I'm approaching my retirement, what pension provider should I use for drawdown?
08 July 2021
Question by Hugh
I retire next spring, just before my 60th birthday.
I have a final salary pension that will pay £25k pa from age 60 (plus a one-off £80k tax-free lump), and a separate DC fund that will be worth £350k.
My plan is to take the tax-free sum from the DC pot, and put the rest into a flexible drawdown, taking £25k pa for 7 years, by which time mine and my wife's state pensions will come in. The pot should still have c£100k left over. That way we get more or less £50k pa for ever, plus any more that we want to take from the £60k of tax-free sums which will be spread between cash and low/moderate-risk investment.
I need to move out of my work DC pension provider to get the drawdown, and am looking at low to moderate risk ethical/sustainable funds with Pension Bee, Vanguard or ii.
I'll take one-off advice, but before I speak to someone, am I on the right kind of track? Not missing something significant? I don't want anything very risky, and I don't want to do active investment management.
(I have a separate lump of money from old endowment policies to pay off the mortgage in 5 years time - that all takes care of itself and is already more than needed.)
Answered by Amyr Rocha-Lima
It's clear from Hugh’s question that retirees in the UK are facing more challenges today than ever before when it comes to retirement planning. Arguably foremost among these challenges is how to convert the retiree’s accumulated retirement savings into a sustainable income that may need to last 30 years or more. One way to accomplish this is to select the proper withdrawal order when deciding which accounts to spend from.
In Hugh’s case, his decision to commence drawing an income from his Defined Contribution (DC) pension straight away – as opposed to, for example, using his cash savings first – might adversely affect the sustainability of his withdrawal strategy, as well as other factors such the potential IHT treatment of his estate. By using his DC pension first, Hugh would be immediately exposing himself to “sequence of returns” risk. This is the risk that his portfolio declines in the early years of retirement, whilst he is taking ongoing withdrawals, which could significantly reduce the longevity of his portfolio.
DC pensions carry a number of advantages which argue for delaying withdrawals from this vehicle. Most DC are not part of the investor’s estate for IHT purposes, and as such have value as an asset transfer vehicle, especially if the investor is unfortunate enough to die before age 75. DC pensions also receive protection from creditors. Finally, flexibly accessing a DC pensions triggers the money purchase annual allowance, potentially reducing the investor’s ability to further contribute to the DC pension in the future. While outside the scope of the outcomes Hugh has stated as important to him in his question, these factors argue for spending from the DC pension last.
In summary, ensuring that Hugh’s savings and investments will support him and his wife throughout their later years is a critical part of their financial planning, and in my view this should be the discussion that comes before deciding on specific products/funds. This discussion would form the basis for building a sustainable withdrawal strategy, which is a plan that’s unique to each individual or couple. Unfortunately, there’s no one-size-fits-all solution when it comes to spending your nest egg. After all, managing withdrawals is a delicate balancing act, thanks to the complex and nuanced nature of mitigating the various risks at hand.