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How to withdraw income from your pension as cheaply as possible

Taking money from your pension is not quite the same as withdrawing it from a bank account.

First you need to determine whether the amount you want to withdraw can be met by the income that has been produced ‘naturally’ by your investments, or whether you’ll need to sell a small slice of your assets too.

The ‘natural income’ of our portfolios

When you have invested your pension in one of the portfolios in Part 3, there are two ways in which you can take an income from it.

The first is simply to take the income that your funds produce automatically. Our stock market funds, for instance, produce dividends, typically paid quarterly. As we have chosen the income as opposed to accumulation fund variants, these dividends will be paid as a matter of course into the cash account of your SIPP. Investment trusts also pay income straight to your SIPP in the same way.

You can then withdraw this cash when you like – we refer to this as ‘taking the natural income’.

The natural income produced by our high-income portfolio is about 4.6% (the figure as of April 20 2019). However, it may not remain at that level, because stock market movements and dividend announcements by companies both affect it. Let us assume for the sake of simplicity that the high-income portfolio yields 4%.

To achieve our target of a total income of 5% of the initial portfolio value, that 4% natural income needs to be supplemented by regular sales of the assets themselves, amounting to about 1% of the portfolio each year.

While the natural income is paid into your cash account automatically, you need to take action to get the extra money from asset sales. You’ll need to go into your account and sell the appropriate number of shares or fund units to produce the extra income. As we mention here, we will aim to sell a fixed number of shares or fund units, rather than aiming to raise a particular sum, as this method is better for the long-term sustainability of your income.

How to make withdrawals

Then come the mechanics of the withdrawals. The income produced naturally by your investments will be paid automatically into the cash account that comes with your SIPP and can be withdrawn from there at the click of a mouse. But if that income was not enough to cover your intended withdrawal and you need to make a partial sale of assets as well, you will often be charged a fee for doing this.

All platforms charge for selling shares in investment trusts, while some charge when you sell ordinary funds too. On top of this there is sometimes a charge for taking money out of the pension, even if it is held in cash within the pension.

Because of these charges, withdraw money only four times a year, rather than monthly. At each withdrawal, take out enough cash to last you for the next three months. Most of the funds we have chosen for our portfolios pay dividends quarterly, which will suit this schedule nicely, although one or two pay at six-monthly or monthly intervals.

There are likely to be times when the amount you expect to withdraw from naturally generated income (that is, before selling any assets) has not actually arrived in your SIPP cash account because the payment date for one or more dividends has not yet arrived.

For this reason, we suggest keeping a small balance in this account, say a month’s worth of income, so that you can withdraw the amount you need when you want it, knowing that the account will be replenished before long when the dividend is received.

If for some reason there is still not enough in the SIPP cash account to meet your income needs for that quarter, you can draw money from your main cash buffer, replenishing it when possible.

<< Return to: step 4: the best ways to make pension withdrawals

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