Phased Drawdown – Could be the Solution
PHASED DRAWDOWN – YOUR FLEXIBLE FRIEND
If this year has taught us anything, it’s that fate can step in and change the best laid plans. You need to be prepared for that and your pension plan ought to be able to cope with the unexpected.
Phased drawdown is a valuable tool which can give people tax efficient flexibility in the way they use their pension pots in retirement.
The rules allow you – once you reach the age of 55 – to withdraw up to 25% of your pension pot tax free and this can be done in phases, you do not have to take this all at once. With advice, you can choose how much to draw down each year, taking into account your personal tax allowance and any state pension, in such a way as to minimise your tax liability.
The beauty of this is that it puts you in control, giving you the flexibility to draw varying amounts each year as circumstances change.
The experiences of three different Reeves clients (names changed for privacy) during the upheaval of Covid illustrates this.
Chris Spelling, 62, was looking forward to an early retirement within the next few years, but then coronavirus struck and drove his employer into liquidation. This was a double whammy for Chris, as not only was he without any income – apart from Universal Credit – he didn’t rate his chances of finding a new job at his age.
He contacted us, convinced that his retirement plans were now in tatters. However, we had a meeting with him, via Zoom, and reviewed his financial situation, looking particularly at his major financial outgoings and anything we could cut out. He was keen to reduce his mortgage commitment. Normally we would strongly advise against using tax free cash to pay off a mortgage but, in Chris’s case, he had taken out a high interest mortgage, so it was beneficial to him to draw from his pension to pay it off. With careful cash flow forecasting ensuring his pension delivered enough income without risk of depletion, this reduced his monthly outgoings by around £1,000 a month, this enabled Chris to be able to retire immediately.
Andy Jenner, 60, works as a consultant through his own limited company and did not qualify for the government support that would have been available had he been a sole trader. He had practically no business throughout the spring and summer, but, following our advice, Andy drew down from his pension pot to see him over this difficult period. His business is now picking up again and he is quietly confident about next year. For both Chris and Andy, we were able to put solutions in place in a little over two weeks.
Pippa Graham, 62, on the other hand, was planning to retire this year and, with our advice, had worked out her monthly outgoings and what she would need to live on. Lockdown, however, also made her take another look at her plans. The lockdown restrictions meant that she couldn’t indulge her usual passions of golf, eating out and the theatre and this meant that her monthly expenditure was about half of what she had been expecting it to be. The epidemic has also put on hold her plan for a month-long trip to Australia to visit her sister and family, saving several thousand pounds on this year’s expenditure.
So, whereas, Pippa had been planning to drawdown £55,000 this year, after discussion with us, she has decided that she only needs to take £20,000. This is especially advantageous for Pippa, because this year markets fell and had she drawn money out in April, as she had originally planned, she would have been realising those losses. As it is, the flexibility of drawdown has allowed her to leave £35,000 in her pension portfolio to grow and benefit from the market’s recovery so far.
Circumstances change and a flexible drawdown allows you to change your plans to accommodate them. Every client is different with different needs – what may work for one may be different for another. Speak to us to find out!
Investments can go down as well as up and you may not get back the original capital invested. This article should be seen as information only and not advice or recommendation. Please seek independent financial advice before taking any action.
This article is for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action