Here at Greybeard Towers, the economy has taken a turn for the worse. Like many other freelance writers and editors I know, I’ve seen a softening in the marketplace in which I sell my skills.
These things happen. Ten years ago – exactly ten years ago, as banks imploded, and stock markets plunged – the same thing happened.
Back then we had kids still living at home, and the last few thousand pounds of a mortgage to pay off. Today, my wife and I are far less encumbered with fixed outgoings. Nevertheless, the experience has been instructive.
Firstly, it’s been instructive in that I took a decision to cushion the hit to our lifestyle by withdrawing a monthly income of several hundred pounds from my ISA-sheltered share portfolio.
This was a weird sensation, and left me – no, leaves me – feeling oddly guilty. For the first time in decades, instead of reinvesting dividend income, I am withdrawing it, and spending it.
Somehow, it doesn’t – yet, anyway – feel right.
All change
The second instructive experience has been less angst-inducing, but is still challenging.
Namely, I have decided to accelerate my plans for retiring. Or, rather, semi-retiring. I hope to carry on working, but I’ll also be taking a pension income.
As readers with long memories may realise, this wasn’t the original game plan.
For years I have planned to retire at 70, gradually winding down as my seventieth birthday approached. And – to be blunt – probably carrying on doing a few simple commissions for long-standing clients, if such opportunities came along.
But having just turned 64, with the state pension two years away, it seemed sensible to consider taking income from my two SIPPs.
Former pension minister Steve Webb’s much-vaunted pension freedoms [1] have not only made that easier, but also introduced new options such as UFPLS [2]1 [3] flexible drawdown.
Frankly, why not take advantage of these freedoms?
From strategy to tactics
Right from the outset, the broad strategy seemed clear:
- Disregard the annuity [4] option. Some form of cautious drawdown [5] on my assets should leave an inheritance for the kids, as well as hold out the prospect of a growing income.
- To this end, take the natural yield, rather than eat into capital. With tax-free ISA income from a share portfolio [6], some freelance earnings, other investment income, two state pensions, and my wife’s occupational pension, that would be ample.
- Although (as I’ve written before) I’m attracted to the more flexible end of the new pension freedoms – and in particular, to UFPLS [2] – it would be necessary to figure out some way of mitigating the effects of the £4,000 Money Purchase Annual Allowance (MPAA) limit, which would severely restrict my ability to shelter freelance earnings in a SIPP [7], away from the beady eye of the taxman. This wouldn’t be a problem with an annuity, or with drawdown (as long as I didn’t drawdown any income, just tax-free cash), but would be a problem with UFPLS.
All good stuff, but I was uncomfortably aware that it was very high-level stuff, as well. The practicalities would need thinking through, and organising. And I would need to be very careful about avoiding any hidden bear traps.
Plus, of course, there was a significant element of irrevocability. Once I’d triggered drawdown, for instance, there would be no turning back.
A summer of careful reading and researching beckoned.
Here’s what I found, along the way.
A route to follow
One immediate realisation was that multiple pension providers offer an abundance of free literature, readily downloadable. I devoured stacks of it.
I could also send off for pension projections and illustrations – including my personal state pension forecast of £148.88 a week, or £7,768.35 a year, which was curiously empowering.
The government’s Pensions Advisory Service [8] and Pension Wise [9] websites also contain a wealth of useful information.
Not all the advice I obtained was through the written word. Determined to do things ‘properly’, I took up my option of a free pension consultation with the government’s Pension Wise service, booking a Pension Wise appointment, which duly happened in early August.
The adviser, named Colin, was incredibly knowledgeable, and we went the distance, going for the full hour. Well worth doing, and highly recommended.
Right from outset, it was clear that the inflexibility of traditional drawdown posed a challenge.
Essentially, I was turning on a tap, releasing a flood of income. Should the freelance market pick up, I’d face an awkward choice between turning down work or getting clobbered by higher-rate tax. Due to the MPAA rules – designed to clamp down on tax-rebate ‘recycling’ – once I’d sheltered £4,000 in a pension, any further earnings were taxable [10].
This in turn reinforced the attraction of UFPLS as an option.
While UFPLS is a form of drawdown, it’s a flexible form of drawdown. If the freelance market picks up and my earnings look to leave me exposed to a hefty higher-rate tax liability, I can simply turn the UFPLS income tap to the ‘off’ position. Like this I can maintain a level income, by using UFPLS as the balancing factor.
On the other hand, the initial plan of a monthly UFPLS income seems unrealistic. Providers do offer it, and apparently people do take it. But the paperwork seems disproportionate, with every UFPLS drawdown triggered by a completed UFPLS application form, and accompanied by an ensuing (and legally required) UFPLS illustration.
Being pragmatic, it probably makes sense to combine my two separate SIPPs into one, and going for three-monthly or six-monthly UFPLS payments, rather than monthly payments. The downside: to some extent, this will limit my ability to ‘flex’ income to avoid higher-rate tax.
Finally, the rules around the taxation of pensions after death seem unduly harsh. If I die after age 75, and my wife survives me, the remaining pension investments she will inherit [11] are taxed as income. That’s not a good option for a sum that should amount to several hundred thousand pounds.
To avoid a massive tax hit – repeated again when the kids inherit it after my wife dies – it’s necessary to set up a dependents’ drawdown account, from which an income is taken.
More research is needed here, but at least I’ve got 11 years to undertake it.
Ready, steady… go?
So what have I done? Nothing, so far. But at least I know the broad outline of what I will do, when I push the button.
Our income, at the moment, is just about adequate without massive belt-tightening. (If you’re looking for a first-class writer and editor, get in touch…)
What have I learned? More than I thought I would.
Moving into retirement – and making the right choices – is a complicated business, unless one goes for the straightforward annuity option. I knew that already. Even so, I’m still surprised at the complexity of the choices I face.
The government, it seems to me, has brought into being a range of pension freedoms, but hasn’t invested the time and energy to provide a regulatory and tax framework to help retirees readily access those freedoms. That is regrettable.
Making the right retirement choice was difficult enough in the old ‘annuity versus drawdown’ environment. It’s tougher still, now.
Read all of The Greybeard’s previous posts on deaccumulation [12] and retirement.
- Uncrystallised Funds Pension Lump Sum [↩ [17]]