residence etc.  as contingencies which are time consuming).  

Implication having income buffer at the 2-3+ level provides equanimity in the face of turbulence.  Whether you sweep some of this minimum volatile asset pool into equities when everyone's hair is on fire - is a 2nd decision you can then make.  

This of course - if assets and income requirements from capital and speculative returns permit this.   

Doing *something* to address sequence risk - would be a "mainstream" piece of thinking I believe.   Certainly to understand and evaluate it before deciding "nothing" is the correct action - to my circumstances.

Some people try to put less arbitrary numbers on it than a 1-2-3 years buffer - by thinking about liability matching - using a strict (narrow) definition of essential income and insisting that this widows and orphans element isn't in the speculative part of the portfolio at all.  GI or close to.  No 60-80% drawdowns allowed.  So GI, annuity, self-annuity bond ladder. Gilts etc. 

Bernstein (Rational Asset Allocation is a reference which explores it in one chapter but it is an older idea than that book).

So if a deaccumulation plan with buffering delivers "enough" income - this is objectively a safer and so better plan than one without.  In that both meet the objective and one takes more in this case - unnecessary - risk doing so.  Albeit with *potential* for higher speculative investment returns beyond said objective.

Yet if a plan instead needs to "stretch" to the maximum possible speculative long term return. All growth assets.  Don't spare the horses - never mind the extra risk.  Then the better plan is the riskier one. As it is the only one that can - possibly - reach the income objective.  Throttle up.  But still choices, with unknown consequences.

A counter argument often made - is that income could be reduced or suspended in difficult market conditions detected in time. To mitigate ravaging. Which is perhaps fine for excess top up income from a SIPP providing some luxury trips on top of a core retirement based on DB and SP.  Yet less agreeable for essential income entirely funded from DC drawdown.  Do you then borrow to leverage your remaining investments and suspend sales?  Essential income from credit.  Some might consider that contingency (if available in a credit crunch) acceptable.  I don't.  Personal preferences.

Assets - it would be unusual to have 100% growth investments in deaccumulation.  While a few do. Many more do not.  So there will usually be a non-growth assets element. And thus a pool in which you can if you choose design income buffering.  Short gilts, money market funds, bond ladders, cash funds *can* all form part of the "not equities or as correlated to equities" component at 80/20, 70/30 60/40 whatever it is.  Some of it "emergency fund", PBs etc. may be outside the pension.  It's all asset allocation.

Personally I also place a value on "not needing to monitor and intervene".   

So my trading at rebalancing only approach results in fewer trades (and trade costs) - and no need to watch the market daily/monthly to stop something auto happening if conditions are hostile.  No risk of short term volatility interfering with said trades - because nothing moves at all - until I poke it.  

Income buffer - on the up or the downside.  Removed from the equation.  No need to watch closely.  Watching closely isn't life enhancing (for me) but others may find it more fun - and we all need to please ourselves. 

If the asset allocation is appropriate to long term need (income cashflow plan) then it doesn't need to be watched daily anyway.   So setting up habits and incentives around sitting on your hands - isn't a bad thing for other reasons. (cf Ben Graham et al).

The retail SIPP platforms apply different approaches to funding income at point of payment.  "Available cash" first and for asset sales - largest fund, smeared across all (preserve balance). A pre-selected fund. 
Some allow you to choose.  Some less so.

I use FAD (for at the time rules and situational reasons). I am not up to date about platforms who do UFPLS monthly and compliance in easier ways. But if you are doing UFPLS (which is a good default idea for many) then the detailed design needs to flow with the grain of that.  If I was adapting my general risk mitigation - control what you can, ignore what you cannot) approach to the other access method - it would still be monthly income ticking away as I like that. But less frequent crystallisation and trades providing the buffering.   As per prior threads - my overall approach attempts to avoid "all eggs in basket" where controllable risk management options exist - platform, tax wrapper, fund house, investing style - because the leopard you didn't even know about and didn't see - is the one that gets you.  There is a cost is in added complexity.  Of setup.  And with multiple platforms - rebalancing.  And of course inherently a multi-style approach is subject to mean reversion.  I won't pick the winning beat the market sustainably approach. Nor though - will I accidentally pick the worst one and apply all of my assets to it.   

There is a whole family of arguments about how much quantitative analysis is appropriate and applicable to modern markets and so to these choices for the individual DC drawdown pensioner.  And political considerations on whether this is a sane approach society wide in the first place.   Those for another day.

QrizB

My goodness you write a lot (of good stuff) for tuppence!

Thanks, that was interesting.

Triumph13

I just took advantage of the current valuations to place the order for the remainder of this tax year's sales.  I will now go back to ignoring the markets.