How to Schedule Planned Withdrawals from a Bond (Onshore or Offshore Life Fund)
Bonds are by default subject to the software's normal expense fulfillment logic which will take ad hoc withdrawals from liquid assets (savings, unwrapped investments, ISAs and bonds) to top off expenses, after income, other credits, and ready cash (in the default cash accounts) is exhausted in a given year.
You may, however, set regular income taken from a bond, withdrawing the 5% in tax free principal for 20 years, for example. Planned withdrawals for a bond are scheduled under Advanced Settings > on the Liquidation Limits and Planned Withdrawals panel.
Timing the Start of Withdrawals
To schedule planned withdrawals from bond, first consider the timing. You will need to have an event in the timeline to schedule the beginning of these withdrawals.
A suitable event for this purpose may already be present in the timeline. For example, if you want to begin withdrawals in the very first year of the plan, simply use the Start event. If withdrawals are to begin at the owner’s retirement, you might use his or her Retirement event. Otherwise, you will probably begin by adding an event to the timeline.
1. If you do need to add an event to schedule to start of withdrawals, either:
- Go to the Time screen to drag and drop an event icon over the appropriate year/age in the timeline (double clicking the text underneath the event, enter a meaningful name and press Enter);
- Or find the Time panel located on the right side of any of the data entry screens (the Investments screen for example), select the Event tab, click the New Event button in the bottom-right corner of the tab, and enter the name, age, and owner of the event. Read more >>
2. Next, go to the Investments screen and in the ledger on the right side of the screen, select the bond from which the withdrawals are to be made.
If you haven’t entered the bond into the plan yet, enter details about it in the fields center-left.
3. Expand the Advanced Settings > Liquidation Limits and Planned Withdrawals panel.
4. Select the Planned Withdrawals option.
You might drag the circle in the bottom-right corner of the panel downward and to the right in order to see the entire panel.
The panel will divide into two sections, Planned Withdrawals, top, and Liquidation Limits, bottom, with the top half being what you are after.
Planned Withdrawals (Yearly Drawdown Amount)
The top half of the panel, Planned Withdrawals, allows you to schedule yearly withdrawals to be taken from the bond.
5. Yearly Draw Down Amount. First, set the amount that should be taken annually. Withdrawals could be taken as a percentage of the investment’s overall value, as an annual amount that could be fixed or indexed to inflation, or you can set the software to calculate and withdraw annually the maximum that could be taken tax free (Max Without Tax Liability), which is a popular choice for bonds.
Note, Maximum Withdrawals: Since there are no rules that limit how much might be withdrawn from a life fund, setting withdrawals to Maximum would effectively encash the bond at the start of withdrawals. If you do want to encash the bond in a given year, the better option is to set that event (year) as the bond’s end event (red dot) on the Time pane to the right side of the Investment screen.
Tip, Fixed Withdrawals: If you specify withdrawals as a monetary amount, the software will automatically populate both the Fixed With Inflation and Fixed Without Inflation fields. Read more >>
Tip, Applying Tax Optimization Strategy to Withdrawals: Apply Tax Optimisation Strategy is a special setting for bonds that attempts to calculate the most tax efficient strategy for obtaining funds from a segmented life fund. Read more >
At the top of the panel, Start Draw Downs is a drop-down list that will only become active after you have selected a yearly drawdown amount in the fields below it.
6. In the Start Draw Downs drop-down menu, select the event that will schedule the beginning of withdrawals. This may be an event you added to the timeline a moment ago.
Liquidation Limits (Total Withdrawals Limit)
The lower half of the panel allows you to set limits on what the software might withdraw from the bond in addition to your regularly scheduled withdrawals. These ad hoc withdrawals would only be taken if the time comes when additional top-up income is needed from the bond in order to help pay for scheduled expenses. We call these limits on possible future draws of top-up income Liquidation Limits.
7. Next to Total Withdrawals Limit, specify whether any limits should be placed on the software’s ability to take top-up income from the bond, should funds ever be needed in the future to help fulfill expenses and work out the cash flow.
In most cases we encourage you to keep the software’s default, Maximum, which allows up to the maximum of funds available in the bond to be liquidated, if ever needed to fulfill expenses.
You may, however, set the software to "Limit to Draw Down”, meaning the software can only draw what is scheduled to be withdrawn annually from the bond, as set in the top half of the panel, and no more.
Note: Liquidation limits could cause artificial shortfalls in the cash flow forecast. Read more >>
Before You Finish - Two important settings that relate to tax free withdrawals are found Advanced Settings.
Entries for the bond’s Current Value, Year Purchased , Purchase Value (i.e. the current cost basis), will all come into play in determining how much can be taken tax free, especially in the first few years of withdrawals. There are also two important and easily overlooked settings that can impact the tax calculation on withdrawals from bonds. Both are found under Advanced Settings.
Advanced Settings > Previous Withdrawals: Enter the totals of any previous taxed withdrawals and withdrawals from principal.
Advanced Settings > Life Fund Segments: If the bond is segmented, be sure to enter the current and original number of segments in the bond.
What happens to funds after withdrawals are made from an account?
Following withdrawal, these funds will flow into general cash where they will first be made available to cover expenses and make scheduled contributions to other accounts.
Any funds remaining may be considered spent with other unallocated habitual income or will be deposited into the owner(s) dedicated cash account (e.g. John’s Cash), until needed later to fulfill expenses or unless swept or transferred into another account. Read more >>
Can planned withdrawals and liquidation limits be increased, decreased or ended later in the plan?
The settings you enter on the Liquidation Limits and Planned Withdrawals panel will schedule the initial withdrawals, apart from any ad hoc withdrawals taken by the software to fulfill expenses.
These scheduled withdrawals can later be increased or decreased or ended altogether using the Investment screen's Advanced Settings > Step Up / Step Down panel.