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?
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. Next, open the Income from Drawdown Pension panel.
8. Use this panel to schedule the initial draw of income from the subsequent drawdown pension.
- Set the drawdown income to begin at the second event - e.g. “Start Pension Income 20k”.
- 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.
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.
9. Click OK and then click Update (or Add) to save these changes.
10. Select Pensions > Drawdown Pensions in the left navigation.
As a final step you will need to step down the future drawdown income two years on.A facility for stepping drawdown income can be found on the Pensions > Drawdown Pensions screen.
On this screen you will find a “USP” (drawdown pension) that the software created and automatically linked to its source money purchase, where it awaits future funding with a current balance of 0.
11. Select this future drawdown pension in the ledger, to the right.
Note: The initial instructions for taking drawdown income have carried over to this screen from the Money Purchase screen’s Income from Drawdown Pension panel. These can be viewed under Drawdown & Annuity.
12. Expand Advanced Settings and click Step Up / Step Down.
13. At the top of this panel select the third event – e.g. “Step pension income down to 10k”.
14. Untick Growth Rate and Asset Allocation since you are not stepping those two settings.
Leave Withdrawal Limit/Schedule ticked. Click this label (the text next to the check box), which will open a sub-panel.
15. Set the “Fixed w/o inflation” and enter 10,000. This will step the income from 20k down to 10k and wil not factor in any inflationary increases.
16. Click OK to close this sub-panel.
17. Scroll town and click OK to close the Step Up / Step Down panel.
18. 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.
Retirement Income (Webinar 2)