The Lemon Fool

This gives away rather more information than I might like, so isn't under my normal account.

I'm due to turn 54 this autumn, think I have "enough", and am starting to wonder about de-accumulation order.

I'm currently contributing to AVCs to the extent my take home pay is around the annual income tax allowance, and I'm finding that enough to live on, but have no time to actually spend on recreation, so I'd guess I'll spend around £30-40,000/year post retirement. I should be eligible for the full state pension give or take a year or two of contributions

Outside my house, ISAs and a moderate DB pension(from 67), I have the following assets:

Mixed VCTs                | 100,000
GIA Equities, VWRL etc    | 300,000
Premium Bonds             |  50,000
Index Linked Certificates | 160,000
AVCs, VWRL etc            | 220,000
Total                     | 830,000

My inclination is to bed and ISA £20,000 from the GIA each year, run down the AVCs at the annual income tax allowance +333% each year and then making up the rest of my expenditure by selling the premium bonds, followed by the VCTs and finally anything left in the GIA, or am I missing something obvious?

Depending on expenditure and investment returns, I may need to dip into the ISA for a few years before state pension age, or depending on the current tax situation, decide to start the DB pension slightly early.

It looks reasonable. I presume you're single with no dependents, since no one else is mentioned. And I presume "+333%" should be "+33.3%".

Your plan sells the VCT investments before the GIA. I suppose that depends on the success and risk of the VCT investments - they have tax advantages over the GIA, so you might say it's worth hanging on to them, but you may also want to be cutting your risk at this stage, in which case selling them first would make sense. That's your call.

Some minimum guidelines from an old retiree (aged 78) rtd 21 years
£100000 of a 60/40 -equities/bonds portfolio should give you a reasonably safe income of £3000 pa before tax- hopefully more if stockmarket does well
You need 2+ years living expenses in cash at actual retirement in case the stock market drops as you leave the work place and you have to live on savings for a year or so while stock market recovers
Hope this is of some help
xxd09

entropicdiscard wrote:Total 830,000

My inclination is to bed and ISA £20,000 from the GIA each year, run down the AVCs at the annual income tax allowance +333% each year and then making up the rest of my expenditure by selling the premium bonds, followed by the VCTs and finally anything left in the GIA, or am I missing something obvious?

Depending on expenditure and investment returns, I may need to dip into the ISA for a few years before state pension age, or depending on the current tax situation, decide to start the DB pension slightly early.

The general rule is to spend unsheltered first. I tend to regard PBs as sheltered as the returns are tax free.

As mentioned - the tax position of the VCT is something to consider, whether that will change soon is another matter. Also the risk factor is for you to decide. If you are getting a decent income from them then it might be worth keeping them longer as it is tax free. I'm not entirely familiar but I think they are currently CGT exempt as well, so selling the GIA down first before it doubles in the next 13 years might be a better approach.

I'd take the income from your GIA, but keep the premium bonds as the returns are tax free and it is "instant" cash. I would also leave any Pension wrappered investments as growth is tax free so no CGT on sale.

Your Index linked certs provide (I assume) virtually no real return above inflation, so your choice as to whether or not to keep them or effectively move them towards equities (by spending them rather than selling equities).

Personally I would try and take the DB pension you mention early. For me this provides a base income, effectively guaranteed, and places a lot less stress on the rest of your finances. If it is (say) £10kpa then even with small annual returns on investments, selling a mix of VCT/GIA and Savings Certs will see you to SP age even ISAing at £20kpa as well, leaving the AVC untouched. I'm actually SIPPing some of my GIA at the moment as well as spending it down and ISAing it. The value is simlar to your GIA/VCT total.

Paul

DrFfybes wrote:Personally I would try and take the DB pension you mention early. For me this provides a base income, effectively guaranteed, and places a lot less stress on the rest of your finance

Another reason is to take the money out utilising the each year's Personal Allowance to make it free of tax. That doesn't apply if you have other taxable income of course.

Alaric wrote:

DrFfybes wrote:Personally I would try and take the DB pension you mention early. For me this provides a base income, effectively guaranteed, and places a lot less stress on the rest of your finance

Another reason is to take the money out utilising the each year's Personal Allowance to make it free of tax. That doesn't apply if you have other taxable income of course.

That was also one of my rationales - the tax free pension compared to waiting a decade and paying tax when SP kicked in meant the discount for taking it early was effectively reduced.

Paul.

Firstly, thank you all for taking the time to reply. To confirm, no dependents and a somewhat younger partner with whom I keep separate finances.

I agree with the general logic of spend unsheltered first, and see DrFfybes' point about PBs being effectively tax free. I have read vanguard's whitepaper "withdrawal-order-making-the-most-of-retirement-assets-uk-en-pro.pdf" . I think somewhere in that it does make the point about using income tax allowances effectively.

The VCTs I am to be honest rather disappointed with. The div yield is typically around 5%, with the occasional pleasant surprise, but they steadily shed capital value, so the total return is very disappointing, albeit tax free. In retrospect, I would have been far better off with the money going into a SIPP, but I wanted to retain some scope for accessing it before pensionable age. They are CGT exempt, but as they only seem to make a capital loss, that makes the exemption actually a negative as I can't offset gains elsewhere against them.

If I compare taking the DB early, vs running the AVCs down (in both cases to ensure I use my personal allowance effectively), then the fairly hefty early retirement factor the scheme applies looks likely to leave me worse off in the long term. If I take the DB at 55 then I only get 57% of the value if I take it at 67 and if there's a genetic component to life expectancy, I'm likely to have a decent length of time receiving the DB, which makes getting the full rate attractive. Stress on finances isn't an issue per se - there's a decent amount in ISAs, I'd just find it very annoying to lose the tax wrapper if I can avoid it.

Unanchoring myself from previous thinking, I'm wondering if encashing some of the ILCs is a better approach than the PBs. I originally held them as "if all else fails" assets, but the loss of the ability to make withdrawals at any time makes them less well suited to that, and £50,000 of PBs plus AVC withdrawals at the personal allowance +33.3% rate would provide 2 years of comfortable living or three years at a significantly higher standard than I experience now.

Given the likelihood of changes to taxation in what will almost certainly be a September budget, I don't intend to hand my notice in until after that and I think I spend the intervening time with a spreadsheet to calculate net worth at say 75 with different withdrawal regimes.

Just one point. Is your AVC free standing or linked to an occupational pension?

I recall not being able to draw my AVC other than when I took the DB pension.

TJH

entropicdiscard wrote:If I compare taking the DB early, vs running the AVCs down (in both cases to ensure I use my personal allowance effectively), then the fairly hefty early retirement factor the scheme applies looks likely to leave me worse off in the long term. If I take the DB at 55 then I only get 57% of the value if I take it at 67

57% for 12 years is a little steep - but the breakeven is still age 83.

Basically ignore inflation IF deferred and in payment schemes have CPI indexing. So you get 57% a year for 12 years (684%) before your full 100% pension would start. At age 83 you would have had 17 years of 57% (1596) compared to 16 years of 100% (1600) so that is the crossover point.

However if we assume after age 67 your SP means your pension is taxed so you only keep 80% of it compared to 48% of your taken early pension after tax, in which scenario the crossover point becomes age 88.

And a lot can happen in 33 years.

Paul

Regarding Index Linked Certificates, you may want to replace them with a ladder of Index Linked Gilts, maintaining inflation protection and tax shelter.
For a very long time ILG had negative yield, which made ILC quite attractive, even more so given that they didn't have any duration risk.
But now ILG have positive yields in most maturities (and more than 1% in 20-30 yr maturities), and the duration risk cuts both ways: if real yields go lower there could be significant capital gains (that are tax free for gilts).

theta wrote:Regarding Index Linked Certificates, you may want to replace them with a ladder of Index Linked Gilts, maintaining inflation protection and tax shelter.
For a very long time ILG had negative yield, which made ILC quite attractive, even more so given that they didn't have any duration risk.
But now ILG have positive yields in most maturities (and more than 1% in 20-30 yr maturities), and the duration risk cuts both ways: if real yields go lower there could be significant capital gains (that are tax free for gilts).

ILGs have the added benefit that you can sell them at any time. The removal of flexibility with ILCs makes them rather less use as a last resort asset. I'm gradually compiling a list of actions, and this or similar is going to be one of them, the problem being I'll have to wait for the various ILCs to mature to release the actual money to do it.

Is there no flexibility with ILC? I thought the penalty for early redemption was 3 months of interest which is 0.01%pa, so you would lose 0.0025% if you redeem early.

theta wrote:Is there no flexibility with ILC? I thought the penalty for early redemption was 3 months of interest which is 0.01%pa, so you would lose 0.0025% if you redeem early.

It is for older certificates, but for anything renewed since 23 July 2023, early redemption isn't possible.

londoninvestor wrote:

theta wrote:Is there no flexibility with ILC? I thought the penalty for early redemption was 3 months of interest which is 0.01%pa, so you would lose 0.0025% if you redeem early.

It is for older certificates, but for anything renewed since 23 July 2023, early redemption isn't possible.

Interesting - and sad. It also says there that even for older certificates you lose a whole year's worth of index linking. I have some that mature on 15/6/26 (5yr ones, started 15/6/21), does that mean if I were to cash them in now they would deduct the index-linked return they just had added last week?

I couldn't edit the previous post, so writing a reply, apologies for hijacking this thread. I read "You will also lose the index-linking on your whole Certificate for that investment year". "For that investment year" is not the same as "for one year", if the investment year has just started it means the penalty is close to zero, correct?

theta wrote:I couldn't edit the previous post, so writing a reply, apologies for hijacking this thread. I read "You will also lose the index-linking on your whole Certificate for that investment year". "For that investment year" is not the same as "for one year", if the investment year has just started it means the penalty is close to zero, correct?

That's correct - they are a bit loose in their reference to "one year's index linking" at the top of that page. So if you cash in just after an anniversary of renewal, the penalty is tiny.