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  • FIRST POST
    • Rodders2409
    • By Rodders2409 7th Sep 17, 5:19 PM
    • 25Posts
    • 6Thanks
    Rodders2409
    Life's swerve ball - need to plan differently!
    • #1
    • 7th Sep 17, 5:19 PM
    Life's swerve ball - need to plan differently! 7th Sep 17 at 5:19 PM
    Hello All,

    I've not posted before but need to get some basic advice ahead of probably enlisting an IFA in the coming months.

    To cut a long story short my better half is going to face some medical / life challenges in the coming years (PD) and we need to plan accordingly, so this is a first stab!....any and all advice very welcome.

    Really want to know if I'm way out in thinking I can retire at 60, with the following parameters...

    Me
    50 yrs / M / Born 1966
    Employed

    Her
    57 / F / 1960
    Housewife...oldskool ..
    Zero income

    We have zero mortgage and no other borrowings

    My pensions
    Aegon - current company pension £169,341...only active one.
    Friends Life 1 £66,998
    Friends Life 2 £4,529
    Friends Life Managed fund £14,341
    Total pension pot (to date) £255K

    Missus' pension
    Prudential - £27,573...no contributions for >15 yrs

    I have recently increased my personal contributions, in anticipation, to £1167 p/m excluding tax relief, and the company pay £205 pm into the same scheme.

    I have a property which I rent out and get £7000 p/a net of all costs...and am looking to get this put into my other half's name if it's tax beneficial. This would form quite a big part of our pension plans I guess.

    We aren't big spenders and have worked out, based on 2 years of trawling through statements etc, that we could fairly comfortably live on £28K pa.

    Question is ...is that possible if I retire at 60?

    Thanks to all who read this!
Page 4
    • michaels
    • By michaels 11th Sep 17, 12:08 PM
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    michaels
    Edit: cross post with k6chris

    I think the 46k (plus interest) was to give the 8k pa that your state pension will give you when you are 67/8.

    Then the remaining pension pot could be used to give additional income from your retirement date as long as is needed and the '4%' bit of the calculation is how much per annum the rest of your pension pot would give you if taken from your age 60 retirement date.

    Ie from age 60 you get £7k rental plus 2x approx 8k state pension using 46k of your tax free lump sum as a baseline = 23k pa. Plus 4% of your remaining pension pot 'for ever' going forward to give the total per annum of 37k so the pension payment is 14k pa (37-14).
    Cool heads and compromise
    • Triumph13
    • By Triumph13 11th Sep 17, 12:25 PM
    • 1,032 Posts
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    Triumph13
    K6Chris and Michaels are spot on. I assumed you would pay voluntary NICs to get your wife up to the full £8300 SP and so your overall income long term is made up of:
    • £17.4k from 4% drawdown on remaining 75% of your pot
    • £8.3k from your SP
    • £8.3k from wife's SP
    • £7k from rental property
    • less £3.6k tax on the above.
    The cost to backfill for the 7 years when you don't get a SP is 7 x £8.3k x 80% = £46.5k. Only 80% as your drawdown will already be enough to use up your Personal Allowance so you effectively pay 20% tax on your SP when you do get it. (In reality HMRC will just up the tax on your drawdown, but impact is exactly the same as if the SP was taxed)
    • Rodders2409
    • By Rodders2409 11th Sep 17, 1:03 PM
    • 25 Posts
    • 6 Thanks
    Rodders2409
    Dooohhhh...got it...I think!



    So, long term when I'm over 67 yrs and based on an estimated pot of £580K at 60 yrs...
    £17.4k from 4% drawdown on remaining 75% of your pot
    £8.3k from your SP
    £8.3k from wife's SP
    £7k from rental property
    less £3.6k tax on the above.

    ....all gives approx £37K per year.

    The period 60-67yrs...
    Cash in 25% tax free = £145K
    Use £45K to cover my SP = £6500p/a
    Rental income = £7000
    Mrs SP = £8300
    4% draw down = £17.4K
    Less tax = £3.2K....pure guesswork...how is this calculated?

    ...all gives approx £36K per year

    Plus we use the remaining £100K to invest elsewhere, or get done the things we need or want ahead of the crap that's coming our way :-( ....which sounds favourite!

    Am I getting there?

    This is very different to the picture in my head before I entered this thread, and in a positive way, so thanks for sticking with me.
    • k6chris
    • By k6chris 11th Sep 17, 1:17 PM
    • 106 Posts
    • 138 Thanks
    k6chris
    Unlike the past, where many retirements were funded by the DB pension from one job, plus state pension, both of which occurred at the same time, today's retirees are pulling together their retirement income from a wider variety of sources. Mine (come the great day) will be made up of 2 x DB, 1 x DC, 1 x SIPP, a redudancy payment, some AVCs, a TFLS and some savings..add to that a couple of pensions and some savings from my other half and you get the monster spreadsheet that I have been building for the last year or so....I must have checked and rechecked the calculations about 30 times before I was happy that we could actually afford to retire...now I just need to pull the rip cord!!!

    Good luck
    EatingSoup
    • Rodders2409
    • By Rodders2409 11th Sep 17, 2:20 PM
    • 25 Posts
    • 6 Thanks
    Rodders2409
    I wanted to add to my last post (63!) following a re-cap through the thread and all the lovely info you've given me....

    I need to...

    Either make payments into the Mrs' Prudential plan to make the most out of her tax, or transfer it to somewhere that will allow me to add new payments.

    Top up the Mrs' tax contributions to get the max SP we can.

    ....do I still need to double check the 40% tax relief on my contributions or are we saying that, because it's all Salary Sacrifice, we don't need to because I'm not being taxed at source as it were?

    Then the biggest thing is to stay employed and pour as much as we can into the existing pension.
    Or is it worth starting up a SIPP?

    I think that's it!
    • michaels
    • By michaels 11th Sep 17, 2:32 PM
    • 19,239 Posts
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    michaels
    I think it is 'NI' contributions that are needed for your DW not 'tax' but this is terminology.

    Your DW even with no earned income can add 3.6k gross (you pay 2880 govt pays the rest) into a pension so the bit the govt pays is pure gain but you need to consider when to draw out her pension, before her state pension age her income is only 7k so she can also draw 4k pension and not pay any income tax, once she has the state pension drawings from her pension will be taxable but there are also some rules on 'recycling' that you may need to be aware of.

    With your pension being salary sacrifice for each £1000 you pay into the pension you are only giving up £580 of net pay as you would pay tax and 2% NI if you took the salary now. If you salary sacrifice below the higher rate tax threshold (45k assuming the rent goes to your DW) then each 1000 to the pension costs you 680 in take home pay (20% tax and 12% NI). You need to play about with the best way to use your wife's pension pot and your income/pension trade off to maximise what you get overall.
    Cool heads and compromise
    • Triumph13
    • By Triumph13 11th Sep 17, 2:40 PM
    • 1,032 Posts
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    Triumph13
    The period 60-67yrs...
    Cash in 25% tax free = £145K
    Use £45K to cover my SP = £6500p/a
    Rental income = £7000
    Mrs SP = £8300
    4% draw down = £17.4K
    Less tax = £3.2K....pure guesswork...how is this calculated?

    Am I getting there?
    Originally posted by Rodders2409
    Close. It's actually:
    • £8.3k Mrs SP
    • 17.4k Drawdown
    • £7k Rental
    • £6.6k = £46.5k / 7 years
    • -£1.9k tax
    All of which gets you to £37.4k spendable. The tax is calculated on the assumption that you've shifted the rental to the Mrs, each have a PA of £11.5k (indexed for inflation) and basic rate tax remains at 20%.


    Other than paying NIC for the Mrs and increasing your pension contributions for inflation each year you shouldn't need to do anything to achieve this.


    If you DO want to do something extra to either retire earlier or have more money then you first priority should be increasing your own salary sacrifice contributions until you are no longer paying 40% tax. This gives much better value than either a SIPP for you (unless your works' pension has very high charges / poor funds) or contributions for your wife. Sal Sac for you turns £58 net into £100 gross which becomes £85 when withdrawn (25% tax free, 75% at basic rate). That's a 47% increase vs only 25% on contributions for wife even if you manage to get them out before her SP and therefore avoid paying any tax.
    • coyrls
    • By coyrls 11th Sep 17, 3:00 PM
    • 851 Posts
    • 860 Thanks
    coyrls
    ....do I still need to double check the 40% tax relief on my contributions or are we saying that, because it's all Salary Sacrifice, we don't need to because I'm not being taxed at source as it were?
    Originally posted by Rodders2409
    No checking required, the salary sacrifice is being taken from your nominal gross pay (nominal because salary sacrifice means you are not actually ever "paid" the part of the salary that you are sacrificing) prior to any taxation, so there is no tax paid to reclaim.
    • Triumph13
    • By Triumph13 11th Sep 17, 3:01 PM
    • 1,032 Posts
    • 1,225 Thanks
    Triumph13
    Unlike the past, where many retirements were funded by the DB pension from one job, plus state pension, both of which occurred at the same time, today's retirees are pulling together their retirement income from a wider variety of sources. Mine (come the great day) will be made up of 2 x DB, 1 x DC, 1 x SIPP, a redudancy payment, some AVCs, a TFLS and some savings..add to that a couple of pensions and some savings from my other half and you get the monster spreadsheet that I have been building for the last year or so....I must have checked and rechecked the calculations about 30 times before I was happy that we could actually afford to retire...now I just need to pull the rip cord!!!

    Good luck
    Originally posted by k6chris
    Almost everything out there on retirement seems to be either this old-fashioned model of work / private pension plus SP starting at the same time, or the MMM or ERE model of you build a pile of investments then when it's big enough you retire and start drawing down. Not that helpful for people like k6chris or me where you have this crazy complexity of a couple with SPs and various bits of DBs all coming on stream at different dates - particularly if retiring before 55 so you can't even get at most of your funds at first. Add in LTA issues, if you're lucky enough to suffer from them, and it can definitely be described as a non-trivial exercise. The one thing that does make modelling slightly simpler is to split the pot between a long term drawdown pot that pays out from day 1, and a bridging pot that just fills in gaps until things like SP come on line.
  • jamesd
    I'll expand on salary sacrifice a bit. First, it's ideal because you get income tax and NI saving automatically and you must not tell HMRC that it is pension contributions without also saying salary sacrifice, else you might accidentally claim double tax relief.

    In salary sacrifice you agree to a contractual reduction in pay and your employer agrees to make employer pension contributions into your pension.

    Because the sacrificed money is never pay it's not subject to income tax, employee or employer NI. The whole gross sacrifice goes into the pension. Since it never shows up as taxable pay it's never part of your taxable income. Sacrifice from 50k to 40k and you get deductions for 40k not 50k, automatically giving you all the relief you're entitled to.

    But it's better than that. Below the higher rate band the employee NI you save is 12% not the 2% for higher rate. This is where it gets fun. You have 7k of non-work property income. Sacrifice to still be basic rate for income tax on the combined income and you get 52% relief:

    40% income tax
    12% basic rate range NI

    This is because the NI is calculated just on pay so when pay is in the basic rate range you save the 12% NI even though you're saving income tax at 40% on your combined income.

    But you can do even better. Income tax is calculated for a full year but NI is calculated for individual pay periods only. So you can increase the amount of 12% NI saving you get by sacrificing down to minimum wage in some months then just enough to get full employer matching for the rest.

    Bet you didn't know you could get 52% relief on your property income!

    Since the sacrificed pay isn't taxable pay it also keeps you out of the higher rate BTL relief reductions if you sacrifice enough to be a basic rate income tax payer.

    The post below from michaels refers to an earlier work in progress version of this post that had 1 as a typo for 12.
    Last edited by jamesd; 11-09-2017 at 3:36 PM.
    • michaels
    • By michaels 11th Sep 17, 3:27 PM
    • 19,239 Posts
    • 88,254 Thanks
    michaels
    12% not 1% so above hrt 40% + 2%, below 20% (basic rate tax) + 12% NI.

    Once you are below higher rate tax it is less clear whether you pension contributions or the 3.6k for your DW make most sense as 75% of yours are likely to be taxed at basic rate (20%) whereas if she draws hers down before getting her state pension then all of hers might be tax free.
    Last edited by michaels; 11-09-2017 at 3:32 PM.
    Cool heads and compromise
    • Triumph13
    • By Triumph13 11th Sep 17, 4:04 PM
    • 1,032 Posts
    • 1,225 Thanks
    Triumph13
    12% not 1% so above hrt 40% + 2%, below 20% (basic rate tax) + 12% NI.

    Once you are below higher rate tax it is less clear whether you pension contributions or the 3.6k for your DW make most sense as 75% of yours are likely to be taxed at basic rate (20%) whereas if she draws hers down before getting her state pension then all of hers might be tax free.
    Originally posted by michaels
    Sal Sac for OP probably still wins as he'd be getting 32% relief - 20% tax and 12% NI so £68 becomes £85 for a 25% profit. This is the same profit as for DW, but only if she can get it out before SP at £4.5k pa (£11.5k PA less the £7k rental income he plans to shift into her name) whereas OP only has to avoid the higher rate band in retirement so is a bit more flexible. The key thing to check though is whether or not OP's employer shares any part of their NI savings with the employee - eg mine gives 6% out of the 13.8% they save. If they do then OP contributions continue to be the clear winner.
    • Rodders2409
    • By Rodders2409 11th Sep 17, 4:27 PM
    • 25 Posts
    • 6 Thanks
    Rodders2409
    Just when I thought it was safe to have a cuppa!

    So, I'm OK with the general assumptions and calculations and many thanks for the confirmation.
    Now there could be an opportunity to fine tune and manage an increased level of return.

    This was mentioned earlier in the thread, but I dread going back that far :-)

    So there's the potential to increase my Sal Sac to the pension to the point I drop below the 40% threshold and then I'm paying standard tax but getting an uplift in my pension pot through the sacrifice...is that right?

    I thought there was a maximum amount that you could put in as Sal Sac'?
    And can you chop and change the amounts you put in?

    The other comment about the rental property being part of this in some way with NI...to be honest , goes over my head...help!
  • jamesd
    That's right.

    There are two restrictions:

    1. It's illegal for your employer to pay you less than minimum wage in any pay period. So they won't ever let you sacrifice below that.
    2. The annual allowance of £40k a year plus any carry-forward of unused amounts from the last three tax years.

    There used to be restrictions on changing amounts but HMRC removed that for pension contributions a couple of years ago because they were incompatible with pension auto-enrolment law. So you're now allowed by law to change whenever you like. Not all employers will allow it, though. Mine used to do it by email request but recently introduced a form for it so I assume it was quite popular to make changes.
  • jamesd
    The rental property generates taxable income. If that takes your total taxable income after salary sacrifice into higher rate income tax you'll pay higher rate income tax on it. You can get rid of that higher rate income tax by increasing the amount of pay that you sacrifice. When you do that you'll save the 40% income tax you'd pay and also save 12% employer NI because at work this sacrifice will be in the basic rate NI/pay range.

    The same applies to any non-work taxable income. I'm getting the 12% NI saving on a fair bit of my P2P lending interest by sacrificing pay down to a bit above minimum wage for the whole year.
    • Triumph13
    • By Triumph13 11th Sep 17, 5:52 PM
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    Triumph13
    If it can be done cheaply, (I'm no expert on this) transferring the rental property to DW still makes more sense as she has unused Personal Allowance. That and paying voluntary NICs for DW should probably be top priority.
    You then need to sit down and work out how much you want at retirement, when you want to retire and how much more you are prepared to pay now to get there. You are already well ahead of your original plan of retiring at 60 on £28k pa. Once you have more of an idea on where your priorities lie in the triangle between more money to spend now, more money when you're retired and stopping work earlier, then it will be time to get into the nitty gritty of the best way to achieve those aims. People here will be only too happy to offer advice to you on how best to meet those aims, but only you and your wife can make the decision on what those aims should be.
  • jamesd
    Really want to know if I'm way out in thinking I can retire at 60 ... Question is ...is that possible if I retire at 60?
    Originally posted by Rodders2409
    You're about ten years out. You can retire at 50 if you want to, though do read the catch I mention later.

    In general the answers you've received so far don't include all of your income and investments so they haven't done a particularly good job of evaluating your options.

    Using cfiresim, try these inputs:

    Retirement end year 2062 because males of your age generally have a one in four chance of living to age 95. One in ten is 100.
    Investigate: max initial spending
    Minimum Success Rate: 75
    Portfolio value: 302000
    Spending plan: Guyton-Klinger
    Spending floor: Defined value, 16000, I assume that you expect your wife not to live as long as you and will accept a reduction of her state pension of 8k plus another 6k without her around below your specified 28k comfortable level and if necessary in many years would accept this with her around as un undesirable but tolerable trade for more income while you have high confidence of you both being around.
    Pension 1 label her SP, amount 8000 start year 2027
    Pension 2 label his SP, amount 8000 start year 2034
    Other income 1 label rent, amount 7000 start year 2018 end year 2062 same as retirement end and I assume increasing with inflation
    Click on run simulation.

    Answer: maximum initial spending of 48,683. This is well in excess of your 28,000 specification. The graphs look very unusual because your guaranteed income is 23k and the target is only 28k with a floor of 16k. A critical point is that most of your money just has to bridge the years from now until your state pensions are both being paid, then only 5k a year of more income is needed from investments.

    Adjusting to experiment a bit, change the minimum success rate to 90 and the income floor to 28000. Now the maximum initial spending drops to 17,421, failure to achieve your objective for the whole 50 years. You can't get your target income with no flexibility at all and only accepting failure in the equivalent of the worse case historic ten percent of investment periods.

    So, with a 90% chance of not having spent all of your money by age 95 and being left only with state pension plus rent, what floor can you use? Change the floor to 20000, assuming loss of her state pension at some point. Initial income now a successful 44,702. That flexibility of income really matters. What about 75%, 95% and 99% success rates? 48,883, 43,241, 29,767. All above your target once you take that income flexibility, though there is a chance that income could drop to 20,000 while she's still alive if you do see a lot of bad investment performance.

    What about living longer? Change the end year and rent to 2067, the one in ten chance of living to 100 and the success rate back to 90. Initial spending 44,177 still comfortable. And 100% success rate as well? 23,142 initial income, not high enough but not at all bad. At that level no historic cases would have produced an income below the floor of 20k before you reach age 100. But that should give you a lot of comfort that 28k is fine.

    I assume that you place a very high priority on retiring early and spending more at younger ages when you're both around and able to get maximum benefit but anything from 30k to 48k looks OK, depends on how cautious you want to be in planning for really bad investment performance and hence having higher amounts of money left over when you die. You probably have some desire to leave an inheritance so more left over isn't too bad an outcome if so. But I expect that you and your wife together, retired and relatively healthy is most important.

    It's vital to use Guyton's sequence of return risk taming approach in your situation, as well as something like the Guyton-Klinger rules. This is because most of your capital drawdown is in the 17 years I've used between now and second state pension and many stock markets are at high cyclically adjusted price/earnings ratios, implying lower than average expected returns, though not the very worst historic investment return cases. If you do see a very bad initial five years, adjust downwards a fair bit early on if you want to stay well clear of your income floor.

    What working and saving longer does is get you higher very bad investment return case income levels. So if you do turn out to live through really bad investment returns your income stays higher than otherwise. Or higher income levels in general. But you pay a substantial cost in being retired later. Only you can weigh those decisions between chance and depth of reduced income vs having more time retired with your wife now or soon.

    But there is a bit of a catch. Much of your money is in pensions and you're still five years from being able to get at your own pension money. The 20k of savings and 27k in her pension plus the rent isn't going to sustain a 28k income for five years. You solve that with borrowing, a mortgage, repaid over time, not as soon as your reach 55, better mostly after reaching state pension age because then your income uncertainty is reduced. Or by delaying and concentrating on boosting the non-pension savings you most critically need for the before age 55 case.

    In addition you have lots of extra safety margin in the form of the capital value of your home, eventually that of the rental property and also knowing that spending tends to drop as people get older, for example about 35% between ages 65 and 80. By the time you'd get to failure cases your spending is likely to have naturally dropped anyway, keeping you away from them. I've also completely ignored the potential for your wife to make £720 a year from pension contributions tax relief between now and reaching age 75, and for you to do some of the same, though taxable so only £180 a year for you. That's still 900 a year of extra income in the riskiest early years of retirement, not at all bad.

    For your children, letting them use student loans is fine, but add some extra spending for a few years for parental contributions and also perhaps some lump sums as they reach say age 25 to allow for possible mortgage deposit help, the best use of your money to help them, capital is harder to gather for them than paying off student loans is.

    Be sure that you read Drawdown: safe withdrawal rates and form your own opinions after reading the things I link to from there.

    Now you have some serious reading and thinking about how flexible you really can be with spending in retirement to do. Take your time, the people here are largely familiar with the issues and options while you probably do need more reading and thinking to get comfortable with the range of choices and decisions to make. But retiring now does look doable if the trade offs in potential lower income later on if investments do badly look OK.
    Last edited by jamesd; 11-09-2017 at 7:16 PM.
  • jamesd
    The rental property is interesting. Given your cash flow needs, I think it's better to prioritise getting the £720 tax free a year from pension contributions for her if you go for retiring around age 50. That helps your cash flow when you most need it. So you'd need to constrain her to leave unused income tax personal allowance of the £2,700 that pension trickery uses.

    Easy enough given the rental income, you could probably switch most ownership to her sensibly given the £7,000 net of costs income level, which still leaves her with some unused personal allowance.

    But there's a catch: during the early years if you do go at age 50 or so, you'll have to be drawing on her pension pot and 75% of that money is taxable. While for you during those same years, you have little income.

    So a general plan for soon after age 50 retiring looks like you keeping ownership until you've drawn the money from her pension and then swapping ownership to her in time for you to start taking money out of your pensions. That combination keeps it as tax free as possible for as long as possible.

    Once you're drawing on your own pensions, her owning all of the income looks best for tax minimisation.
    • Triumph13
    • By Triumph13 11th Sep 17, 8:48 PM
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    Triumph13
    And that, Ladies and Gentleman, is how to completely fry someone's brain.
  • jamesd
    Fortunately they have plenty of time to let their brains cool off after being fried and do more reading.
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