Help with drawdown strategy

What I cannot get my head round is how to take the yield from the SIPP's.

You will take a fixed regular income (or ad-hoc) rather than natual income. Typically, get the natural income paid into the cash account of the SIPP and then draw a figure that you know is sustainable from the cash account.

You would do this using flexi-access drawdown or phased flexi-access drawdown. Latter sounding more likely suitable given what you are written.

Gallygirl wrote: »

Our SIPP's are approaching £300,000 each and we have ISA's of 250,000 each. ... how much we are taking from our SIPP so we can leave something for our children.

If you are set on letting inheritance questions intrude on your strategy then you might like to consider drawing so little from your SIPPs that you pay no income tax (currently an annual £11,500 plus corresponding TFLS of £3833 if we ignore the interest on your savings) and thereafter live off your ISAs. To get a joint £30k you need take nothing from the ISAs or Emergency Cash except in years when some unusual expenditure arises. (And they do arise; in our case, more often than we expected.)

However (merry wheeze) take a bit from the ISAs or Emergency Cash and annually each contribute £2880 net to your SIPPs. This is a tax-effective way of avoiding having the SIPPs run down so quickly.

Once your state pensions begin then reduce your take from the SIPPs so that you still pay no income tax. At that point your SIPPs might hardly be running down at all. Your ISAs and EC will still be covering you from unusual expenditure and the grim prospect of care in old age.

If you are really keen to use SIPPs to avoid inheritance tax ask yourselves whether you can contribute more while you are still both working e.g. by withdrawing money from ISAs or your cash reserve. After all, if you are already 55 the money in SIPPs is about as easily accessible as the money in your ISAs.

It looks as though the flexi-access drawdown approach is likely to be most suitable. That's because you can easily take just the tax free lump sum from all or part of one of the pots at the start and put the 75% into income drawdown. You can then put the tax free lump sum 25% into the ISA and have it grow there with no income tax cost if you take money out. This no tax way to get money into the ISA so it can generate tax free income is one of the nicer uses of the tax free lump sum.

From the taxable 75% you can draw out enough to at least use your income tax personal allowance each year, so you're getting it out tax free.

There is further income tax optimisation possible by learning about Venture Capital Trusts. Those provide income tax relief of 30% of the amount purchased that has to be repaid if you sell within five years. Also tax exempt dividends and no CGT. the one I tend to suggest to beginners here pays 7% dividend. What you can do to support this is taking out your full basic rate band of income from the taxable pension 75% for a few years early on and just move it into the ISAs as the five years expire. Or you can hold for the ongoing tax exempt dividend.

You appear to be considering taking far less than your actual income potential, which is probably more like £40-50,000 each. To learn more about that sort of potential have a read of the examples linked from this post in the Drawdown:safe withdrawal rates topic. A ley thing you need to know about income drawdown is that the amounts from safe withdrawal rates are cautious, assuming you live through some of the worst investing times when retired. In effect the inheritance ends up reduced mainly in cases where your children would be wanting you to look after yourselves first. To give some idea of how cautious, the old fashioned 4% rule would be 6.5% of pot as annual income if average results happened instead of worst and two thirds of the time when drawing 4% in the US the final amount would have been more than twice the starting amount, 96% of the time at least as much. Really big differences there between worst case and average or better that you can exploit if you're willing to adjust based on how your investments really do while retired.

There's one fairly easy way to still take natural yield and increase the income you take at the moment: peer to peer lending. The sort of places normally suggested here, Ablrate, Collateral and MoneyThing, normally pay about 12% raw interest rate with perhaps 10% if a loan defaults and the security has to be sold for less than the amount borrowed. 10% natural yield can greatly boost yield without exposing you to stock market risks and without any long term tie-in since you can offer to sell non-defaulted loans whenever you like and that doesn't normally take an excessive time. If you were to use the £325,000 you have from ISA now and the pension tax free lump sum in this way you'd generate around £32,500 a year (at 10%) of interest each from about 60% of your total investment pot. You should add more places to get to at least five platforms, some would pay less but £25,000-£30,000 a year each is easy enough.

Dividends from funds don't pay out regularly the same amounts so they aren't great for easily managed income provision. Instead what you'd look to do is leave some cash in the pensions and have that topped up by the dividends as they arrive. That cash then funds the regular payments and you top it up from time to time with more selling if needed. If you set the drawing monthly payments to about the natural yield you won't end up having to do selling because it won't be drained, though in reality bad dividend years will gradually deplete the cash.