Bridging Fund to DB Pensions – Invest or not?

ukdw · 24 May 2017 at 8:03AM

In a similar position to you - left at 52 and bridging until DB pension at 58.

Agree with most of the points above - especially taking out any credit you may require now as having no official income makes even changing credit cards or taking up high interest current account offers difficult.

I have about 20% of my SIPPS in equity funds, with the rest in cash. Rather than having contingency as S&S I would consider switching this around to being cash - and drawing from investments even if this means temporarily losing ISA protection.

I don't see any mentions of continued pension contributions during your pre DB period - as there are 2 x £720 tax relief available each year as long as SIPP TFLS draw downs levels are carefully planned to avoid recycling rules.

Lastly - are you set on both retiring in April next year? Whilst this is a nice time of year to leave due to improving weather and lengthening days etc. have you considered working 2 or 3 months into the 2018/19 tax year to tax advantage of that years Tax free allowances, or potentially even bringing retirement forward a few months instead so that you get a tax rebate.

jamesd · 24 May 2017 at 8:43AM

Ukdw, there's no need to lose ISA protection to put S&S money into cash if desired. It can be transferred to a flexible cash ISA. Money from a flexible cash ISA can be withdrawn and paid back in again as "replacement subscriptions" before the end of the tax year. No limit on the amounts, if you have a million in there you can take it out and pay it back in without using any of this year's subscription. Or move it out and back in ten times if you like, no limit on that either.

I did this last year to let me invest ISA money in P2P before good P2P options inside an ISA were available and I've temporarily withdrawn a few tens of k this year for the same reason.

As good P2P options with ISA support become available I'll be transferring most of my remaining S&S ISA money to the P2P ISA options. Also making replacement and new subscriptions to get as much of the P2P as possible into the ISA.

Someone who doesn't want to invest can use the withdraw from flexible ISA approach to use the current accounts that pay more than a cash ISA instead if they like, though it's not much compared to secured P2P lending.

ukdw · 24 May 2017 at 9:30AM

jamesd - good point about keeping contingency cash within ISA wrapper by using flexible ISAs or swapping investments and cash around. Will reconsider my own withdrawal plans with this in mind.

Triumph13 · 24 May 2017 at 12:48PM

ukdw wrote: »

Lastly - are you set on both retiring in April next year? Whilst this is a nice time of year to leave due to improving weather and lengthening days etc. have you considered working 2 or 3 months into the 2018/19 tax year to tax advantage of that years Tax free allowances, or potentially even bringing retirement forward a few months instead so that you get a tax rebate.

The date I would recommend would be to keep working until you have earned at least £5,876 each in the new tax year. If you were on £35,256pa that would be the end of May. That way you it counts as a full year for NI contributions saving you £750 odd each. You can also then phone up for a rebate of all tax paid (as long as SIPP withdrawals won't tip you over the personal allowance) and then contribute 80% of your income to your SIPP and get a further 20% tax relief added on.
Add in the fact that April has one bank holiday and May 2 and that would look very tempting to me.

jamesd · 24 May 2017 at 2:49PM

That timing it to get a full year at no cost other than the extra time worked is a neat one. Some people might want to extend it to:

1. Earn their full income tax personal allowance then...
2. Pay that whole gross amount into a pension to get the basic rate tax relief on the no tax due income.

Ian66 · 25 May 2017 at 6:13AM

Triumph13 wrote: »

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As others have said, your best plan is probably to secure a mortgage whilst still in work so that you can use that to get you over the tricky period if necessary. Rather than pay my own mortgage off I got an offset mortgage and keep enough in the associated current and savings accounts to have a roughly nil balance and pay no interest, but I get to keep the line of credit as an emergency fund. You may wish to look at something similar.
Downsizing may solve the problem for you, but beware - many people seem to find that after all the costs are taken into account it realises a lot less cash than they hoped.
OH taking her pension early wouldn't help as the crunch doesn't come until after the date already planned.
If you want to live off £35k pa then by the day before your pension kicks in you will have burnt through roughly £110k - including most of OHs voluntary NICs, but leaving most of yours for later. That number is exactly what you have in cash and ISAs so you can, theoretically, fund it from what you have if your cash / investments just keep pace with inflation. It leaves you with no breathing room at all though - which is why a mortgage facility you can draw down in in the last 18 months before your DB kicks in and then pay off from your DB lump sum would give you the cushion you need.

Thanks Triumph13,

Using an offset mortgage arrangement for a credit facility is a great tip – thanks. Main issue with this for us is we plan to follow up downsizing with a long term move to Spain, renting our “new” downsized home in UK out to effectively fund rental on accommodation in Spain. (We like the comfort of retaining a place to return to in the UK along with this being a safer place to hold our main property asset than Spain – Any different opinions on this?)

From limited research I have done renting a home with a mortgage attached appears to be problematic, main issues being Lenders Permission and a hike in borrowing interest rate as it is viewed as transition to a BTL loan, although I need to make specific enquiries with Providers to check this.

To clarify my OH Pension proposal, this was not to take early but exchange part of her DB for an enhanced TFLS at the scheme release date of Dec 2022 and release an extra £40k for the period from Dec 22 to Oct 26. Scheme provision is TFLS increased by 12 times the value of Pension exchanged, so this additional £40k would require a OH Pension sacrifice of @£3.4k pa, reducing her DB Pension going forward to £7.6k. Seems a poor deal on reflection but the scheme allows us to make this decision at Dec 22 so it does provide a useful flexible capital buffer option.

I’m also currently ploughing through the study you linked to for managing drawdown with a combination of guaranteed DB income and Investments, very interesting.
Cheers

Ian66 · 25 May 2017 at 6:20AM

Jamesd - Thanks for your very comprehensive responses – thought provoking and much appreciated!

Your suggestions generate a number of possible different scenarios to consider and I will need to take some time to crunch the numbers / timings for these, but my initial main query would relate to the use of P2P lending and the comparative risk / return. 10% return tax wrapped in an ISA would be more than satisfactory and I would be happy to divert existing & new ISA contributions and SIPP TFLS into same on this basis. Current opinion elsewhere advises against portfolios investing heavily into P2P, but your experience appears to provide a reassurance in taking a different view. Ultimately I suppose this is for my personal risk tolerance to lead.

Our DB Pensions are both deferred and therefore no longer being actively contributed to. Re; your query on current work DC contributions and SIPP contributions; DC contributions are being maximised for Employer matched contributions only (5% us = 10% Employer) and additional SIPP contributions to a level that will enable drawing to depletion within Personal Allowance levels for our respective periods prior to DB Pensions kicking in, so not currently 100% of Gross Pay. Main thinking here is any unused DC & SIPP held after DB’s kick in would be taxed at 20% once drawn, hence negating benefit of placing funds there initially.

Your proposal to max out contributions for and draw OH SIPP to invest in a VCT vehicle is an alternative to the above and is one for me to consider at the moment. I’ve not considered VCT investments at all before.

For info, DC pension amounts will be small owing to recent job moves. For OH, 2 DC pots of £8.5k & £6.5k available from Dec this year in addition to £70k SIPP. You also enquired about State Pensions, these land Dec 28 for OH and & Oct 33 for me.

Recycling of pension contributions and topping up SP’s have also been suggested by others in this thread and will be incorporated into my planning going forward.

Final theme is your suggestion to utilise a mortgage arrangement for a credit facility. I’m repeating some of my reply to Triumph13 here but my main issue with this for us is we plan to follow up downsizing with a long term move to Spain, renting our “new” downsized home in UK out to effectively fund rental on accommodation in Spain. (We like the comfort of retaining a place to return to in the UK along with this being a safer place to hold our main property asset than Spain – Any different opinions on this?)
From limited research I have done renting out our property with a mortgage appears to be problematic, main issues being Lenders Permission and a hike in borrowing interest rate as it is viewed as transition to a BTL loan, although I need to make specific enquiries with Providers to check this.

Thanks again

edinburgher · 25 May 2017 at 8:39AM

The low and uncertain potential 5% from a 50:50 bond/equity mixture doesn't really seem sensible for money which could be outside a pension at the moment. You can quite easily get something like 10% in interest from peer to peer lending at the moment, after allowing a couple of percent for bad debt on secured loans.

I also concur that expecting 5% real return over your stated timescale from a 50/50 portfolio seems ambitious considering recent valuations. I will be overjoyed if I'm wrong

Triumph13 · 25 May 2017 at 9:14AM

Ouch!
The plans re Spain sound great, but add one hell of a lot more risk into the picture and thus increase the need for a goodly-sized buffer in the budget. If the UK property ends up without a tenant for any length of time then you'll be carrying the costs of that plus the rental on the Spanish place. There is also the possibility of large maintenance bills as you won't be there to do things yourself. As you say, it also makes the mortgage option trickier, but not impossible.
You could explore James's world of P2P and VCTs, but in the interests of a low-stress life I might be inclined to plan on dialling back the spending over the period until your DB kicks in to more like £32k rather than £35k pa and then take it back up if you do manage to realise a reasonable amount on the downsizing and/or make a net profit on the rental arrangements.

bostonerimus · 25 May 2017 at 3:18PM

I'd be careful with the P2P. 10% comes with risk and I've never liked the restrictive market.

If you want an $25k inflation linked income and have $230k available to bridge the gap between 2018 and the DB pension starting you can easily do it. Even with 4% inflation and 2% return from a saving bond ladder you'll still have over $50k left when the final pension starts. Personally, I would keep enough for a year's spending in cash and put the rest into a 60/40 portfolio. I'd keep things simple so you can easily track stuff and also keep fees to a minimum as they could eat up 25% or more of your annual drawdown

Bridging Fund to DB Pensions – Invest or not?

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