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  • FIRST POST
    • richieboy
    • By richieboy 14th Sep 17, 10:14 PM
    • 8Posts
    • 1Thanks
    richieboy
    Pension plans for an early retirement
    • #1
    • 14th Sep 17, 10:14 PM
    Pension plans for an early retirement 14th Sep 17 at 10:14 PM
    I would welcome some helpful suggestions regarding what I'm thinking of doing to prepare for an early retirement.

    Objective
    I would like to retire at 58 at the latest, and my wife at 60 and we think we need £43k pa before tax to live on

    Background

    I'm 44 live in Scotland earn £67k pa
    My Wife is 46 and earns £18k pa
    2 kids - 1 is fully self supporting, 1 is still at home but pretty much fully self supporting
    We owe £120k on our home mortgage and have 11 years left before its cleared. Current value £220k. We don't have any other debt.

    Savings/Pension Info
    Small amount of emergency cash now saved £3k

    My State pension forecast says that if I contribute for another 8 years I will get max state pension possible however it also says Your COPE estimate is £44.97 a week. Which I think means that amount is deducted from the state pension ? Is that correct.

    Wife State pension states she needs to contribute for 7 more years although her COPE is £1.21

    Wife has just joined the NHS Scotland CARE pension scheme a few months ago but has no other pension provision.

    I am a deferred member of the Civil Service Classic DB scheme and have a statement from Aug 2015 which details a £3300 pa pension + TFLS of £9900 available without reduction from age 60

    I have also built up 14 years in a LGPS which I am still a member of. This consists of a split between FS 1/80+3/80, FS 1/60 and CARE 1/49.

    I asked LGPS to provide a future benefits quote if stay in scheme and take early retirement (the earliest they can quote is at age 60) and this came back suggesting that taking into account the reduction for taking early it would provide an annual pension of £26k pa with a lump sum of £13k.

    We now have about £1500 per month available to save and invest and I recently set up an ISA account and bought some units in a VLS80 ACC fund and another Global multi asset tech fund (I work in IT) and have started paying into that on a monthly basis and my wife has just started building up the cash emergency savings. The logic is to have access to some cash but pay majority into longer term investments and compounding should be the way forward. Now I am thinking I should be paying more into a pension, but not the LGPS as that is reduced for early access and I cant get to before 60, (unless through employer agreement for redundancy or ill health). So maybe a new private pension is the best option as I pay 40% tax then I can potentially benefit more this way than through the S&S ISA VLS and get to it slightly earlier...so the plan was for us to split the £1500 and pay £375 into savings accounts and £375 into S&S ISA and £750 into a new private pension scheme so that this will attract a 40% tax relief making the monthly pension contribution an effective £1250 for the cost of £750 and do this for the next 14 years. I understand I must pay sufficient tax at the higher rate to claim the full 40% rate tax relief which I think in my case is true. I think by doing this I would maybe have upwards of £250K in a private pension (4% growth) and can then start taking it from probably 57 at the earliest.



    I dont think I will hit LTA by doing this.


    Does this sound like a sensible plan ? Or maybe there is a better way and we can retire even earlier



    Thanks.






Page 1
    • p00hsticks
    • By p00hsticks 14th Sep 17, 11:00 PM
    • 5,709 Posts
    • 5,319 Thanks
    p00hsticks
    • #2
    • 14th Sep 17, 11:00 PM
    • #2
    • 14th Sep 17, 11:00 PM

    My State pension forecast says that if I contribute for another 8 years I will get max state pension possible however it also says Your COPE estimate is £44.97 a week. Which I think means that amount is deducted from the state pension ? Is that correct.

    Originally posted by richieboy
    No - the COPE was used in calculating your 'starting amount' at the point the new State Pension was introduced in 2016 but has no further effect. If your forecast says you can get the max State Pension that is what you will get.
    • Alexland
    • By Alexland 14th Sep 17, 11:36 PM
    • 672 Posts
    • 422 Thanks
    Alexland
    • #3
    • 14th Sep 17, 11:36 PM
    • #3
    • 14th Sep 17, 11:36 PM
    Generally sounds an ok plan. I wouldn't really bother with S&S ISAs when contributing more to your and your wife's pensions could be more beneficial provided you keep an eye on your LTA risk including the risk the govt reduce it again!

    In particular there might be an opportunity running 2 concurrent pensions for your wife (such as a stakeholder on the side) as she will benefit from being able to withdraw not just the tax free lump sum but also against her annual income tax allowance. Also worth considering moving some married income tax allowance across when you reach retirement.

    Finally working in IT is no reason to invest in it unless you have inside information? Diversified strategies with periodic rebalancing tend to work best in the long term.
    Last edited by Alexland; 14-09-2017 at 11:41 PM.
    • Linton
    • By Linton 15th Sep 17, 7:51 AM
    • 8,495 Posts
    • 8,438 Thanks
    Linton
    • #4
    • 15th Sep 17, 7:51 AM
    • #4
    • 15th Sep 17, 7:51 AM
    Your plan to gain 40% tax relief from private pension contributions to finance early retirement seems very sensible, though I havent worked through the detailed numbers.

    One area where an S&S ISA is useful would be if you were to want to invest more than the amount needed to bring your current tax rate down to 20%. There may be a danger that putting too much money into pensions would prevent you draining the private pension pot during your lifetime without paying higher rate tax. With your numbers I think you are OK but it is something to watch out for.
    • Dazed and confused
    • By Dazed and confused 15th Sep 17, 8:18 AM
    • 1,861 Posts
    • 829 Thanks
    Dazed and confused
    • #5
    • 15th Sep 17, 8:18 AM
    • #5
    • 15th Sep 17, 8:18 AM
    so the plan was for us to split the £1500 and pay £375 into savings accounts and £375 into S&S ISA and £750 into a new private pension scheme so that this will attract a 40% tax relief making the monthly pension contribution an effective £1250 for the cost of £750 and do this for the next 14 years.

    Don't think you've got this right.

    If you pay £750 into a SIPP or personal pension then the provider will add basic rate relief so your pension fund will have a gross contribution of £937.50. You could then be eligible for a tax adjustment for the higher rate tax relief which could save you £187.50 in tax but that money comes back to you or reduces your PAYE deductions if you tell HMRC during the year you make the payment.

    So your £937.50 pension fund will ultimately only have cost you £562.50 but your pension fund is only going to have 75% of the amount you anticipated in your op.
    Last edited by Dazed and confused; 15-09-2017 at 8:21 AM.
    • kidmugsy
    • By kidmugsy 15th Sep 17, 11:18 AM
    • 9,848 Posts
    • 6,641 Thanks
    kidmugsy
    • #6
    • 15th Sep 17, 11:18 AM
    • #6
    • 15th Sep 17, 11:18 AM
    I would like to retire at 58 at the latest, and my wife at 60 and we think we need £43k pa before tax to live on

    I'm 44 live in Scotland earn £67k pa My Wife is 46 and earns £18k pa

    Small amount of emergency cash now saved £3k

    Wife has just joined the NHS Scotland CARE pension scheme a few months ago but has no other pension provision

    I have also built up 14 years in a LGPS which I am still a member of.

    We now have about £1500 per month available to save and invest
    Originally posted by richieboy
    You're on £67k; your higher rate tax starts at £43k. So you can get higher rate relief on £24k. Part of that will be deducted monthly for LGPS: the rest you want to contribute to a personal pension of some sort. For simplicity I'll pretend that your LGPS contributions are £4k p.a. leaving £20k for the personal pension. That will cost you a net £12k, equivalent to £1k per month. Easy-peasy.

    Note that you'll need to check against your annual allowance of £40k: add the £20k to the figure that LGPS should provide on request for the contribution-equivalent to LGPS. If the total exceeds £40k then just carry forward unused annual allowance from tax year 14/15. Note that your own contribution to LGPS is not the figure you need for this purpose: ask LGPS for the needful.

    This leaves you with £500 p.m. You'll have to decide how to split it between personal pension contributions for your wife and adding to your emergency cash fund.

    By deferring personal pension contributions until late in the tax year you can effectively have a much larger emergency fund for most of each tax year.
    Last edited by kidmugsy; 15-09-2017 at 11:20 AM.
    • AlanP
    • By AlanP 15th Sep 17, 1:06 PM
    • 959 Posts
    • 678 Thanks
    AlanP
    • #7
    • 15th Sep 17, 1:06 PM
    • #7
    • 15th Sep 17, 1:06 PM
    All sounds sensible to me, but you might like to take a look at the AVC scheme that can run alongside your LGPS.

    You pay in via payroll deduction, so get the full "40% relief" into your pension pot and it can then be taken as the part of the 25% TFLS when you start your main LGPS pension - so get it out tax free.

    Doesn't help with the retire early without taking main LGPS benefits but could be useful.

    For example you might have a SIPP /PP to cover the 58-60 period supplemented by using cash savings / ISA withdrawals to get you to the income level you need.

    At Age 60, start LGPS with appropriate reduction, and take larger tax free Lump Sum without commuting any of your annual pension.

    Refill cash savings / ISA with some of the lump sum as it will only have cost you 60% of what they pay you (ignoring your bit of 80th scheme). This also ignores any growth / loss on the AVC investments over the investment period as well.

    Try to make sure your wife has taxable income up to her tax allowance level in retirement to make full use of it.

    If I were in your position I would build wife's pension, build your own PP / SIPP to cover the early retirement years and build the AVC to gain the most tax benefit.

    Once you have enough in your PP / SIPP to cover 2/3 years of early retirement why continue to contribute to it? Most you can get out tax free is 25% plus your tax allowance. Switch the contributions to the AVC and maximise the tax free money currently on offer at a rate if 40%.

    As for the S&S ISA - Do you need a "pot" that you can access outside the age and reduction limitations that pensions enforce on you? Children's Wedding, Special Birthday / Anniversary Holiday / Caravan or Motor Home or Canal Boat and so on.
    • Triumph13
    • By Triumph13 15th Sep 17, 3:12 PM
    • 1,104 Posts
    • 1,355 Thanks
    Triumph13
    • #8
    • 15th Sep 17, 3:12 PM
    • #8
    • 15th Sep 17, 3:12 PM
    I haven't run the numbers, but it looks like you should be more than fine in terms of overall income requirements as eventually your DBs and SPs should just about give you what you need, risk free as long as you don't take them too early. Everything comes down to a) cashflow and b) tax efficiency. I would suggest working backwards year by year through the period between when you get your SP, via all the other streams that come on line along the way (DW SP, DW DB, own DB etc) until you get all the way back to your planned retirement date. That will let you see how much cash you need in each of those years to plug the gap.

    In terms of tax efficiency (assuming you don't hit LTA) you have several useful tricks up your sleeve:
    • LGPS AVCs can be taken out tax free subject to limit of AVC + existing lump sum not greater than 25% of (AVC + 20 x DB + lump sum). This gets a lot out tax free, but not until you draw your DB.
    • Free standing pension for you lets you get 40% relief and take out £15,333 pa in the years between retirement and DB commencement (PA of £11,500 plus 25% TFLS)
    • Free standing pension for DW gets 20% relief - even on money she hasn't actually paid any tax on - and again take £15,333 until DB and probably still some more until SP age as looks like her DB won't use up her PA
      In an ideal world you'd be aiming to contribute all your pay over the HRT threshold and several years' worth of your wife's salary to maximise the tax advantages. The challenge to that is cashflow. The solution may well be the mortgage - change to interest only and extend the term. Divert all monies freed up into pensions and pay it off from LGPS AVCs when you take your DB.
    • richieboy
    • By richieboy 15th Sep 17, 6:33 PM
    • 8 Posts
    • 1 Thanks
    richieboy
    • #9
    • 15th Sep 17, 6:33 PM
    • #9
    • 15th Sep 17, 6:33 PM
    Thanks to everyone who has posted a reply, very helpful and much appreciated. Once I have had a chance to digest a bit more I'll no doubt have a few clarification questions that I'll come back to you on. Thanks again.
    • Terron
    • By Terron 15th Sep 17, 11:06 PM
    • 97 Posts
    • 95 Thanks
    Terron
    I wouldn't start paying into a pension until I had built up a larger emergency reserve. which could be an ISA. I use a credit card that I pay off every month for immediate needs and that allows me to extract funds from a S&S ISA in time to pay off the bill if needed.
    • OldBeanz
    • By OldBeanz 16th Sep 17, 7:45 AM
    • 693 Posts
    • 534 Thanks
    OldBeanz
    OP and wife are both in public service. They can afford not to have as large an emergency fund as someone working for a company. They have a lot of scope for paying into a pension at 40% and receiving all the money back untaxed (circa £100k from LGPS AVC; 2 years at £16.3k assuming planned rise in personal allowances) along with stuffing his wife's pension with 8*£16.3k at 20% tax free. So in broad terms build up tax free pensions for himself and his wife worth over £250k+ to ensure they use their personal allowances of which Government has contributed 30%. Fill your boots as they say.
    • enthusiasticsaver
    • By enthusiasticsaver 16th Sep 17, 8:10 AM
    • 4,674 Posts
    • 8,843 Thanks
    enthusiasticsaver
    Your plan sounds fine. You will have a 2 or maybe 3 year funding gap between 57/58 and 60 when you will get your pensions so the nearer you get to retirement the more cash you will need to build up in case the market is low. You do not want to be forced into liquidating your private pension or s and s isa if we are in a downturn. It sounds like you will be fine after 60 but need to work out how to get the £86k to £130k you will need for the first two or three years. So certainly you should invest in a combination of private pension and s and s isas now but coming up to the last 5 years before retirement we started to hold some money back in cash fixed rate bonds, one maturing each year. So far we have not had to draw on our sipps or stocks and shares isas.
    4 weeks to go until early retirement in December . Debt free and mortgage free.

    I'm a Board Guide on the Debt-Free Wannabe, Mortgages, Banking and Budgeting boards. I volunteer to help get your forum questions answered and keep the forum running smoothly. Any views are mine and not the official line of moneysavingexpert.com. Pease remember, board guides don't read every post. If you spot an illegal or inappropriate post then please report it to forumteam@moneysavingexpert.com
    • atush
    • By atush 16th Sep 17, 11:48 AM
    • 16,333 Posts
    • 10,081 Thanks
    atush
    I think yoru plan is sond, but as others have said iw ould up your pension contribs into a DC or AVC to use up all your HRT relief.

    But i w ould also say that 3K is not enough of a cash reserve, so putting away 500/m into that would also be a good idea- at least until you have a larger cash sum. Then SS&S isas
  • jamesd
    Or maybe there is a better way and we can retire even earlier
    Originally posted by richieboy
    In general the core way to do it is to plan to make personal pension contributions that you start to draw on then take the defined benefit pensions at their normal retirement age to avoid actuarial reduction. To go earlier than 55 you add non-pension investing usually in an ISA and draw on that until age 55.

    Current interest rates mean that transfer values out of defined benefit pensions are very good in most cases. In that situation a better combination can be non-pension savings to cover the years until age 55 then a transfer out of the DB pension to a personal pension. In your case allowed for the LGPS but not CS because CS is unfunded. Transfer values probably won't be as high when you get to 55 and it probably isn't a good move to transfer before retiring.

    The transfer values at the moment mean that it can be possible to retire well before age 55. Maybe 50 in your case, depending on how much non-pension money you an accumulate to cover your income need until 55.

    To see some worked examples of this sort of planning, look at the ones linked from this post.

    In general what you'll find is that the transfer of the LGPS pension will allow you to retire earlier on a substantially higher income, but in exchange you'd have to accept the potential for that income to drop if investment performance was at the bottom end of the historic range. The willingness to accept that variability is one of the key things that determines whether it's a suitable approach or not. Someone who wants the certainty will take the lower DB income and later retirement go get it. Deferring the state pension can get useful guaranteed income but not 24k worth, around 4-8k per person is about its potential, so maybe 16k between you if you defer for ten years each. regular buying of annuities of maybe ten thousand or twenty thousand every year or two can also be useful sometimes as a way to gradually shift to more guarantee income as you get older and less healthy causing annuities to become increasingly competitive with drawdown on income level per Pound.

    A common mistake for this sort of planning is overpaying on a mortgage and thereby depriving yourself of money you need before age 55. Better strategy is to extend the term of even borrow more to maximise the amount available before 55. Big paying off fits best after state pensions are in payment.
    Last edited by jamesd; 16-09-2017 at 3:15 PM.
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