Monday, 23 February 2015

SWR - Who Cares?

Safe Withdrawal Rate (the % of a pot of money that can be taken each year without fear of it running out before the grim reaper strikes) is a topic much discussed on FI boards and blogs. However I only have a passing interest in the subject because I don't really have a pension "pot". I'm one of those lucky people with a (modest) DB pension that will never run out and will keep going as long as I do. It's index linked and 50% of it will pass to my husband if I die before he does. So once I get to 66 I'm sorted.

My problem consists of funding the years between 58 (when I hope to retire) and 65 (when I intend taking my pension). My calculations are not around working out how much I can take, they are based on having enough there in the first place. It doesn't matter to me if it all goes and I do have the luxury of knowing how long it has to last, but it does have to be there. I'm very close to needing the money (two years this month) and still a fair way off from having it. I need the pot to grow but I haven't got a lot of time. If it shrinks dramatically I could be looking at working longer or not sleeping at nights when I do leave, so I need to secure my income for those years as tightly as possible. How to do this?

I have no training in economics and failed A level maths 3 times (this and learning to drive are the two things I've allowed myself to fail at in my life) and the dynamics of the markets is something I've only just started to take an interest in. Financial products and how to manage money (beyond the basics) is an art I'm only just learning but I think these are the two areas I need to work on.

Assess how much I need to live on.

This should be the easy bit. Working on the premise that we will need as much as we are spending now I have calculated that I will need to secure an income of £930 per month for the 20 months before my husband receives his state pension and £505 for the 64 months after until my pension becomes payable. Total = £50,920.

But at this point I am already making two assumptions:

  • that our rental property will bring in at least £4,000 pa
  • our ISA's will have grown to £70,000, won't lose value dramatically and will pay 3% dividends giving us at least £2,000 pa. 

This process also tells me something quite important: I need a substantially higher amount of income in the first two years than I do for the following 5.

Work out how much I need to produce this income and how to secure it when I've got it.

This is the tricky part. In simple terms I could just plan to save the whole amount in cash, put it in a bank account and draw out what I need each month. The problem with this is that I'm getting very nervous about whether or not I'll actually have the full amount. I have £29,600 at the moment but that could be £25,000 next week, or £32,000 depending on what the markets do. In any case I definitely need to ramp up my saving to reach my target and this will be made very difficult due to the fact that our disposable income will shrink massively in a few months when my husband retires.

According to received wisdom I shouldn't really have any of my pension in equities at all since I will need to draw on it in 2 years time. Thankfully a good chunk of it (around £19,000) is safely stored in my CIS FAVC but I will have to transfer it out in order to draw it so I will need to have worked out what to do with it by then. Maybe I shouldn't actually put this in my SIPP for drawdown but put it into a "high" interest current account instead and use it to fund the first two, most expensive, years of retirement?

It's very difficult to see how things will pan out given that we don't yet know how pension drawdown will work under the new rules so maybe when this becomes clearer I will be able to put together a firmer plan. But my more immediate dilemma is that I need my SIPP to grow but I shouldn't risk the volatility that this requires. According to my calculations I'll have just enough, but only just and only if....

I know the solution of course, spend less, save more. Any kind of withdrawing, safe or otherwise, depends on the funds being there in the first place. Perhaps I need to concentrate more on tactics for saving than worry so much about where to put the money and how to make it grow.

Having more than enough is the only way to be confident that I won't run out and it's time I acknowledged this, bumped up my targets (see below) and got on with it.

ISAs - £70,00065,344
Pension - £50,00029,600
Abundance Gen - £7,5001,500
Cash - £22,50022,000
Total - £150,000118,444
Isa To Go4,656
Pension To Go20,400
Cash To Go500
Abundance To Go6,000
Total To Go31,556

(The money in Adundance is an interesting addition because it works in quite a different way from the rest of my investments. A chunk of capital is returned each year and, so long as the project you are invested in doesn't fail (which is a risk), you can be fairly confident of that return. So this level of investment should give me a return of around £650 - £700 pa.)


  1. I think you're right - concentrate on savings skills and sneaky tactics to save as much as possible. Once you get that disciplined, then you can spend some time researching the best place for the money!

    1. Thanks M, I'm hoping to do just that. Writing it all down has helped to motivate (scare!) me into taking another look at our budget and where I could cut a little more.

  2. Ah, the old early retirement income suckout :(

    > I need a substantially higher amount of income in the first two years than I do for the following 5.

    It's not unreasonable to treat this as an acceptable case to run down capital a little. It's not a strategic permanent deficit, it is a cash-flow problem. You need ~£400 a month more for 20 months, which is about £8000. Toss £6400 into a SIPP as cash, leave it as cash and the taxman will make it up to £8000. Talking of which -

    > According to received wisdom I shouldn't really have any of my pension in equities at all since I will need to draw on it in 2 years time.

    Then toss the cash into a SIPP and don't invest it. Or sell some for the coming £8k crunch and leave the cash as cash :) There's no law saying you must have equities in a SIPP, it is just that if you are saving over 30-40 years you'd be nuts to do that.

    You seem to be a canonical case of someone who can use a short pension for those two years. You can, however consider the cash in your SIPP separately, or open another - it all depends on fees and if they start charging you drawdown fees. In which case shift the cash to another SIPP provider which doesn't count as crystallising and use the new freedoms with the new provider to liquidate the cash. Naturally, check for transfer and exit fees first.

    I have a SIPP with Hargreaves Lansdown to which I contributed £2880 as cash last year. I will do the same this year, and then the same in May - next year from a tax POV. And then some time over the next couple of years, ask them for all my money back, plus the tax bung (and less the exit fee of about £250). Conveniently this total will be lower than the personal allowance, and 25% of it tax free so I could even earn a little money without paying tax ;)

    It's not a bad time to divest at the moment, if you will be needing the cash in the next couple of years. But there's absolutely no reason to take it out of the SIPP wrapper - that was the whole point of the new pension freedoms, take it out as and when you need it, and stay below the personal allowance if possible ;)

    1. Very many thanks ermine.

      I think you're quite right and what I need to do is keep the first 2 years funds as cash in the SIPP if possible. I need to investigate how drawdown works with Fidelity and if that's the best place to put it. An added complication is the transfer of my CIS FAVC which is around £19,000 of a "with profits" product which is pivotal to my plan. Fidelity have said they'll probably take it but need to see the paperwork. I've been delaying transferring it as it's been doing OK and I wanted to see exactly what happens to the drawdown rules for my SIPP come April and also wait until after the rush dies down. When (hopefully "when" rather than "if") it arrives it will have to be in cash, I think, as Fidelity don't offer this product. This could be the best time to re-assess and make sure I keep enough in cash. I am getting twitchy though as if something goes wrong with my plan at this point it's getting a bit late to work out a "Plan C".

      At least you've clarified that point for me though - hold the first two years (at least) in cash in a SIPP and get to this position sooner, rather than later. Thanks again.

    2. You could also take some of your cash that is outside a SIPP and run it through a SIPP to get a 20% lift over that period 58 to 65. It appears you are 56 at the moment, and still earning. If you put the difference between your (salary - existing pension contribs) and the personal allowance into a SIPP just as cash you will get a risk-free 20% bung (the tax back, less exit fees) which is a 10% p.a. return if you start drawing in two years. There aren't many places you can get that sort of return on cash at low risk. It is probably worth waiting both for Osbornes changes to be made and perhaps right up to March 2016 to see what the new government will do in this area - by that time you will be within a year and a bit of retiring so the return now looks like a 20% boost to your cash reserves and you're only exposed to Government meddling for a year ;)

      You can take 25% tax-free and then draw £6000 or less a year from it because you have £4000 rental income that is taxable, your ISA income does not count as taxable, so you have about £6k of your personal allowance left. It could be a nice way of handling that suckout.

      You need to watch your annual allowance because any pay rise you get * about 20 will be knocked off because of the increase in your FS pension.

    3. Thanks again ermine. I'll check all that out and makes plans. Even considering my pay rise (thanks for the tip) I reckon I could still safely put around £32,000 this year into my SIPP and I'm not going to be able to get anywhere near that, so I'll aim as high as I can. (Although I am a bit confused by this - the LGPS is now assessed on 1/49th salary so the increase in my pension that I should be taking into account from this year's salary increase is about 600/49 X 20 = £244? rather than 20 x the pay increase itself? - anyway it makes little difference as I won't be be topping £20,000 whatever I do.

      ( btw I should actually be able to draw around £8000 tax free as the rental is shared with my husband).

    4. > rather than 20 x the pay increase itself?

      Yup, sorry, that was misleading. You are absolutely right - it is 20 * the increase in your pension, as payable at normal retirement age. It tends to hit moderately Big Cheeses towards the end of their careers. Imagine Mrs Roquefort on £50,000 (with a pension payable of £25,000 and she's in the last couple of years before NRA. If she gets a 10% pay rise on a FSP she's up for a £2.5k*20 = £50k lift so she's well out of order.

      > I won't be be topping £20,000 whatever I do.

      Why not? Let's play with the idea! To be honest I'd view a pretty sure fire 10/20% win one of the few examples where borrowing to invest (ramping up your mortgage if any, or even, ahem, a good 2 year or even 1 and a half year credit card 0% deal with a 3% initial fee) is worth considering as an option.

      I'm not advocating it as such, but not doing it is an opportunity cost. It's always good to have a convincing story to tell yourself about why you're not taking an opportunity. For anyone a couple of years or more off 55 "I don't trust those people in Government not to keep meddling" is a perfectly reasonable answer. For someone able to ramp out £20k over two years the bar's probably a little higher on 'why not save £16k into a SIPP as cash (gives you a SIPP of 16/4*5=20k), take out £5k tax free lump sum plus £7.5k the first year. You could pay off £12.5k of your loan, you only need to find £3.5k yourself to discharge it. The next year you get £7.5k, making you £4k better off and you get your £3.5k capital advance back. Obviously you have to eat the £480 cost of the 3% loan so you're only £3k better off, less any exit fees (seems to be ~ £354 at Hargreaves who aren't known as the cheapest people in town If you hold the SIPP for more than a year (which you would in this example) that drops to £30. You don't pay portfolio fees if your money is held as cash.

      I'd do it, but I can't. I wouldn't borrow money to invest into equities, but I'd borrow it to invest into cash for a 20% leg-up as long as I was left with at least 10% after the cost of the loan and any exit fees on a SIPP! Heck, I opened my Hargreaves Lansdown SIPP for three lots of £720 because it would have been rude not to ;) £2k isn't going to dramatically ease my retirement but it's a shame to leave free money on the table....

    5. Hi ermine. It's really useful for me to get your thoughts on this - especially if they involve opportunities you think that I might be missing.

      After reading your comment I decided to really bottom out what I would actually be allowed to pay in rather than just work out what I could "afford" over the next 2 years whilst I'm still working and then decide if/how I might be able to fund this along the lines you suggest. I was actually a little surprised as I realised I hadn't understood the rules properly and the amount I could contribute is lower than I thought.

      The maximum I would be allowed to pay in is £20,560 (net) made up to £25,700 by HMRC. (This is what I earn - I work part-time). Then I need to take off the value of my DB pension added during the relevant tax year which (going on the 2013/14 tax year figure) is around £5750, leaving me with a maximum contribution of £14,810 - £14,000 pa to be on the safe side. £28,000 for the two years.

      I had been planning on putting in around £6,000 next year TY and £2,000 the following from our normal budget so if I were to look for a way of funding a higher amount I would need around £20,000 from somewhere. Funnily enough we have £20,000 sitting in a high interest current account that we aren't planning on touching any time soon. :-) It does seem a little crazy to not take advantage of the tax lift when I know I will not be paying tax on it when I take it out.

      Lots to mull over. I just need to see what happens over the next few months politically and with the pension platforms and then get my FSAVC transferred into my SIPP so that I'm sure what the rules are, and how much I'm working with, before I decide exactly what to do.

      Many Thanks. :-)

    6. btw - more as a reminder to myself than anything, the MBNA Platinum credit card currently has a 24 month 0% interest rate period on cash transfers with a 1.94% handling fee which sounds promising and beats taking money out of our Santander 123 account to max up the SIPP. So long as they would give me a credit limit of £8,000 or so. This might be the way to go come April.

    7. Your FSAVC, if it goes into the same SIPP (or is transferred in) as your 28k cash would increase the tax-free lump sum you could take, 'cos the TFLS would be 25% of the total amount. Because you would take that at the beginning of your need for extra income it would help with that nicely.

      > This might be the way to go come April.

      You've still got a month to make up this year's allowance ;) At this stage where you direct future money would have to be the SIPP with the tax boost compared to favouring the ISA for a couple of years, even to the point of considering pulling some from the ISA

      The tool for this job is the good old spreadsheet with the (tax) years 2015, 2016, 2017 2018 (from when you will be drawing your interim suckout SIPP as cash) until and then through to 2025. You will be flattening your SIPP over those seven years, whereupon you will be 65 and your regular DB pension will kick in.

      In the rows for each year show your 2k rental income, and the income from your other investment streams. Then replicate these rows, but now show what would happen if you dropped your ISA a bit and put some of the amount into a SIPP - in groups of rows you test out the various scenarios.

      You can map out when you get the TFLS and when you need to repay the loan, and how much interest you pay each year. The results can be illuminating, because sometimes the right course of action is counterintuitive. You can represent your TFLS as extra income for those first two years by first paying down the loan, then with the rest putting half in the first year and half the next. Alternatively if the boost in income from the SIPP to £8k p.a. is enough, commit all of your TFLS to paying down the loan.

      To find the upper limiting case look at the most you can get out tax free. Over seven years you can get £8.6k*7=£60k out tax-free (the personal allowance will be £10,600 by the time you do this), plus a third of that as your TFLS of 20k, making a total pot of £80k (which would cost you £60,000, you are a bit under halfway there with the CIS FSAVC). The TFLS is a great match to the requirement to pay down the loan that got your SIPP that high in the first place. You can use some of the cash to reduce your borrowing and/or augment it.

      In the spreadsheet you can also represent the effect of inflation and fees, which will reduce your return somewhat over a seven year period. You could argue that since you won't be making a call on some of the money for more than five years you could leave money not called on for five years or more in the SIPP in the stock market, that depends on your personal views and risk tolerance.

      In many ways a SIPP will do for you what abundance does, but with lower risk - with cash you get the 20% ROI provided you spread out your repayment of capital to be below your personal allowance (£8.6k p.a. in your case because of the rental income).

      You may or may not agree with his politics, but I would say that you are the very person Osborne was thinking of with his pension freedom plans. You may as well consider his offer of roughly 10k towards your retirement savings, and it's only open to you in these last few years of working. Over the same three year period an Ermine will only be able to win a maximum £2160 from the same offer.

      The limiting case may mean you need to borrow a shedload of money, though the TFLS will let you pay it back, and again this is something that is much easier while you are still working.

      May the force of Excel be with you! I roughed this one out and it seems if you use three years of £14k allowance you can reach the limiting case, hence consider this year too ;)

    8. Excel here I come :-)

      I've just cancelled our regular monthly ISA payments as a start and will divert this into my SIPP. Once I've done the modelling, as you suggest, I should have figures telling me the optimum amount I need to put in for this and the next 2 tax years. Then I need to sort out the cheapest way to get it and pay it back.


    9. I guess you may also want to note the pension recycling rules. The fact that a large part of your capital comes from the CIS FSAVC is favourable, as is your history of paying into private pensions as well as the DB scheme. It certainly favours spreading your payments over several years, however, so this year counts ;)

  3. Hi Cerridwen

    I must admit that like you, I'm a bit the same about the SWR - I find it all really fascinating and interesting but I don't think it really applies to me - my Future Fund is mainly to cover my expenses until I am old enough to collect my DB pension and the state pension, plus a little bit extra to ensure that along with the pensions, I have a decent standing of living.

    Ermine seems to have come up with a good solution to some of your cash dilemma - the 20% from SIPPs is not to be sniffed at!

    Thanks for posting that Abundance link - not seen that before - looks like something I'll probably chuck a small amount of money at (more diversification!), plus it's towards something good, especially compared to the "sin stocks" that I shall be buying more of...

    If you have a referral link for Abundance, let me know and I'll sign up on that.

    1. Hi weenie, DB pensions are a real luxury nowadays so I do count myself lucky.

      However, there has been some interesting discussion on the MSE forum recently (which you may have seen?) about how DC pensions might actually be starting to be more beneficial for younger people in some cases, due to the relatively late age that DB pensions tend to become payable (mine is 66) and their general inflexibility when compared with the new freedoms for DC pension holders. Things are changing.

      (Great news that you think you might invest a little in Abundance - they do have a referral scheme and thanks for the offer, but it only kicks in when the person you refer invests £500 which I guess might be a bit steeper than you want to go at this point.:-))

    2. Not seen the MSE discussion - I'll check it out. The flexibility of DC pensions is good for some - I just like the fact that with the DB pension, I've no need to worry about getting looking for a decent annuity for the rest of my life.

      Throw me your Abundance link anyway as it's probable that I will invest the minimum to get you your referral! ;-) I have some bonus money to play with, which hasn't been accounted for in my budget/analysis and investing it (in any way) is better than me spending it!

    3. Hi weenie. That's great. I've messaged you :-)

  4. Hi Cerridwen,

    I was gearing up to say pretty much the same thing as ermine but he's already said it (and has more knowledge than I having been dealing with all that stuff right now!) so I haven't much to add.

    Is there opportunity to just pump your SIPP full of cash at the expense of most other things, take the 20% or 40% tax bung, then start to withdraw more than you need to live on in draw down and put the remaining money into ISAs? Or will the tax paid on the way in / out just cancel each other out? Again I am no expert and have not looked into it in detail, as it's not a particularly urgent matter for me right now, but I am aware that certain quasi-tax-arbitrage opportunies such as this do exist especially when you are nearing the age when you can draw down the SIPP etc...

    Good luck anyway, sounds like there are a few options there which make the situation a bit more rosy than you thought when you wrote the post (hopefully!)

  5. Thanks FS, I currently putting virtually all my spare salary "excess" into my SIPP at a rate of £1,000 a month but this will stop in July when my husband retires. As ermine says I do need to get enough in there to be able to withdraw it at a rate of about £8,000 pa in order to get the best tax advantage (tax lift on the way in, tax-free on the way out). The tax free dividends from the ISAs along with our rental income can then hopefully be used to make up the extra bit we need to supplement my husbands pension.

    What ermine and the rest of you helpful folks have made me realise is that I can (and should) use other funds to fill the SIPP, if necessary, rather than keep it outside the SIPP in cash/ISAs because using the SIPP is by far the best way to give my income a leg-up.

    I do feel a bit more hopeful, thanks, but won't be entirely happy until I have my FSAVC safely sitting in cash in my SIPP along with enough more in cash to see me through at least 4 of the 7 years, and the rest in equities that I can sell at the right time to fund the remaining years.