Early-retirement wannabe

gadgetmind

aldershot wrote: »

£450k of the combined cash is wrapped either in ISAs or NS&I IL certs. They pay RPI flat these days but I think they're still worth rolling.

Agreed, and we have £60k in NS&I for exactly this reason.

We can still shovel 30k pa from unwrapped to wrapped cash (ie into ISAs) and will continue to do so.

£40k pa from next year. Tasty.

Interesting view on hitting the pension funds straight away.

Money is fungible. All of your savings can be invested in the same assets and the only real difference between pots is tax. Drawing hard on pensions before other income starts to consume your allowances is a no brainer. This will let you preserve investments in other wrappers and even add to them.

It would yield about 3.5%-3.75% gross but we cannot be bothered with the aggro of being a landlord. I figure I would rather just stuff the cash into an equity tracker for a similar gross yield with greater liquidity and (to my mind) no greater risk.

That's my view too.

Would you pay for advice?

In my experience, IFAs want to run the investments, and I don't think you want/need that. When I hit 55 and put the plan into action, I might be tempted to drop £2k ish onto a "wealth manager" but I suspect they'd listen to my plans, repeat them back to me with some woffle about IHT and offshore trusts, and slap me with an invoice. In 3 years time, I'll probably spill the beans here regards what we have in various pots, explain my plan, and see what feedback I get.

It's your choice but you come across as smart and informed so I'm pretty sure you can come up with a plan yourself.

gadgetmind

AnotherJoe wrote: »

"fat flogged" ?

http://www.specsavers.co.uk/

gadgetmind

uk1 wrote: »

My main "hobby" for a while was "miles" and we have around 2m BA miles which supplemented by the 241's get's us in F a couple of times a year.

I once did 18 trips to the USA in one year, plus a few to Japan etc., so am "gold for life" with American/BA. I'm at 1.7m miles flown, and get the next level up for life with "just" another 300k, but I really hope to dodge this!

ex-pat_scot

AnotherJoe wrote: »

Whats your reasoning there? My thought was, I get the 20% relief going in but get taxed 20% out so there's no gain.

Or is it that you get the 25% TFLS so a bigger proportion of your salary than normal would be tax free??

Can you explain the maths? I dont think they'd work for me as I'd need to get to late August to hit £40k then I'm into winter almost but I can see if you can do it by say about now you might be OK.

It's the immediate 25% UFPLS (TFLS) really. Plus I'm assuming Salary Sacrifice, so it's 32% relief @BR, not 20%. (as a side note, I think this is a commonly-forgotten part of the calc).


Mind you - you can't sal sac below national min wage - so i'd have to come up with some sort of plan.


OK three scenarios then:
1. just do enough work post April, to get £40,000 into the pension pot.
From my calc, I'd need to earn £41,250 gross. From that, I'd sal sac down to NMW and get 8.1% employer match contribs.
I'd end up with £40,000 in the pension pot and £4,136 as a basic salary, paying £200 tax & £180 NIC.


2. earn up to the higher rate threshold (ie use up all basic rate tax band) and also ensure £40,000 goes into the pension pot.
From my calc, I'd need to earn £78,700 gross. Sal sac with employer contributions. I'd take home £34,000 with £3,880 tax & £41,28 NIC.


3. whichever of the above, then I'd take 25% of the pension tax-free and incur BR tax on the remainder. Ie on the theoretical £40,000 pension I'd earned, I would retain £34,000.


In the absence of any other compelling reason to quit at a particular point in time, then it would be sensible firstly to max out the pension contribution, then to earn up to the HR tax threshold.


Each person's circumstance will vary depending on income.
For my (current) circumstances then, Scenario 1 would have me working April through to July. Scenario 2 would have me working until mid-November. Each additional month worked between August and November would give me £8,220 net.
I'll clearly run the figs in more detail as I approach this for real, but it seems pretty compelling to work those few extra months.


Actually - thinking about it - why not just work until Nov each year, and take the rest of the time off until the following 6 April? Ie work each year to earn up to HR threshold, stick £40,000 in the pension, then clear off...

ex-pat_scot

aldershot wrote: »

Thanks. Nice post and I know you're right. I didn't get us to the position we're in by being stupid or reckless so there's no reason I shouldn't be able to continue the process in retirement and not worry about every last drop. I could walk out of here today and not come back but actually knowing you are financially secure whatever actually make you relax at work and not to worry about it any more. It does make the job easier which has kept me here for another year. One day, I will have to step out. We did think that not both stopping at the same time was a good idea and her job was reorganised which made leaving easier for her first.

We have travelled lots (turning left which is nice) but now all I really want is the freedom to see the 90% of this country that I've not seen before. When it hit 27c in the Western Isles a couple of weeks back, I wanted to be able to jump on a plane (or train) and be there tomorrow. I think we would be able to do that.

I think you are exactly right.
It's the "not worrying" that is a huge relief. I hope! That's why the "FIRE" people always emphasise the Financial Independence first, then the Retire Early.
Having your money sorted is an enormous lift to the spirits in the relationship between employer and employee.


I'm also with you on the local travel. There's tons to see and do, right under our noses. It doesn't have to involve foreign climes. In fact, I'm looking forward to the day when we can go exploring, rather than basing the holidays around the beach for the children.

jamesd

aldershot wrote: »

I was figuring around 2.75% yield gross roughly split between us with a zero real growth rate. It's very conservative I know and I should probably take more risk with a 30-40 year time horizon but I see a very uncertain world out there and agree with Bill Gross that the next 40 years won't look like the last.

With that pot size I'd be looking more at £10,000 a month, 6%. Based on things like Guyton-Klinger rules and others and knowing that it's no big deal to cut back from that 10k to less if you do happen to find that long term returns aren't as good as historic results. After all, there's no prize for dying rich and you have ample buffer to draw on if after say ten years things have turned out to be way below history.

You could even do something like splitting the pot into two virtual chunks, one using modified Guyton-Klinger and historic results and one using something much more conservative. This way you'd have a generous backstop but still the prospect of keeping the higher income potential long term if the bad things don't happen.

So far as tax goes, at least take enough taxable from the pension to use any unused portions of your basic rate income tax bands, redirecting any unspent portion of this to ISA investing as the ISA allowance allows.

If you don't mind becoming residents of Portugal then staying out of the UK for several years it's possible to take out a whole pension pot tax free. This is because the 75% is income and Portugal has an opt in scheme where you can be taxed at 0% on foreign pension income. However this removes the money from a tax wrapper so it may not be wise anyway unless you plan to stay out of the UK longer term.

For staying in the UK you can protect from UK income tax by buying VCT shares and treating that as just deferring the income for five years. Say you wanted to eliminate £10k of UK income tax you'd buy £33,333 worth each year and sell each five years later, respecting a required gap between buying and selling at the resale point. You'd end up with ongoing £10k less income tax in exchange for having five years of £33,333 (£166k) tied up in the VCTs.

AnotherJoe

gadgetmind wrote: »

Pensions are taxable so draw down on these as hard as you can tax efficiently before other income kicks in. Seriously, gut them as much as possible.

Leave anything in ISAs as long as you can, and keep using ISA allowances. You really don't want anything unwrapped because you'll have to worry about tax on dividends and income, capital gains, and that's not exactly relaxing.

Aim to hit DB and state pension kicking in with pensions depleted such that you don't get pushed into 40% tax, nothing lying around unwrapped (including 25% lump sums), and I'd argue for flat flogged despite the capital gains tax issue, but that's very much your call. You've then got DB income, what's left of your pensions, and big fat ISAs that need as much maintenance as an Easter Island statue.

What if all your pensions are in shares and your cash elsewhere so that by leaving more in pensions longer you get more growth since return on cash is low? The idea being to put off cashing in investments for as long as possible.

Eg if I cash in a pound of cash I pay 20% tax, that 20p might appreciate 0.4p next year.
If I cash in a pound of Acme Fund I still have the 20p tax but that 20p may appreciate at 1p next year and compounded over say 15 years that would be an appreciable difference.

gadgetmind

AnotherJoe wrote: »

What if all your pensions are in shares and your cash elsewhere so that by leaving more in pensions longer you get more growth since return on cash is low?

As I say, money is fungible and each pot (ISA, pension, unwrapped) can invest in pretty much the same thing. You can artificially skew asset allocations and make all kinds of arguments, but why would you?

Why not pull the money out of the pension at 0%/20% tax (rather than maybe 40%/60%/45% later) and invest in the same assets in an ISA?

atush

aldershot wrote: »

I know I should worry about IHT (in fact I did worry enough about it to get married after 18 years together!) but that's for our security rather than inheritance for (my, not our) kids.

Does she have children? If not (or even if), have you thought about if you die first?

Do you want the money left over after she dies to go to your children? Rather than HMG? Or people you may or may not even know or be related to by blood? Worth at least a thought or two if you have children.

If they are adults, I am all for leaving everything to your wife- for her lifetime. But you might want to at least write half of it in trust for after she passes to your own children? Then she can leave the other half to them or someone else.


After all, you could pop your clogs and she could then remarry and then half of your money would belong to her new husband. or she could pop her clogs and leave it all to her cat/the RSPCA.

It is something that we are thinking about in how we write our next will.

atush

AnotherJoe wrote: »

Whats your reasoning there? My thought was, I get the 20% relief going in but get taxed 20% out so there's no gain.

Or is it that you get the 25% TFLS so a bigger proportion of your salary than normal would be tax free??

Can you explain the maths? I dont think they'd work for me as I'd need to get to late August to hit £40k then I'm into winter almost but I can see if you can do it by say about now you might be OK.

The basic math is you get abt 6% more even after BRT if you put the money into pension