Early-retirement wannabe

jamesd

A good tax year for me, net wealth ignoring mortgage balance increased by 113% of net pay plus gross pension contributions and now stands at 94% of the total for the last nine years and comfortably over a third of a million Pounds. The mortgage balance is covered several times over by non-pension investments and next month will be covered by 25% pension tax free lump sum value, barring adverse market moves. Still around fifteen years before I have to repay it.

Here's the longer term history of increases as a percentage of net pay plus gross pension contributions each year:

2006-07 71%
2007-08 56%
2008-09 67%
2009-10 180%
2010-11 112%
2011-12 50%
2012-13 97%
2013-14 80%
2014-15 113%

With only three years to age 55 I've commenced moving non-pension money into a pension to get tax and NI relief of 38.9% on the money moved. Limited by minimum wage rather than available carry-forward. Each year that passes reduces my need for non-pension money by a year's spending and also the pension freedoms limit how much I need outside a pension to produce a greater than GAD income until state pension age.

It's unlikely that I will make any ISA contributions for a few years, unless I can fund them with cheap borrowing. Withdrawing is more likely.

Last tax year I started using VCT buys to greatly reduce my remaining income tax liability, with the tax relief from that significantly helping the numbers and providing tax free ongoing income from asset-backed VCT lending for at least five years.

The VCT and pension move tax reliefs increase the chance that the next few years will also be 100%+ years, though a substantial market downturn would change that if it happens before I've moved enough money into P2P investments.

hugheskevi

Presumably the same [restrictions due to living overseas] won't impact on you as you'll have returned from your travels by the time you access your personal pensions?

Yes, I would be surprised if I wasn't back living in the UK by age 50, and certainly by age 55. Still, you never know, and my travel plans will be extremely flexible so as to enable me to just do whatever I feel like at each stage. For example, I intend to spend 6+ months volunteering in a few different countries, and perhaps I might like some places so much I'll spend a lot longer there.

There might be some interesting tax games I can play by being so flexible if I am still overseas at age 50/55, but I very much doubt that will be relevant and would just be pure advantage in any event.

As you are only 37, does that mean that there is a risk that pension changes (Govt or otherwise) could threaten your assumption that you can access your DB pension before 50?

It is a risk, but I consider it only a small risk. HMRC has put in place the whole protection regime, and to unpick that would probably be retrospective change. Given the small numbers it applies to (in terms of those with protected ages, and of those the small number who would commence pensions before age 55) I doubt any Govt. would feel the need to change the rules. So it is a risk, but not particularly high on my list of policy change concerns.

It is also interesting that reflecting on your post from 4.5yrs ago, that the major change (threat) has come from legislative changes. I am sure that will remain the case going forward from here and is a real physcological barrier to some people investing in pensions.

I did a lot more considering today about whether I should use my full Annual Allowance on SIPP contributions in 2015/16 or not (and cease contributions thereafter). This was because I have about £4,000 of carry-forward over available which I will lose if I don't use it up in 2015/16, as well as the possibility of higher rate tax relief being restricted in future.

My final conclusion was that I should not, as my AA usage from DB pensions alone will be about £33,000 p/a over the coming years. In 2015/16 I should use about £30,000 of the Allowance from the DB pensions. Therefore by not using my allowance now, I get £10,000 carry-forward, which will be very useful in the event the AA is reduced to £30,000. I can also use that £10,000 up in a future year if the AA stays at £40,000.

I generally dislike second-guessing possible policy change as that makes planning extremely difficult. However, as I already need to divert pension saving to ISA saving at some point in the coming years, it seems sensible to do so now given it protects me from a reduced Annual Allowance.

You may want to consider keeping an offset mortgage in early retirement. This gives you access to cheap borrowing should you require it in early retirement.

This has been my main point of consideration over the last 6 months. From a pure financial point of view there is a compelling case to have a mortgage. However, that creates practical difficulties with travel.

The problem is I will have no income when I get back from travelling so getting a mortgage will probably be hard. There may be ways, but nothing I can rely on at the point when I leave the country.

I could keep my London property when I go travelling and rent it out and retain or increase the mortgage. Then when I return from travelling, sell the house and port the mortgage to the property I purchase to retire in. There is a risk that the lender will not allow the porting. This plan is very sensible, and I think the most financially optimal route. However, I am loathe to rent my property out when I will be so far away and uncontactable for extended periods (eg I intend to spend lots of time deep in the Amazon). My final conclusion was that I would fret too much about it and it may well spoil travel. It would also lead to logistical issues upon returning and having to move tenants out and sell property. Therefore I decided I would be much happier selling the property even though that probably isn't the financially optimal decision.

Last tax year I started using VCT buys to greatly reduce my remaining income tax liability, with the tax relief from that significantly helping the numbers and providing tax free ongoing income from asset-backed VCT lending for at least five years.

VCT's are something I have considered closely too. They are very attractive, but unfortunately don't fit well with either my time of leaving employment and my time of greatest financial pressure. I will be needing funds at very specific times and will not be well-placed to handle volatility.

I tried several ways to make it work, and it isn't impossible. However, I decided that I was letting the tax tail wag the investment dog which isn't a good idea. So I've decided against VCTs until at least age 55 (by which time the whole system will probably be completely different anyway).

Marine_life

hugheskevi wrote: »

Although we have around £50K on 0% credit cards

Why so?

Thats a decent chunk of change to have on credit cards

tigerspill

jamesd wrote: »

Last tax year I started using VCT buys to greatly reduce my remaining income tax liability, with the tax relief from that significantly helping the numbers and providing tax free ongoing income from asset-backed VCT lending for at least five years.

The VCT and pension move tax reliefs increase the chance that the next few years will also be 100%+ years, though a substantial market downturn would change that if it happens before I've moved enough money into P2P investments.

Very interesting thread.

VCTs are not something I know anything about.
Where did you start with these? What did you invest in?
Also - what is your p2p strategy?
Hope you don't mind the questions.

hugheskevi

Why so? [Have £50K on 0% credit cards]

Thats a decent chunk of change to have on credit cards

It is just stoozing really, without requiring the funds to be used in savings accounts. I only use cards that have no balance transfer fees, in conjunction with the MBNA low rate card to move money into current account and only pay literally a few pence in fees and interest (the balance then being transferred to the 0% balance transfer fee-free card). Hence the balance is just an interest-free loan which I constantly roll-over (the £50K is spread across about 10 cards at any given time, all with different maturity dates).

I started using 0% credit cards several years ago, as putting all higher rate income into pensions created liquidity issues in the years when I was buying a house, getting married, buying car, etc, and income requirements were significant. Using the free borrowing available on credit cards enabled me to get liquidity to use to fund pension contributions, and then repay the credit cards from income over the next year or so (although this has not been necessary, as all balances have been rolled over, although I never rely on being able to do this).

I now don't need the 0% finance, but everything is all set up to keep moving the money around so it is not much of a burden. There is no reason not to take it - the funds are just used to do whatever I'm doing at any particular time slightly sooner than I would otherwise have done it. I've had good investment returns over the last few years, so it has been lucrative, as during that time the borrowing enabled me to invest more which got good returns. Going forward the return will be much less as the borrowing will pay down mortgage. That is just a bit of de-risking given that markets may be looking a bit uppish at the moment, plus I have increasingly less time until I leave employment, so I'm less inclined to borrow to invest than I was in previous years as I will have fewer years in the market.

I always make sure I will be in a position to repay cards as debts fall due. As both myself and wife have excellent redundancy cover I don't have any concerns that unexpected events will leave me unable to cover repayments, and it is a helpful way to gain some benefit from the redundancy cover in scenarios where the cover proves to be unnecessary.

jamesd

Marine_life wrote: »

Why so? ...Thats a decent chunk of change to have on credit cards

That's also part of why my 2009-10 numbers was so good. I borrowed on cards and invested. I estimated that I made around £12,000 on around £25,000 or credit card debt in a year, more in the next couple of years. Stoozing can be really profitable if used in appropriate ways for the individual at appropriate times.

That can't be done today because markets aren't in the late 2008/early 2009 lows. Something for next time a big drop rolls around. That's part of why I'm using P2P, a source of income and capital repayments that I can either reinvest in P2P or switch into then low priced standard investments.

Loughton_Monkey

hugheskevi wrote: »

.......I generally dislike second-guessing possible policy change as that makes planning extremely difficult. However, as I already need to divert pension saving to ISA saving at some point in the coming years, it seems sensible to do so now given it protects me from a reduced Annual Allowance.......

I am approaching 10 years of retirement (I went at age 56) and would suggest that this mix between Pension/ISA is an interesting one. There is no doubt that pension has the slight 'edge' given the tax free lump sum. But the biggest danger is having too much in pension so that you hit higher rate tax, especially when a lot of it was built up on 'only' lower rate tax relief.

In my own case, I have got it 'about right' but only by accident. My last 6 years work was abroad, and so I was barred from normal pension tax relief or contributing to ISA's. Hence I came back to retire with a big lump of cash not in tax shelters. Luckily, over ten years of contributing the £3,600 minimum pension, I am in danger of paying HRT now.

I made cautious assumptions on my 'retirement model' - although my estimate of 4% on cash savings has turned out to be rather 'rash'! But I find that my overall assets are worth 26% more than they were on the day I retired. My model had them increasing by only about 14% [both in cash terms].

So it's been very much swings & roundabouts, but overall I am 'ahead' and 'struggle' to spend enough to bring the assets down to plan. [Mrs LM is probably right, though.... it's more that I'm a tight bast**d and have never spent just for the sake of it.]

It's my pensions and investments that have produced the most 'surplus' (despite going through the 2008 'crash'), and slightly lower spending have together more than compensated for the low 'cash' interest.

So although I'm rather proud of my 'model' [which I keep perfectly unchanged - but record/track deviations from it], I did make a rather significant error which I can only class as a bit 'silly'. This was to do with downsizing. My model took the view that as my cash gets drained, and we get older, we will want to move to a smaller house in a cheaper area. That way we grab about 50% of the substantial equity, and live in a house 75% the size. My model originally informed us that age 79 would see our cash balances at zero. So age 75 [we are 65 now] seemed a nice time to do it........

However, by maxing out ISA and Pension allowances, for both of us over 10 years, we have only about 3 years of cash not in tax shelters - which we obviously use to top up our pension income. This gives us the dilemma of downsizing in a couple of years or so [which we have decided as a good option], or sticking to the age 75. The latter would entail drawing out oodles of cash from ISA's, moving, only to find another huge pile of cash which will take years to push back into tax shelters...

Waddamistakatermaka........

Not an awful problem to have, but in any model, I would advise paying extra special attention to cash flow and in particular tax treatment of income and assets. I covered it, but not in enough detail. We can't predict future tax regimes but it's a least worth having a good stab and updating it each year....

jamesd

tigerspill wrote: »

VCTs are not something I know anything about. Where did you start with these? What did you invest in?

I used mostly the asset-backed Albion VCT from its top-up offer. Besides projected income of around 7% tax free, around 10% after allowing for the tax relief effect on the money invested, they have a buyback policy at 5% of net asset value, one of the tightest around, that can protect against capital loss at selling time. For context, XIRR for my work pension has been a bit over 10%, so I'll be anticipating similar returns to that.

VCT use for me probably won't reach 25% of assets, from around 6% now. That's also too high for most people, though do note the heavy use of asset-backed rather than equity.

tigerspill wrote: »

Also - what is your p2p strategy?

Zopa that has been running down for several years now and is getting to be almost insignificant. Bondora, don't use it now, I've put it into drawdown for a range of reasons and the returns that attracted me are no longer available to new investors. For new money I'm currently favouring the 10-12% available via Ablrate; I anticipate that much of the money I place there will be inside a pension. When that gets a bit unbalanced in terms of amount at each platform I'll use others as well.

I'm taking an unconventional view about P2P for my own investing: assuming that there will be a major stock market drop in a two year or so timespan and moving quite a lot into P2P to protect against that, then move into reduced price buying after the drop. The result of this will be much more P2P than I'd suggest for general use, potentially going as high as 50%+, which would be split across lots of platforms, not just three.

Don't do all of what I've just described unless you both have a high risk tolerance and risk capacity (future earnings power mainly) and are comfortable with being way outside investing norms. Bits in more judicious amounts are OK for more normal people.

In the coming tax year I expect that around £6,000 of my income will be coming from P2P interest and VCT dividends. Given my very high savings rate that could be half of my spending.

gfplux

Hugheskevi,
Remember to factor in some medical costs when you return from your travels. If you have not lived in the UK for 6 months you will be considered as a Health Tourist. Luckily A and E treatment will be free but anything else you will have to pay for.

Loughton_Monkey

gfplux wrote: »

Hugheskevi,
Remember to factor in some medical costs when you return from your travels. If you have not lived in the UK for 6 months you will be considered as a Health Tourist. Luckily A and E treatment will be free but anything else you will have to pay for.

This was not my experience.

I returned after 6 whole years away in the Far East. When I returned, I simply re-registered with the same GP back here, and gave him a small wad of medical notes for minor treatments that I had received in Korea China and Hong Kong. Sorted!

Had I been ill on my (rare) home 'visits' then that may have been different. But my company medical insurance would have covered those anyway.