Modelling pension decumulation strategies 2025

Hello. In this video, I'm going to take

you through some of the features that

you may find helpful when modeling

deumulation strategies for your clients.

In the first part of the video, I'm

going to discuss the good practice

guidance on cash flow modeling, which

came out of the FCA's thematic review of

retirement income advice, and show you

how you can incorporate some of those

good practices. I'll explain the

software's default approach to

fulfilling expenditure using liquidation

order and I'll then go on to build a

planned de accumulation strategy whatif

scenario where we use planned

withdrawals to override the default

liquidation order. I'm starting on the

timeline in my base plan which I've

called current position April 2025

and this represents where the clients

are today having just retired age 60.

So this is their retirement event. Their

plans start. The timeline enables us to

show the clients what they're planning

for and when. And the FCA guidance

suggested that when discussing

deumulation with clients, you should

stress test for longevity. And I'm doing

that by modeling potentially to

mortality at age 100. However, we know

of course that the clients may well not

live as long as that. So, I went to the

ONS website and used their life

expectancy calculator to obtain the one

in4 life expectancy ages for the two

clients. And for James, that came out at

age 92. And for Sarah, that came out at

age 95. And I've just added events on my

timeline really as a visual talking

point.

The SCA also suggested that you should

consider how the pattern of expenditure

need in retirement might change over

time. And to help demonstrate this, I

have built in two stages of retirement

spending so the clients can visualize

when their high spending stage and their

lower spending stage might be. My first

stage I've called early retirement and

my second stage starting at age 80 I've

called later life. I used 80 because

recent research showed that that's

typically the point at which

discretionary expenditure starts to

reduce. Of course, if later on the

clients need long-term care, expenditure

will rise significantly, I could then

add an event called long-term care and

create an additional stage.

When looking at expenditure, the FCA

suggested that you should consider

different types of expenditure and

categorize them into effectively

essential spending, more discretionary

spending, and then a sort of luxury

spend as well. And so that's what I've

done by modeling three retirement goals

here. And a goal is an expense that we

can visually track.

They also said you should prioritize

these goals and factor in the effects of

inflation. And so if we have a look at

how I've modeled these, my first

essential spending, which is intended to

cover food, utilities, council tax, etc.

I've given it a name. It's jointly

owned, £3,000 per month. Remember to

change the frequency if appropriate. And

I've left this as a top priority. This

is one of the first things that we're

going to pay for each year.

Again, the FCA said you should be

factoring in the impact of inflation. So

to maintain the spending power of this

goal, I've factored in inflation at 2.5%

peranom, which is my default inflation

rate. I've set the timing to happen all

the way from the plan start until

mortality, which is the default timing

for a retirement goal.

Moving on to our discretionary

expenditure. So for the nicer things in

life such as eating out, again I've

added a separate goal, but this time

I've prioritized it a little bit further

down the priorities list in the leisure

category so that we'll pay for this

after funding the basic expenses in each

year.

I've set the timing overall to start at

retirement running through to mortality.

But this is the type of spending that

tends to decrease over time. So I've

added in a step and used my slowdown

event to reduce that particular item to

50% of the original starting value. But

again factoring in inflation all the way

through. And my third goal is the

holidays in early retirement. We've

allowed 18,000 a year for this. The

clients appreciate this is a real

luxury. This is an area that could

easily be cut back on if needed. And so

I've modeled it further along the

prioritization list. The timing for this

I've set to end at around age 80 because

it's probably unlikely that they will

continue to travel as much as they get

older. So, if that's what we're planning

for and when in terms of expenditure,

let's go back to the dashboard and see

what our starting point is. And the

assets by type pie chart on the right

hand side is a good place to help the

clients visualize where their wealth is.

750,000 is tied up in their property.

It's a non-lquid asset, so it won't be

easily accessible to fund expenditure

during retirement. The software won't

touch this. So to release equity, you'd

have to model a downsize or an equity

release. The pink in the pie chart shows

their cash values. 50,000 which is set

aside in a savings account and which

I've ring fenced using withdrawal limits

so that the software does not touch this

money and I'm just rolling up the

interest.

They've got some money in investments

and then almost half of their wealth is

in their pension funds.

Let's expand the dashboard sections and

look at this in a bit more detail.

Savings and investments. You can see the

cash, a couple of ISERS, an unwrapped

investment which is being used as an ISA

feeder, and Sarah has a bond. And then

we've got their pensions. They've both

got uncristallized money purchase

pensions. I've bottled those as money

purchase and the software has

automatically created linked draw down

accounts which may be used once I start

to crystallize the pension funds. In

addition, the clients both are entitled

to full state pensions and they won't

get these until age 67. So, I've

factored that guaranteed income in in

the future. And the FCA recommended that

when considering retirement income

advice, you should think about the tax

implications of where money is drawn

from.

Now, before we go on, let's just look at

our plan settings. Again, FCA guidance

was that these should be reasonable and

credible, and you can set your own plan

settings, your long-term assumptions.

And these are mine. And in particular, I

would draw your attention to my

inflation rate and my CPI value, 2 and a

half%. My cash savings growth rate and

my investment growth rate. I'm using a

gross return of five, but reducing that

by 1% peranom in fees, but it's entirely

up to you what you choose to use in

these plan settings. And you can set

them here at individual client level or

on your open client record screen at

overall subscription level. Once we

start using the software using its

defaults, we will be looking at

liquidation order

and this affects the order in which

invested assets are drawn upon. The

software's basic approach to de

accumulation is to look at the total

expenses in any given year. Try to fund

them from regular income. If there's not

enough regular income or none at all, it

will look to see if there happens to be

a one-off inflow in a year. Again, if

there are no one-off inflows, it will

then look for available liquid cash in

the plan. In this case, there's no

liquid cash because I've set a

withdrawal limit on my cash account. So,

it will then start to look at invested

assets. And this is the software's

default liquidation order to draw money

from taxable investments, your unwrapped

investments first, then the tax deferred

class, which includes pensions and

bonds, and finally the tax-free ISAs.

And it's important to remember that this

is not intended to be an advice

strategy. This is just the software's

default approach. And once clients get

to the deumulation stage, you may well

want to override this using planned

withdrawals. And I'm going to

demonstrate how to do that in a minute

in a whatif scenario.

Let's come out of that and look at what

the future may hold for these clients by

going to the let's see screen. single

chart starting on cash flow. Every bar

in the chart is a year in their plan and

the bars are blue in this case which is

good news. It means we have positive

cash flow i.e. sufficient income or

available liquid assets that we can draw

upon to fund their total expenditure

need which is shown by the black need

line. I'm also showing the basic

expenditure need line in blue. Basic

expenditure includes taxes and anything

that I've modeled as a basic goal or

expense. The gap between the blue and

the black need lines is my discretionary

spending. And we can see that that drops

significantly at age 80.

Overall expenses are rising in line with

inflation over the lifetime of the plan.

If we put on the details, we can see the

software's default approach to

deumulation.

Let's click hide all. Turn the chart red

to focus on the expenditure and then we

can introduce the different sources of

funding for that expenditure.

Let's look at guaranteed income first.

These clients don't have any DB income,

but they will have state pensions in the

future starting when they're 67. And

I've just put an event marker on the

timeline at that particular point in

time. If I put on the basic need, we can

see that the state pension will not even

cover their projected basic needs over

their lifetime. So this just means that

the clients will be heavily dependent

upon their invested assets to supplement

that state pension. And that may come in

the form of savings and investments. In

this case, we're spending the unwrapped

first, then we've got money purchased

pensions, and then the bond and the

ISIS.

It's important to remember that when the

software draws money from the pensions

shown in orange in this case to indicate

that they're coming from uncristallized

funds, it will use a recurring of plus

approach by default and it will draw

upon the first named person in the

plan's pension first. When that's

exhausted, move on to the second named

person and 25% of each of those

withdrawals will be treated as tax-free.

the remainder would be treated as

taxable.

This strategy may not necessarily give

you the most efficient approach to

deumulation, and that's why you're

likely to want to override it once

you're looking closely at deumulation.

Let's see what's underpinning the cash

flow. I'm going to turn off details and

switch to the assets chart.

I'm going to hide the property from this

chart and focus on what's happening to

their liquid assets over their

retirement span. You can see that we are

de accumulating over time. The pink at

the bottom is that emergency fund that

I've ring fenced and I'm just rolling up

the interest. The green is the pensions

and the blue is their investments.

If we put the property back into the

equation, although that's not available

to spend to help meet retirement income

needs, and hover over any bar in the

chart, you will be able to see the

projected asset values. The FCA guidance

said you should talk about the impact of

inflation with clients. And it's

important to remember that the default

charts in voyant are in nominal terms.

But if you want to convert them to real

money, so factoring in the impact of

inflation, you can do that by switching

on the real money mode. So let's have a

look at the final year in the plan. We

can see the client's total assets worth

about 2.5 million.

Switch to real money mode by clicking at

top right.

And the clue that you're in real money

mode is this information symbol. And

this is telling us that we're stripping

out inflation using our default uh

inflation rate whatever you have set for

CPI. So in my plan because property is

growing at 2.5% peranom the value of the

property is staying level over their

lifetime. Have a look at the cash in

pink. We started off with 50,000 in cash

that's been ringing fenced and I'm

rolling up the interest. But this has

lost value in real terms because my

interest rate at 1.5% is below my

inflation rate at 2 and 1/2. My invested

assets are growing at 4% perom net of

charges. So that's a 1 and a half% real

return. Let's switch off real money mode

again now and let's look at expenses.

This is a good chart for very quickly

showing the client where their money is

going. They are paying some tax in their

retirement, mainly when they draw on

their pensions. The blue is their basic

expenditure. The pink the discretionary

and the dark green are those luxury

holidays finishing at age 80. Finally, I

want to look at the taxes chart and have

a think about the pattern of the tax

payments in this plan. And you can see

this is heavily frontloaded

during the time on which the software

has been drawing down on their pensions.

But I suspect we could come up with a

more taxefficient advice strategy for

these clients. And that's what we're

going to do by modeling in a whatif

scenario.

So to create a whatif scenario, we're

going to click what if at the top center

of the screen and name our what if. And

I'm going to call this a planned

deumulation

strategy.

And by creating a whatif, I can make

changes without affecting my base plan.

And then I'll be able to compare my base

plan with my planned deumulation

strategy to see whether we may have

improved the position of the client.

I'll click create this plan

and I'm now working in my what if. I've

got the plan deumulation strategy name

at the top. I'm going to turn back on my

dashboard chart so that I can see at a

glance as a sense check whether I'm

modeling what I think I'm modeling. So,

I'm going to switch on show dashboard

chart and goal progress.

And now what I want to do is override

the software's default approach to

deumulation by thinking about the

different tax wrappers and how much I

want to draw from each of those. I'm

going to put the cash flow detailed

chart on and switch on the key for you

by clicking the three gray dots and

clicking legend so that you can see as

we go along what I'm doing.

So, I'm going to start putting in

planned withdrawals so that I can

control how much and when we take from

different investments instead of just

using the software's as needed approach

using the liquidation order. So, to

create a planned withdrawal, click the

plus button at bottom right and look for

plan actions planned withdrawals. And

let's look at chart James's pension

first. And I'm going to call this

James's half plus to use personal

allowance because until he gets his

state pension now that he's retired, he

doesn't have any other taxable income.

And so we could use his personal

allowance to create some effectively

tax-free income from his pension.

I'm going to specify the amount that I

want to take and the figure I'm going to

use is 16760

because if I use a recurring of plus

with that amount 25% will be tax-free

until he reaches his lump sum allowance

and the remainder will be equivalent to

the current personal allowance of 12570.

I want it to recur. And now I need to

choose the account. And this is going to

come from his uncristallized funds. So

his money purchase pension. Once I've

clicked on that to select it, I need to

look at my pension strategy. And if

you're not sure what we mean by pension

strategy, and you see dots underlining

the field, it implies that inline help

is available. So you can hover and click

on the dots, read what the choices are,

or watch a video.

And in this case, because I want to do a

recurring off plus, I'm going to change

the strategy to off plus. Now, I need to

tell the software when and we're going

to start this immediately.

And initially, I'm going to set it up to

run for as long as his fund lasts. So,

I'm going to set that to run until

mortality. We may later on choose to

step this down along the way. Click done

and we'll have a look at what the chart

is showing us. If we're taking

withdrawals from uncristallized

pensions, we should see some orange. And

here it is in year 1. When you set up a

planned withdrawal, the software treats

that as regular income and will spend

that first. And by introducing some

regular income, it just means that the

software will then make up the

difference between my planned withdrawal

and my total need by adjusting its as

needed withdrawals using its liquidation

order. The summary box is showing me

I've got 16,760

coming out of a money purchase pension.

Let's look behind the scenes at year

view. Either by clicking year view at

top right or double clicking on the year

I want to look at. We can see the

money's coming out of James' SIP. Go to

the pensions tab and double check what's

going on. Click on this line. Scroll

down and you'll be able to see the

details of that crystallization.

Total of 16760.

Just over 4,000 is taxfree and the

remainder equivalent to his personal

allowance. So he won't be paying any tax

on that.

If I come out of year view, we can now

think about what we want to do with

Sarah's pension.

She also doesn't have any income in

retirement until she gets her state

pension. I'm going to show you a

slightly different way of taking

withdrawals for her. Starting off by

choosing planned withdrawals. And first

of all, I'm going to use her taxfree

cash by phasing that in over time. And

I'm going to call this Sarah's tax-free

cash income. Again,

for today, I'm going to use a specified

amount. So, I'm just going to set that

amount here. 15,000 a year recurring.

It's taxfree cash, so it needs to come

out of her uncristallized pension. And

this time, I'm going to leave the

strategy as flexi. And the software's

interpretation of that is this is the

figure you want as taxfree cash to

realize that it will crystallize four

times that amount. Set the timing

starting now. And for as long as her

uncristallized pension lasts, I've set

it up to mortality, but once that fund

is crystallized, that planned withdrawal

will automatically stop because there'll

be no more taxfree cash. Quick sense

check. There should be a little bit more

orange in the chart in year one. Now

double click, come to the pensions tab

and have a look at Sarah's SIP. You can

see we've crystallized 60,000.

We've paid out 15 as taxfree cash, but

the software has moved the remaining 45

into that draw down account.

If you do have crystallized funds in the

plan, you can set up a planned

withdrawal from those two. And this is

what I'm going to do here by setting up

a planned withdrawal. And I'm going to

call this Sarah's draw down. And by draw

down, I mean from crystallized funds to

use her personal allowance.

So I'm just going to specify 12570

on a recurring basis, but this time

choose the draw down fund. Set the

timing

starting at retirement,

running through for as long as her fund

lasts. And let's check the chart. If

money is coming out of crystallized

funds, you should expect to see some

pink in the chart. And if we hover,

there's that 12570

being used in the early years of the

plan. So we're using both of their

personal allowances early on.

The software has reduced the as needed

withdrawals from the unwrapped

investment which is the first in our

list of liquidation order assets.

However,

we could use some of their other

investments to also set up a planned

withdrawal. And this is where you as an

adviser can help the clients think about

how they might use the different assets

and tax rappers available to them. Left

to their own devices, many clients would

think in retirement I spend my pension

because that's what I saved for whilst I

was working. But you know that they

probably need to control how and when

they take money from the pension to make

best use of their tax allowances. On the

flip side of that, a lot of clients have

quite large ISA portfolios now and they

tend to think of ISIS as a good thing

because they know they're taxfree, but

they tend to forget that they could be

used to generate some tax-free income.

So that's what we're going to

demonstrate here to the clients. Let's

start taking some withdrawals from their

ISAs. So, we're going to do the same

thing. Click the plus button,

planned withdrawals,

and I'm going to call these ISA

withdrawals.

Now, again, we need to specify the type

of withdrawal. We can specify an amount,

an amount with inflation. If we were

wanting to strip out the growth, maybe

we'd target a set percentage from the

ISA. Or if they were in funds that had

the potential to generate dividend

yield, we could switch on the dividend

income. For today, I'm going to keep it

nice and simple and we'll target a

specific amount. And let's say we'll do

15,000

on a recurring basis. We need to select

the ISIS. And here because we're wanting

to spend them down equally, I'm

selecting both ISAs.

And when you select more than one

account here, the distribution type

comes into play. The default is each. So

we will take 15,000 from each of those

accounts each year.

Let's set up the timing again from the

start potentially until the funds are

exhausted or until mortality.

If we've set up planned withdrawals from

an invested asset rather than a pension,

you should be looking for yellow in your

chart. And that's what's showing up

here. Again, the summary box shows us

the 30,000. If we double click, we can

see the cash flow where the money's

coming from. We haven't given them quite

enough regular income to fully meet

their total needs. So, the software is

still taking those as needed withdrawals

in accordance with its liquidation order

to top up. But we've got a bond in this

plan and we could also set up some

planned withdrawals from the bond. Sarah

hasn't taken any withdrawals from her

bond to date. Um, but we could add

a planned withdrawal,

call it bond withdrawals.

And again, we can specify either an

amount, a percentage, or we could for a

bond take the maximum without penalty,

which would allow us to roll up those

unused tax deferred 5% peranom

withdrawals. But in this case, I want to

keep it to an amount that's within that

tax deferred amount. And so I'm going to

specify a certain amount which relates

to 5% of the principle. Let's say yes

that we want it to recur and choose the

bond

and again set the timing

theoretically throughout her lifetime.

And again, if we hover over year one and

doubleclick, we'll be able to see where

that money is coming from. Now, I've

just used nice round numbers for today's

purposes. I haven't totally covered off

their total need, and so the software

has just sort of put in a little ad hoc

withdrawal from those savings and

investments.

Let's go and look at the larger chart on

our Let's See screen.

And there's something to be aware of

once you start setting up planned

withdrawals.

Very often you will find that once the

state pensions kick in because they're

regular income coming in from outside of

the plan and they're spent first, once

they're added into the plan, your

planned withdrawals may be giving you

more income than is needed. And that's

what's happening in this year. Here you

can see the colored bars are going over

and above the black need line. And when

you hover over that year, you'll see

some surplus income. Now, the default

for the software is to assume that

surplus regular income is treated as if

it were spent. So, it disappears out of

the plan. In reality, we wouldn't take

more than we need from investments um

because we'd want to leave it

compounding up within the investment

wrapper. So, it may well be that

although you try to match their overall

need early on in the plan, uh you may

need to adjust the withdrawals as time

goes on. And if we wanted to do that, we

could just come back to the dashboard

and step down some of our planned

withdrawals.

And the ones that I'm going to step down

are the taxable withdrawals from the

pension. So, for example, Sarah's draw

down, we started off at 12,000 a year.

Um, but I could then say, well, once she

gets her state pension, that will use

her personal allowance. So any further

taxable withdrawals from her pension

will probably incur a little bit of

basic rate tax. I think they're going to

have to accept they will pay some basic

rate tax in this plan because so much of

their wealth is tied up in pensions. But

let's reduce that. Again, I'm just using

nice round numbers for illustrative

purposes to £6,000 a year once we get to

state pension age.

So I've added in the step. It's

summarized here. We'll click done.

Let's have a look in that year. We've

still got a little bit of surplus

income. So again, I might think about

reducing James's pension withdrawals.

Come into the planned withdrawal and set

a step.

And let's say we'll reduce this to

10,000 a year as a nice round number.

Set the timing.

Click done. Just watch what you've done.

So 45% of this will be taxfree. The

remainder will be taxable.

And let's just sense check that year

again. Have we got any surplus income?

know by the look of it now we've managed

to get rid of that. So we've set up a

structured withdrawal. Now I'm not going

to worry about getting it too exact. You

can see in the first couple of years we

are topping up or allowing the software

to top up. This would be something you

would review on an annual basis with

your clients.

Let's have a look to see what the

implications of using a planned

withdrawal strategy as opposed to the

software's default approach might be.

And to do that, we'll go to let's see

compare plans chart view.

So at the bottom I have the software's

approach. At the top I've got my planned

deumulation strategy. In both cases,

there's no shortfall in the cash flow,

but we're just altering the order in

which we take money from the different

assets.

Let's switch on the assets chart and

let's have a look at what's happening

over their lifetime with regards to

their assets. And if I hover over any

year, we can see in the boxes the

projected asset values. And I've picked

a random year at age 90. And we've got

considerably more money left in the plan

at that stage. Why might that be? Well,

what I've tried to do is defer or

minimize tax. And if we come to the

taxes

chart, we can have a look at what's

happening. Now, just a note here, when

you're comparing taxes charts in

particular, you may find that there are

different scales on the left hand side.

So, to equalize those scales, click the

three gray dots and just click zoom. And

then we've got a true visual comparison.

And you can see what I've tried to do is

keep the tax take low early on in the

plan. And over time

the tax does start to rise particularly

once the state pension comes into pay.

But if we look at the boxes and the

cumulative tax figure in the bottom of

each box we can see that the top chart

where we've planned to reduce our tax

early on is showing a much lower

cumulative tax take certainly in the

early years. As time goes on, that will

shift and we'll start to see more tax as

we continue to use pensions. Whereas in

the software strategy, it had moved on

to using the ISAs last. But overall,

throughout their lifetime, we have

reduced the tax burden. And so what

we're doing there is leaving more money

invested because less is being spent on

tax. More money invested means we've got

more compound growth building up. So

potentially we might be helping the

clients meet their goals for longer

or leave more money to pass on to future

generations and hopefully on a

yearby-year basis reducing their tax

take. All of which is adding value to

the clients during their de accumulation

period of their lives and something that

they probably couldn't achieve without

advice from a qualified advisor. So I

hope you found that useful. But as

always, if you have any questions about

how to model anything, click the client

name at top right and click request

support. Type a message in the box and

put your phone number there. And that

will send an email from you to our

support team and we can then come back

and answer any questions you may have.