The following scenario offers a good example of how to fund retirement initially from tax free cash, defer taxable withdrawals, and later step these withdrawals down, perhaps when other pension benefits (from state benefits, final salary schemes) become available.
Q - My client has specified that he wants to take tax free cash in his first year of retirement. He then wants to start drawing £20K annually for two years following. After that, in his fourth year following retirement, he wants to reduce his drawdown income to £10K per annum for the life of the plan. Please can you confirm how I model this?
A -
1. First, go to the Time screen.
2. You will need to add two to three events on the timeline to schedule this pension income.
- You will need to have an event to crystallise the money purchase and take the 25% tax free cash. This could be your client's Retirement event, for example, or if your client is retiring now, it could be the Start of the plan.
- A second event will be needed to start the draw down income of 20k per annum the year following retirement.
- A third event will be needed to then step withdrawals down to 10k per annum three years after draw down income begins.
These events can later be re-positioned as needed, should you need to make any changes to this income schedule.
3. Next, go to the Pensions > Money Purchase screen.
4. Select the pension in the ledger, to the right side of the screen.
4. Expand Withdrawals & Annuity.
5. Select Crystallisation of Money Purchase.
6. Use this panel to schedule how and when the money purchase will be crystallised.
- In the drop-down list at the top of the panel, select an event to schedule the crystallisation – e.g. Retirement.
- Crystallised Amount – Set 100% to be crystallised at this event.
- Lump Sum - Select either "Tax Free Cash Only" or set the percentage taken in lump sum to 25%. In either case this is taking tax free cash up front.
- Frequency - Set the frequency of “one time”, since we will be scheduling the entire money purchase to be crystallised in order to withdraw the tax free cash from it upfront.
- Click OK.
7. Select Pensions > Drawdown Pensions in the left navigation.
On this screen you will find a “Drawdown - ” that the software created and automatically linked to its source money purchase, where it awaits future funding with a current balance of 0.
8. Select this future drawdown pension in the ledger, to the right.
9. Next, select Withdrawal Limit then Scheduled Only.
10. Click OK to close this sub-panel.
Also Note: Consider also selecting and survivorship option for the drawdown. This setting is applied to the future drawdown pension, not the money purchase. Settings for the handling of funds that in a money purchase at the time of the owner's death can be found on the Money Purchase screen under Advanced Settings > Survivorship Options. Read more >> about setting survivorship options on money purchases and drawdown pension.
11. Click Update to save your changes.
12. Select Planned Withdrawals in the left navigation.
13. Name: Enter an appropriately descriptive name for the planned withdrawal.
Note – Planned withdrawals, bearing the names you choose for them, are now shown in the software’s General Overview but are omitted from the overview’s printable report.
14. Available Accounts: This field shows a list of all the liquid assets (present and future) available in the plan.
Depending on your entries, accounts could include present or future pensions, investments, savings and other cash accounts. Default cash accounts (e.g. John’s Cash), which are created automatically by the software to hold unallocated cash inflows, are intentionally omitted from this list. The pensions in this list might include present or future money purchases and drawdown pensions.
15. Select the Drawdown pension as the source account for the future withdrawals from the list of Available Accounts and click the right arrow button to move it into the field of Selected Accounts to the right.
16. Scheduled Withdrawal Type: Select the “Fixed w/o inflation” option and enter 20,000.
Note: The fields adjacent to the income options with and without inflation will both be populated with the with amount you enter. The software does this as a convenience, should you later want to toggle inflation of these withdrawals on or off. Only the selected option be used to schedule the amount of these future withdrawals.
17. Time (Event and Stages): Withdrawals can now be easily set to begin and end for discreet time periods on the Time panel.
To schedule the start of withdrawals, go to the Time panel, select the panel’s Events tab, and click an event (Start pension income 20k). A green dot will appear next to the selected event indicating that this is when the planned withdrawals will begin.
To end recurring withdrawals, select a second event, an end event (Mortality). A red dot will appear next to selected event indicating that this is when scheduled withdrawals will end.
Withdrawals will recur for the duration set on this panel, provided the selected accounts are not fully liquidated before the end of the selected timespan.
Stepping the income level down
Note that steps can only be scheduled in the years between the planned withdrawal’s start event (green dot) and end event (red dot), as set on the Time panel. You cannot step a planned withdrawal in the year that it is scheduled to begin or end. Steps can only occur in the years between.
18. On the Planned Withdrawals screen expand Advanced Settings and select Step Up / Step Down.
19. Select the event at which the step/change in in withdrawals is to occur.
20. Select and enter details of what the planned withdrawal will be from that point onward.
When you add a step, an additional set of fields will appear automatically on the Step Up / Step Down panel. These are available if you need to add additional steps. Simply disregard these fields if you don’t. Scroll down and click the OK button to save the step.
21. Click Update to save your changes.
Confirming the results in the Let's See charts
The results in the cash flow chart, apart from anything else in your client’s plan, should look something like this.
The following details from the Let's See charts show the withdrawal tax free cash at Retirement.
Read more >> about what happens to tax free cash that is not needed, initially, to meet expenses nor scheduled to be saved or invested.
In the year following retirement, the chart details should show two years of initial withdrawals of 20k from the drawdown pension.
After two years (three in total since retirement), the chart details should show a step down to regular income of 10,000 per annum in the years that follow.
