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SIPP Drawdown plans
Supernova
Posted: 28 February 2013 12:31:09(UTC)
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Hi all,

Can I run some retirement plans past you, please?

I will be 55 next January and expect to be made redundant from a £60k-ish job by July this year.

I’m thinking of semi-retirement via the phased drawdown SIPP route. With a matured (shortfalled) endowment lump sum (35K), transferred personal pensions (£35K), redundancy payments (£42K+ a bit of the tax free £30K) and finally a transferred Company-contributed pension pot (currently £325K 90% invested in equities!) I could get my SIPP pot up to say about £450K.

Some of that (£35K) needs to be achieved by taking advantage of the 3 year backdated 40% tax relief by the end of this financial year.

I would also have savings of about £100K (£70K in ISAs).

If I have understood correctly, phased drawdown should give me about £17K plus say another £2K from the ISAs. More artistic and precarious pursuits by me and my partner will hopefully get my income up to nearer a more comfortable £25K and by paying little if any tax.

The trick, I guess is where to have the SIPP with low costs and what to invest in to sustain the pots for 30 years or so with the right balance of risk growth vs the danger of stock markets plummeting 40% etc.

Not to mention the Government perpetually meddling in pension rules.

Any comments on the general plan and investment ideas (not taken as advice, just ideas) most welcome. Wondering if I need to have it managed and whether 1% commission is worth it plus costs of chopping and changing or whether trackers are adequate.

Cheers!
DGL
Posted: 28 February 2013 17:51:45(UTC)
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Supernova
Good luck ! Morbid it may be but I think the MOST important question you have to ask yourself is how long are you going to live ??
Consider family history, current heatlth etc. even look at life expectancy tables...

The next consideration (in my view) is INFLATION.... your figure of £ 25k might be OK for a few years but if you remember the late 1970s when inflation hit 20% p.a. + .

IF (and it may not be possible) you can get all pensions up to £ 20k p.a. (including state pensions) you can then opt for 'flexible drawdown' which looks much more attractive to me..

2 users thanked DGL for this post.
Supernova on 18/03/2013(UTC), Stephen Garsed on 18/04/2013(UTC)
Maverick
Posted: 28 February 2013 18:04:21(UTC)
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Supernova - I do this already (though not quite with those sums!), having transferred a company pension into a SIPP just before I "retired".
The only problem with the plan is that to keep the SIPP income up you have to have the SIPP invested in growth stocks, not dividend stocks. If the fund in the SIPP starts to drop you will suffer a reduction when your next three-year review comes up. I have broadly 50% in investment trusts, and the rest in carefully-chosen shares (e.g. Intertek, Micro Focus, Taylor Wimpey), and I have no compunction in selling, and buying others, if they stop performing.
All I can say is, it's worked so far. You have to monitor your SIPP regularly.
There are no half-measures - if you don't want to buy an annuity, you have to be prepared to do a little work on your portfolio. Paying someone to manage it for you is the worst of both worlds.
3 users thanked Maverick for this post.
Supernova on 18/03/2013(UTC), Stephen Garsed on 18/04/2013(UTC), Paul Davies on 10/05/2013(UTC)
Kenpen2
Posted: 28 February 2013 18:10:42(UTC)
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Don't, don't, DON'T put your cash lump sums into your SIPP !!!

Once they're in, you've lost all control over how and when you can draw them out. Put as much as you can into an ISA and the rest into some sort of savings plan - National Savings, Premium Bonds, deposit account, stocks & shares if you know what you're doing or want to learn; whatever. Move cash into your ISA each ensuing year. That way you maximise your freedom to spend your lump sums how and when you like and minimise your future tax bills.

Depending on how frugal you're willing to be, you may still have enough in your SIPP to retire completely right now.
3 users thanked Kenpen2 for this post.
Supernova on 18/03/2013(UTC), Stephen Garsed on 18/04/2013(UTC), Paul Davies on 10/05/2013(UTC)
Supernova
Posted: 28 February 2013 18:37:55(UTC)
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Thanks DGL, Maverick and Kenpen2.

I forgot to mention my partner's State Pension kicks in after 8 years, assuming we are together, of course, and mine after 11 plus a final salary of about 3K per year after 10 years. Inheritance is a dangerous thing to rely on but there is a reasonable chance of that helping too.

I am probably making a huge assumption of fund growth of 4% above inflation which should keep the fund itself level at that rate of withdrawal.

Do the three-year reviews set a maximum amount which can be put into drawdown and hence the TFC that can be taken, or is it just the level of income itself?

Kenpen2, I guess the carrot for me is the 40% tax relief I can still get on those cash sums (I will still have provision for ISAs this year and next too). Not sure how any other savings will help generate that immediate or future growth.

No doubt that it is all a risk.

Cheers
Kenpen2
Posted: 28 February 2013 19:38:12(UTC)
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Ok, given that you already have a substantial cash cushion there may be some merit in taking the Government's shilling (or 40%) in your specific case.

You're pretty clued up, I guess you've done the sums. But the benefit is still much more marginal than it sounds. The price of that tax rebate is that at least 75% of the enhanced sum is subject to Govt control for the rest of your natural. You can only draw on the remaining balance at about 6 - 8% p.a, you're most unlikely to be able to draw it all and when you die the taxman will take 55% of the residue.

Going for flexible drawdown means that you can draw it all, but you'll have to give about £200K to an insurance co to buy an annuity of about £10Kp.a. which with your final salary pen and state pen would take you to the required £20K p.a. threshold. And you'll always pay at least 20% tax on your withdrawals.
1 user thanked Kenpen2 for this post.
Supernova on 18/03/2013(UTC)
James Burn
Posted: 01 March 2013 11:01:54(UTC)
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You decide how mch to leave in the SIPP. But you can only get money out of the SIPP by
- the 25% tax free lump sum
- flexible drawdown
- capped drawdown
- annuity purchase

Money/assets moved into capped drawdown are valued each three years and this sets a maximum amount you can withdraw from them over that three year period. You can leave in the SIPP the amount related to what you don't need to withdraw if you are concerned about inheritance tax.

At some later date you can take the money/asssets out of flexible drawdown and purchase an annuity. If you are not concerned about inheritance, there will be a point where you benefit from this switch.

Do also think about whether your spending will fall as you get older: most people's do.

To achieve that 4% above inflation return, you must be investing all in risky assets. So do think about what would happen if stock prices fell 40% and took a long time (15 years maybe) to recover in real terms. An event like that has happened three times in the last 150 years. If that happened, you are going to need to use the money outside the drawdown/SIPP to supplement your income. You might also decide that you want most of the money you have outside the SIPP/drawdown to be in low risk assets (ones that yield 0% in real terms) so your these do not fall in value at precisely the time the value of the drawdown is cut.
2 users thanked James Burn for this post.
Supernova on 18/03/2013(UTC), Stephen Garsed on 18/04/2013(UTC)
Supernova
Posted: 01 March 2013 12:32:45(UTC)
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Thanks James, very helpful.

So, I decide on whether to take out 60K or even 200K into Drawdown and the review decides that I can take 120% of the GAD of that amount on a rising scale over 3 years, say 5.5%, 5.9% and 6%?

Good point about the risk balance between the SIPP and the ISAs/cash.

When you say risky do you mean at least say 60% in equities?

I'm not sure my spending will drop off too much from 55-65, but I might have to be prepared for that if necessary.

Cheers
James Burn
Posted: 01 March 2013 18:54:55(UTC)
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The calculated amount you can take out from drawdown is the maximum for each of the next three years. There is no minimum. You can take out more than you want to spend (paying basic rate tax of course) and invest it in the SIPP or ISA.

The FSA projections are based off a portfolio 2/3 invested in equities and 1/3 bonds, and their intermediate projection is 4.5% after inflation. For me, 1/3 low risk investments (for the overall portfolio including pension and nonpension) is a bit too much, but you need to understand your own risk preferences. You can ask yourself the question: if you had to toss a coin and you would get an income of £20k if heads and £30k if tails, what certain income instead would make you indifferent between that and the bet? (For me is it about £23.3k).

I agree spending goes down more between 65 and 75 than it goes down between 55 and 65. The point is the less you will spend later the more you can spend now.
2 users thanked James Burn for this post.
Supernova on 18/03/2013(UTC), Stephen Garsed on 18/04/2013(UTC)
john_r
Posted: 01 March 2013 21:35:42(UTC)
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I agree with some earlier comments - i.e. do not put spare cash into your Sipp - unless you are getting tax relief. 40% tax relief makes it worthwhile, 20% is debateable versus putting the money into an Isa and retaining complete control over your withdrawal options.

Other personal preferences: ......

Find a good Sipp broker that has a good track record. In my view avoid brokers that impose annual charges for holding equities or have annual management fees for doing nothing (for me that excludes HL or Alliance Trust).
I use Sippdeal which avoids these charges, has a good platform with lower dealing charges as an extra bonus.

Avoid funds i.e. avoid Unit Trusts or Oeics (Fundsmith oeic is my only exception to this rule).
Instead Investment Trusts and ETF's have a more transparent charging structure and in performace terms they generally outperform funds.

It can also be fun and very rewarding to select your own individual equities but remember you will need to do plenty of learning and research to do this successfully. You are also likely to make some bad decisions during the first 5 years of your learning curve so grow this side of your portfolio gradually. For individual equities stick to UK listed companies but for managed investment trusts you can diversify your holdings across UK, Asia, Americas, Global and Themed investments.
Example Investment Trusts from my own portfolio:
Aberdeen New Thai IT, Scottish Mortgage IT, Findsbury Inc & Growth IT, Templeton Emerging mkts IT, First State Oriental Smaller Cos IT, Standard Life Smaller (UK) Cos IT, Biotech IT, ETFX Agriculture fund(£).





3 users thanked john_r for this post.
Guest on 03/03/2013(UTC), Stephen Garsed on 13/03/2013(UTC), Supernova on 18/03/2013(UTC)
Supernova
Posted: 03 March 2013 13:43:58(UTC)
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Thanks again James, and John.

I'll check out Sippdeal and ETFs.

I'm confused about diversifiers for the non-equity part. People seem to have had a downer on bonds for a while and I'm not sure of an alternative yet.

Similiarly, before I transfer the company pension next year, the default core fund is invested 90% in equity trackers across regions with 0% costs and 10% in corporate bonds. Quite a good thing given the recovery from 2008 so far but a bit risky going forward I would have thought.

Cheers
paul fisher
Posted: 03 March 2013 17:08:54(UTC)
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I agree that SIPPs are only really any good if you can get 40% tax relief on the way in, and only pay 20% tax on the way out. Otherwise ISAs are much better.
The Alliance Trust SIPP, has recently started charging £162 p.a. and is now only worth having if you have a large pot.
SIPPdeal has the cheapest charges that I have found, but be careful as I think that they have more than 1 type of SIPP and they have different charging structures.
2 users thanked paul fisher for this post.
Supernova on 18/03/2013(UTC), Stephen Garsed on 18/03/2013(UTC)
gggggg hjhjkl;'
Posted: 03 March 2013 18:26:41(UTC)
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"Money/assets moved into flexible drawdown are valued each three years and this sets a maximum amount you can withdraw from them over that three year period"

No they are NOT!!

If you meet the flexible drawdown criteria (currently £20K in pension assets, reviewable in 2016)) then you can withdraw, what you like , when you like.

However remember there is a one off charge to set this up (HL charge some £290) and you cannot make any future pension contributions.



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Supernova on 18/03/2013(UTC), Stephen Garsed on 18/03/2013(UTC)
James Burn
Posted: 04 March 2013 07:41:34(UTC)
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Supernova,

Interesting question about diversifiers. During historic extreme stress on shares, property prices also seem to have been affected, and corporate bonds and most hedge funds were in the 2008 stress. Gold seems to have had a mixed record. Oil has kept value most times so far. Index linked bonds of short duration (or matching duration to how you would spend them) is propably part of the answer. Probably also important to consider diversifying within the low risk part of the portfolio.

BTW, I realised I said something potentially misleading above regarding FSA projection rates because they have already agreed to decrease them from next year to 3.5% real return for a portfolio 67% equity and 33% bonds. (PwC, who advised the FSA on the change, also came up with the same figure for a portfolio 57% equity, 10% property, 10% corporate bond, 23% government bond based on average real returns of 4.75%, 3.5%, 2.25% and 0.75% respectively.)

Another perspective on your current portfolio is half of the value is what you will spend over the next 18 years or so and the other half is what will grow into the portfolio you need to have in 18 year's time. Equities will always be a sensible choice for the latter.
2 users thanked James Burn for this post.
Supernova on 18/03/2013(UTC), Stephen Garsed on 18/03/2013(UTC)
Supernova
Posted: 18 March 2013 16:18:14(UTC)
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Thanks Paul, gggggg (:-)) and James

Food for thought.

Sorry I had to abandon thread temporarily - back to work and also number-crunching my budget to a deadline.

The impression I get is that I should be allowing for total charges of around 1.5% whichever route I go. Would that be reasonable? Including Custody charges, drawdown fees and suchlike.

I'm also thinking I might need some initial advice on the best way to structure drawdowns from what will hopefully be a £500K SIPP and £100K ISA to provide a decent income for some time in a tax-efficient way - i.e how much to phase the drawdown each year and possibly be able to reinvest into ISAs and the SIPP again?

Not overly keen on paying £1000s for that advice, so wondering what is the most cost-effective? Obviously good advice might be worth it.

One thing I thought of was that I'll be 55 next January and still a 40% taxpayer. Got a few months to take some TFC and reinvest, subject to whatever the recycling rules might be?

Cheers
tony m
Posted: 18 March 2013 17:51:49(UTC)
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Joined: 20/12/2011(UTC)
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My understanding of SIPP investment for a absic rate taxpayer is as follows

Invest 80
Tax relief 20
Total 100
Tax free lump sum 25
Amount invested 75

Income at 5% 3.75
Tax at 20% .65
Net income 3.1

Therefore a net income of 3.1 is obtained for a net investement of 55 (80-25)
A return of 5.6%

If the 55 is invested outside a SIPP then the net return is
55*5% less 20% tax = 2.2
A return of 4%

Is my understanding correct?
Roydo
Posted: 18 March 2013 18:55:01(UTC)
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tony m;18793 wrote:
My understanding of SIPP investment for a absic rate taxpayer is as follows

Invest 80
Tax relief 20
Total 100
Tax free lump sum 25
Amount invested 75

Income at 5% 3.75
Tax at 20% .65
Net income 3.1

Therefore a net income of 3.1 is obtained for a net investement of 55 (80-25)
A return of 5.6%

If the 55 is invested outside a SIPP then the net return is
55*5% less 20% tax = 2.2
A return of 4%

Is my understanding correct?


Pretty much. Tax relief is the trade off for reduced flexibility.
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