Personal Finance

How to spend it: ultimate drawdown plan for a £500k pension


This is the fourth in a five-part series looking at the best way to manage your pension spending, for those who have saved up £50,000, £100,000, £250,000, £500,000 and £1m in their nest egg. It will be published at 6am on Thursdays

Drawing up a plan for pension income is the biggest financial decisions you will make in your life. The good news is that those who have saved up £500,000 should be more than comfortable. However, a bigger pot of money comes with more options and can be harder to manage. It is crucial to have a clear idea of how you want to spend it.

To squirrel away £500,000, it is likely savers would have had well-paid jobs and have access to other assets and to draw an income from. They will also have access to the state pension, which pays £9,110 per year to those older than 66. 

How fast you draw down your pension depends on your living costs and when you will need it most. The average retiree needs a minimum of £10,200, or £15,700 for a couple, according to the Pensions and Lifetime Savings Association, an industry body. But this does not include housing or care costs, so savers must plan for that themselves.

A comfortable standard of living would require £33,000 a year, meaning savers would have to top up the state pension with £23,890 a year. A £500,000 pot could last nearly 21 years if kept in cash and gradually drawn down, however, inflation would erode its value over time

By combining investing and drawdown, savers can boost the size of their pot while taking money out, ensuring the pot either diminishes slowly or is kept in tact in order to pass down as inheritance.

According to John Fletcher, of wealth manager Brewin Dolphin, if you took the 25pc tax-free lump sum (£125,000), and then started to withdraw 4pc of the remaining £375,000 from age 66, £15,000 a year, and you made 5pc from investment returns you would be left with £299,487 by age 85.

Pension drawdown calculator

Fixing a rate of drawdown can be easier to keep track of but in reality a lot of new retirees will want to spend more in their more active years after they give up work. It could make sense to set aside more money for the first decade or so to meet the costs of new passions or travel. 

You could withdraw the 25pc tax-free tax and then 5pc of your remaining pot size at age 66 for the first 10 years before reducing it to 3pc from age 76 onwards. Taking £18,750 in income a year from age 66 to 75 would leave you with a fund value of £300,025.

If you then take 3pc from age 76 and you live to age 99 you would still be left with £290,000, according to Brewin Dolphin calculations.

A £375,000 pot would last for 29 years if a saver withdrew £23,890 a year and kept the money invested in markets that provided a 5pc return on average. However, this does not account for income tax.

If you have a pot of £500,000 you can take a tax-free lump sum of £125,000 at any point from the age of 55. However, Pete Glancy of pension provider Scottish Widows, said those who make use of this must then be careful as the remainder of their pension pot will not provide an enormous amount of retirement income.

If they opt for a fixed drawdown percentage rate, they would have to settle for less income each year than they would otherwise have had.

John Tait, of the retirement advice arm of Standard Life, said those withdrawing large amounts in income should be careful not to get caught out by the tax implications and rules.

After the tax-free lump sum is taken the rest is classed as taxable income and is taxed at your marginal rate of income tax when you withdraw it.


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