When Mrs FIUK and I finish work, we will need to provide an income to pay our bills from our investments. As there is not enough in our SIPP and ISA to cover these costs from dividends / investment growth alone until we are receiving our state and final salary pensions, we will need to gradually reduce the value of our investments.
We have therefore calculated the drawdown of our SIPP/ISA to ensure that we should not use up our investments before we receive our pensions.
Based on the current position, our investments when we finish work should be:
Value of SIPP, ISA and Company Pension £261,5001
Cash available £21,000
Value of Company Shares £17,500
1 includes payments into my SIPP and ISA up to June 2017 as finishing work in June means we will be able to receive a rebate of the tax on our earnings of approximately £2,500.
From June 2017, we will allocate £2,000 per month to cover living expenses (this will be £1,750 for regular expenses plus an allowance of £250 per month for irregular expenses). This will be taken from the £21,000 cash sum, therefore, from July 2017 to March 2018 we will take £18,000 from the cash available, this will leave £5,500 (£21,000 – £18,000 plus £2,500 tax refund), if I add the £17,500 I will have received for the sale of the shares in my employing company we will have a total of £23,000 remaining at the end of March 2018
In the 2018 / 2019 Tax year we will then need to cover living expenses of £24,600 (I am adding 2.5% to the £24,000 current per year living costs to allow for inflation), which we will initially take from the remaining cash, but will then need to take one year’s expenses from my SIPP & ISA so we don’t get to a position where I have drawn down all my cash. To cover the £24,600 we will take the tax free personal allowance from my SIPP (as this is taxable if I exceed the allowance), plus the balance tax free from my ISA.
I will review when to withdraw this money based on how the stock market is performing so if it looks like it will fall lower in the next 6 months I will take it out in April. If it looks like it will rise over the next 6 months, I will not take the funds from my SIPP / ISA until later in the tax year. My aim will be to not drop below a cash reserve of 6 months living expenses, but not to go above 2 years in order to maximise the value on which I receive dividends / investment growth).
Assuming that we get 6% per annum growth (including dividends), our initial £261,500 should have increased to £277,190, so when we take my one years living expenses out, we will have £252,590 remaining. If we then repeat this process over the following years, the value of our investments should never drop below £200,000 before we reach the point that our living expenses are exceeded by the value of our pensions and the 6% growth of my investments. At this point we are in a position where our investments should grow in value, and along with our pensions be able to more than cover our living expenses.
If we don’t achieve an average of 6% per year growth, the £200,000 minimum value provides a “safety net” to cover any shortfall. Of course, the risks cannot be completely avoided, and a market crash for 3-4 years could mean that we cannot get to when our pensions are payable on our current investment value, but we believe that it is worth taking this risk to be able to cut the chains that currently tie us to our desks.