u/PixiePooper

I've been doing a lot of modelling of drawdown pension to see how much I need. The basic principle is fine: decide how confident you want to be based on historical data, run some simulations and pick something that gives you ~90->95% chance of success.

The fundamental problem is this: "Success" is defined as "Dying before the money runs out" - the "Success" cases include a number of cases where you almost ran out, but died "just in time". In reality I think this would be hard to actually experience your pot almost running-dry late in life.

The other possibility is "just buy an annuity" - which gives you peace-of-mind, but requires more money / working longer.

However, I've been wondering about a half-way house- buying an annuity later in life.

To put some hard-numbers out there for explanation. A single 60 year old person with a pot of £500,000 fully invested in global equities could drawdown (in real-terms) ~£19,400 a year (~3.8%) and have ~95% chance of "Success" - assuming ONS mortality rates.

The problem here is that if you actually lived to 110 (unlikely) there's "only" a 78% chance of having enough money. This is an extreme example, but the point is I don't want to be 90 and have £20K in the pension - even if I did die next year.

So, I tested the approach of using a slightly larger pot and then finding the optimum age to buy an annuity to cover the £19,400 indefinitely (the trade off is that the longer you wait to buy the annuity, the cheaper it will be).

This approach is gives a nice half-way house between buying an annuity at 60 (expensive) and running out of money late in life because of drawdown (longevity)

What my modeling said was interesting - for a 95% chance of "Success" - assuming that you live for ever! the optimal approach to give you the same £19,4000 a year is:

1. Increase the starting pot from £500,000 -> £555,000.
2. Buy an annuity at age 75.

Buying it earlier means that the annuity is more expensive, and (on average) your extra pot will have grown less. Buying it later increases the risk that the money will have run out altogether.

(usual caveats - I had to make assumptions about annuity rate being linked to interest rates, and used historical estimates built around how annuities are priced etc.)

I've been doing some analysis of approaches to withdrawing the 25% tax free using either UFPLS (as a monthly part of the income) or PCLS (lump sum) post 2027 IHT rules changes - particularly for large (>£1.1M) pension pots.

My instincts (which seems to be backed by my analysis) is that the optimal approach is to make a single PCLS withdrawal at the start for the full LSA amount (£268,275) put it into a GIA and then sweep it into ISAs each year. (assumption is that Pension, ISA & GIA is all invested in the same thing)

The advantages of this (compared with UFPLS) are:

1. The money can continue to grow outside of the pension without incurring additional income tax to withdraw it (although dividend, CGT becomes payable - see below)
2. You can make up some of you income completely income tax free from the GIA / ISA reducing taxable withdrawals from your pension.
3. It's more flexible, if you suddenly need a lump sum or move it to a spouse or for gifting.
4. From an IHT point of view it's potentially better, since the ISA / GIA won't face "double taxation" after 2027 (in fact CGT is "written off")
5. If the lump-sum is removed in future legislation, it doesn't matter.

The disadvantage is that you obviously have to pay dividend + CGT on the full amount in GIA - although this reduces as you use it move to ISA / spend it.

This doesn't (all) apply to smaller pots, since the advantage of UFPLS is that the uncrystallized pot can continue growing in the pension, providing more tax free cash.

TLDR: I think that the default on retirement post 2027 should be:

Pot >£1.1M ? -> Lump Sum LSA to GIA -> drip feed into ISA

Pot < £1M ? -> UFPLS

I can't fine any specific analysis of this - is my reasoning sound? what do others do in this situation?

I'm currently putting large amounts into my Defined Contribution pension (to avoid the "60% tax trap"). It's plausible that it might end up being close to £2M by the time I'm able to start drawing on it (in approximately 5 years) if things continue on the same trajectory.

I've started thinking about tax-efficient strategies for drawdown and realise that (assuming tax rules remain the same) I might end up hitting the same 60% trap when withdrawing (after accounting for the tax-free element).

When I'm likely to retire, my situation would probably be (in today's terms):

1. House (worth approximately £800K), no mortgage.
2. ISA £500K.
3. DC pension £2M.

Ideally I'd like to be able to gift assets to my children (or at least help them buy a house) to minimise IHT.

In an ideal world, I was thinking about borrowing against the pension and just paying interest, which, as I understand it, is not allowed by the tax rules.

As an alternative strategy, I was wondering about re-mortgaging the house on an interest-only mortgage, with the idea being that on my death the mortgage could be paid using the pension assets. If I did this, I'd probably only be able to get around £400K, I guess. Obviously this carries some risk.

Another thought was that, if I'm going to lose my Personal Allowance, surely it's better to do a massive pension withdrawal in one year (£1M) to at least only lose £12K once, rather than every year.

My current thoughts are:

1. I might as well carry on putting everything over £100K into my pension because: (a) my pension value might drop; (b) the 60% tax rule might end up changing at some point; and even if it doesn't, I'm not worse off.
2. IHT is "only" 40% anyway, which is better than a 60% marginal rate / 45% rate.

Is my understanding correct?

Is it worth continuing to pump money into my pension?

Are there any other approaches I've missed?