Advice regarding my wife pension and drawdown strategy

Mick70

Morning all , hope everyone is in good health and not impact too much with this snow.
My wife is hoping to retire at the end of March, she is self employed and the work can be quite tiring, she will be age 58.5.
I know share prices are high at the moment.  Her current retirement portfolio is 
£142k cash  (I realise this is very high, just the way it has worked out).
£130k  S+S ISA
£118K  DC Pension

combined as at 06/01/26  = £390k.

I was unsure whether folk still bother with an annuity, I realise the drawbacks being lack of flexibility and risk if die early, also we would be using a lot of cash and tax free S+S ISA to buy it , however the benefit is security and stress free retirement - did a simple google for an rpi increasing annuity and it came out as £16.7k pa (wife has mild asthma), think provider was Aviva.
Im assuming this is best way to get annuity.

Other option and the more likely one is Drawdown, and we would use the 4% rule, then reduce this when State Pension kicks in at 67.  For argument sake she would want £1250 income from this per month (£15k pa) and this should all be tax free seeing as much of it is already in tax free wrappers.
But unsure how best to access it all ?   is it best to use the cash in year 1 and 2 to get this balance down slightly and leave the ISA and Pension to grow ?  or take a mix from all three ?

Does she need to tell HMRC she is retiring also ?    she currently does self assessment.

Many thanks for any advice and opinions 

Mick

dunstonh

I was unsure whether folk still bother with an annuity

Yes they do.  Whilst annuity rates are just off their recent peak, they are still higher than the safe withdrawal rate on drawdown.

I realise the drawbacks being lack of flexibility and risk if die early

That is what death benefits are for.  I'm not a fan of value protect (which largely equates to a 13-14 year guarantee period at the same cost), but you can guarantee payments for upto 30 years.

also we would be using a lot of cash and tax free S+S ISA to buy it

You wouldnt buy a lifetime annuity with tax free cash and ISA funds.  You could buy a purchased life annuity and there may be some merit on that but it is a niche option (I only did one PLA last year).

 did a simple google for an rpi increasing annuity and it came out as £16.7k pa (wife has mild asthma), think provider was Aviva.
Im assuming this is best way to get annuity.

No.  The best rates come via IFAs and a couple of online broker sites.  They are the best way to purchase.

Other option and the more likely one is Drawdown, and we would use the 4% rule, then reduce this when State Pension kicks in at 67. 

There is no 4% rule in the UK.   The 4% figure is based on a US study for those domiciled in dollars.      The UK suffers greater currency movement and higher inflation than the US historically.   This means that 3.5% in your late 60s is a more suitable guide (3% in late 50s to early 60s).

However, a hypothetical SWR is irrelevant when you are funding the gap until the state pension as you are not receiving a consistent level of real terms income.   Instead, you are getting a higher one initially and reducing it later.    So, it needs a different style of modelling to a consistent real terms income.

For argument sake she would want £1250 income from this per month (£15k pa) and this should all be tax free seeing as much of it is already in tax free wrappers.

With no other income, £1250pm UFPLS would be 100% tax free until state pension age.  Indeed, increasing it to £16,760 would be more sensible with any excess being put back in the S&S ISA.

Does she need to tell HMRC she is retiring also ? 

No.

Mick70

@dunstonh      many thanks for your detailed replies above, much appreciated

Mick70

From the mix i posted  -  Cash / S+S ISA / Pension  - is there a best way of how to drawdown/access it all  each year ?   Should she be leaving the pension for 2 year say and just use the cash then ?  or just take an equal element from each .      Ive ruled out an annuity route now I know you don't really use cash or S+S ISA for them.

MallyGirl

She should make sure she is using up her personal allowance imho

NoMore

Not sure you should be considering your wife in isolation; shouldn't you be planning based on both of you and your required joint income?

Albermarle

Mick70 said:

From the mix i posted  -  Cash / S+S ISA / Pension  - is there a best way of how to drawdown/access it all  each year ?   Should she be leaving the pension for 2 year say and just use the cash then ?  or just take an equal element from each .      Ive ruled out an annuity route now I know you don't really use cash or S+S ISA for them.

You can, but it is just not the usual way ( which is by using a pension pot) so it is a very niche product, with few providers and rates not as competitive as mainstream annuities. 

Pat38493

Mick70 said:

From the mix i posted  -  Cash / S+S ISA / Pension  - is there a best way of how to drawdown/access it all  each year ?   Should she be leaving the pension for 2 year say and just use the cash then ?  or just take an equal element from each .      Ive ruled out an annuity route now I know you don't really use cash or S+S ISA for them.

That's a pretty big question and I'm not sure you gave enough information to comment in detail.

In particular, as mentioned by NoMore, the normal practice for retirement planning would be to plan your retirement needs and finances as a couple (unless you are planning to separate!).  You didn't mention anything about your situation for your retirment and assets.

You should discuss together what is your attitude to risk and how flexible do you want the retirement to be - then you need to figure out how much money you expect to need in retirement per year.  Ideally this should include any large one off expenses, particularly during the next 5 years or so.

However as Mallygirl said, if your wife takes the drawdown route one almost universal comment would be to make sure she uses her personal tax allowance each year by taking at least the personal allowance (currently £12570) out of the pension as there is no tax to pay and the allowance can't be carried forward.  (note you might have to adjust this slightly based on taxable savings income if the cash you mentioned is not in cash ISAs).

One comment on annuity - this is not al all or nothing decision - you can for example decide to take 25% tax free from your DC pension and use the rest to buy an smaller annuity, keeping the other funds for flexiblity, or you could use a portion of it to get a partial annuity.  Some people decide to purchase an annuity to cover their basic annual expenses and obligations.

You can also buy a fixed term annuity (inflation linked or not) to cover some costs during the period up until state pension.

Buying an annity with all the money now would be an unusual thing because you will end up with £16K per year until state pension age, then a big pay rise at 67 which is almost the opposite of what most people want as typically if anything they want more money to spend in the earlier years when more healthy and energetic.

Once you go down the drawdown route, the sequence of withdrawal is usually determined to minimise the overall tax burden as best as possible during the planning horizon.  Based on the figures you posted it may well be possible to avoid paying any tax atall on drawdown if managed correctly and depending on your needs.

Another topic you need to look at is how your wife's money is currently invested in the S&S ISA and the pension - this needs to be invested in a way that gives the best chance to achieve your goals.

But as I said the main comment would be - look at your retirement finances as a couple/family.

This is a good place to ask questions and research.  You can also get paid advice from an IFA, but this will obviously cost money to obtain.  

p.s. you should both check your state pension entitlements on the gov.uk web site if not already done.

LHW99

p.s. you should both check your state pension entitlements on the gov.uk web site if not already done.

And make sure you read the whole thing, not just the headline part. 35 years for a full NSP is totally irrelevant to anyone under the transitional arrangements - it could be as low as ~28 or as high as ~50 years

Mick70

Hi all I have checked my wife's NI on the govt gateway , it says £230.25 is most can get , you cannot improve your forecast any more , and it shows 42 consecutive full years paid in (I also checked mine and shows same albeit 39 full consecutive years), so we will both qualify for full SP.

I was calculating my wife pension so that she has some independence and I aim to work another 2 year , once I retire also I will think more as a pot together.  It sounds odd but we met when teens and mid/late 50s now and we always had separate bank accounts , a bit weird perhaps but it worked well for us.

I was just unsure with my wife having a mix of cash (normal savings accounts) / S+S ISA/  DC Pension - if there was an optimum way to withdraw from them,  i.e should we use the cash first or leave the cash  etc , its unlikely she will pay income tax , even if her pension is £15k pa, as much of it will be cash , S+S ISA and the 25% tax free element of the pension, so cant see how she will pay tax, that is more likely an issue when reach SP.
Our initial thought was to take £15k pa (just under 4%) and reduce once reach SP ,  However it does now have me thinking that for the two year I am working that could be £12k instead as I will be earning those two years anyway, food for thought I guess.

Thank you for all your replies BTW and taking the time to offer guidance and different opinions, Im sure it also helps other folk on the forum also who may not wish to post.
Good health to you all
Mick

squirrelpie

My wife and I have also always had separate bank accounts and have been very happy with that arrangement. But we've now set up a joint account that we both pay into every month and which pays our shared household bills (council tax, TV licence, electricity, water etc etc. That's so that when one of us eventually dies it will be easier for the survivor to continue payments without hassle. All the payments from that account go to accounts in both our names.