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  • FIRST POST
    • GSP
    • By GSP 29th Dec 17, 10:26 AM
    • 189Posts
    • 45Thanks
    GSP
    780k pot how much would you drawdown each year
    • #1
    • 29th Dec 17, 10:26 AM
    780k pot how much would you drawdown each year 29th Dec 17 at 10:26 AM
    Hi,
    I am four months into drawdown fund of 780k. The wife will be eligible for a fund of 150k in 4.75 years time. SPA age for me is 12 years time, my wife 15 years and we have to make 5 years contributions for full SPA.

    She has given up work and we intend to have some good holidays though keeping an eye on the fund.
    I have been reading posts regarding safe withdrawal rates etc. Some posters are cautious, but some say enjoy what you can.

    I will be having reviews with my IFA but with differing opinions out there be interesting to know how much people would withdraw each year. Excluding shopping, all regular household bills are less than 500 a month, no loans or mortgage.

    Thanks
Page 3
  • jamesd
    with differing opinions out there be interesting to know how much people would withdraw each year.
    Originally posted by GSP
    Depends on objectives. Anything from 30,000 to 70,000 can make sense. A UK IFA is likely to suggest approaches at the cautious end of the range, in part because it isn't their money that's being wasted if you die with too much and in part because most customers will be at the cautious part of the preferences ranges.

    At the 30,000 end comes allowing for future state pension and using the outdated 4% rule reduced for current market values and perhaps going lower still with high weights towards lower volatility investments with substantial spending on inflation linked annuities.

    At the 70,000 end comes deliberate loading to younger ages, deliberately having a base plan to reduce income substantially, having high willingness to reduce income if investments don't do better than average and using modern rules like Guyton-Klinger with Guyton's sequence of returns risk reduction approach. By design with carefully considered choices this wouldn't be required to be sustainable for life.

    Using modern rules with planned age-related spending reductions and allowing for your age now, starting out at around 50,000 should have decent sustainability.

    Model your plans with something like cfiresim to get some feel for the implications using your planned cash flows. Even at higher levels I'm a fan of state pension deferral because it's an efficient way to get guaranteed base income and longevity insurance. You might also consider spending 10-20k every year or two, particularly in good investment performance years, to buy some level annuity guaranteed income with built in reduce as you get older due to inflation profile.
    • bostonerimus
    • By bostonerimus 31st Dec 17, 8:42 PM
    • 1,947 Posts
    • 1,283 Thanks
    bostonerimus
    No maths required. Just choose ones with a dividend annual increase you estimate to beat inflation (ie 2-5%- many are around 3-4%).

    You of course need to look at longer running ITs and ones that are income based over accumultation.

    I trust that isnt out f your wheel house
    Originally posted by atush
    It is out of my wheelhouse. High fees, use of borrowing and premium/discount pricing don't attract me. I'd rather have a diversified low cost portfolio and spend capital gains and dividends.
    Misanthrope in search of similar for mutual loathing
  • jamesd
    Agree paying no tax is the goal. I could crystallised the whole amount and taken nearly 200k tax free, but decided as wasn't going to use left it invested so it might grow a bit more. Know amounts and limits will change but based on today was hoping to take out say 16.5k tax free each year which should last 11 years.
    Originally posted by GSP
    You have 780k. Average UK stock market performance has been around 5% plus inflation. That's 39,000 a year just to avoid it growing by more than inflation, though you'd typically want less than all of it in equities. Around 3% is 23,400 just to stand still without expecting long term to draw on the capital.

    You've accumulated a lot of money but maybe haven't yet adjusted to how much spending it'd take just to stay still.

    If you don't start taking some fairly substantial tax free lump sums soon you're destined to go over the lifetime allowance in only a few years in pot value, though no actual tax to pay until you withdraw.

    When you take a tax free lump sum that portion of your pot has the percentage of lifetime allowance used fixed at that time, protecting you from going over the LTA short term. Then there's another test on just the growth in value at age 75. You avoid that one by trying to withdraw as fast as growth or faster.

    With two people you have 40k of ISA allowance available. The start of a plan might be taking enough tax free lump sum to fund that. That crystallises 160,000 a time to get the 40k tax free, with the remaining 120k going into flexi-access drawdown to be taken at whatever rate is sensible. That'll use 16% of a million Pound LTA a year.

    Your basic rate band is another use it or lose it allowance and I suggest that for a few years at least you try to use it all to avoid the potential for higher rate tax later. You can withdraw this effectively tax free by buying enough VCTs. You get 30% relief on the VCT buying from HMRC, capped at your tax otherwise due. You have to hold for five years or repay the 30% then you can sell. Along the way VCT dividends are tax exempt and there's no CGT either. So 20k of VCT buys gets 6k of relief covering the income tax on 30k at basic rate. Given the five year restriction it's nice to do this early so the end of that is fairly close to the point when you might be running out of tax free lump sum money. Though you might want to hold for the ongoing tax exempt income. After five years of this and tax free lump sums you should be well on the way to never being hurt by the LTA. You can be fairly sure that the basic rate band will be cut by some flavours of future government so best to hedge against that risk by using it all for a while. Then you might end up never going over even a much reduced one.

    Along the way this causes your money to be in three different tax wrappers - pension, ISA and VCT - providing you a bit of protection from what future governments might do.

    Given a spouse it's also often a good idea to move some income generation to their name so their allowances can be used.
    Last edited by jamesd; 31-12-2017 at 9:24 PM.
    • kidmugsy
    • By kidmugsy 1st Jan 18, 1:38 PM
    • 10,899 Posts
    • 7,447 Thanks
    kidmugsy
    I am four months into drawdown fund of 780k. The wife will be eligible for a fund of 150k in 4.75 years time. SPA age for me is 12 years time, my wife 15 years and we have to make 5 years contributions for full SPA.
    Originally posted by GSP
    Suppose we take to heart jamesd's point about ensuring that you are unlikely to be caught by the LTA. There's a case for taking the full TFLS now. The pair of you put 40k into S&S ISAs and your wife exploits her Personal Allowance by investing the surplus into tax-exposed S&S (or a mixture of S&S, high interest accounts and Premium Bonds). The dividends and interest will be tax-free. Each tax year she moves a bit more into ISAs. Each year you pay the max permitted contribution into a pension for her.

    Meantime you draw maximum income from your own pension subject to avoiding higher rate tax. (If you wanted to go further you could always use jamesd's VCT strategy, but be sure to keep your annual taxable income below 100k - you don't want to start losing Personal Allowance).
    Free the dunston one next time too.
    • GSP
    • By GSP 1st Jan 18, 3:56 PM
    • 189 Posts
    • 45 Thanks
    GSP
    Been great reading your views and thank you very much for them and not surprised by the different train of thoughts ranging from keeping cautious and protecting the fund from falls to "emptying" the fund fairly quickly and moving money into S&S ISA's keeping away from LTA penalties.

    To show you where I am, I had to look up what S&S ISA meant! I thought a pension was pretty straight forward after it was set up and running, but that does not seem to be the case. Even mentions of having more than one pension? Is that right and why have more than one pension?

    I suppose like on here you get differing opinions from financial advisers too. Without knowing mine too well I would say he was on the cautious side and how proactive he would be in doing some of the things suggested on here. His fee is % based, so is it in his best interests to keep as much money in the pension fund or would it be based on total assets irrespective of what product it was pension, ISA etc.

    Not expecting this but if they wish those suggesting I move money out as soon as possible could list what action they would take in:

    Year 1
    Year 2
    Year 3 etc

    Just be interesting to see what a plan like this would look like and a conversation that seems I need to have with my FA at some point. I see it as the more knowledge I am armed with the better.
    Before I forget, what does the term VCT that has been mentioned.
    Thanks all.
    • Linton
    • By Linton 1st Jan 18, 4:32 PM
    • 9,396 Posts
    • 9,529 Thanks
    Linton
    .....
    To show you where I am, I had to look up what S&S ISA meant! I thought a pension was pretty straight forward after it was set up and running, but that does not seem to be the case. Even mentions of having more than one pension? Is that right and why have more than one pension?
    Originally posted by GSP
    Many reasons for more than one pension eg
    - multiple employers
    - private pensions vs employers pension
    - old pensions with guarantees

    Often it is sensible to merge pensions, but sometimes not.

    I suppose like on here you get differing opinions from financial advisers too. Without knowing mine too well I would say he was on the cautious side and how proactive he would be in doing some of the things suggested on here. His fee is % based, so is it in his best interests to keep as much money in the pension fund or would it be based on total assets irrespective of what product it was pension, ISA etc.
    Any planning should be done on the basis of understanding all your assets. You cant make a sensible decision unless you have the full picture. Where those assets are held is really a tactical decision affected by tax considerations and convenience etc. However how the IFA (not FA!) charges is up to them.

    Just be interesting to see what a plan like this would look like and a conversation that seems I need to have with my FA at some point. I see it as the more knowledge I am armed with the better.
    I would expect a plan to consist of a general strategy with a list of what investments you hold where, how much you can expect to withdraw, and when you should begin to take benefits. Not a detailed year by year todo list. Circumstances will change over time.

    Before I forget, what does the term VCT that has been mentioned.
    Thanks all.
    A Venture Capital Trust (VCT) is a government scheme whereby investors are given tax benefits in return for investing in higher risk small companies. However the industry has been able to devise schemes that meet the letter of the VCT rules without incurring the level of risk the government envisaged as suggested by their name. So it's tax avoidance, arguably bordering on evasion - I believe some have been closed down for that reason. There are continual predictions that the government will be tightening the rules. Some of us dont share Jamesd's enthusiasm as the risks could (or should) outweigh the tax benefits.
    • Thrugelmir
    • By Thrugelmir 1st Jan 18, 5:30 PM
    • 58,979 Posts
    • 52,314 Thanks
    Thrugelmir
    Some of us dont share Jamesd's enthusiasm as the risks could (or should) outweigh the tax benefits.
    Originally posted by Linton
    Nor the high charges levied on many of these schemes.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • GSP
    • By GSP 2nd Jan 18, 10:27 AM
    • 189 Posts
    • 45 Thanks
    GSP
    Thanks again all for the advice. I transferred out and using drawdown so only need the one pension.
    Does LTA affect both crystallised and uncrystallised funds?

    I am just four months into my pension fund so relatively new keeping an eye on the lump sum we took out against bills and holiday bookings. Can see I need to have a conversation with my IFA. Do you think this should wait until my annual review in August which we said we would have, though paying him he is open anytime. Is there a rush to speak before then.
    Thanks
    • MallyGirl
    • By MallyGirl 2nd Jan 18, 10:47 AM
    • 2,742 Posts
    • 7,746 Thanks
    MallyGirl
    Personally I would have an earlier conversation in case there is a desire to make use of ISA contribution allowances which reset at the beginning of April.
    • GSP
    • By GSP 2nd Jan 18, 12:17 PM
    • 189 Posts
    • 45 Thanks
    GSP
    Again thank you for your replies.
    Mentions of me taking chunks out to put into "S&S ISA's". How much interest interest do these pay as the rates on the normal cash ISA are very low. Is the money best left where it is in my pension fund to grow more, over the longer period.

    As to LTA, does this really only come into effect if the pot exceeds 1million, or is transactions of the pot up to that figure.
    Thanks
    • Linton
    • By Linton 2nd Jan 18, 12:33 PM
    • 9,396 Posts
    • 9,529 Thanks
    Linton
    Again thank you for your replies.
    Mentions of me taking chunks out to put into "S&S ISA's". How much interest interest do these pay as the rates on the normal cash ISA are very low. Is the money best left where it is in my pension fund to grow more, over the longer period.

    As to LTA, does this really only come into effect if the pot exceeds 1million, or is transactions of the pot up to that figure.
    Thanks
    Originally posted by GSP
    S&S ISA's dont pay interest. They are similar to pensions and can invest in almost everything a pension can. It is just the tax treatment and the contribution limits which are different. Like pensions the return depends on the investments you choose. Over the long term something like 5%/year above inflation is a reasonable average though over the short term returns can vary a lot.

    If the money is in a pension now and invested in a way you are happy with there isnt generally any reason to change. The main reason to move it into an S&S ISA would be in particular tax situations. For example if you arent a tax payer now but will be later it could be sensible to make full use of your tax allowance by drawing down some of the pension into an S&S ISA.
    • GSP
    • By GSP 2nd Jan 18, 12:49 PM
    • 189 Posts
    • 45 Thanks
    GSP
    Thanks Linton. Would of thought stocks and shares ISA's is a more concentrated portfolio rather than a multi asset pension fund containing equities, bonds, shares, property etc, and carries more risk than the latter.
    • Linton
    • By Linton 2nd Jan 18, 1:22 PM
    • 9,396 Posts
    • 9,529 Thanks
    Linton
    Thanks Linton. Would of thought stocks and shares ISA's is a more concentrated portfolio rather than a multi asset pension fund containing equities, bonds, shares, property etc, and carries more risk than the latter.
    Originally posted by GSP
    S&S includes funds, so you can hold multi-asset funds and bond funds in an S&S ISA if you wish. You cant hold directly owned commercial property in an S&S ISA and I think it is is more restricted as regards other more esoteric investments. For the normal investor the restrictions are irrelevent.
    • Fermion
    • By Fermion 2nd Jan 18, 1:55 PM
    • 83 Posts
    • 32 Thanks
    Fermion
    As to LTA, does this really only come into effect if the pot exceeds 1million, or is transactions of the pot up to that figure.
    LTA applies not just to the 780K residual pot but to the total value of your uncrystalised pension fund prior to drawdown which I assume is very close to 1M. When you applied for drawdown you should have received a formal drawdown account statement from your provider which quoted the percentage of your Standard Lifetime Allowance used to date. The LTA is reassessed at age 75 and applies to the total value of your residual pension pot at the time together with any lump sum you took when you went into drawdown.

    In my case, I went into drawdown over 2 years ago just before the Chancellor reduced the LTA from 1.25M to 1M, so my figure is only 75.6% although my residual drawdown pot is similar to yours. If your pension pot was over 1M at that time then it was possible to apply for LTA protection - note sure if this applied to you at the time?
    • GSP
    • By GSP 2nd Jan 18, 2:25 PM
    • 189 Posts
    • 45 Thanks
    GSP
    Thanks Linton and a thank you to jamesd who provided a lot of analysis and range of options.

    Hi Fermion. Pot was c800k, took a lump sum out but it has already grown back again to the 780k figure. We must be in a very good period of pension growth given my fund has only been going 4 months.

    Just looked online and I have an end year pension statement which says I have used 10.6% LTA. Do you know if this okay at this stage, or needs addressing.
    Thanks
    • Fermion
    • By Fermion 2nd Jan 18, 3:00 PM
    • 83 Posts
    • 32 Thanks
    Fermion
    Just looked online and I have an end year pension statement which says I have used 10.6% LTA. Do you know if this okay at this stage, or needs addressing.
    I don't think this 10.6% figure is the total proportion of your SIPP LTA used to date. If you had a pot of say 800K and moved all of this into drawdown but took part as a lump sum then the total figure used to date should be nearer to 80%. Best to check with your drawdown provider. Maybe the 10.6% they quote is the lump sum percentage taken to date - of the max. 25% allowed? viz. you took about 106K lump sum which is 10.6% of 1M LTA leaving 694K but this has grown to 780K???
    • GSP
    • By GSP 2nd Jan 18, 4:02 PM
    • 189 Posts
    • 45 Thanks
    GSP
    Thanks Fermion. No the pot was about 800k, took a lump sum out of 38k (more than the 28k planned but to pay off bills etc) of which 26.5k was tax free and 11.5k taxable. The 106k must be the amount crystallised.
  • jamesd
    I believe some have been closed down for that reason.
    Originally posted by Linton
    So far as I know no VCT has ever been shut down for not following the rules. Occasionally one has come close to not getting enough newly raised money invested in qualifying ways within the time limits, though.

    There are continual predictions that the government will be tightening the rules.
    Originally posted by Linton
    Those aren't predictions so much as facts. There have been regular changes in rules over the years and it's effectively certain that there will be more in the future. Money already invested could stay invested but new money isn't allowed. Last year restrictions on management buyouts were added. This Autumn Budget added restrictions on how much of an investment could be backed by things like property. Previous added restrictions included green energy and hotels. VCTs stick within whatever is eligible at the time of investment.

    the risks could (or should) outweigh the tax benefits.
    Originally posted by Linton
    There are a wide range of risk choices available from highly speculative research businesses to late stage established businesses. As with any other form of collective investment each person can pick the combination that fits their own preferences.

    The risks not only shouldn't outweigh the tax benefits, the ability of the incentive to work requires that this is not ever expected to happen. If it ever does the supply of new investor money will end and the rules will need to be adjusted to make VCTs more attractive again.

    VCTs are no more evasion or undesired tax avoidance than pensions, ISAs or the personal and CGT allowances. They are all completely above board regulated options with full disclosure. So are EIS and SEIS.
  • jamesd
    Nor the high charges levied on many of these schemes.
    Originally posted by Thrugelmir
    As usual, all investment returns are reported after charges. As usual, you can select based on charges if desired, though selecting based on profits seems more sensible. If the charges are excessive they show up as reduced profits.
  • jamesd
    Does LTA affect both crystallised and uncrystallised funds?
    Originally posted by GSP
    Both. The first calculation happens at the time that portion of a pot is changing from uncrystallised to crystallised. The age 75 check can apply to either but normally the money will have been crystallised before then.

    Do you think this should wait until my annual review in August which we said we would have, though paying him he is open anytime.
    Originally posted by GSP
    No. Both ISA and basic rate band are use it or lose it annual allowances and it appears that you should be trying to fully use both.
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