A variety of retirement planning options can be modelled within the software, relating to drawdown and/or to the annuitisation of benefits. What follows is step-by-step guidance relating to phased drawdown:
When inputting details of a money purchase scheme, the software's default position is to assume that benefits will be vested at the owner’s Retirement event, with 25% tax-free cash paid-out. Note that, because of this default, each time you add a money purchase arrangement to your plan, the software will create an empty Drawdown account, corresponding to (and linked to) that money purchase scheme. The remainder of the crystallised fund will be paid to the Drawdown account and, in the Pensions > Money Purchase screen, you will see that your newly-created account has a small 'link' next to it.
If you click the 'link', a small window containing the name of the linked (Drawdown/USP) account will appear - if you select the drawdown account, the software will immediately take you to the Pensions > Drawdown Pension screen, where the Drawdown/USP account is displayed in the Ledger, shown as having an account balance of £0 (which is the balance as at start-of-plan).
Within the Pensions > Money Purchase screen, select the Withdrawals & Annuity option, within which you will be presented with 2 options - select the option entitled Drawdown Strategy/Drawdown Pensions (USP).
There are 2 modes for the phasing of drawdown benefits - automatic phasing and manual phasing:
1. Automatic phasing of benefits
The automatic phasing of benefits is illustrated, below: in this instance, instructing the software to phase the vesting of benefits over 5 years.
Working with the inputs shown above, for illustrative purposes, the software will proportion the fund into 5 tranches, as follows:
Tranche 1: 20% of the balance at the time immediately prior to vesting - this will be the balance at the end of the year immediately preceding John's Retirement.
Tranche 2: 25% of the outstanding balance (after tranche 1 has been vested).
Tranche 3: 33.3% of the outstanding balance (after tranche 2 has been vested).
Tranche 4: 50% of the outstanding balance (after tranche 3 has been vested).
Tranche 5: 100% of the outstanding balance (after tranche 4 has been vested).
2. Manual phasing of benefits
If wishing to target a specific level of income from a money purchase account, the software is not able to calculate the (varying) proportions that would need to be vested, year-on-year, to provide the combination of tax-free cash and taxable income. If one has this information (e.g. from a pension provider's drawdown quote), however, the software can be manually instructed to crystallise the appropriate proportions.
As indicated in the illustration, one can manually input a series of crystallisation events by, firstly, amending the Percent Used field (instructing the software to crystallise a specific proporition of the fund) and then hitting the Add Crystallisation button, to input subsequent crystallisation events, until 100% of the money purchase fund has been crystallised.
Of course, for each input (each crystallisation event), one will need an 'event marker' in that year. It will be easiest to create these events (if necessary) prior to manually entering the phased drawdown instructions.
There are 2 further points to be noted:
1. Each crystallisation event - i.e. the proportion vested - is based on the value of the account (temporarily disregarding growth) at the end of the year immediately prior to the commencement of vesting (in this case, the year prior to John's Retirement event). As such, the series of Percent Used entries must sum to 100%.
2. Because - in manual mode - each crystallisation event is a discrete entry, the Phase drawdown over field should be left as shown.
Finally, note that - at present, the software cannot leave money purchase funds unvested, post-75 and any funds remaining in money purchase wrappers will be automatically vested at that point (possibly without paying tax-free cash).
Further Reading
Preferences - Default assumptions that relate to money purchases
Videos
Retirement Income (Webinar 2)