Drawdown

[Alan24]

I’m ready to draw on my DC pension using a drawdown policy. The given rate is app 4% annually but if I’m looking at 20 yrs period then say 5% better ?

[Urbandreamer]

I’m ready to draw on my DC pension using a drawdown policy. The given rate is app 4% annually but if I’m looking at 20 yrs period then say 5% better ?

Are you planning on dying in 20 years?

Nobody can tell you the best drawdown rate for you. If you do have a terminal disease then a high rate may be a good idea. If you are looking at a 1 in 4 chance of living another 30 years or more*, then possibly a rate of less than 4% might make sense. The 4% rate is predicated upon exhausting the pot after 30 years.

I gave up work over a year ago and have yet to go into drawdown. To me it makes better sense to spend money that I have in my ISA's.

*A man who retires at 55 today has a 1 in 4 chance of living to 92, a 1 in 10 chance of living to 97 and 4% of them should reach 100.
https://www.ons.gov.uk/peoplepopulation ... 2019-06-07

[xxd09]

Classically a 4% drawdown rate was the product of a financial study paper “The Trinity Study” produced many years ago in the States (still available online)
It postulated that a 60/40 portfolio of US stocks and bonds could sustain a withdrawal rate of 4% safely over a retirement of 30 years with 99% chance of success
It was a good baseline for it’s time but it is just that -a piece of financial baseline guidance only
A 3% withdrawal rate is probably more sensible in the current climate
xxd09

[Hariseldon58]

I’m ready to draw on my DC pension using a drawdown policy. The given rate is app 4% annually but if I’m looking at 20 yrs period then say 5% better ?

The prior responses are good advice. It's important to decide what your proposed 4% is. Is it 4% of the initial value? Will it increase with inflation?

I entered drawdown in late 2007 with a similar plan. The events of 2008/9 resulted in a 40+% drop in my portfolio value, which was uncomfortable. Drawdown is a tricky decision, and it's worth considering different scenarios.

I have seen suggestions (Charles Ellis) that you draw down 4% of the rolling three-year average of your portfolio value and keep three years of income in cash-like investments, then each year convert another year of spending from equities to bonds if markets are optimistic, then convert two years of spending.

[Kantwebefriends]

I’m ready to draw on my DC pension using a drawdown policy. The given rate is app 4% annually but if I’m looking at 20 yrs period then say 5% better ?

What could you get by buying an index-linked annuity? It removes longevity risk on the money, or part of the money. It avoids Sequence of Returns risk.

I'd be careful to avoid I-L annuities which have a cap on the inflation rate they will compensate you for.

Anyway, it would give you a basis for comparison for your proposed drawdown rate.

[vand]

as you get older and your probable investment horizon comes down the withdrawal rate question becomes tricker, as you have to still account for longevity risk which might be adding on a lot of years of planning which you may well not get to spend..

That's why an annuity becomes increasingly more attractive as you get older - the provider plans out with very good certainity based on the actuarial tables and the law of large numbers, and holders of annuities have effectively planned out the same, but with the longevity insurance built into the product.

With rates where they are right now, a 65yo can get 5.1%pa with 3% escalation, whereas if they were still managing their DC pot they'd reasonably want to still use 30yr or even long horizon, which then still constrains you to all the usual 4% SWR failure rates

[Alan24]

Cheers for that. Also should i take the tax free element even if I don’t really need it ?

[MuddyBoots]

Cheers for that. Also should i take the tax free element even if I don’t really need it ?

Seeing as your opening post says you're ready to go into drawdown, then I'll assume that's the route you're going and ignore the effect of a tax-free lump sum (TFLS) on annuities.

Pensions are promoted to us as tax-efficient savings for our old age. So if you were to take the TFLS (some or all of the 25%) you could feed it into an ISA and avoid income tax on both the way in and out (that's what I did) and draw off your ISA at a later date if needed. However, money within your pension pot is outside the scope of inheritance tax; so it depends on how you want to do your tax planning. If your estate will be above the IHT threshold, and you don't need that 25%, and you have beneficiaries for your will, then leaving it inside your pension starts to look attractive. On the other hand, if you're likely to use the money within your lifetime the TFLS -> ISA route is an option. If you're married, you can think about gifting some of that money to your partner's ISA to maximise the tax efficiency, because when one partner dies their ISA tax benefit is terminated and isn't transferable within the wrapper.

It's complicated, eh? The pros and cons of each course of action depend on your circumstances which is why the 'official' advice is usually to see a good independent financial adviser who you can trust with all that personal information. Otherwise carry on educating yourself until you feel comfortable you have enough knowledge to take these kinds of decisions.

Of course the next government could decide to abolish the pension TFLS and/or the IHT advantage and even reduce ISA allowances, but we can only act on what we know at the moment.

[EthicsGradient]

[On the other hand, if you're likely to use the money within your lifetime the TFLS -> ISA route is an option. If you're married, you can think about gifting some of that money to your partner's ISA to maximise the tax efficiency, because when one partner dies their ISA tax benefit is terminated and isn't transferable within the wrapper.

I thought it is transferable - effectively:

If your spouse or civil partner dies you can inherit their ISA allowance.

As well as your normal ISA allowance you can add a tax-free amount up to either:

the value they held in their ISA when they died
the value of their ISA when it’s closed

https://www.gov.uk/individual-savings-a ... il-partner

Or did you mean something else?

[MuddyBoots]

[On the other hand, if you're likely to use the money within your lifetime the TFLS -> ISA route is an option. If you're married, you can think about gifting some of that money to your partner's ISA to maximise the tax efficiency, because when one partner dies their ISA tax benefit is terminated and isn't transferable within the wrapper.

I thought it is transferable - effectively:

If your spouse or civil partner dies you can inherit their ISA allowance.

As well as your normal ISA allowance you can add a tax-free amount up to either:

the value they held in their ISA when they died
the value of their ISA when it’s closed

https://www.gov.uk/individual-savings-a ... il-partner

Or did you mean something else?

No, thanks for that I didn't know about this change (from 2018 by the looks of it). So no need to share ISA allowances if you don't want to.