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Retirement withdrawal strategy: introducing our decumulation series [Members]
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Probably a good idea and possibly would make the post even more relevant to factor in 2 kids
This the position of many if not most retiring couples -school expenses,college expenses etc etc
Can the two scenarios be run in parallel
xxd09
You describe how you intend to minimise tax in the GIA by filling it with some of the portfolio’s bond allocation, using government bonds. So far, so good, but the article then says these would need a 9.66% capital gain to breach the CGT threshold. Surely, the simplest way to ensure CGT is not payable is to buy individual gilts which are exempt from CGT?
Brilliant idea for a post series. There is very little to follow on this topic around the blogs/etc.
Being in my early 50s myself, and not far off your chosen scenario – admittedly with a somewhat higher London cost base to support – I will follow with interest, pardon the pun.
Hi @TA – this looks excellent, and is a great primer to what I hope / expect (!) is going to be a really insightful series.
At first read-through it appears to emulate much of what we’re planning (we’ve no children, no legacy to plan for, no mortgage).
Our numbers are spookily equivalent … although I am currently thinking about using UFPLS (to draw out personal allowance + 25%) each year for n years rather than take the full 25% tax free cash from the get-go.
Not quite eligible to start pension withdrawal (another 15 months or so), but it’s looming large on the horizon.
Am definitely interested in the bonds holding part … and as per @DavidV, I’ve started to try and get my head around buying individual gilts (trigger not pulled as yet).
Only potential banana skin for us right now is health taking an unpredicted arc across our plan. Have just started my cancer treatment and more to come in the new year (yay … can’t wait), but I’m hoping our planning can withstand whatever may happen down the line.
Looking forward to this series ! Thanks in advance.
I’m very excited by this, I’m a long term fan of the slow and steady portfolio and this article has made me realise that I have an area of mental white space for what the considerably more complicated decumulation phase would look like when I get there. And I barely need an excuse to start knocking out a good excel model!
Two points of feedback:
1 Probability is much more important for decumulation. During accumulation, there is one line going upward and you are trying to make the angle of the line as steep up as possible. For decumulation, you are trying to plan for all the possible downward lines. Rolling the dice for any probability “events” doesn’t feel like the most useful or interesting approach as we could just effectively watch you roll the highest or lowest score 50 times (which would be impressive, but not very relevant for what would happen if we tried to repeat it).
My proposed solution to this is a Low tech Monte Carlo simulation. Document all the instances where you will be introducing random chance life events, then run 100 versions of the portfolio, and randomise the events that happen to each of them. This way we get to see both upside and downside risk and explore mitigation strategies for a wider range of scenarios. Doesn’t need to be too complicated, allocating five slightly different portfolios and then randomising a cost profile for each “person” each year might be enough to create a spread of outcomes. On the technical side of doing this, I’m happy to make myself available for pro bono MS excel advice! 😉
2 For the sake of making this more “accessible” to the masses, I would suggest applying a materiality threshold to any design decisions. The expected saving figure for some of the tax optimisation is quite low. While it is a beautiful piece of design work, remember people can usually make a hundred quid or so just by swapping bank account, which would probably take a similar amount of time and yet that still motivates (monevates?!) quite a small set of people. Applying a level of materiality could help pare down the length and complexity of this article and avoiding subtleties of the moving target that is the tax code may also extend the life of the article series. If the numbers won’t add up, I’d rather see our plucky retirees explore short term income options like a stint at Uber driving – a potential scenario probably worthy of its own article.
Parting thought: this content would probably be good enough to get me to part with my cash to join Mavens. However it did make me feel a sense of sadness to think that potentially some of your best and most original content might end up parked behind a pay wall. Maybe the paywall is where the “fine tuning” could live?
Thanks so much for this. I look forward to following this series, just a few short years behind your model couple.
@Jason — As I’ve emailed you, thanks for your comment. Good feedback. I’m hoping you see this comment here too some day! 🙂
Unfortunately the No Cat Food portfolio was indeed a Mavens post; I accidentally failed to set the permissions properly, which meant it was public for a few hours when you saw it.
So your comment is on the site — but alas (as you can now see) behind the paywall.
Re: that paywall, we have tried various things over the past 17 years to try to monetize Monevator, and the only thing that has come close to looking sustainable is this membership model (/paywall).
However even then, fewer than 10% of email subscribers have signed up even to the cheap Mavens option (just £30 a year) let alone the (literally) hundreds of thousands who will visit the site over a year for free. Which is… not a great feeling.
It’s not an easy decision to put stuff behind a paywall. We started Monevator to help people, and we’d rather help everyone if we could.
But even today, with the site monetizing better than ever before, it still doesn’t compare to what either of us could (much more easily) earn elsewhere. Let alone the 17 years of ‘sunk’ costs.
De-accumlation is behind a paywall because people at that stage of life ‘should’ more easily be able to find £30 a year to support the site, we feel. (Obvs up to them if we do). That’s versus newbies / young / poorer starting out who we really want to reach, were £30 is more material, and who we are loathe to paywall.
Anyone reading this reply here is a Mavens or Moguls member of course already. Thank you so much for stepping up and helping to support Monevator, and for keeping 99% of the content free for all! 🙂
Excellent timing.
I’m very keen to follow, as it will provide some valuable planning a year or two ahead of my flight path.
Clearly, whilst it would be great to run a couple of scenarios (eg the “+2 children”), in practice I expect that would be just too much work.
Perhaps you might outsource this to the Maven / Moguls – someone (or a small group) to take the standard decumulation narrative and to flex it?
@TA – Thanks for this, very timely for me. And very similar budget and circumstances to me, though I’m 3 years older than your couple.
Apart from the 2 kids and (cheat alert!) my wife’s still working (but I’ll still be contributing my 50% to the household budget, so de-cumulating.) And I’ll have a small defined benefit pension that together with the State Pension when I’m 67 will only leave a £3000 shortfall from our our £22k essentials budget. Which includes plenty of padding. And I want to get a small part time job. Now I think about it, not that similar at all…
I’d come up with a similar plan to UFPLS my way to state pension age but it’s more tax efficient to run down my SIPP while my (much younger) wife builds up hers 🙂 so I’ll be following your path I think.
Nice tip about the starting rate for savings, that’ll be very useful when I take my 25%. That’ll give me a nice little tax free boost while I ISA-way the PCLS. Ideal for my GISG I think. And I can presumably buy IL Gilts directly too.
Btw, in the six-monthly updates, will you be mentioning things like the tax forms that need to be completed for these little wheezes? Especially if you’re using the starting rate for savings wheeze and/or might need to declare capital gains tax? Would be very useful, though obviously you’re not dispensing tax advice any more than you are investing advice. And the tax rules change.
Anyways, great little series and super-relevant. Many thanks.
Thank you for this.
This subject is very much on my mind. I’m still working and could potentially stop now or more likely work for a year or two.
Something puzzling me is why you would take tax free money out of the SIPP to put it in an ISA. Why not just leave it in the SIPP? Maybe take it bit by bit with UFPLS?
This is something that I can never figure out to my satisfaction – whether to take the full tax free amount out of my SIPP or whether to leave it where it is. I’m in the fortunate position of not having an immediate need for a big lump sum – first world problems!
Hi TA,
As others have said this is a great series idea as there’s a lot more to it than accumulation set and forget in a world tracker etc.
As we seem to have entered an era where both partners have some form of pension / assets I wonder what appetite there is among fellow Monevator readers for the same scenario as you set out above but 90% in one pension and 10% in the other pension e.g. £630k and £70k SIPP? Or even 100% for one but still a couple.
I personally think that my situation will be 95% pension for me and 5% for my wife but I appreciate this is a broad scenario encompassing a never ending number of variables that as you say won’t fit anyone’s exact situation.
Still a great idea and one that many of us readers will look forward too.
AndyD4
@Andy D4 – as it happens my situation is 100% in my SIPP, my other half will only have the state pension.
@TA Another thank you, for what promises to be a very useful and interesting series…
I’m about 3ish years away from being in this position and in a very similar position to your model. Had to Google UFPLS (in the comments above) but will no doubt be well versed in all things pension by the end of this series…
I cannot overstate how important Monevator has been to my financial situation since stumbling on it (2012?) 🙂
Thank you very much for this post, again, as others have said this is very close to our financial position though somewhat lopsided with one of us having the assets and the other a good NHS pension. Glad you mentioned the 0% savings for the excess £5000, took me a while to find this out.@PC, I wondered this as well as this is my current form of withdrawal from my SIPP. Look forward to the updates.
Wow! Comprehensive project on something that will be relevant to many followers. One of my continual questions on a SWR is what income I will need twenty years from now as I approach 80? Is the endgame here to “die with zero”? If so, and investments after inflation return 8% over the next 5 or 10 years, when are you going to skim the excess? And how will you decide when to do it? What will you do with the extra income when the state pension kicks in? Given that the majority of people don’t manage to spend their pensions, it will be interesting to see what you do if you’re well ahead of your projections, even if it is a nice problem to have !
Really looking forward to this series as we have drifted into decumulation, over the last couple of years without (as yet) re positioning our passive accumulation portfolio, something that is getting a tad more urgent now as the cash element has been significantly depleted !
@PC – Because pension rules may change and you may not be able to get 25% out tax free in the future? I think ISA rules are less likely to change.
@Brod (9) My experience of managing tax affairs in retirement is a nightmare. Unless you qualify for self-assessment through, for example, being a higher-rate taxpayer, receiving rental income or having unsheltered dividends over £10k, you end up having to phone HMRC to report things to them. There is the online Personal Tax Account but this is quite restrictive in what you can report and mainly confined to the current tax year rather than the year ended. In theory HMRC receive notice of savings interest direct from the banks, but I can’t remember when they last got this right. Unsheltered dividends over the allowance have to be reported and can only be done online if you know the total before the year end (I have one dividend nominally paid on 5 April).
In most cases, of course, if you can keep within the allowances you do not have to report anything.
I admire the ambition to live to 100 😉
You are a little bit younger than I am, but I admire your frugality, the numbers sound a little close to the edge IMO. Either than or I am a wasteful blighter in some way I can’t yet see. It is food for thought.
@DavidV #18
> Unless you qualify for self-assessment through, for example, being a higher-rate taxpayer, receiving rental income or having unsheltered dividends over £10k, you end up having to phone HMRC to report things to them.
None of these apply to me but I continue to fill SA. The idea of
> you end up having to phone HMRC to report things to them
brings me out in hives, I will carry on the old way until HMRC tell me to sod off
@ermine (19) I assume you qualified for self-assessment when you had self-employment income. Or I seem to recall you saying you were once an HR taxpayer when employed by The Firm.
It really winds me up when I hear people moaning about having to do their self-assessment. They do not seem to realise how bad the alternative is.
The ultimate insult when you phone HMRC is listening to minutes of recordings encouraging you to look at their website! Do they think I’m phoning them for fun if I could do what I needed online?
@ all – thanks so much for the positive feedback. TI has been on at me for ages to kick off the decumulation series. I’ve been putting it off truth be told, but the support is making me feel much happier about getting on with it.
@ xxdo9 – financially I think you’d just scale up the income requirement? Obviously, kids are a completely different ballgame emotionally…
@ DavidV – good point about individual gilts. I steered away from it because I’ve not bought individual gilts so I’m not sure about the hassle factor. Then again, it would just be a question of buying a one-year and two-year gilt before everything is in an ISA, so probably not too much trouble.
Alternatively, I could have parked the cash in a one-year and two-year fixed rate savings account and let the starting rate for savings take care of the tax.
The other option I considered was holding a money market fund in the GIA. Very little chance of busting through the CGT threshold with that. Again starting rate of savings to the rescue.
I second your point about HMRC generally being hopeless if you do anything out of the ordinary. My mum has a PLA and they never get the tax right.
@ W Reeve – chortle. I’ll probably rip that gag off at some point 🙂
@ Weatherby – I hope your treatment goes well! I feel for you as the Big C has cut a swathe through my family these past few years.
@ Jason – Thank you for a very thoughtful comment. I’m not sure my spreadsheet skills are up to it but can you point to any *very* simple tutorials on running monte carlo sims in Excel?
@ Ex pat scot – I’m with you. Happy to run any number of useful variations if it can be automated or outsourced. These things often turn into a nightmare though as I’m no Excel ninja. Tried to find a tutorial on running safe withdrawal rate calculations the other day as I have all the historical UK data I need. Couldn’t find anything useful. One day I’ll try to get my head around Big ERN’s or Simba’s US spreadsheets and substitute for UK data – but there creations are as daunting as they are magnificent.
@ PC – UFPLS seems like a good option, especially if your tax-free cash far outstrips ISA capacity, or you’re in bad health.
Drawdown edged it for me for two reasons:
I’m persuaded by the tax shelter diversification arguments summarised here:
https://monevator.com/sipps-vs-isas-best-pension-vehicle/
ISA advantages increase when taxes rise. Mr H’s comment plays into that, too.
Meanwhile, the ISA allowance has been frozen since 2017. Effectively it’s getting smaller relative to a portfolio tracking ahead of inflation. So I’d rather get the tax-free cash out now and tucked into ISAs while I can still do it quickly. I’m also predicting zero tax hit under current circumstances, but I guess the situation is likely to deteriorate in the future.
I guess some people will bump up against the tax-free cap and are better off getting their money out. Not that that’s a concern in this scenario.
@ Mr Jim – Loving your optimism! I’m hopeful the dynamic withdrawal rules will enable us to ramp up withdrawals safely when the market gods smile upon us.
@ Ermine – I’m shocked! I thought you were Mr Frugal? 😉
A long way down the road-20+ years retired-now in 78th year
Just a couple of thoughts
Simplify as much as possible otherwise you spend your time shifting money about-I worked hard at it but still ended up with a Teachers Pension,2 SIPPs (wife and I),2 Stocks and Shares ISAs (wife and I), 2 Instant Access Cash ISAs (wife and I),a high interest savings account (mine) plus 2 State Pensions ie 10 financial accounts !
However 3 index funds (2 equity and 1bond) only for investments keeps one area simple
Re Asset Allocation-regard the 10 pots as one giant portfolio and don’t sweat the particular constituents of each pot as long as the overall Asset Allocation remains intact
If relying on investment for retirement income (currently provides over half our retirement income) make sure you have at least 3 years living expenses in cash or equivalents at all times in order to ride out market drops without having to sell stocks and bonds-one use of the tax free lump sum ?
I used my tax free cash lump to live on for a few years while getting used to retirement and setting up my withdrawal strategy
xxd09
Only skimmed this so far so may have wrong end of stick. But are you saying you’re ignoring state pension? If you only think you need 30kish and state could provide 20k ish of that then that seems an odd decision. But maybe I need to re read?
Sounds like a great series in the making TA.
On individual gilts for reducing tax: I found the whole process pretty straightforward in the end. Also useful that you can hold them in a GIA at HL at zero cost. So, for anyone here considering it, I’d say it’s likely to be worth learning the one or two details you need to.
The spread can appear to be a problem, but the range stated on each gilt page is much wider than what you eventually face at the point of quote/deal. Ultimately a non-issue.
@Rhino… interesting point re treatment of state pensions, I wasn’t sure either.
Is the state pension being counted as part of the income at age 67 or is it being ignored ?
If the former then put the entire pension into Index Linked Gilts, job done.
If the latter it’s more interesting but is it representative of real life…I don’t think so.
I’m 16 years into ‘retirement’ and the state pension is 1 year away (and 9 years away for Mrs Hari), the state pension will definitely be welcome but I must admit its not part of the plan, we have managed for so long without it, however if our household income was the £28k in the scenario and then it jumped to £50k after 12 years that would be very dramatic step up.
Would it be more realistic/likely that one spends a bit too much for 12 years and rebuilds the pot after 12 years ? Perhaps a drawdown that was £40k per year throughout ? (With the inflation adjustments on top )
With regard to variability of spending we have seen a forced reduction in spending for a year or so due to health issues and of course 2020 was a cheap year*… the spending on the upside has happened but it was almost always discretionary.
( *but only after the fact , as we nipped out and bought an expensive new motorhome and then were lucky to sell it after 2 years for more than it cost and I had to restate the previous accounts, as the anticipated depreciation vanished, bizarre)
Will watch this series of articles with interest, thank you for the hard work.
Thank you @TA for another brilliant and deftly written piece, and a special thank you for the reminder about the possibility to increase the personal allowance from £12,570 to £17,570 if savings income and non-savings, non-dividend income is kept below the latter figure. I’m slightly amazed that the chance of either one of a couple at 55 making it all the way to 100 is now at 10%. The UK’s health outcomes are evidently improving.
@DavidV #20
> I assume you qualified for self-assessment when you had self-employment income. Or I seem to recall you saying you were once an HR taxpayer when employed by The Firm.
I don’t recall having to do SA at The Firm though I was a HR taxpayer before I caught on how you could stop that. That was all sorted through PAYE.
Although I’m not any more, anybody can be self-employed. You don’t have to even turn a profit. There are specific advantages – for instance Class II NICs are an absolute steal compared to class III voluntary, though Class III still ain’t bad at all compared to buying yer index-linked annities on the open market. I still do SA because of interest on cash, dividend income wher I just scraped through last year, and capital gains, note you have to declare sales of 4*CGT allowance even if there’s no CGT to pay!
@TA I think you’ll be fine but it sounds tight. As I read it each individual has a post-tax income of £14k pa? I know I spend more than that because my company pension is more (post-tax) and I spend most/nearly all of it. We only have one car, I haven’t been on a plane for the last few years. Not becaue I couldn’t afford it but I hate other people in airports and planes in a JP Sartre way and flying is hell 😉 And we live in the sticks, rather than the Great Wen.
I have virtually no SIPP but more ISA than the illustrated SIPP+ISA+GIA. And a GIA, interesting concept of putting bonds in the GIA. I don’t do bonds (because I have a DB pension that matches bond asset class characteristics) but I do gold in the GIA for broadly similar reasons, for my sins I also do equities in the GIA and I will have trouble with tax on that.
I have used your trick of flying under the personal allowance running out my SIPP, and I was able to do it but it was a tough game, definitely worth doing but it’s not gracious living IMO. I was drinking homebrew then…
I absolutely second that you need cash reserves. I carried three years essential spend as cash reserve across the gap between stopping work and starting to draw my company pension. Even though I have a company pension I still hold the full whack of premium bonds to kick the wolf from the door in an emergency – the advantageous tax status of PBZ makes up for the quirky return. I know it’s bonkers to carry that much cash and I have given up a lot of return for it .
So somewhere I am being a wasteful bugger and I’m not sure where. But we have been to a spa in the last quarter and we drink decent wine, so perhaps the decadence is hidden in plain sight 😉
Ah scratch my previous comment, it’s got to support for over a decade before SP kicks in. Makes sense now.. although will be a whopping boost in your late 60s!
Thanks TA for another great article. Really looking forward to seeing how this works out and taking some learnings before I have to start doing it for real!
@ Rhino and Hariseldon – State Pension arrives in 12 years time – it won’t be ignored then. In the meantime, I’m not spending more upfront (i.e. taking an SWR bonus) now on the assumption that the SP rides to the rescue later.
Instead, I’ll just be sanguine about taking enough out of the portfolio to live on should we be hit by a terrible sequence of returns in the first 12 years.
It’s possible the variable withdrawal rate could force income below my discretionary floor if market conditions are exceptionally poor.
Not taking a State Pension bonus now gives me the headroom to take enough from the portfolio without worrying – should market returns / inflation deteriorate significantly.
This is an interesting debate, I think, because it goes to the heart of the great dilemma of decumulation. Spend more upfront and risk reduced income later. Keep spending tight in the go-go years and risk dying rich.
I’m opting for caution but hopefully not paranoia 🙂
@ Rhino – ah sorry, wrote my comment before seeing you’d followed up. Yes, roll on the late sixties 😉
@ TLI – The UK life expectancy calculator just averages across the whole country so Monevator readers who look after themselves could do better. I’d certainly up my chances if I had any 90-somethings or centenarians in my close family.
@TA
I think there is some future risk to the state pension for wealthier people – means testing sounds too harsh but perhaps some tax free allowance withdrawal. But I’m hoping not!
It sounds like the state pension is your solution/insurance for SORR. This makes some sense and has the added value that as you glide through the 12 years until SPA it’s entirely possible to reassess the risk/value in waiting until the extra money actually arrives.
I’m ~8 years into a 10/15 year wait for my SIPP/DB to arrive – it’s a long time and things change. Price inflation and salary inflation has recently become very noticeable and feels like a 10-15% one-off (hopefully) wealth tax.
With hindsight firing with significant mortgage was higher risk than I realised..
This is a great development ..I’m 4 years into early retirement so been absorbing everything I can on SWR and withdrawal strategies for the last 7 years or so
I will also soon become UK tax resident after many years overseas , due to this I have had limited chance to use SIPPs and ISA so have a healthy GIA account now trying to consider how to optimise for tax.
As far as I can see once you’ve done the basics ie use up married partners allowances, limited ISA and SIPPs there is not much more you can do.
I was a little surprised with your focus on minimising tax liability on your GIA… as a zero or basic rate tax payer is the tail not wagging the dog?.. When debating my own circumstances with a friend he commented surely have some tax liability via dividends or CGT is a good thing as it means your investments are performing!
Whoop – very pleased to see this series @TA – really appreciate you doing it.
A lot of the comments about refinements resonate but I think your scenario can be scaled and the big themes remain the same.
Our situation is both 52 and planning to reduce work from 55 onwards. My savings are mostly in one old style company scheme which I will have to move to a SIPP or other pension to be able to do 25% lump sum which will clear the mortgage and by then this series will have helped me work out the drawdown plan! I’ve been using an ISA for last 4 years as a proxy for how a SIPP might work once transferred. Plus I have 2 small final salary pensions. My wife had a collection of 6 employer schemes that we’ve been consolidating into a Vanguard SIPP.
Overall household asset allocation is a challenge across all these but I am trying to follow a version of xxdo9’s keep it simple strategy!
Thanks again for a great thread from everyone.
@The Accumulator
>>@ PC – UFPLS seems like a good option, especially if your tax-free cash far >>outstrips ISA capacity, or you’re in bad health.
Thanks for expanding on this. Yes, in my case, the question is what would I do with the full amount of tax free cash. It would take years to put it into ISAs.
@TI #7 – begs the question of how you advertise pay walled content in order to tempt people in?
Classic example here where Jason got a sniff of something he would be willing to pay for. If you hadn’t made your mistake he would be none the wiser.
@Rhino — Well I’d hope that our near 2,000 free articles to-date might be some proof of work. 😉 However your point stands, given Jason’s comments.
@TA
many thanks for this, and all Monevator content in fact. This has given me the impetus to sign up as its all very relevant now having just stopped f/t employment (though I still have some self employment income).
Our position is we’re both late 50s, 2 children out of the house and well established for now, house paid off( though nowhere near £500k!).
For reference our total expenses for TY22/23 were £21k including £9k of discretionary spending, £5k of which was travel/ holidays. And looking at 23/24 its roughly in line with these figures so far….
@ PC – this may not work for you but have you come across the flexible ISA hack for increasing ISA capacity?
https://monevator.com/annual-isa-allowance
Scroll down to the Flexible ISA hack section. Kudos to Finumus who originally wrote about this manoeuvre.
@ simon – cheers! I don’t see the bonds in GIA move as the tail wagging the dog. It’s probably not clear because I didn’t talk about the portfolio asset allocation in any detail… but I haven’t chosen the asset allocation to fit the tax situation.
I’ve just chosen to concentrate the portfolio’s bond allocation in the taxable account. (There will still be some bonds left over in the tax shelters too).
It’s no more effort to do this than not and gives me a better chance of reducing the tax bill versus equities in the taxable account.
I haven’t reduced the equity allocation for this purpose. It’s just a question of aligning the right assets with the right accounts.
Standard advice is normally to prioritise bond funds in tax shelters but it really does depend on personal circumstances:
https://monevator.com/tax-efficient-investing-uk-order-isa-sipp/
Like the choice on values. Helps people scale up to their circumstances. Hopefully not many Monevators are planning on scaling down much without DB pensions in the background.
I note that £22k of essential income on a capital pot of £730k is almost exactly a “SWR” of 3%. I assume this isn’t coincidence though might clearly it is influenced by being able to keep all drawdown tax free.
As you say there is a fair amount of potential safety net in state pension and equity release down the line (something I too only reluctantly put into my model).
@The Accumulator
State pension as a bonus in your late 60’s is clearly one approach but I suspect we leave a lot of money on the table or a lot of spending later !
But if the intention is simply £28k a year for a couple anticipating full state pensions and living for 45 years..
£28kx12 = £336k
£6k pension top up for 33 years =£198
A total of £534k below the £700k SIPP pot
Index linked gilts are giving a positive real yield at all durations, typically of around 1%, a gilt ladder would be a very easy, safe option and in fact a safe index linked income of £32k+ would be available.
@ Hariseldon – Nice. I haven’t considered a linker ladder yet but the pieces are coming together for a Monevator series on building one. Very little on this in the UK, and the available material from the US seems pretty complex, but I’m getting there.
Let me check if I’ve understood correctly:
You’re saying £534k in an index-linked gilt ladder = £28K per year at current yields? And £700k ladder = £32k annual income?
Can you share the maths?
It seems like a good idea, though two things are nagging at me:
Longevity risk: what happens if someone carries on beyond 45 years?
Income volatility: what happens if I need more money than anticipated but we’ve put everything into the linker ladder?
I guess both these problems can be addressed with a floor (linker ladder) and upside (equity portfolio) approach. Traditionally that’s been more expensive than a withdrawal rate strategy but let’s talk it through.
Are you doing this, btw? The UK brokers I’ve checked don’t typically seem to sell the full slate of linkers that should be available on the secondary market. Thought perhaps Computershare do. I haven’t dug into it properly yet.
@TA & Hari.
That’s what I’ve been working on for a good few months now.
Linker ladders from ISA & SIPPs, probably UFPLS to keep guiding PCLS entitlement. Planning on buying 15yr bond fund as proxi for annuity market until I buy one as part of an income floor. Then SP kicks in.
Really helpfully Helfordpirate (sp?) On Lemon Fool has uploaded a great spreadsheet to created the linker ladder. I couldn’t get it to work with yieldgimp, but it did with tradeweb.
For longevity I have 18% of fund left to place in risk assets which I hopefully won’t need to touch for 30 yrs.
This basically follows Bernstein in 2nd edition of four pillars.
@Sleepingdogs — Oh, @Helfordpirate has been known to post here in the past. Be great if they could pop up on one of our bond article comment threads with their spreadsheet link! 😉 (Please do share here too though if you have it — thanks!)
@TA. I think Hari is saying bridge the gap to the state pension (SP) with a linker ladder. £28k/annum for 12 years costs £320k in current terms. That leaves a £380k portfolio. If you then receive a full SP x 2 (£21k), then you need to only bridge another £7k/annum. On a £380k portfolio, that’s a 1.8% withdrawal rate. If the portfolio rises 4% real per annum to 67, the portfolio will be worth over £600k and WR is close to 1.1%. If your portfolio collapses 50%, you might be looking at something close to a 3.7% WR. Plus you still have equity release or downsize house as a fallback.
The main issue I see here is not really investment risk since you basically want £28k and have £1.2mm in assets (or a 2.2% WR) in a 3.4% annuity environment. It’s not even sequencing, liquidity or perhaps longevity. It’s more grim. It’s extended care costs. I’ve got an 80 year old pair of relative who were spending £30k/annum but now are spending £80k/annum due to care costs of £60k/annum for one of them. If that scenario extends for a few years, you can have a big issue.
Here’s the thread with the ladder spreadsheet: https://www.lemonfool.co.uk/viewtopic.php?f=52&t=41004&sid=31a7e87df09fa7bd68c16537243a9642
All very timely for me as just started my drawdown. There are a number of constraints and choices for taking retirement income that would be useful to build into any withdrawal strategy. E.g., when taking income from bonds, as per M McClung’s Living Off Your Money, the first doubt I have come across is the effects of drop in bond prices and so an whether selling bonds which have taken a big hit at this time in preference to equities is a good idea. In parallel other constraints in a real portfolio may be to maintain the proportions of various asset classes, including types of bonds, and migrating from a portfolio built for accumulation to one built for deaccumulation.
@ZX. A lot of debate about care costs feels like working for a gold plated coffin. Statistically few people are going to need extended care for many years and if we all create our plan to account for that in full the reality is that most would be unable to retire pre 67/8 or even later.
At the same time the majority of the population will be facing the same issue with just the state pension and whatever else they happen to have in assets/DB/annuities. There is of course a backstop in state provision, messy though it is.
I didn’t know about the GIA and tax etc and have always steered away, I will investigate thanks!!!!! That’s the value of being a subbed member. Also need to confirm when you’ll be topping up the emergency/year living expenses monthly/quarterly/bi/annually? or wing it and try to time the market 🙂
In practice over many years of retirement
Withdrawals done usually once a year to top up 3 years cash living expenses account
Withdrawals are made by selling units of equity and/ or bond units in amount required (usually 1 years living expenses)
Withdrawals are made in such a way so chosen Asset Allocation remains intact
ISA withdrawals are tax free.SIPP withdrawals often require a P55 tax reclaim form if amount of tax charged is too much-platform provider by default usually charges tax at 20% on cash withdrawals
Can withdraw some monies from ISA and/or SIPP
SIPP withdrawals have tax implications so try to remain in 20% tax band or below
Etc etc
xxd09
BBBobbins. I’m only implying that there is no major issue to be concerned about in the scenario put forward. Generating £28k/annum with £700k of liquid assets and £500k of illiquid assets is not hard if you assume two full state pensions at 67. At least not in the current yield environment. Full state pensions are an assumption that could be challenged. As is the current favourable tax regime for retirees. But if those are a given, then only big out of pocket expenses such as extended care costs can risk the position. Whether you see that risk as a problem is subjective.
@ ZX – What happens if yields turn negative again? Does that cause reinvestment risk to materialise? Would it be time to sell up early and take some capital gains?
@ tetromino and Sleeping Dogs – Helford Pirate’s spreadsheet looks excellent. Thank you very much for sharing.
@ Mr Anthony major – did the drop in bond values cause a rebalance from equities to bonds using McClung’s rules?
@ miner2049er – annual withdrawal for living expenses. Emergency fund topped up when there’s spare cash.
@TA. If you buy a ladder of linkers and we reverse the last two years, you are probably going to want to lock that in. There is little value in holding linkers at negative real yields. All you would do is bleed those gains back over the remaining period. It would expose you to risk but you’d need to weigh that against the gains you’ve made.
I think you’ve created a very benign asset-liability scenario here. Two years ago it would have been riskier. You’d have been forced to take risk to bridge the income gap until the pension kicks in since buying a ladder was locking in a 2-3%/annum real loss. Now, you can simply hedge via linkers. Once the pension income is available, the problem is reduced to generating just £7k, so a 75% reduction in the ALM problem.
This is why I tend to think everyone who is moaning about asset returns in 2022 is missing the point. We’re in a massively better place than in 2021.
Comments #45, #48 & #51: @All:
Is it possible to insure against risk of care costs exceeding a certain amount and/or duration? Would this be cost effective as opposed to self insurance?
Thanks, ZX. Makes sense. Will put some time into working out how to run a linker ladder.
@ TLI – looks like long-term care insurance used to be available but all the providers pulled out of the market. Now the closest product you can get is an immediate-needs annuity.
@TA. Just got back to this and ZX has put down my thoughts and articulated them thoroughly.
Your scenario could be more challenging but the exploration of the ideas or around it will no doubt be illuminating.
The care scenario probably won’t arise but if it does it may be very expensive. ( selling a family home would probably suffice for many people)
One issue that is not addressed very often is that decumulation is not simply a mathematical exercise but a personality issue.
How much do you value certainty?
How worried are you about the care scenario.
If you took more risk with your portfolio will the upside be actually spent ?
Thanks for looking into that @TA (#55). Seems the old adage applies about insurers offering umbrellas during cloudless summers only to pull the offer at the first sign of rain.
@TA. Today you buy a linker ladder for £21k/annum for 12 years (to 67) and another for £7k/annum for 45 years (to 100). With £21k/annum of pensions at 67 (assuming CPI-linked), you are now hedged for £28k/annum of income with CPI indexing from age 55 to 100. Cost: £480k in today’s terms.
That leaves £220k of your assets (we’ll ignore £30k emergency fund). That’s another 30 years at £7k/annum if they return 0% real over the next 45 years. If the assets generate 4%/annum real over the next 45 years, you will be left with £1.285mm in today’s terms. Plus, the house, easily worth £1mm+ in today’s terms. The donkey sanctuary can name a bench after you. Nice!
Now in reality, the tax situation deteriorates, the SP may get means-tested, or one of you drops dead at 68 and you lose a lump of the pension income. You probably won’t be happy just with cost-of-living adjustments (you will want that iReality 15 Pro since travel is so passe). You will experience some unexpected lumpy expenses (remember when we used to have the NHS?). The reality is clearly far harder than the paper scenario.
Just as an aside, in 2021 the same linker ladder would have cost over £900k. It would not have been possible to consider the same approach.
Alan Roth -a rather well thought off American financial adviser has viable instructions on how to build a TIPs ladder for retirees-he has his own website and has been discussed recently on the Bogleheads forum
Consensus is that the math required is rather above the average investors pay grade so possibly a non starter for many
Re care homes-fees now running at £50000 pa and upwards…..
There are no easy answers-no viable insurance products that I know of
Told the kids it might finish off their inheritance if it is required-maybe it will incentivise them to look after us carefully in our old age!
xxd09
@ZXSpectrum48k — Great input as always, thanks for taking the time to type all that out.
Shame you’ll be back in work soon from our POV! 😉
@xxd09 — Yes, I’ve been featuring Roth’s portfolios in Weekend Reading and he was indeed one of the first to flag this possibility to the (American-based) likes of us.
I agree linker ladder-building is non-trivial for the average person.
In the US there exist target date bond ladders ETFs:
https://www-etf-com.webpkgcache.com/doc/-/s/www.etf.com/sections/features/bond-ladders-new-appeal-puts-spotlight-target-maturity-etfs
A couple of months ago the first target date TIPS ladder ETFs were launched:
https://www.etf.com/sections/features/case-blackrocks-new-defined-maturity-tips-etfs
They don’t solve all the complexity but they would make it easier for the average person to handle, presuming sufficiently liquidity etc.
Be nice to see the same here please iShares! 🙂
@TI (61) Thanks for the link to Blackrock’s US-based target date TIPS ETFs. I naively hoped that these would throw off an equal real-terms distribution (coupon and matured principal) each year until being exhausted at the target date. This is how Pfau-style TIPS ladders for income are constructed. However, the Blackrock spokeswoman said they are designed to be held to maturity and the distributions appear to be just the CPI-adjusted coupons.
The article’s author Allan Roth describes building a ladder of the available ETFs, each with a different target date. As each ETF has a different yield to maturity he had to calculate how much of each ETF to purchase. I’m not sure this makes constructing a ladder much simpler than with individual TIPS. The Blackrock spokeswoman does however speak of lower spreads and simplified tax reporting (US applicable).
PC asked “Something puzzling me is why you would take tax free money out of the SIPP to put it in an ISA. Why not just leave it in the SIPP? …”
The answer (via my advisor as I am just starting the process of taking a pension) is ….it depends…. on your circumstances and plans and risk attitudes as for a drawdown you can;-
A) Take 25% as a lump sum and feed it into ISAs.
B) Take just a bit of the 25% tax free amount each year till it runs out.
C) Take a mixture of some tax free plus some taxable income each year.
Reasons for taking it all at once
1) The Government moves the goal posts in the future. The tax environment WILL change in unknown ways over the decades you plan to retire over so get control of some of your money ASAP.
2) Feeding it in to ISAs allows you to de-risk part of your finances with say a Cash ISA i.e. the rainy day fund.
3) Simplicity & flexibility. You now know all income taken from your SIPP is taxable so if your income increases from other taxable sources (e.g. when you get the State Pension) you can use more of your ISA income to keep you below the next tax threshold.
P.S. This is just my understanding…I have no qualifications
@Ray #63 “Government moves the goal posts in the future”: so very true.
With investment risk it’s at least possible to foresee the general types of risks, their form, and how they might play out: e.g. sequence of returns risk, recessions, the sentiment cycle, the interest rate cycle, sector rotations etc.
But political and policy risk has such opacity going forward that it surely puts many people off using a SIPP, despite the (IMHO) overall still massive net benefits.
It’s bewildering the many and varied changes that there have been to pensions (other than the state pension) since 2006. In some ways things have improved, in others they’ve got worse, but – overall – it’s got more complex and less clear, especially as to what further pension upheavals might take place in the future.
Ray – in your position many (20) years ago
I took the 25% tax free lump sum and lived on “tax free” income for some years
Money was kept in a high interest building society account-no instant access cash ISAs in those far off days!
This allowed me to adjust to retirement living without worrying unduly about living expenses-Retirement is a big enough psychological jump without immediate money worries ie a good breathing space!
Allows you current ISAs and SIPPs to grow untouched for some years while you work out your withdrawal plan
Simple and easy to understand
xxd09
@ Ray – thank you for taking the time! I agree that diversifying between tax shelters is an excellent idea, especially as the tax position of SIPPs is deteriorating.
For as long as we’ve had the SIPP vs ISA debate on Monevator, there have always been more voices suggesting that ISAs are politically safer from future government meddling than SIPPs. It’s never been clear to me that that’s the case. But taking the 25% tax-free cash seems like a sensible way of positioning one’s self ahead of time.
You make a good point that it doesn’t have to be all or nothing. With ‘phased’ drawdown, it’s possible to stagger the 25% tax-free cash over time so as to manage limited ISA capacity.
I’ve also just remembered that UFPLS triggers the Money Purchase Annual Allowance (MPAA), whereas drawdown does not so long as you leave crystallised funds untouched.
I’m struggling now to see why anyone would bother with UFPLS when you can achieve the same effect with phased drawdown but not activate the MPAA.
Think I need to write a clear Monevator guide to the various defined contribution pension withdrawal options.
Much what’s out there seems confused and convoluted to me. I’d be only too glad to add to that tradition 😉
@Accumulator
>>I’m struggling now to see why anyone would bother with UFPLS when you >>can achieve the same effect with phased drawdown
I confess to being confused .. I naively thought they were 2 names for the same thing. I’d be very interested in a guide.
@Brod I use Taxcalc to compile my tax return as this is easy to use and you can see exactly how the tax bill is calculated – I’ve not had to complete any extra ‘forms’ so far.
Many accountants also use Taxcalc so you can enter all the data yourself and then simply send the data file to them if you wish them to check everything (probably not necessary unless your tax affairs are complex or you need their re-assurance that you’re doing it right).
@TA From my current reading you can get the same with Phased DD as UFPLS, but DD costs more. I havn’t any evidence for that or know which Sipp providers offer both. That’s my next deep dive.
For anyone thinking of it I bought a 9 year linker ladder yesterday using the Helordpirate sheet through HL. Looking at the formula in the sheet my excel skills wouldn’t be up to do it myself with any degree of certainty. I can confirm that I needed to quote the number of gilts x100 i.e. sheet says 62, quote 6200 to HL. The other thing is look closely at the redemption dates as the ‘simplistic’ cashflow tab just works on the year. You need to see if the date that cash drops works for you.
Other than that, it all seems to have worked a treat. I’m just your standard retail investor, so whilst I found it a bit daunting at first it got easier as I found my way around the sheet. It’s doable for your average Jo with a week or so of thinking time I think.
Hope this helps someone along a bit…
@ Sleepingdogs – thanks for the update! Very interesting to hear how you’re getting on with Helfordpirate’s sheet. It’s on my desktop – swigging a strong coffee before tackling it 🙂
Re: cost for drawdown vs UFPLS. Do you mean broker costs? There’s a £90 per year or so difference in favour of UFPLS on the flat fee broker side. Interactive Investor charge nothing for both approaches though. Same goes for HL, AJ Bell and Fidelity. The broker table includes drawdown costs: https://monevator.com/compare-uk-cheapest-online-brokers/
My apologies if you have something else in mind.
@TA #66: “Think I need to write a clear Monevator guide to the various defined contribution pension withdrawal options”: that would be really fantastic, especially if it could cover as part if it what the major SIPP platforms and providers offer and the costs of each. 🙂
@ TA. The comment I’d read was probably referring to the broker costs DD v UFPLS. Is there any difference in cost between Phased DD & standard DD do you know? In my head we have 4 options with the Sipp. Annuities, Drawdown (DD), Phased DD and UFPLS. Looking into all this and XXd09’s comment on trying for simplicity & yours of Bunny hopping on high wires sooo rings true…
Very interested to read this item and comments. Re UFPLS and drawdown, as far as I can gather, the difference in MPAA treatment is because this is meant to stop pension income recycling – otherwise people could have taken out unrestricted amounts of pension income and recycled it back into pensions as contributions (attracting tax relief in the usual way), and by that means gained yet more tax free cash (25%) when the funds (deriving from the original income) were taken out again, and repeated that process over and over again. This wasnt an issue before when only annuities and capped/restricted drawdown (with tax free cash) were permitted under the old regime, as these restricted income amounts, the point of both being to provide a steady income over lifetime. Some very clever clogs must have thought up this regime!
CGT is becoming more of an issue so like someone said above I switched an IL gilt holding out of my wife’s ISA and into a general investment account as gilts are cgt free and the income off the gilt isn’t high compared to equity income stuff. I can always reverse this if things change ( like my mind) without a cgt hassle.
Even worse, my wife is a Trust beneficiary and a trustee. Trusts get half the personal cgt allowance, 3k this year, 1.5k next year. Rebalancing is difficult with holdings having been held for decades with the consequent gains.
@ Sleepingdogs – as far as I can tell without deep-diving, phased drawdown and flexi-access and all that jazz all appear under the generic banner of pension drawdown these days.
I think terms like flexi-access and phased were mostly used to distinguish between different drawdown options in the years shortly after the pension freedoms revolution.
Now things seem to have settled down, and it looks like the drawdown cost you’re likely to be quoted will cover for you any type (of contemporary drawdown not including old school arrangements like capped drawdown). I’m sure there are exceptions but that’s my general impression of the market, and plenty of brokers still use the term flexi-access
@ TA. Thanks for clarifying that. So it’s more a case of Flexible Access DD & Phased DD as sub categories under the banner of Drawdown. I’m going to call HL & II on this and so will report back findings. Thanks…
Has anyone got any sense of how large the spreads are when you buy index-linked gilts?
HL swore blind that the quoted spreads (of 2-3% on-screen for super long duration linkers) would collapse if I placed a trade (at 1% trade value commission, with a minimum commission of £20, and a maximum of £50). Foolishly, I’ve been trying to market time the bottom for ILGs and so didn’t proceed at the time (I was a bit shell shocked by the trading cost). The Lemon Fool website has this user thread on linker spreads, but it’s a bit old now:
https://www.lemonfool.co.uk/viewtopic.php?t=5479
Thanks TLI!
Spreads do look chunky. 1-2% using LSE clean prices
Ignore LSE. Nothing trades on that. It’s all OTC or TradeWeb. Generally speaking you should think in terms of yield bid-offer, not price bid-offer. Clearly a 2-year bond will have a tighter price bid-offer than an 50-year one given the much smaller duration. The yield bid-offer, however, may be more comparable.
The actual market is essentially choice unless it’s distressed. Something like the UKT 0.125% 2073 (the longest linker) closed today at 0.803/0.801%. So 0.2bp wide. In price terms 72.41/72.48. Remember though that will a PVBP of about 35, that 1bp from mid is 0.35 in price terms. So 5bp wide would be 1.75 price points. So on a long-duration bond, it may seem like you are paying a large bid-offer but stop looking at price and think yield instead.
In terms of execution, the issue is unless you trade in six or seven figure size, you run the risk of getting routed towards the retail LSE ORB platform. Instead find a broker who accepts limit orders. Never take the offered price from them. It will be too wide. Put in limit orders a few basis points through mid yield. Normally some market-marker will find themselves needing a very small odd lot (<£100k) and hit you since it's below mid and free cash for them. You clearly run the risk of the market moving away from you but that's a choice you have to make.
That’s depressing on Treasury 0.125% 2073 ILG. Have been trying to call the bottom, and tempted to buy <£60, but when it hit an intra-day of £55-57 (IIRC) ~20 Oct I thought maybe sub-£50 might be in sight. Not to be it seems. Would have been a good 25-30 percenter now 🙁
Hi all – another question for anyone who’s bought individual gilts:
Have you been able to buy gilts in fractional amounts described as units where by each unit is worth a few pounds or even pennies?
As per this reference from the DMO.
https://www.dmo.gov.uk/responsibilities … out-gilts/
“Whilst gilt prices are quoted per £100 nominal, gilts can be traded in units as small as a penny.”
@ ZX – I totally missed your comment on the 14th. Many thanks. That’s very helpful. AJ Bell accept limit orders on linkers.
Apologies if this has already been answered somewhere in the comments and I’ve failed to assimilate it, but I’m just trying to get a handle on the points HariS and ZX have made. Is the TL;DR that this set of articles is (potentially) slightly moot as the assets available w.r.t the income required mean that you can achieve your objectives with close to zero risk and still have a good chunk of change left over? Don’t want to denigrate anything, but trying to get that high level takeaway straight…
@Rhino yes.
The devil is in the detail though…
Well maybe this series could incorporate an inflation linked gilt approach as a baseline for comparison against whatever the more complex portfolio/withdrawal strategy is?
So, further to this week’s excellent gilt ladder article how sensible would it be to transfer the index linked gilt funds e.g. Royal London from the S&S accumulation portfolio into such a ladder for decumulation? Looking forward to the next instalment of both series
@The Accumulator
>I think terms like flexi-access and phased were mostly used to distinguish >between different drawdown options in the years shortly after the pension >freedoms revolution.
Are Flexi-access and phased drawdown the same thing?
Can you achieve the same effect as UFPLS with them?
I had been thinking of UFPLS but perhaps flexible/phased drawdown would work better. In particular it would enable me to take just the tax free part and leave the taxable part in my SIPP.
This would be very handy as I was working for the first part of the year, but my contract ended and I’m not at all sure what will happen next. I’m probably going to have a short term need for cash, ideally tax free to avoid higher rate tax.
@ PC – Yes, it’s all just drawdown. Phased drawdown is not a separate option, it’s just a term for a particular way you can use your funds in drawdown.
I can’t see the point of UFPLS now, perhaps there’s an edge case somewhere but phased drawdown looks to accomplish the same thing but without triggering the MPAA.
Please do double-check though given you’re about to make this decision for real. There may be some angle I’m not considering.
Also, do you know about the free pension advice appointment you can get:
https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise
@The Accumulator thanks for coming back to me.
Yes, I’ve made an appointment with pension wise. I think you said somewhere you found it useful and AJ Bell are going to make me tick a lot of boxes if I don’t.
I confess to being sceptical about advice, having been a money market and futures trader in the past, but I accept that pension rules and tax are a specialist area.
@The Accumulator
I’ve done the free Pension Wise advice call. I didn’t find out anything new but it was useful to run through the options.
‘Flexi-access drawdown’ does seem to make more sense than UFPLS for me
– you have a choice of what to do with the taxable part of the crystalised amount, such as leaving it in the SIPP for example until the next tax year
– leaving money in the SIPP means it’s not going to be subject to inheritance tax
– AJ Bell lets you manage drawdown and uncrystalised money under one account. It should be simpler and more efficient.
What an excellent series this is turning out to be. It generates so many more questions.
On care home fees, is it not the case that your pensions are not taken into account for qualifying benefits?
So if most of your wealth and thus income was in / taken from a SIPP. You would not need to spend this down before receiving state help?
Thanks again for hosting this amazing site @The Accumulator.
Really interesting article. At 65 I’m a year off SP and still working PT but considering drawdown to fill the gap before I get SP. However, I’m expecting to be able to put in a chunk to my SIPP after selling a property in a couple of years time so I don’t want to trigger any money recycling rules.
I haven’t been able to get any guidance from my SIPP provider (HL) to the Q of whether drawing the tax free lump sum will trigger the money recycling rules but this guide seems to suggest that the most tax free cash you can withdraw is £7500. https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/
There’s a bunch of other gate questions but I’d be interested if anyone has found someone who knows this stuff.
Hi Colin.
The rules to which you are referring are those around the MPAA. Money Purchase Annual Allowance.
Simplified: the MPAA is a one time trigger, that restricts any future pension contributions to a maximum of £10,000 pa, rather than the Annual Allowance of (up to) £60,000 pa.
Crystallising any or all of your pension does not in itself trigger the MPAA.
Taking the tax free cash element of any crystallised pension does not trigger the MPAA.
Taking ANY of the non-tax-free crystallised pension, as income, DOES trigger MPAA.
There are a number of useful guides on t’interweb.
The HMG is pretty straightforward and up to date
https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa
@TA I’m late to the party, but I’ve just Mavenised (Mavenated?) my account and I’m catching up, so this is my first chance to say how good it is to find this article and discussion.
I compared your savings notes to my ridiculously Gothic Excel sheet and I wondered if you’d spotted the extra £1K allowance you can have on savings on top of the starter rate….bringing you up to £18,570 pp.