Simple drawdown

If you go deep into it, the whole field of pension drawdown can be massive, but you don't necessarily need all of that. If you're not a high earner / high spender, it gets simpler.

Access

Here's when you can get access to your various pots of wealth.

• ISA / GIA - anytime
• SIPP - at personal pension access age, probably 58
• State Pension - at 68 (probably)

So if you want to retire before the age of about 58, you'll need to build up some wealth in an ISA (or GIA) as what is called a "bridge fund" to span that gap until you can access your pension.

You don't want too much money in this, since it misses out on the free money that pensions get.

There's not much to learn about the first and last ones. You access your ISA whenever you want. And you have no real choice in when your State Pension begins. (It's not worth delaying it.) This just leaves your Personal Pension to figure out.

Pension Withdrawal

The government have made a stupidly complicated system, but here's a simple version of it.

It's based on old-fashioned DB pensions where you got a tax-free lump at the start of your retirement, and then you got regular payments which counted as income. That income part may be taxed if you went over your personal tax-free allowance for the year.

In the current system, you get 25% of your pot taxfree. You can draw from either bit.

A PCLS is a pension commencement lump sum. It's a stupid name as it doesn't have to be at commencement. This just means drawing purely from the taxfree part.

A FAD is a flexi access drawdown. Another complicated name. It just means drawing from the taxable part.

Finally they allow you to draw a blend of the taxfree and taxable parts. This is called UFPLS. Uncrystallised Funds Pension Lump Sum. The most ridiculous title of all. This just means taking a lump, for example £1000, of which £250 is from the taxfree pot and £750 is from the taxable pot. 

All of these "taxable" withdrawals use up some of your taxfree Personal Allowance each year. More on that next...

Use Your Allowances

The basic tax strategy is to use up allowances as much as you can. This is a similar idea to when you were working and you tried to use as much pension allowance as possible.

I'm just going to cover the two big ones. 

• Try to use up your taxfree Personal Allowance each year.
• Try to use up your ISA contribution allowance each year.

We currently get £12,570 per year Personal Allowance. You can use this up with the taxable parts of personal pension withdrawals, either using FAD or UFPLS.

If you have some remaining ISA contribution allowance, it's worth taking money from your pension to fill it, so long as you don't get taxed for doing so. 

Why? Well, an ISA is a better place for your money to grow than a SIPP. We wanted the initial benefit of passing money through a SIPP to get the tax relief, but after you've had that, getting it into an ISA is better. 

The ISA has two benefits. You get taxfree growth, like in a SIPP, but you also get fully taxfree withdrawals there. The SIPP, on the other hand, only gets taxfree growth - the withdrawals are partly taxable.

To give a practical example of this, I may make an UFPLS withdrawal each year, taking £16,760. That will include 75% taxable portion, which perfectly uses up my £12,570 Personal Allowance, and 25% taxfree portion of £4,190. 

This £16,760 may cover my living costs, or I may have some left over. I can chuck any spare into my ISA.

At the end of this, I'm going to have some spare space in my ISA. It's worth using that up, so I'd take a PCLS of taxfree cash to fill it up. 

In the above example, maybe that £16,760 was about right to cover my living costs, so I'd have taken £20k PCLS to fill up my ISA.

If my spending was higher than that and I needed more money, I'd pull out more taxfree money with a PCLS. I'd still take enough PCLS to fill my ISA.

Crystal what?

Because you can use different withdrawals at different times, your pot could get messy. They keep track of how much taxfree cash you've juiced from your pot by calling the juiced part "crystallised". 

They need to do this to keep track of things, because you may have various different assets continuing to grow in your pension and you may sell and cash out different ones - with the crystallisation marker on the account none of this will matter.

As you go along making withdrawals, your platform will keep track and your level of crystallisation will gradually increase, until you reach the point where you've had all of your taxfree cash out and the remaining pot is all taxable.

And there we are. 

Want to read more of my ideas? I have a new book out - Build Your Retirement, 5 ways to improve your wealth in retirement. Or other books here. 

Or you may prefer my FIRE series for beginners.