Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@.

Search
  • FIRST POST
    • Shashy
    • By Shashy 8th Feb 18, 9:38 AM
    • 93Posts
    • 116Thanks
    Shashy
    The Practicalities of Drawdown
    • #1
    • 8th Feb 18, 9:38 AM
    The Practicalities of Drawdown 8th Feb 18 at 9:38 AM
    Morning all

    It's now been 12-18 months since I started to take a proper interest in educating myself on pensions and savings. Late 20s, half-decent DC scheme (I pay 7%, they pay 10%) currently sat at 30k ish. Homeowner.

    Still a long way to go until it matters, but one thing that still eludes me is understanding the actual practicalities and actions associated with a pension drawdown (or drawdown of any capital actually).

    How does it work in practice?

    My current understanding:
    Hold 3-5 years worth of expenditure in cash / money markets
    Keep the rest in equity based investments
    In years when you're investments are 'up' - sell down 1 years worth of expenditure to live off and top up any cash usage.
    In years when investments are 'down' - live off cash buffer.

    Is that the crux of it?
Page 1
    • Money Help
    • By Money Help 8th Feb 18, 9:49 AM
    • 63 Posts
    • 26 Thanks
    Money Help
    • #2
    • 8th Feb 18, 9:49 AM
    • #2
    • 8th Feb 18, 9:49 AM
    You seem to have a fairly good grasp.

    With drawdown you have ultimate flexibility. You can draw as much or as little as you want. Some of your pension income will be tax free and some subject to Income Tax. It all depends on your situation at the time and what sort of income you will need. This will dictate your investment strategy.
    I'm a Chartered Financial Planner. Trying to be helpful without giving advice.
    • dunstonh
    • By dunstonh 8th Feb 18, 10:44 AM
    • 92,580 Posts
    • 59,890 Thanks
    dunstonh
    • #3
    • 8th Feb 18, 10:44 AM
    • #3
    • 8th Feb 18, 10:44 AM
    Hold 3-5 years worth of expenditure in cash / money markets
    That is a higher than typical amount. Usually closer to 2 years. However, there are different ways you can hold the cash. e.g. holding it in a savings account and turning off the draw from the pension in a downturn would be similar to holding the cash actually in the pension and drawing from that.

    Keep the rest in equity based investments
    That is a high risk approach. Nothing wrong with that if you can afford the risk and it is within your knowledge and understanding (i.e your risk profile). Most people in retirement are not that high. You would expect some fixed interest securities and property typically.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • Terron
    • By Terron 8th Feb 18, 1:17 PM
    • 212 Posts
    • 188 Thanks
    Terron
    • #4
    • 8th Feb 18, 1:17 PM
    • #4
    • 8th Feb 18, 1:17 PM
    Hold 3-5 years worth of expenditure in cash / money markets
    Originally posted by Shashy
    Unless banks start paying a lot more I wouldn't hold that much in cash. I would go for 3-5 months. keep some more in a low to medium risk ISA were you can withdraw in a dew days if needed. Have a credit card (that you pay off every month of course} for emergency spending.
    • dunstonh
    • By dunstonh 8th Feb 18, 1:37 PM
    • 92,580 Posts
    • 59,890 Thanks
    dunstonh
    • #5
    • 8th Feb 18, 1:37 PM
    • #5
    • 8th Feb 18, 1:37 PM
    Unless banks start paying a lot more I wouldn't hold that much in cash. I would go for 3-5 months.
    That likely to be too low unless your draw rate is very low. Most crashes recover within 18 months. So, anything less than 18 months and if you are not using yield, that means you are likely to have to sell units at lower prices to fund your income. The cash buffer is not there to give you a better return. It is there to act as a buffer when markets fall and avoid you having to draw money out of investments when they are lower.

    One of the most common reasons for drawdown to fail is when people draw too much when markets fall and are unable to benefit from the recovery as the increased draw rate prevents the recovery. Having the cash buffer means you can leave the investments alone during the worst or even all of a downturn.
    Last edited by dunstonh; 08-02-2018 at 1:40 PM.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • redux
    • By redux 8th Feb 18, 1:54 PM
    • 18,101 Posts
    • 23,881 Thanks
    redux
    • #6
    • 8th Feb 18, 1:54 PM
    • #6
    • 8th Feb 18, 1:54 PM
    If much of the drawdown comes from dividends, is it a problem just to keep receiving them during downturn (unless this drags on for years)?

    If the drawdown also includes sizable capital disposals then I see what you mean.
    • dunstonh
    • By dunstonh 8th Feb 18, 2:17 PM
    • 92,580 Posts
    • 59,890 Thanks
    dunstonh
    • #7
    • 8th Feb 18, 2:17 PM
    • #7
    • 8th Feb 18, 2:17 PM
    If you are drawing less than the yield then job done. You need virtually no buffer. That is why many drawdown portfolios focus on yield.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • pip895
    • By pip895 8th Feb 18, 3:23 PM
    • 576 Posts
    • 321 Thanks
    pip895
    • #8
    • 8th Feb 18, 3:23 PM
    • #8
    • 8th Feb 18, 3:23 PM
    Worth having some balance in your portfolio (some bonds absolute return funds, property etc.) so you can still draw at least your tax free allowance out of the SIPP even if there is a major equity crash.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

709Posts Today

6,246Users online

Martin's Twitter
  • It's the start of mini MSE's half term. In order to be the best daddy possible, Im stopping work and going off line? https://t.co/kwjvtd75YU

  • RT @shellsince1982: @MartinSLewis thanx to your email I have just saved myself £222 by taking a SIM only deal for £7.50 a month and keeping?

  • Today's Friday twitter poll: An important question, building on yesterday's important discussions: Which is the best bit of the pizza...

  • Follow Martin