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Should you use cash to bridge the gap between your ISAs and your pension?

ISAs and SIPPs are the building blocks of FI wealth.

This is part six of a series on how to maximise your ISAs and SIPPs to achieve financial independence (FI).

I put this series on hold when coronavirus gripped the world but it doesn’t look like the pandemic is disappearing any time soon.

Life marches on so let’s pick up where we left off.

Where was that exactly?

Right here:

  • Part one laid out why you need to juggle your ISAs and SIPPs if you’re to retire early.
  • Part two investigated why the tax breaks favour personal pensions over ISAs.
  • Part three showed the simplest way to divide your stash between your ISA and SIPP.
  • Part four dealt with choosing a separate sustainable withdrawal rate (SWR) for your ISA and your SIPP.
  • Part five walked through the entire FI calculation incorporating age, income, outgoings, tax, time horizon, SWR, expected returns, investment fees, and access to the State Pension and defined benefit pensions. (This one nearly killed me!)

The final part of this series deals with a very specific part of the puzzle.

How do you bridge the gap between living off your ISA and finally cracking open your SIPP at age 55 or later?

Minimum pension age blow – Since we started this series, the government has confirmed that the earliest age from which we can access our personal pensions will rise from 55 to 57 in 2028. Thereafter, your minimum pension age will be set 10 years before your State Pension age. If you’re born after 31 Dec 1972 then you’re liable to fall into the 57-year old camp, depending on the date in 2028 when the new rules take effect. If you’re born after 6 April 1978 then your minimum pension age will be 58. It’s possible that others born before those dates could still be caught up in government fiddling if the new thresholds are tapered in, or your State Pension age changes, but they’ve yet to publish the details.

Part 4 in our series showed that you can choose a sustainable withdrawal rate (SWR) of 8% to bridge a ten year gap between living from your ISA and the arrival of your pension reinforcements. If the gap is wider then the SWR goes downhill pretty quickly.

But what if your gap is shorter than ten years? Then it gets much riskier to fund your living expenses from a portfolio of volatile equities because you’re more exposed to the chance that asset values could slump. You’re a forced seller because you have to pay the bills regardless. This can end up driving your ISA portfolio off a cliff before your pension comes on-stream.

This graph from the Barclays Equity Gilt 2020 study illustrates the volatility problem:

A graph of max and min returns for UK equities, gilts and cash

The range of annual returns for UK assets is wide over any period of less than a decade. We can see that equities are the asset most likely to deliver a positive average return over 20 years or more. But they can smash you with a -60% loss (or worse) in any given year.

Even over ten years, average real returns can be negative. This means we can’t risk funding our lifestyle from a portfolio of 100% equities – they’re just too volatile. It’s this volatility that conjures up the dreaded sequence of returns risk.

See part 4 for asset allocations that are better suited to shorter time horizons.

Note that while the range of outcomes increases for periods under ten years, cash is much less risky, as you might expect.

Liability matching

The alternative to paying your bills using a portfolio of volatile assets – including a hefty slug of equities – is to pay them using a portfolio of low volatility assets that don’t include equities.

In a nutshell, you predict what your annual expenses (or liabilities) will be for the ISA bridge period. Then you save enough low volatility assets (cash and bonds) to pay off those liabilities…

Year Liabilities Savings match
1 £25,000 £25,000
2 £25,000+inflation £25,000+inflation

… and so on, matching low risk assets to liabilities for every year you need to fund.

The FI capital you need to save is the sum of your future expenses, adjusted for growth and inflation.

Now, you may be thinking that predicting your future expenses and inflation is a tall order. However we take the same punt when creating any financial independence plan.

The reality is we need to build in plenty of margin for error – and to hold off pulling the trigger if life deals us a bad hand along the way.

The ideal liability-matching solution is to build a ladder of individual index-linked1 bonds (also affectionately known as linkers).

If your expenses were £25,000 (in today’s money) and year one of your retirement was scheduled for 2030, then you’d buy a linker that matures in 2030 and pays you back an inflation adjusted £25,000.

Holding the individual linker to maturity means you wouldn’t be exposed to a capital loss, while its RPI-linked payout staves off alarming reductions in purchasing power.2

The next linker in your ladder would pay out in 2031, the next in 2032, and so on. Your last maturing bond finances your final year before pension day.

This is the safest way to match future liabilities because index-linked bonds (or gilts) are backed by the government.

The problem is a linker ladder is extremely expensive.

Index-linked gilts are currently paying negative yields. You lose money on them every year if you hold them to maturity. Their yields have only worsened for years. There may even be a structural problem with the UK linker market.

The upshot is that few of us can afford to pay for our future using an asset yielding -3% or more per year.

The next best alternative for ordinary investors is cash.3

Bridging the pension gap with cash

Cash isn’t typically prey to huge swings in value. It often does okay inflation as you can switch to higher yielding accounts pretty quickly.

You can stuff plenty of it in your ISAs and use your personal savings allowance to ward off tax, too.

Go cash!

A liability matching strategy means that our SWR-based FI calculation doesn’t apply, and you could save the required cash more rapidly than you can build an investment portfolio.

The following example shows how you can calculate whether cash is the better option for your ISA bridge.

If we need £25,000 per year for ten years using an 8% SWR, then our FI capital requirement equals:

£25,000 / 0.08 (8% SWR) = £312,500 stash needed.

But this isn’t the case if we meet our £25,000 per year liability out of cash.

Our cash ladder (in today’s money) is the sum of our liabilities adjusted for expected inflation:

Year Liabilities (£)
1 25,000
2 25,750
3 26,522
4 27,318
5 28,137
6 28,981
7 29,851
8 30,746
9 31,669
10 32,619
Total FI capital 286,597

Assuming expected inflation of 3% p.a.

Ten years of retirement starting tomorrow would cost us £286,597 in cash money. That bakes in an annual inflation rate of 3%,4 so that the equivalent of our £25,000 liability in year ten is £32,619.

I should factor in an estimate for the interest we’ll earn, too, but I won’t. Let any interest be our wiggle room in case expenses are more than anticipated.

The USP of £286,597 is clearly that it’s much less than the £312,500 involved in the SWR strategy.

  • So how quickly can we save our grand total?
  • How do we account for the fact that we’ll need more than £25,000 per annum in X years to deal with the money-withering inflation we’ll experience as we save?
  • Where did that 3% inflation assumption come from?

We walked through the calculation for accumulating your FI capital in part five.

Here’s how to adjust for cash:

In this example, the part five calculation reveals we should sock away £1,446 per month into our ISA.

To estimate how long it will take us to transform £1,446 per month into our FI stash of £286,547, we turn to the How Long Investment Calculator from Candid Money. (Other investment calculators are available.)

How long it takes to save FI capital of £286547

Target sum = FI capital figure: £286,547 in this case.

Monthly saving = £1,446 derived from the part 5 income layer cake calculation.

Annual investment return = A downbeat assessment of how much interest we’ll earn from cash over our saving period.

Annual charge = 0%. I trust you use fee-free cash accounts?

Are you a taxpayer? = Non-taxpayer, as savings will be sheltered in ISA or by the Personal Savings Allowance.

Annual inflation rate = 3% based on Bank of England implied inflation forward curve. See the expected inflation section below.

The result = 20 years to reach the target after inflation (in reality we’d need to adjust our contributions and the target sum in line with inflation every year).

Notably, it only takes 14 years to accumulate the £312,500 required by the SWR strategy, with £1,446 per month stocks and shares ISA contributions and the following assumptions:

  • Expected real return of 4%
  • Investment fees of 0.5%

So I’d stick to the SWR strategy in this case.

The situation swings in favour of cash when the ISA bridge period is seven years or less.

You’d only need £191,561 in today’s money to bridge a seven year gap using the cash ladder figures above.

How long it takes to save FI capital of £191,561

Now it will (hopefully!) take just 12.5 years to reach the target sum.

We don’t have any data to show that a higher SWR is viable for volatile investment portfolios that only need to last seven years instead of ten.

If investing instead of saving cash, I’d still accumulate the full £312,500 given the wild range of possible outcomes over short periods. The ISA portfolio should outlive the seven year time-frame and I can use what’s left to spend more on fun things once I’m living it up on my pension.

Personally I’d likely go for the liability matching option, though, because it’s quicker and safer.

The trade-offs we need to think about are:

  • It’s quicker to save the cash needed for the liability matching portfolio.
  • You’re much less vulnerable to sequence of returns risk – both as you accumulate the money and also when you spend it.
  • You’re somewhat vulnerable to inflation risk.
  • The capital is likely to be entirely spent at the end of the bridging period.
  • Without equities there’s little chance of upside, but there’s also much less chance of a catastrophic downside, too.

At the eight year mark, with these assumptions, it’s a total toss up, especially given the uncertainties inherent in this planning process.

On assumptions – I’ve used reasonably conservative ones throughout the series. You can always be more cautious. And you can never be absolutely safe. The more money you save, and the less you spend, and the safer you will be. But the longer it will take you to get there, the less time you will have left.

To shoot for the £312,500 target in 14 years with an expected return of 4% means taking on a lot of equity risk. You don’t face that risk with a cash liability-matching strategy.

Before we’d access our £312,500 ten-year ISA portfolio, we would lower our equity allocation to reduce our exposure to major market crashes that we do not have time to recover from. The potential upside from a large dose of equities is just not worth the risk of running out of money.

Part four of the series shows that the highest historical success rates for time periods of less than 20 years were achieved with global equity asset allocations of around 30%.

That’s in complete contrast to the 80% equity portfolios – they proved most successful over time horizons of 30 years or more.

Expected inflation assumption

My inflation assumption uses the UK instantaneous implied inflation forward curve published by the Bank of England:

An expected inflation curve from the Bank of England

The curve shows inflation hovering around 3% in 15 years, which is approximately the time our example liability-matching cash goes into action. Inflation then dips under 2.5%, ten years further down the curve.

My crude eyeballing plus a dose of pessimism therefore conjures up an annual inflation rate of 3% for the purposes of planning.

The BoE derives the curve (to massively simplify) from the difference between conventional gilt yields and index-linked gilt yields. This theoretically gives us the bond market’s inflation expectations over time, because conventional gilt yields factor in a premium over real yields to compensate for inflation risk.

Nobody is saying that this measure is a dead ringer for future inflation!

It’s just the market’s best guess right now.

The end of the road

I think we’ve covered every important aspect of combining your ISAs and SIPPs to reach financial independence somewhere in this series.

Although there’s much more to say about achieving and managing FI, I’ll now draw this six-parter to a close unless anybody needs anything else covered. Let me know in the comments.

Take it steady,

The Accumulator

Bonus appendix: How much?

I’ve assumed all cash savings are protected by ISAs / the PSA so there’s no need to scale up the FI capital required to account for tax levied on any interest.

The £20,000 annual ISA limit allows for a max monthly contribution of £1,666.

The Personal Savings Allowance further allows basic-rate taxpayers to shelter:

£1,000 / 0.012 = £83,333 tax-free at 1.2% interest.

Higher-rate taxpayers can shelter:

£500 / 0.012 = £41,666 tax-free at 1.2% interest.

Remember to adjust your SWR for investment fees and taxes as shown in part 5.

If you want to adjust down a little more due to the prospect of prolonged negative yields on bonds and negative interest rates then I wouldn’t blame you.

Data can only get us so far. You’ll need to take a personal call on how bullet-proof you want your plan to be from the outset versus adapting it later.

  1. That is, a return that keeps the value of your investment unchanged in real terms after a particular measure of inflation. []
  2. Subject to your personal rate of inflation roughly approximating RPI. []
  3. The best case scenario would be the government releasing National Savings index-linked certificates back on to the market, but it won’t. It’s much cheaper for the government to fund debt in a market prepared to buy index-linked gilts at negative yields than to pay ordinary UK citizens even a CPI +0% rate of interest. []
  4. Multiply year one’s £25,000 by 1.03, multiply year two by 1.03 etc. []
{ 72 comments… add one }
  • 1 never give up September 22, 2020, 10:18 am

    Thanks so much for this. I’ve been patiently waiting for this series to complete as I was particularly interested in the liability matching approach. Every Tuesday for six months I’ve refreshed my Monevator page hoping this article would appear like an expectant puppy waiting for its dinner! Now it’s here I’m ridiculously excited as only a pursuer of FI can be.

    It’s timely given the NS&I announcement yesterday. Where I hoped cash accounts could at least match my personal inflation rate I’ve now accepted this won’t be the case. It is prudent to save the extra amount caused by inflation upfront.

    Thanks again for all the work you have put into this series.

  • 2 ermine September 22, 2020, 11:32 am

    I am puzzled. I have lived this, BTW, and while I absolutely agree cash has a place, the all-or nothing nature seems counter-intuitive and plain wrong IMO.

    First – saving 286k doesn’t sound that much easier to me than 312k. These are both big numbers for most people, there’s only about 10% difference in it. There’s an argument that reducing your outgoings by 10% has some value too.

    I was fortunate enough to start from one stock market crash and bridge this gap across to another, So I had a pretty good sequence of returns. However, the alternative option is to carry about three to five years expenses as cash, and hold the rest in equities. In good years you discharge some of your equities, in the usual SWR manner. In bad years for equities, that’s what your cash drawdown is for. Few bear markets last three years.

    Although I did this derived from the rule of thumb don’t have money in the stock market you need to call on in five years, I had about three years running costs in cash. Some of it in NS&I ILSCs, some in cash accounts.

    I never needed to draw it down across the eight years. I still have my ILSCs, the cash is getting invested in my last year as an accumulator, now that I have pension income.

    The method of balancing a multi-year cash amount with equity exposure isn’t original to me, I believe it is formalised as the Guyton-Klinger rules

    I’m not saying this all-cash approach wouldn’t work. But I do query whether it is the right balance? A cliff-edge change between all cash for ten years to some equity mix for > 10 years is odd to me, and the downside is burning 10 years running of capital across this intercession rather than say half that much.

  • 3 Spk September 22, 2020, 2:04 pm

    Is the Barclays chart outdated? Can’t imagine cash returning 5% annualised over 23 years! And that’s supposed to be real return!

  • 4 The Accumulator September 22, 2020, 2:58 pm

    @ Spk – the chart is from this year’s Barcap report. It’s not telling you what happened for the last 23 years though. It’s the range of outcomes that have occurred in periods from 1899-2019.

    @ Ermine – given that the best historical equity allocation is approx 30% for 10-year global SWR (using Timeline data) you could of course adopt some lower allocation along the curve for periods of less than 10 years. (Interestingly Pfau came up with an allocation of 20% to equities at 10 years using US data).

    But I don’t have data for what that allocation should be, it’ll make less and less of a difference to your upside, and expose you to a greater degree of sequence of returns risk than liability matching. Aside from the fact that it’ll take you longer to build the wealth. I’ve laid out the trade offs in the article so everyone can make their own mind up.

    The damage from bear markets can last a lot longer than most of us would like to think:

  • 5 Madflier September 22, 2020, 3:56 pm

    Equally, is a range of annual returns for cash of -20% to +40% realistic or useful in the current climate? That seems massively exaggerated, compared with guilt and equity returns over a year.

  • 6 Madflier September 22, 2020, 3:58 pm

    Hah. Gilt instead of guilt, but read into that what you will!

  • 7 Al Cam September 22, 2020, 4:26 pm

    Maybe I missed it above, but why not take a hybrid approach and use equities, etc to grow the Gap “Stash”. Then, once you have enough (287k being “enough” in your example above) convert it to cash/cash-like and de-accumulate across the Gap in a liability matching manner?
    Using this approach you may well spend all of the “Stash”, but bar runaway inflation, you should:
    a) acquire the “Stash” quicker; and
    b) get across the “Gap” safely.

    P.S. I recognise your logic and came to very similar conclusions a few years ago.

  • 8 The Accumulator September 22, 2020, 4:48 pm

    @ Al Cam – I agree you could try that and I nearly wrote a paragraph on it. The risk is that you build up 50% or more of your stash and then get smashed by the market and set back by years.

    My guess is that if you did well with such a strategy it be very, very hard to ease off the throttle as planned. Still, you’re right it’s a viable way to approach the problem if you accept the risks.

    There’s definitely more than one way to skin this cat.

    @ Madflier – those are the numbers and worth knowing what can happen under different regimes. The real point of that graph is to show how volatile equities can be.
    What that graph doesn’t show is how often those outcomes have occurred over the last 120 years. That would be a good one to include.

    The report has 3 other graphs that show the distribution of cash returns in a pretty tight range bar the occasional outlier during periods of extreme inflation / deflation. Cash has been more stable over the last 30 years as we know.

    Equity returns are widely distributed although the -60+ outlier only happened once.

    Gilt returns are a halfway house although the figures are derived from long bonds for much of the period so wilder than what you might expect if you hold medium or short bonds.

  • 9 ZXSpectrum48k September 22, 2020, 5:28 pm

    @TA: If you want to take a look at some return data for cash/bonds/equities/property etc then Jordà-Schularick-Taylor (part of the team that published the paper “The Rate of Return on Everything, 1870–2015”) made their data set available to download for all countries at http://www.macrohistory.net/data/.

    It’s rather broad brush (only annual, not monthly data) and all the caveats about quality of data back that far apply but it’s a single excel sheet so you download and work out real returns etc in minutes … and it’s free!

  • 10 The Accumulator September 22, 2020, 6:31 pm

    @ ZX – Awesome! Thank you.

    The freeness is critical. As well as the integrity of the data of course [Sotto voce: whatevs!]

  • 11 The Accumulator September 22, 2020, 6:34 pm

    Lordy that dataset will keep me busy. No more posts for a while!

    @ Never give up – thank you for saying. I’m very glad it’s been helpful and sorry it took so long to get round to this last one.

  • 12 Dawn September 22, 2020, 6:58 pm

    What about the royal london short duration global index linked fund? As an alternative to cash

  • 13 Al Cam September 22, 2020, 7:16 pm

    Re “There’s definitely more than one way to skin this cat.”
    I agree totally.
    Personally, I consider that the risk on the run up to acquiring the “Stash” is very different to the risk during the deaccumulation phase; it being one thing to have to wait another year or two or three or …… to pull the plug versus running dry during the Gap with no income to fall back on.
    Also, there are many tactical decisions about how to precisely implement and monitor the liability matching deaccumulation part. For example, what about fixed term savings a/c’s (or certificates of deposit (CD’s) as our US cousins call them), should you also hold an emergency fund, what mix of taxed and tax free a/c’s is best- and which to spend from first, what is the best way to track your progress and then what to do if you are falling behind or ahead of plan, etc, etc. In short, hours and hours of fun and loads of stuff for you to write about in due course as you start to experience how all these moving parts fit together.

  • 14 The Accumulator September 22, 2020, 7:34 pm

    @ Al Cam – agreed. I could well imagine looking at the 14 year calculation and thinking “sod it, I’ll gamble on 100% equities and pull back later if it goes well. If not I’ll deal with it at the time.” That’s legit as long as your eyes are wide open going in. It also helps if you have prior experience of a bear market with real teeth.

    I sense that as a group, the Monevator community is quite gung-ho and confident in its ability to handle risk. Many more people here talk about maximising returns as opposed to managing risk. ZX is pretty unusual in these parts as a risk averse voice.

    One thing we should bear in mind, as we look at the unappetising prospects for cash and bonds, equity valuations are high too. We can’t expect equity returns to shoot the lights out either. Which is a real bugger.

    @ Dawn – you could. It’s a fund so it can experience capital loss but IIRC duration is about 3 so pretty low risk. It would be interesting to compare its yield with the yield for individual index-linked gilts and see how different it is.

  • 15 never give up September 22, 2020, 7:37 pm

    TA – nothing to apologise for. I’m glad the series is complete and have no doubt it will be very useful for people.

  • 16 Dawn September 22, 2020, 7:52 pm

    Thanks. Got 7k to go into fixed income, was going to put it in royal london until I read your article, now I’m considering a non isa fixed rate cash bond .
    I do have an individual index linked guilt due to mature nov 2022 so I will find out in due time. From what you your saying I can expect capital loss on this?

  • 17 John Elkins September 22, 2020, 7:58 pm

    You say that if you’re born after 31 Dec 1972 then you’ll definitely fall into the 57-year old camp. I’m not sure that’s quite true, it may be that the change will happen on a fixed date such as 6 April 2028, the beginning of the tax year. If so, anyone who has their 48th birthday before 6 April 2021 will still be able to access their pension from age 55, but anyone even a day younger will have to wait another 2 years to start taking an income from their pension.

  • 18 Al Cam September 22, 2020, 8:49 pm

    Re “I sense that as a group, the Monevator community is quite gung-ho and confident in its ability to handle risk.”
    Possibly, but then again I suspect rather a lot of the community are still climbing the hill! Deaccumulation (or to continue with the analogy descending the hill) IMO is a different game that requires another approach – with the focus on paying yourself a steady income rather than maximising returns.
    Some of the reactions from the community to the mini-bear earlier this year may well have hinted at a fair degree of inexperience; the need for the “do not fxxxxx sell” post being rather memorable! Peoples apparent risk appetite often exceeds their true risk capacity IMO.
    Personally, I tend to a floor plus upside approach, as I might just have mentioned once or twice before.

  • 19 ZXSpectrum48k September 22, 2020, 10:09 pm

    Strong in these padawan, recency bias is.

    As @TA says I’m about as risk averse as you get. Yet my portfolio has returned 12%/annum on a unitised basis since 2000 (9% asset allocation, 3% active). Looks fine and dandy on the surface.

    That two decades, though, hides a terrible period for equities. I started investing in 2000. Between Sep 2000 and Mar 2003, the S&P dropped over 50% in nominal GBP terms. Worse than 2008. Wonder why I’m risk averse? Wonder why I prefer bonds and alts? Shaped by my early experiences. You bet!

    Plus it didn’t come back quickly. Due to a 40% appreciation in GBP/USD (yes, Sterling can appreciate; clearly FX hedging is never needed …), you were still 20% underwater in 2007. Then 2008 happens and you’re back to 45% underwater in nominal terms.

    Those sorts of moves would have been a disaster for bridging between cash and a pension. It happened twice in a single decade. So over a long enough horizon, investing looks great but never underestimate path dependence (or sequence of return risk).

  • 20 Vanguardfan September 23, 2020, 3:22 am

    @ermine. Now I’m puzzled. When you say you never had to draw on your cash stash, what did you live on? I’ve clearly misunderstood something!

    Very useful article, thanks TA.

  • 21 Joe 45 September 23, 2020, 8:37 am

    I’ve adopted a similar approach in my plan for retirement, which is imminent. Based on £22k non-discretionary annual spend, I’ve calculated the amount required ahead of state pension (mine and Mrs 45) and then the shortfall for 20 years beyond.

    The figure required is around £300,000 using a SWR of 4% over the latter 20 years. I then apply a relatively “safe” asset allocation to this amount (50:50 in equity & bonds/cash).

    The rest of my portfolio will be available for discretionary spending (holidays and going out) and with this portion of the portfolio which needs to last for 30 years, I can be more aggressive so 70:30 equities and bonds.

    Blending the 2 sub-pots gives me 67:33.

  • 22 Al Cam September 23, 2020, 9:01 am

    @TA & @ZX:
    As I see it, when deciding how best to de-accumulate across such a Gap the only path that matters is that which will occur over the Gap. Unfortunately, this path is unknown and unknowable in advance. History, of course, can provide some clues – but that is all. Furthermore, the path to this point ( ie acquiring the “Stash”) is irrelevant. After all, I may have won the lottery on even received a completely unexpected inheritance from long lost Aunt Flo – what does it matter.

  • 23 The Accumulator September 23, 2020, 9:06 am

    @ John Elkins – good spot. You’re quite right and I got myself muddled up. Have corrected in line with your point.

    @ Dawn – it would depend on when / how much you bought it for. If you hold to maturity then you’ll get your principal back plus accrued inflation. Plus you’ll have got all the interest you’ve received to date and will get between now and maturity. Stack that all up and it could well be less than you paid for the bond. If I buy a linker now then I can see at current prices that I will get less if I hold to maturity.

    Incidentally, if I really feared inflation, and was sufficiently moneyed, I could decide that the annual loss was worth it on linkers to protect the bulk of my wealth. I’m not in that position though, so I can jaw on about it all I like.

    But when I’m 75 I could be in this position again. Looking at terrible rates on an index-linked annuity and wondering whether it’s worth betting that I’ll live to age 100 (or something) in order to break even. I have backed my mum to keep going on exactly this point and she sometimes ribs me about it. She doesn’t quite seem to get that it’s an early bath for her if I’m wrong!

  • 24 ermine September 23, 2020, 12:09 pm

    @Vanguardfan #20
    > Now I’m puzzled. When you say you never had to draw on your cash stash, what did you live on? I’ve clearly misunderstood something!

    I sold off (in principle every year, though it was not as organised as that):

    Sharesave shares, then SIPP index shares. In all cases I observed a profit. If I was to observe a loss, I would have switched to running down some of the cash stash.

    I do take TA’s point that perhaps I have been a tremendously lucky mustelid, I started my decumulation journey effectively into the teeth of the GFC, and reached a landing point a few months before coronavirus hit in March, I now have DB pension income which means I did not need that capital.

    I had more in the SIPP than I have needed, though there is an argument I lived less large across the last eight years because I could never bring myself to really believe equity income would hold. I had about three years running costs in cash, so until I was within three years of getting able to draw the DB pension I was fearful, though reason should perhaps have told me to push the boat out – 50% retrenchments are possible, but if it goes 100% titsup I have bigger problems. But whatever. I shifted the unused residual of the SIPP and some of the unused profits of the sharesave into my ISA, which is more at the end of the journey than my collected assets were at the start.

    I was a lucky padawan, in ZX’s terminology. The increase in assets was due to a very benign stock market, particularly in the early days (2009 to ~2015), enough to beat out my spending in the first half. I saw a slow fall in networth in the second half, which was then beaten out by the PCLS or my main pension and the quite frankly absolutely nuts behaviour of the stock market during this year.

    I am glad to observe TA’s remark

    > equity valuations are high too. We can’t expect equity returns to shoot the lights out either. Which is a real bugger.

    None of the increase is real. I am comparing heavy equity valuations at 2009 with a slightly less heavy equity valuation in Q3 2020. Valuations were down in the dumps in 2009, which served me well as a net buyer. Valuations are up in the sky at the moment because the FAANGs will save the world. Yeah, right

    The fortune of this padawan was to have a job that went wobbly in the GFC and reading this when I wanted safe passage out of a dying career. I couldn’t replicate that starting now 🙁

  • 25 Naeclue September 23, 2020, 12:49 pm

    This has been a great series. Not directly applicable to me as I have been in decumulation for some time, but very helpful in helping me think through what we were doing with respect to asset allocation and drawdown strategy. For example, we have decided to stop drawing from our SIPPs and to run down ISAs and unsheltered investments first. This will mean sizable LTA charges when we reach 75, but worth it for the IHT saving.

    We have no ISA to SIPP gap to fill, but have set aside 10k per year of cash each that will take us through to when we start drawing state pensions. This is mostly invested in 2-5 year fixed term deposits.

  • 26 Brod September 23, 2020, 2:21 pm

    @TA – I agree with everyone else – great series. And for me very timely.

    Using your calculations and Big ERN’s work for my State Pension, I’ve worked out that I can boost my 3% SWR by 1% and retire next year reasonably comfortably! (With the very reasonable assumption the Govt. launch a big austerity push next summer and I can claim my small DB pension after being made redundant.)

    Come on Rishi, you know yer wanna…

  • 27 Mezzanine September 23, 2020, 5:15 pm

    Recently, I’ve been building my ISA bridge using Vanguard TR funds – mostly TR2020 which is now at 50:50 on its glidepath. My original intention was to draw directly from the funds but as my bridge will be 5yrs or less, I’ll likely liquidate most of them once I hit my number.

    Repeating @Al Cam above, I chose to accumulate in equities rather than cash but switched to TR funds a few years back to soften the landing once it was in sight. During April this year, it was looking like my FI had been put back 6-9months and while the losses have since evaporated, I was sleeping fine with the TR fund risk.

  • 28 CisforV September 23, 2020, 7:48 pm

    Great post! This is an interesting problem.

    I had played around with the EarlyRetirementNow SWR Toolbox v2.0 Google Sheet a while ago and came to the same conclusion that it’s safer to use cash between ages 50-57 before drawing down longer term from a stock/bond pension.

    With a bit of trial and error, I actually found it’s slightly more optimal to have 8% stock, 92% cash. That is based on historical US data with monthly withdrawals and maintaining the same allocation for the 7 years.

    Another minor optimisation could potentially be to gradually increase the equity allocation each month/year. ERN has shown good results with this type of glidepath, at least with stock/bond allocations over longer durations.

    My biggest problem as discussed in the comments is bringing myself to transition from my 80/20 stock/bond allocation to 8/92 stock/cash over the next 6 years (when I will hit 50). I find myself wanting to keep the stock rocket burning for as long as possible.

  • 29 Sparschwein September 23, 2020, 11:00 pm

    I suppose there is a skew in the comments because “gung ho” correlates with extrovert/talkative 🙂

    The biggest question to me is how to build a portfolio that is halfway resilient in different scenarios.
    QE-infinity might continue to pump up asset prices forever (as most seem to assume by default). Or stagflation, or “Japanification”; both possible enough to warrant some hedging.

    Precious metals, cash and linkers/TIPS are parts of the puzzle, but I believe we need some new ideas or adopt strategies from the pros. Hope Monevator can explore that next frontier.

  • 30 Matthew September 24, 2020, 12:14 am

    With a bit of creative thinking and flexability you can give your portfolio more time to make good on losses – ie use debt if you have to, refinance it with equity release or even sell the house & rent, or just be willing & able to go back into some kind of work, or just limit your spending ambitions at first. We are even ultimately covered to some extent by the welfare system – People do survive on it, with food banks, etc, or grow your own food (really if you’re unemployed and mortgage free you wouldn’t have to pay council tax if you fell onto universal credit, and if you have the food bank then apart from utilities what do you really need to pay?). Maybe also some utilities companies will let you pay massively in advance to cover you against inflation.

    Ultimately if you need less cash than investment to do something then your risk isn’t being adequately compensated, you have to ask yourself what are you really trying to do? – guarantee a set retirement date and standard, or hope to have a more luxurious retirement later on? Or leave an inheritance? – we sometimes have a multitude of incompatible goals

  • 31 Al Cam September 24, 2020, 7:46 am

    A few Q’s if I may:

    1) I agree with you that [in the absence of ILSC’s] fixed term deposits probably provide the next best fit to liability matching deaccumulation objectives, including [FSCS] security. However, there seem to be few, if any, accounts that last longer than five years. And, reversibility options are now quite rare/relatively punitive with these products too. Did you also look at fixed term annuities?

    2) LTA vs IHT tax is an interesting one. Would you agree that your conclusions are:
    a) somewhat tied to the detailed situation e.g. desire or otherwise to leave a legacy;
    b) subject to review if/when the taxation situation changes

    3) Also, do you favour drawing from your taxed accounts ahead of your ISA’s or vice versa. I ask as I view the ability to convert cash ISA’s to stocks and shares ISA’s [and vice versa] as potentially useful. Thus, currently, I tend to favour holding onto the ISA’s even if/when they pay a lower interest rate cfi unsheltered accounts.

  • 32 Naeclue September 24, 2020, 9:34 am

    @Also cam.

    I haven’t looked at fixed term annuities, which might be worth doing. I had just assumed that they would give worse returns than cash deposits.

    In our case we are likely to pay both the 25% LTA charge and be subject to 40% IHT on part of our estate, although impossible to say for sure. For the moment, opting to increase the LTA charge and decrease IHT seems like the best thing to do for our beneficiaries. No absolutes here though. Future investment returns, how long we will live, future care costs and tax rule changes are all uncertain. If we were just thinking about ourselves it would be better to continue drawing from SIPPS up to the basic rate limit as the LTA charge is something you are liable for whilst still alive. All very much subject to personal circumstances and in need of regular review in light of changes in tax rules and changes in personal circumstances.

    I am definitely in favour of drawing down unsheltered investments ahead of ISAS, which is what we do, selling investments outside ISAS and buying back inside using income generated inside the ISA and annually with ISA contributions. CGT does complicate things though and I try hard to avoid paying any. ISAS are stuffed with equities apart from a small position in a corporate bond fund, which is purely a parking space for cash due to the fact that we have fully utilised our CGT allowances for this year. I guess we could transfer out to cash ISAS instead, but not something I have looked into.

  • 33 ermine September 24, 2020, 9:45 am

    @Al Cam
    > I view the ability to convert cash ISA’s to stocks and shares ISA’s [and vice versa] as potentially useful.

    I did just this. I held on to that damn cash ISA for far too long, but then it was stiffening the spine.

    As a more general point, this is a pure DC trajectory, which burns down the ISA and then uses the SIPP on its own in the last part of life.

    I went the other way, I have no SIPP to speak of now, other than enough to keep my HL SIPP open to make the £180 p.a. from the taxman (25% of the £720 bung onto on £2880 which is still tax-free).

    That is because I have a DB pension enough to set me firmly into paying tax. I believe you have a DB pension too at some stage, and for that retirement journey a SIPP is more favourable as something to burn down between 55 and the DB NRA. You ISA is more valuable to you than it is to DC pension savers, paradoxically because you have less flexibility with your pension drawdown.

    That is unless, of course, you are trying to favour your progeny with a legacy. While your spouse can functionally inherit an ISA as an ISA children can’t, whereas they can inherit a DC pension under certain restricted circumstances.

  • 34 Vanguardfan September 24, 2020, 10:58 am

    @naeclue. We are technically decumulating, as in, expenditure exceeds earned income, although at present the withdrawal rate is very low, and covered by income generated from taxable accounts.
    I’ve never quite worked out how I should spread my asset allocation between ISAs, pensions and taxable accounts, whether I should favour equities in particular accounts. You mention ISAs being equity heavy, what’s the rationale for that and how does your AA vary across types of account?
    One of us is close to LTA due to a DB pension, so that SIPP is bond heavy, but maybe that’s a mistake?. Overall asset allocation is 50% equities with the rest split between cash and bonds (more cash). Any thoughts about which types of account should hold which assets preferentially? Maybe the bonds/cash should all be outside tax shelters…

  • 35 Brod September 24, 2020, 11:36 am

    @ZX – I’d like to point out that we’re not all gung-ho. With my limited work-life (half-life?), I’m only 25% equities. Over the next 12 years, that’ll re-balance to something like 70-80% as I drawdown bonds to live and re-balance into equities as I get nearer my SP and small DB pension providing my floor.

    There are also at least a couple of distinct tribes here – those lucky enough to worry about strange things called LTA and IHT and CGT. And the rest of us trying to eek out a few extra tenths of a percent from their SWR (Secure-ish Withdrawal Rate) by looking at Big ERN’s work on the effect of the SP on SWRs.

    It’s a broad church.

  • 36 Al Cam September 24, 2020, 12:43 pm

    @naeclue, Ermine, & Vanguardfan
    Scenario: DB & DC pensions; LTA likely without action; and IHT probable.
    DB, in due course, has potential to consume majority of LTA.
    No burning desire to favour progeny (or anybody else) with tax optimised legacy. FWIW, I thought gifting whilst alive was a pretty good IHT strategy?
    I too have done the ISA re-cast – e.g. as part of my SIPP [to ISA] “shuffle”; see below.

    I pulled the plug a few years back and, in theory at least, my Gap runs until I decide to draw my DB. The timing of that decision is now entirely within my gift, albeit with the impact of early retirement factors (ERF), etc. As an aside, ERF’s can be viewed as both bad – due to a lower annual DB pension and good – as they lower the LTA hit. My initial view was to seek the optimal DB pension pay-out [at NRA] but I am now having second thoughts about this. All DB schemes are complex and mine has a specific twist around survivor benefits. The devil really is in the details with DB schemes!

    Irrespective of when I draw my DB, for my particular circumstances I believe the best approach to tackling my Gap is: unsheltered/taxable to live on, then, as soon as you can, start shuffling SIPP until approx. empty (into S&S ISA’s via annual drawdown with full PCLS and NOT via UFPLS), and then, if and when required, ISA’s.
    But, of course, it is all subject to change & I keep it under review.

    What I would really like to do [or, perhaps, should do] is to be able to put it onto auto-pilot at some point – as it is all rather complex.

  • 37 Mezzanine September 24, 2020, 12:51 pm

    There’s a new opinion piece on the FT “When are you going to retire?” outlining the basics of age, expenditure & withdrawal rates. The article contains nothing new for Monevator readers but in the comments, someone pointed to a free (incentivised by onward commission) resource developed by an actuary that appears to help individuals model drawdown from ISAs/pensions taking account of tax, state pension and any DB income streams. I noted in the FAQ that it doesn’t account for couples – they suggest splitting the income needs and creating two plans.


    Anyone seen or used this? I might have a go with it later on…

  • 38 ermine September 24, 2020, 1:17 pm

    > FWIW, I thought gifting whilst alive was a pretty good IHT strategy?

    You would think so. But it appears that people who wish to do this fear for the moral fibre of their progeny – which is perhaps why said kids aren’t self-starters. And therefore the parents can’t rely on them to do the right thing should they live longer and need to call on it. There is some truth in the from clogs to riches to clogs in three generations, grit is forged in the crucible of adversity 😉

    > What I would really like to do [or, perhaps, should do] is to be able to put it onto auto-pilot at some point – as it is all rather complex.

    Hmm, your DB pension drawn at NRA rather than earlier is one way to maximise this?

    > As an aside, ERF’s can be viewed as both bad – due to a lower annual DB pension and good – as they lower the LTA hit.

    Are you absolutely sure on this? I read the HMRC manual as the LTA is tested against the value at NRA although I agree that it is not totally clear and could be read in other ways, but the ERF reducing the LTA is not one of the ways I read it?

  • 39 Ruby September 24, 2020, 1:17 pm

    @ naeclue – I have nearly 20 years to go until 75 but having paid some LTA tax when I took my 25% lump sum I’ve been pondering what to do about this myself. My limited understanding is that if one exceeds ones LTA at 75 (for the first or second time or whatever) one has to pay the charge of 25% on the excess. However, if one pegs it shortly thereafter, while the SIPP may avoid IHT, ones beneficiaries have to pay income tax at their marginal rates on any amount drawn from the SIPP (whether this be all at once or annually for a while). This contrasts with IHT free completely if one expires before achieving 75. Doesn’t the obligation for beneficiaries to pay income tax mean the is no great saving by paying the LTA charge but avoiding IHT. What am I missing?

    Like @ VanguardFan I’d be interested in any observations on AA across wrappers. I’ve always just taken the portfolio as a whole and applied an AA to that and given no great thought to finessing it by having different AA for wrapped/unwrapped.

  • 40 Vanguardfan September 24, 2020, 1:32 pm

    @ermine, I confess I haven’t read the link to the HMRC guidance, but I’m pretty sure Al Cam has it right re DB and LTA. The test is done when you put the DB into payment, and is based on what it is actually paying. So if you take it reduced and early it will take less of the LTA.
    I too have been mulling this one. My NRA is 60 for the DB, and I’ve always thought I would take it then, and crystallise the SIPP afterwards, to ensure that any LTA excess charge lands on the SIPP rather than the DB. I think the second part of that is still correct, but I’m not sure about the rationale for not taking the DB early. It’s partly (possibly mainly) psychological, in that I want the highest possible secured income – that is surely one way to keep it simple for those of us who have lived our lives with steady monthly income. Purely financially it may not be the best, not least because it increases the risk I’ll be in higher income tax brackets.
    I’m fairly relaxed about any post death taxation. I actually anticipate getting to the point of giving quite a lot away (not to offspring), but I think I want to be nearer the finish line before I start divesting myself of too many assets.

  • 41 Vanguardfan September 24, 2020, 1:43 pm

    Now I have read the HMRC guidance I am convinced we were correct, it talks about calculating the LTA value based on the pension ‘at the date it comes into payment’.

  • 42 Al Cam September 24, 2020, 1:44 pm

    Re: “Hmmm…..”
    I hear you re NRA. However, there is a rather complex trade-off hereabouts that becomes even more nuanced if/when you may not need all the pension payable at NRA/SRA! Furthermore, if you draw prior to NRA you get to that form of auto-pilot stage quicker too!

    Re: “Are you absolutely sure on this?”
    About as sure as I can be.
    Every DB pension “quote” I have ever had specifies the associated LTA (as a percentage) for “tax purposes”.

  • 43 ermine September 24, 2020, 1:44 pm

    @Mezzanine Thanks for that. I gave it a go, and it it tells me I should spend more, and not even think about working even in the face of high inflation and reinforces that I should drawn down more ahead of my SP entitlement, which I sort of knew but haven’t done so far.

    I respect them for not demanding outrageous amounts of personal data or even your name and place of residence, other that implied UK and London/not London, though as usual you should always mildly falsify things like D.O.B…

    They appear to think I will live surprisingly longer than my allotted three-score years and ten. They did not seem to discriminate between savings and investments which was a concern. So I’m not sure it has the rigour that Monevator users would require. But it’s an interesting take. The amount they suggest I should spend is I suspect a little bit more than I ever spent while working, when you take into account all the parasitic costs of working, and paying down a mortgage. Not dramatically so, but either they want to give people a really good feeling to get their business, or I am paranoid as hell somewhere…

  • 44 ermine September 24, 2020, 1:55 pm

    @AlCam, Vanguardfan

    Re HMRC and valuing a DB at NRA – fair enough, perhaps another example where I was overly paranoid 😉 In support of your postulation, I drew my pension a few months before NRA and there was a citation for the amount of LTA used. Curiously this was higher if I took the greatest amount of tax-free lump sum, despite the actual pension being correspondingly lower. Which isn’t how I read that HMRC doc either. What do I know, eh? Thankfully this isn’t my problem any more.

    I was mainly an ISA sort of guy, though I recall there being another one of these LTA citations when I flattened my SIPP – and indeed each year when I drew down pretty much the personal allowance leaving the rest. I did wonder if I’d have had a problem if I had gone all-in for the SIPP option. Unlike the procedure advocated in this post, I preserved my ISA at the expense of burning my SIPP to the ground. This is rational for people with a DB pension, though nuts for pure DC pension holders for the reasons given in this post and earlier ones in the series.

  • 45 DavidV September 24, 2020, 3:46 pm

    @Al Cam (31, para.3) I have read a number of articles on the optimum order of withdrawal from various types of accounts. A couple were by Vanguard and all were US-focussed. It seems the conventional preferred order of spending is as follows:
    1. DB pensions and annuities in payment
    2. Taxable investment flows (interest and dividends)
    3. Taxable investment accounts
    4. Tax-deferred accounts (SIPPs, DC pensions etc. in UK)
    5. Tax-sheltered accounts (ISAs in UK)

    In the UK I think this order may need to be modified for those who have a legacy motive. They may prefer to preserve the SIPP for as long as possible. For those without a legacy motive, I think the conventional order of spending is sound.

  • 46 Al Cam September 24, 2020, 4:23 pm

    Re DB and/or SIPP crystalization:
    I am near 100% sure that I would have had a non-trivial LTA issue if I did nothing before I wanted to take my DB. Hence, I pulled the plug (stopped working) and fully crystalized my DC (now a SIPP) pretty much as soon as I could. This gives me at least twenty years to manage any DC/SIPP LTA fallout. My DB is still to be drawn. I see a big risk lurking in the bushes. That is, HMG decide to increase the DB LTA multiplier from the current 20 before I draw it. Also, as I am no longer working (for money), I can actually shuffle my SIPP rather effectively w.r.t. tax – and much more effectively than had I been working OR drawing my DB pension!! You might just want to give this latter point some further consideration.

  • 47 Al Cam September 24, 2020, 4:40 pm

    I recognise the types of documents you describe.
    And yes there is much more info available in the US – principally, I believe, because they abandoned DB schemes earlier and with more gusto.
    Whilst these docs and your conclusions are probably about generally correct, I would recommend that everybody holistically review their own situation as there are so many moving parts that will interact in subtly different ways with everybody’s personal circumstances and objectives.
    I have learned a lot from these types of documents but probably even more from chatting with folks on forums like this and bashing out the odd spreadsheet or two!

  • 48 Naeclue September 24, 2020, 4:54 pm

    @Al Cam, Vanguardfan, although I would be pleased to have a DB pension, I don’t, so at least that is one less thing to have to concern myself with in an already complicated situation.

    I am not really knowledgeable enough about DB pensions to add much, except it seems to me that DB pensions, typically index linked, are completely undervalued by the LTA test. There is no way that a normal healthy retiree could buy an index linked annuity for the LTA value of 20 times annual income. As such I would have thought in almost all cases anyone with a DB pension and a DC pension would want to take the LTA hit on the DC pension rather than the DB pension. But like I said, I don’t have a DB pension, so may well be missing something in the arcane details somewhere.

  • 49 Vanguardfan September 24, 2020, 5:06 pm

    @naeclue, I think you are right. I don’t want to end up with an LTA excess charge on my DB pension, it will result in a permanent reduction in the pension, so the longer I live, the more I will pay.
    @al, I have to say I am not sure that I will be a non tax payer at any point.
    I suppose the decision about crystallising the SIPP first depends partly on the balance between the two.

  • 50 Al Cam September 24, 2020, 5:09 pm


    Re complexity – you’re not joking!

    Re DB LTA valuation – I agree with you.
    Hence my comment that “I see a big risk lurking in the bushes.”

    IIRC your new AA is 50 years equities & 5 years cash, with no particular “magic” as to how these are distributed across a/c types. Is that broadly correct?

    I await your thought on Ruby’s Q (at #39) re “What am I missing” with interest.

  • 51 Al Cam September 24, 2020, 5:25 pm

    I understand why you would prefer the DC scheme to take the hit but what I would worry about is are you sitting on a ticking time bomb? Under those circumstances I would want to do something.
    My own situation as I turned 55 [and the LTA limit was helpfully reduced again] was I was looking at an LTA uncomfortably close to 100% from the current value of my DC scheme if I took my deferred DB scheme at NRA. My DB scheme is revalued iaw CPI. So, as I saw it then and bar any changes in the DB LTA multiplier, I was able to intervene and achieve all of my objectives. It is all very situational.

  • 52 Naeclue September 24, 2020, 5:38 pm

    @Ruby, @VanguardFan AA across wrappers is not necessarily as simple an issue as it may seem.

    The case for bonds in wrappers is 1) income tax rates on interest is higher than on dividends and 2) bond interest is typically amplified by the fact that most bonds, long dated govies anyway, trade above par value and you are compensated for a drop in capital value at maturity by being paid more interest along the way compared to a bond with an equivalent gross redemption yield trading at par. More interest means more income tax if held outside a tax wrapper, even if some of the interest is paid in compensation for a capital loss.

    The case against holding bonds in wrappers, as opposed to equities, is that the expected return on equities is higher, so over an extended period you should expect to end up with more money inside tax wrappers if you put equities in them and held your bonds outside.

    FWIW we don’t hold any bonds any more so our ISAs and SIPPs are both stuffed with equities (apart from the small amount we have temporarily in bond funds in our ISAs). When we had bonds though we did hold these mostly in our SIPPs for the reason @Vanguardfan mentioned – trying to mitigate the LTA charge. However, I am not confident this was necessarily the best thing to do. I remember having a conversation with a work colleague many years ago about this who was adamant that it was better to concentrate equities in SIPPs in preference to bonds. Not just because you ended up with more inside tax sheltered accounts that way, but also because if you held equities outside tax wrappers you could end up building up a significant capital gains tax problem. He was right, this has happened in our case and it is tricky to unwind without paying CGT. It may well have worked out better to hold the gilts and US Treasuries fund outside our tax shelters with more equities inside, even if that meant more income tax along the way.

    I cannot see a case for holding cash deposits inside SIPPs or ISAs at present, unless your SIPP/SSAS allows access to decent deposit rates. Some do, but the schemes cost more to run than the cheap SIPP providers such as Hargreaves Lansdown or AJ Bell. Waste of tax sheltered account space.

  • 53 Ruby September 24, 2020, 6:07 pm

    @Naeclue – thank you for taking the trouble to leave such a detailed reply. Plenty of food for thought.

  • 54 Naeclue September 24, 2020, 6:09 pm

    @Ruby, @Al Cam, sorry missed the “What am I missing bit?”. In a nutshell, you are missing the fact that whoever takes money from a pension usually has to pay tax on the withdrawal. For example, if I take £1 from my SIPP, as a basic rate taxpayer I will end up with 80p. If my wife and I drop dead tomorrow that is 80p our beneficiaries have to pay 40% IHT on, leaving 48p. If instead I leave the £1 in the SIPP I will likely end up paying a 25% LTA charge at age 75, reducing this to 75p in the SIPP. When I die, that 75p goes to beneficiaries as a survivors pension. If they withdraw it at basic rate, they get 60p. So the beneficiary will get 25% more if I pass it to them via my pension compared with passing it from my estate. All of that assumes the same basic rate tax is paid in both cases, the LTA charge stays at 25% and IHT stays at 40%.

  • 55 Naeclue September 24, 2020, 6:23 pm

    @Al Cam, I am not sure what the point is in rapidly drawing down a SIPP to transfer to an ISA. They are both tax advantaged accounts and the SIPP has additional benefits, for example residual amount passing to beneficiaries outside your estate, and completely free of tax if you die before the age of 75.

    Another benefit is with the way SIPPs are treated in financial assessments for social care. If you need social care and have more than about £23k in savings, including ISAs, the local authority will contribute nothing to your care costs until your savings are reduced below £23k. With SIPPs, only a notional income is considered, equivalent to the annuity that could be purchased at the point of the assessment. This means you would not need to burn through the entire SIPP before receiving a contribution from the local authority.

  • 56 Vanguardfan September 24, 2020, 6:48 pm

    @naeclue, I had wondered that about my SIPP, does it actually matter if it grows ‘too much’ – I still get some of that growth. I’m not putting any more in.

    @al cam. By time bomb do you mean a change in the multiplier for DBs? I’m not too worried about that. Perhaps I should be, but I just think that the political pain would be too great for rather little gain. And given that LTA protection was provided for those affected by previous reductions, why wouldn’t the same be offered for this change. Or at least enough warning to be able to take it early and reduced.

  • 57 Al Cam September 24, 2020, 7:20 pm

    Principally to retain the possibility of being a BR tax payer once my DB and SP come on stream. And, to be honest, just a little bit because I can and for the “challenge” …… see below.

    Maybe I am being a tad selfish – but I am just not that bothered about people tax affairs beyond those of my wife and myself. My view is that it is a nice problem for any inheritee to have …… and frankly they will need to learn too! W.r.t. inheritance I am totally on Ermines team!

    Thanks for the additional info re social care, but IIRC the DB pension income will do for those too.

    It is, of course, a balance and if I draw my DB earlier then I would have more headroom to work with.

    I also am attracted, probably somewhat short-sightedly and unwisely, to the challenge of emptying the SIPP with the minimum tax paid. I will not emulate Ermines achievement of not paying any tax on his SIPP – but I will achieve a far higher rate of tax efficiency than I originally foresaw. On the other hand paying tax at 40% [even well into the future] on the SIPP would be IMO a bit of a fail [even if the underlying investments had done extremely well] knowing that I could have done what I call the “shuffle” and side-stepped that totally.

    Lastly – and I agree this is pure speculation – I suspect ISA’s will survive more intact than SIPPs.

    So, to steal some phrases I have read somewhere before, we are all a bit of a mixture of rational econs and emotional humans, with at least a conceptual foot on planet Vulcan whilst residing on Earth.

    P.S. when you say “completely free of tax” do you mean IHT.

  • 58 Al Cam September 24, 2020, 7:30 pm

    OK – no more going in to either DB or DC, so only potentially significant time bomb issue is growth of your DC. I have described my own take on this (at #57) above.
    Does your DB revalue with RPI or CPI, if it is the former then there is a bit of a slow burner there too.
    And yes, to date, in the event of a significant rule change (like LTA reduction) protection has been the way to go – long may it continue.

  • 59 Naeclue September 24, 2020, 7:39 pm

    @Al Cam, our AA our of 50 years equities & 5 years cash is kind of right, but I wish it was that straightforward. 50 years equities + 5 years cash + state pensions is closer, but we haven’t yet reached SPA so have additional cash to bridge the gap. We also have more than 50 years equities as money cannot be drawn from the SIPPs without paying tax and we are expecting to pay an LTA charge at age 75. So I have a 70% fiddle factor for that. The value of the equities will of course move all over the place, so I think in terms of 5 years cash, everything else in equities, but if the equity amount rises above 60 years spending (adjusted for SIPP values) the intention is to sell the excess and if cash rises above 6 years estimated spend, we will spend or give away the excess cash. We are not likely to need 60 years worth of spending in equities when we are 80 though, so I am expecting to move that limit down over time in a as yet to be determined way.

    AA across accounts is as I have mentioned equities in both SIPPs, ISAs and normal trading account apart from a small position in corporate bonds in our ISAs.

  • 60 Naeclue September 24, 2020, 8:26 pm

    @Al Cam “Completely free of tax” means completely free of income tax, not IHT. So if you die before 75, your wife or other named beneficiaries bet a can opt to draw your residual SIPP free of income tax via flexi-access drawdown, or draw the whole lot as a tax free lump sum. Any money drawn will of course form part of the estate of whoever draws it, so IHT is a later possibility. The beneficiaries SIPP can be passed on when they die and the same rules apply again, so if the beneficiary dies before they reach 75, their beneficiaries can continue to draw income free of income tax as flexi-access drawdown, otherwise they are taxed in the normal way.

    These successor SIPPs are strange things. They cannot be contributed to, but are not subject to any BCEs so can continue to grow free of income and capital gains taxes. They flip between being taxable on withdraws under flexi-access drawdown to untaxable depending on when the current holder dies. There is no age restriction on when they can be accessed. Successor pensions could become enormous over time if their holders allow them to roll up. If that were to happen though I am sure a future government would pass legislation to award themselves a slice through additional BCEs.

  • 61 Naeclue September 24, 2020, 8:28 pm

    ps @Al Cam, avoiding higher rate tax is a worthy aim 😉 I can see your logic.

  • 62 Al Cam September 24, 2020, 9:41 pm

    From the above info (#59 & #60) I can see that you will almost certainly be using “gifting whilst alive” to manage some of your IHT issues. This seems to me to be eminently sensible.
    I had absolutely no idea about the complexity associated with successor SIPPs – for the reasons I explained above I have tended to ignore inheritance issues beyond the OH – so thanks for giving me a heads up. From your description they look like the classic definition of unintended consequences – and I agree with you that the government will not be able to “ignore” such potentially juicy takings for much longer.
    As I said before this is an absolutely fascinating subject – but far, far, far too complex for most!!
    Re your P.S. and very much tongue in cheek – if/when I come to buy my Lambo I sure as hell do not want to pay 40% tax!

  • 63 Al Cam September 24, 2020, 10:36 pm

    Re your comment above (#43) “… it it tells me I should spend more, …”. This sounds rather similar to our chat a month or so ago. Is lobster and chips with a nice white wine still available round your way or do you have an Autumnal alternative?

  • 64 Jonathan September 24, 2020, 10:37 pm

    This discussion does seem to have become so specific that any approach depends entirely on personal circumstances.

    For better or worse – described here in case it helps anyone else in their own decision – my own strategy was to maximise AVC contributions to my DB pension scheme for the final few years to retirement, being prepared to run down ISAs up to the extent I could benefit from my bit of higher rate tax relief each year and at the same time keep the benefit in my 25% tax free cash at retirement. Lifetime Allowance wasn’t an issue though. In my wife’s case it was more complicated, she has changed jobs several times so has service in a number of schemes with her most recent being DC. We decided to hold them all to their designated retirement age, augment and transfer the DC fund to a SIPP so it could be drawn down (DC rules only allowed an annuity), keeping drawdown within her income tax threshold and making up shortfall from my enhanced lump sum. At 60 a few small DB pensions will allow her drawdown to decrease, and by 65 she will have more DB income (and run out of SIPP). Finally when she turns 67 she gets State Pension and we become fully set up; by then outgoings should also be less than now until care costs are needed; at the moment we are supporting a daughter going to university and if it were not for Covid we would be spending on post-retirement travelling.

    In terms of investments though: we have been very conservative about my wife’s SIPP. After taking the tax free 25% we left almost 5 years’ worth in cash despite the poor interest rates (with HL, though the comparison doesn’t look so bad now) with money needed later in LS20. Spare money from the lump sums paid off the mortgage and goes into ISAs (mix of LS60 and LS40) – we are currently drip-feeding annually so to the full annual allowance, though if it were not for an inheritance that would have slowed down or stopped by now.

    We haven’t planned for IHT however which is obviously some people’s concerns, even though I have had the angst of dealing with my late mother’s tax. It seems a long way away, and we assume that along the way we will have contributed to our daughter’s future home purchase with seven years to take it out of IHT. Unless they change the rules …

    But who knows whether any of us is making the right choice. When we started on our journey no-one imagined Covid, and Brexit seemed an unlikely possibility with the assumption that it would be handled by a sensible government. How things change!

  • 65 Matthew September 24, 2020, 11:09 pm

    Maybe we should split the community into tribes – ie
    1- High earners where IHT and the LTA are problems, where allowances are full and managing capital gains is a problem
    2- Basic rate taxpayers trying to eke out a little something more and leave an inheritence, where choosing between a sipp and a lisa is a trickier question (ie sipp efficiency vs risk of losing pension freedoms vs being stung for care costs in retirement)
    3- people who are somehow able to invest while on means tested benefits (saving for a house maybe?) but suddenly sipp contributions become more favoured by means testing so they have to weigh up whether home ownership is worth it. These people might consider the welfare state to be their safety net if things go wrong

    Of course someone could exist somewhere between – ie may not be a high earner but a DB pension might be enough to threaten the LTA even if IHT unlikely

    Maybe for that matter we should also think about how important giving a whopping inheritance is to us – do we really despise work so much that we try to save our children from it? – And work longer ourselves just so our children don’t? How much help is enough? – Personally I think advice is most valuable and there needs to be some sense of independence and personal achievement, even if you do ease the journey

  • 66 Al Cam September 25, 2020, 2:09 am

    Nice to hear from you again.
    Trust you are your wife are keeping well?
    Apologies for inadvertently dragging this discussion into a particularly small set of rabbit holes – but it is somewhat inevitable, and as I said earlier to David V (#47)
    “Whilst these docs and your conclusions are probably about generally correct, I would recommend that everybody holistically review their own situation as there are so many moving parts that will interact in subtly different ways with everybody’s personal circumstances and objectives.”
    And yes, rather a lot has happened since Part 5 back in February – who would have thought!

  • 67 Kim September 25, 2020, 8:57 pm

    Would there not be some merit in using a LISA to fund (some) income over the £12500 personal allowance in retirement, if paying into it as a basic tax payer?
    My plan is £15,000 income in retirement, drawn from my pension from age 57 and from age 67 state pension plus personal pension and LISA for “tax-efficiency” (as LISA is not taxed at all for basic rate payers, whereas other ISA’s are).

  • 68 Kim September 25, 2020, 10:50 pm

    Doh, just spotted the comment on this early in the series.

  • 69 Chris P May 30, 2022, 3:42 pm

    Fascinating read. Is there another option to bridge the gap – remortgage? So 2005 I know but rather than saving £300k into an ISA, save 50% say and top it up courtesy of the bank to get a few years ahead of the game. Go interest-only to keep expenses down and pay it back when you finally get your hands on the pension prize, possibly with the tax-free lump sum.

    Or even, if you’re just shy of the amount you need, money transfer? You can probably get £20k easy across a couple of cards then if you bounce them around you can tap into a few more years of FI that you’d otherwise need to work…

  • 70 Wodger November 4, 2022, 5:33 pm

    I have a question about saving for FIRE that’s loosely aimed @TA, although someone else might also know the answer.

    Let’s say you’re on a ten-year FIRE accumulation path and have a bridge period of 10–15 years before you can access your pension. Does the following plan make any sense? Phase 1: save exclusively into your pension, until the target for that part of your overall pot is met (buying riskier assets because of the longer time horizon). Phase 2: switch to saving exclusively in ISAs to cover the bridge portion (buying less risky assets).

    My thinking is that front-loading the pensions in Phase 1 would allow you to benefit from a longer period of compounding on the extra money contributed by the tax relief. And in Phase 2, saving into less risky assets in the ISAs wouldn’t be so much of an issue because your time horizon is shorter.

    I’d be grateful if someone would tell me if my logic is sound or screwy!

  • 71 Wodger November 7, 2022, 11:21 am

    Following on from my last comment, I made a simple spreadsheet that confirms my intuition. You would indeed receive a small boost to your final investment value if you 1) first exclusively contributed to pensions, until you have as much as you need, and then 2) contribute exclusively to ISAs.

    Let’s compare both scenarios using a toy example where you’re accumulating for 20 years.

    In the first scenario, you contribute £800 per year in your ISA for the first 10 years. Then you switch to contributing £1000 p.a. to your pension for the next 10 years (i.e., £800 plus tax relief for someone taxed at 20%). After 20 years of contributing and compounding at 4%, you would end up with £27,272.

    However, in the second scenario, you exclusively contribute £1000 p.a. to your pension for the first 10 years, then switched to contributing £800 p.a. to your ISA for the next 10 years. You would then end up with £28,472. So going full-steam on pensions first does increase the total pot value at the end of the accumulation phase. It just comes at the cost of less flexibility along the way.

  • 72 Kim November 7, 2022, 12:43 pm

    Thanks Wodger! Don’t forget that there is NI and company matching as well if pension contributions are via salary sacrifice , this would skew it further.

    I’m following the same approach – pension contributions until they are unlikely to be unhealthy by the time I can withdraw them plus LISA, then I will switch to saving into ISAs.

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