Note: the lower part of this post has rapidly moving/flashing graphics
I am slowly inching my way to being able to run my DC pension flat in front of my DB pension, effectively burning up the DC fund over five years, drawing my DB pension at normal retirement age. The latter will give me enough to live on, and I can keep my ISA tax-free income reinvested against the day when wages in Britain begin to increase in real terms, whereupon I will start to fall behind without being on the side of Capital. Or I can use it to hedge against the demise of the NHS, when healthcare will become at best insurance-based like in most other European countries, or at worst like the evil that is the US system. I am fortunate enough to avoid doctors and hospitals at the moment, but nobody gets healthier as they get older.
Running a DC pension flat over five years is an odd time-frame
There’s an age-old rule of thumb, never have money you will need in five years anywhere near the stock market. Ever ask yourself why this is so? The basic reason is that the equity premium is tiny – about 1/20th of the capital sum per annum, and this is the fella who is fighting on your side. He is such a puny bastard you either need a lot of time or a lot of money on your side. They ain’t making any more time, which is why compound interest won’t save your ass unless you work till you have one foot in the grave…
On the other side of the ring is the Bad Guy – volatility. He’s a moody bastard – sometimes euphoric, and sometimes down in the dumps. He will drag the aggregate value of your share portfolio up and down as he pleases, and that volatility is massive, because Mr Market is the 600lb gorilla, and if he’s in a grump everybody gets to know.
So I asked myself what would happen if I started out with a lump of about 80k – if I want to run it flat in five years I can’t really use much more than that, and there is no point in running my DC SIPP into the revenue from my main pension as that is already over the personal allowance, so I’d be taxed on the SIPP in its entirety.
Right off the bat I can take ~£20,000 as a tax-free lump sum, and this is the obvious thing to do. [ref]the PCLS is a special case, the actual income from the SIPP is the tax-free personal allowance each year[/ref].
After taking the PCLS I can take ~£11,000 per annum income tax-free from the personal allowance, and simple arithmetic shows that after I have iced £20k from my stake I have £60k to run out, and 5×£11,000[ref]the personal allowance is £10,600 at the moment[/ref] is 5k short of the £60k balance. If I am lucky they will lift the personal allowance towards the end of this Parliament[ref]the aspiration that nobody on the full-time national minimum wage should pay tax ought to help with that[/ref] and an Ermine will squeak under the finish line with the goose feathers unplucked.
What about that steamroller then?
I have paid a lot of tax in my time, and I considered contributing £3600 a year to the SIPP over those five years at a cost of £2800 p.a.. Somehow I want a way for the taxman to share in the risk, so I asked myself the question of what I think about tackling the steamroller of the stock market
What would happen in my SIPP if rather than cash I held it in some index fund of a market that isn’t on a high CAPE, so FTSE 100 or 250 rather than S&P500…