Pensions Planning: The NUMBER

NedS

michaels said:

NedS said:

ex-pat_scot said:

I'm cautious about commenting on energy, as it's a touchy subject!
We are deep in the N Yorks moors, on heating oil, which is very volatile in price (and delivery times).
One of my many early projects in retirement will be to address a more sustainable energy strategy for us.
1. draughty large house, which we struggle to heat even with a large boiler
2. 1930s Aga (family heirloom) that is non-negotiable
3. insulation
4. solar
5. electric car. Next door neighbour has just bought a BMW i3, so I'm keen to see how they get on with it.

We live rurally and are also dependent on oil for heating and hot water. Last March as oil prices plummeted we were scrambling to fill the tank to the brim to take advantage of cheap prices and I even went as far as pricing up another tank to add more storage so I could buy more cheap oil, when it struck me I could buy as much cheap oil as I like through an ETF in my SIPP/ISA. My plan is to hold the equivalent of 10 years worth of oil in an ETF, topping up the holding when prices are low and selling from the holding to release funds to top up the real tank as required or when prices inflated. Given the price volatility of oil it seems a great way to mitigate against price movements and ensure I'm not a forced buyer at peak prices.

I like this - are there similar ways to hedge gas and electricity prices?  How does the downside risk work?  If prices fall even lower would you effectively be paying the higher price you had bought your futures at?

By buying at a point in time, I'm basically locking in that price right now for my future usage. Similar to how you would if you lock in your electricity supply for a fixed term contract. Of course there is potential downside, the price can always fall further, but if it does I can always buy more, something you can't do if the tank is full or you've bought a fixed term contract. I'm effectively making a bet (judgement call) that the price is more likely to be higher in the future than at the time I choose to top up my holding. The other key point to recognise here is that, unlike conventional trading of assets, as a user of oil I normally have no choice over when I have to purchase as that is dictated by when the tank is empty so I may be forced to buy a peak at a price I wouldn't necessarily do if I were trading/investing in that asset. You can't average in when you're filling an oil tank, you pay the price on the day you order.

I think you just need to look at the historical price of oil and decide at what price would you be comfortable buying. Currently, oil looks sensibly priced at $60-80 a barrel to me, so below $50 I'll be topping up and above $70-80 I'd be selling enough to cover the cost of filling the tank. If it drops to $40 or below again I'd be filling my boots. You don't need to time the top or bottom of every rise and fall, just take enough out of the volatility to avoid getting caught short when prices are high.

In terms of hedging gas and electricity, you'd need to find an ETF or asset that is closely correlated. Doesn't need to be the same asset, just closely correlated. I don't really see it with gas and electricity as the consumer price doesn't tend to be as volatile as purchasing heating oil which can almost double or halve in a year. Domestic gas and electricity prices don't tend to exhibit that level of volatility, and I've certainly never experienced them dropping by a significant amount.

MrsFingersCrossed

Hello again.

A quick update on my favourite thing, THE NUMBER THREAD.  Reading all the posts over the years has been a huge help and reassurance to me. 

It's a few years now since I last posted. We retired early after my OH was made redundant in January 2016.

We spent his approx £70k pension 'pot' over the next few years to live off, only drawing down up to his tax threshold each year (I had transferred the marriage allowance to him) to avoid paying tax and topped up with money saved from downsizing in 2015 (we sensed his redundancy was coming).

We topped up so we had £2,000 per month, £24,000 pa to live off and spent most of the rest of the equity we had from downsizing on doing up our run-down bungalow just a mile up the road from where we used to live.

At age 65 my OH's defined benefit scheme kicked in. We elected not to take the £45k tax-free cash to maximize the annual income, and now receive approx £10,500 pa, increasing at 5% pa, with a 50% widows pension to come if he goes first.

We both did a bit of self-employment which allowed us to pay class 2 National Insurance to earn the final years to get us both up to the new Full State Pension.

I am now just under 2 years away from my State Pension. OH is now receiving his. So for the next 2 years we have an income of:

  9, 339 pa his state pension
 10,700 pa his defined benefit
-----------
20,0039  pa 
less tax of approx 1125.00

= £18,914 pa   or £1,576 per month.

From our remaining equity last year we lent one of our sons the deposit on his first house which he is paying back at £500 per month so that tops our income back up to just over £2,000 per month.  We have random ad hoc additional income from the ongoing self-employment which isn't much but every little helps.

When my SP kicks in in just under 2 years it will bring our final retirement income up to approx £29,000 pa, or £2,400 per month. (I have a tiny private pension which should add £700.0 pa).

The monthly £500 from our son will go back to join the little equity we have left in Premium Bonds which should bring that total back up to around £24,000. It is currently only at £11,000 but I keep topping it up when we have any surplus, and have a small monthly standing order of £50.00. Any winnings are reinvested - we won £50 last month.:)

In December I opened a Nest pension and have squirrelled away £1,400 already and will keep topping it up for the free government tax relief money while I can. I will withdraw it before my State Pension kicks in in 2023 and put it into Premium Bonds. 

So overall we are far from rich but I think £2,400 per month will be enough for a good quality of life and a bit to spare / save. We might not have enough to do that American road trip or exotic travel to the far east I used to dream of but overall I think we'll be fine.

I hope this helps new visitors to THE NUMBER THREAD. We live in the South East and property and everything generally is very expensive so I'm quite proud of how all that planning and squirreling away and crossing my fingers seems to be working out as I hoped.

Fingers crossed

bownyboy

bownyboy said:

When I first read this thread many years ago we were aiming for £24k for a couple so £600k in investments.

We’re now at £630k and from analysing our spending in Money Dashboard I think £2.5k to £3k per month or £30k to £36k a year is more realistic.

Last few months in lockdown has validated how much we would need for bare bones retirement which is around £1.8k a month.

The one thing I wish money dashboard would do is show your categories of spending over a 12 month period, seems only to do it for current and last month.

Checking in after another year of lockdown. 

Our number is definitely sitting around £3k a month now or £36k a year. It may even be slightly higher for the first couple of years as we escape lockdown and go slow travelling (covid permitting).

My current contract finishes beginning of September when our investments will be sitting at around £780k which I’m comfortable at. Reason being is my wife has full state pension of £9340 and mine is currently £7738.

Also we will most likely rent our house out for a year or two while travelling which will give us some additional income.

I also managed to get better monthly spending breakdown figures using moneyhub instead of money dashboard. It allows you to do month by month comparisons of all categories quite easily. 

triplea35

In December I opened a Nest pension and have squirrelled away £1,400 already and will keep topping it up for the free government tax relief money while I can. I will withdraw it before my State Pension kicks in in 2023 and put it into Premium Bonds. 

Nest has an expensive charging structure of 1.8% of each contribution and then an annual management charge of .3%. Not quite so bad if the 1.8% is going to be diluted over many years but that is not your case.

Have you considered that even without unearned income you can contribute £2880 each year into a  SIPP  and get a £720 tax uplift. You can withdraw 25% tax free and should be able to use your personal allowance to withdraw the remaining tax free, or even in years of SP and your small pension get a significant amount without paying tax.

You might consider lower cost platforms such as Vanguard, or if keeping the SIPP in cash for this very short term than HL have no charges whatsoever.

Rhanaroo

My number is just under £29,000 PA and is easily achievable. I retire in 5 months at 57 with a pension of £16.600 my wife will continue to work for two years and then she will retire. 

At some point one of the cars will go and I think there are other savings we can make easily. Nothing on for house maintenance but we have savings that will cover anything major. Car servicing is a bit on the high side but will allow for some repairs

Outgoings P/A			Outgoings P/M
TV Licence	159		Broadband	52
Car tax 1	150		Mobiles	26
Car Tax 2	205		Spotify	10
Car Insurance 1	350		Netflix	6
Car Insurance 2	350		Gas and Elec	138
Car Service 1	600		Opticians	30
Car Service 2	600		Car Fuel	150
Caravan Service	250		Dog Food	20
Caravan Insurance	275		Pub, Meals, wine	400
House Insurance	160		Food	600
Rates	2430
Water Rates	500
Service bikes, boiler	600
Holiday	2000
Xmas / Birthday	2500
Clothing	500
Total	969			1432
Total P/A	11629		Total P/M	17184
			Grand Total	28813

SouthCoastBoy

My breakdown is similar coming in just over 2k a month. The zeros in the breakdown are items we once had but no longer do

Annual Costs			Monthly Costs
Golf Membership	800		Life Insurance	0
MOT Car 1	50		Critical Illness	0
MOT Car 2	50		Endowment	0
Service Car 1	150		Sky	40
Service car 2	150		Broadband	30
Insurance Car 1	400		Food	600
Insurance Car 2	250		Petrol	150
Car Tax 1	160		Expenses	100
Car Tax 2	20		Gym	0
Council Tax	2200		Swimming	0
Water	600
Electricity	650		Mobiles	25
Gas	650		Misc	150
Telephone	0
TV Licence	160
car breakdown cover	100
home insurance	200
car repairs	100
car tyres	150
christmas presents	800
birthday presents	400
holidays	4000
boiler service	90
	12130			1010.833
				2105.833

MrsFingersCrossed

Thank you, Triplea35 . I will look into a SIPP.

I had read on here (just after I opened it) that a Nest pension was an expensive option. I chose it because it is simple and they say suitable for small earning self employed but I am not that pleased with how it takes ages to add the tax relief so I can't easily tell whether it is growing or not.

I've stopped the direct debit for this tax year so I might soon withdraw it all and start a SIPP instead so I can pay £2880 in as you said, and get it boosted by £720 tax relief.

I previously hesitated about a SIPP as I have no clue about investments but will look into your listed options. Thank you.:)

cfw1994

Just on moneysaving to lower the number.....our renewal for car insurance (Admiral) came up last week.
Multi-car, incl daughter, best offer they got down to was £1,110 (after starting north of £1,300)

So we separated the policies....got *better* cover (protected NCD which we hadn't chosen with Admiral) for under £200 each for our two, then daughter got hers for under £400....and each with a further £40 TopCashBack   

Oh, & maybe use https://www.freemotorlegal.co.uk to remove the need for legal cover, usually another ~£25-30 on top!

Sorry, not strictly part of TheNumber, but seeing the numbers in the previous few threads just reminded me it can save quite a chunk to shop around each year!   
All that lowered our annual number by a further £400

DairyQueen

Thankyou for the updates. Calculating your number/planning finances in the lead-up to retirement can be challenging and it's helpful to see how others' plans have worked-out. Especially given the events of the last year.

Since I began planning several years ago our number has been revised several times. It's still a movable feast although we will both fully retire at the end of this year at ages 64 and 62.

We always planned to sell our two (small) homes and buy one, larger property. Non-discretionary expenses in retirement were therefore a finger-in-the-air job and we have struggled with the property budget thanks to a red-hot property market.

With immaculate timing (not) we began the process of moving at the beginning of 2020 and the pandemic has extended the timescale by some margin. Sale of property 1 took six months from offer to completion despite only us/buyer in the chain. Ditto our purchase - only 3 in the chain and despite both of the purchasing parties being mortgage-free. We were unable to find a property in move-in condition in the right location so now need to address ten years of previous owner's neglect. A major refurb wasn't part of the plan but, hey ho, it will keep me busy whilst travel/activities are limited. 

Mr DQ received an inheritance last year and this has enabled us to hold-on to property 2 for longer than planned. We will be based there until the refurb is complete but Mr DQ now has the most peaceful and spacious office on the planet. The new home is close enough for him to 'commute' so he is no longer crammed into property 2's tiny guest room whilst WFH.

He planned to retire at Christmas 2020 but that has been revised by a year. Absent opportunities to travel, and to engage in his favoured activities, he has reduced to 3/4 days per week instead. 

Builders are so busy that the refurb is unlikely to begin until next spring and property 2 will be 'home' until summer 2022 at the earliest. A move which we thought would take a year will therefore be closer to 3 and we are carrying the extra cost of running two homes a couple of years longer than planned.

On the plus side, and to our surprise, Mr DQ's consultancy services have been required throughout the pandemic. He was lucky to escape the ageism that is endemic in the corporate world when he was made redundant in his 50s. Although it seemed a disaster at the time, he has been lucratively and happily self-employed ever since. Other victims: take heart.

I retired several years ago to support elderly parents (mum-in-law now sadly deceased although my 80-somethings need increasing help) but have earned a small, part-time salary since July. Mr DQ had to pick-up the slack on pension provision/income for us both whilst supporting his daughters throughout their young adulthood. They are now both independent and doing well. The poor guy deserves a medal and is long overdue a rest.

'Sandwich generation' is a good description of our experience in our 50s/early 60s.

So, after that long preamble, where are we now financially?

I transferred my DB to a SIPP in 2018 (positive recommendation - I am one of the exceptions who benefit from doing so) and have deferred drawdown until next tax year whilst contributing the max possible. I will initially take max tax-free until SPA in 2025 and then drawdown at a variable rate depending on need/tax/market conditions. Mr DQ will drawdown up to the BRT threshold from next tax year. Surplus cash will be moved to ISAs.

Mr DQ crystallised his SIPPs in 2019 (LTA issues) and took his deferred DB pension last year  - a year after NRA. The deferral and late retirement factors kept decreasing in the years leading to, and after, NRA so it made no sense to continue deferring, especially given the LTA issue. Note to others: don't take your private sector DB illustration as gospel. Mr DQ is several thousand short of the projections provided in the years immediately pre/post his NRA.

He also has a small S32 plan which reached NRA last year. 

We will both receive full SP in 2023/2025 and the markets have been kind so we anticipate enjoying a higher drawdown than previously estimated. If we suffer the dreaded adverse sequence of returns we are fortunate to have the budget flexibility and sufficient reserves to suspend drawdown.

After disposal of property 2 next year, I estimate that we require £42k (after tax) for a very comfortable life but we can safely spend up to our maximum tax-efficient drawdown to realise £51k net. Our number is therefore a variable £42k-51k.

At £37k, and allowing for inflation, my first 'number' estimate back in 2016, wasn't that far from the latest projection of £42k. The big difference has been the higher income now available courtesy of kind markets/inheritance/extra saving/deferring pensions/working a little longer/tax and retirement planning. All have contributed something toward that higher variable income.

£42k includes all non-discretionary expenses, from utilities to cat flea tablets, and all discretionary, from charities/Christmas through generous eating-out budget and a weekly cleaner. It excludes travel/large capital items (e.g. cars, electronics) which will be funded from excess income or capital. Our cash buffer will hopefully be sufficient for us to suspend drawdown if required when the markets go belly-up.

Guaranteed Income:
DB £28,500 (CPI inflation up to 5% - 2/3rds widows)
S32 £3,000 (no inflation linking)
2 x SPs £18,600

Variable Income:
Combined SIPPs: £700,000 (tax-efficient, front-loading drawdown before SPs kick-in then variable withdrawals up to a max of 2.5%p.a.).

Plus £200-400k cash buffer depending on what we do with property 2. This may be gifted now.

We estimate that total expenses will reduce by £5k-7kp.a. on first death so £37kp.a. (net) should be ample for the survivor. Mr DQ's guaranteed income should cover this requirement but we will both use SIPPs to make-up any shortfall. I have reduced life expectancy so am likely to go first and the house will be Mr DQ's fall-back if he needs to cover care fees until he is 100+.

No inheritance ring-fenced but we have tried to minimise IHT should Mr DQ fail to meet his life expectancy and/or I confound the medics.

End of essay.

Please keep the updates rolling.

tichtich

triplea35 said:

Have you considered that even without unearned income you can contribute £2880 each year into a  SIPP  and get a £720 tax uplift. You can withdraw 25% tax free and should be able to use your personal allowance to withdraw the remaining tax free, or even in years of SP and your small pension get a significant amount without paying tax.

I think she said their joint retirement income was going to be £29K, so their personal allowance will be already used up. In that case 75% of the tax uplift will go back to the tax man. What the tax man giveth the tax man taketh away.