Early-retirement wannabe

jamesd

Workerbee999 wrote: »

Any thoughts or advice?

I grimaced at reading about your choice to more than double the cost of clearing your mortgage vs the alternatives but did read that you made that choice deliberately. Few of us have that much money to throw away or spend just to be rid of a mortgage, particularly when it makes the financial situation much more perilous due to lack of savings that could force you to sell just to pay the bills.

Workerbee999 wrote: »

OH will be reduced as he has always been contracted out.

He'll probably still get the flat rate maximum though maybe he'll have to buy some years if he doesn't continue to work. From around November he'll have the 2015-16 year in his state pension statement and that will tell him how many more years he needs to get there. That statement will include all reductions for past contracting out before 6 April 2016 and there is no more contracting out allowed after that even for work schemes.

On the savings and investment side you could do two rounds of 30% tax relief on VCT investing and be out by age 56, having to hold for five years each time or repay the 30% to HMRC.

Your defined contribution plan is good, you could dodge the income tax issue with borrowing, say by taking out a mortgage then repaying once all of the income is in place. You blew this one with the mortgage overpayments, you could have done it with savings instead.

On the face of it you've enough income and potential to mostly eliminate your income tax bill with VCT buying on top of pension contributions. There are some relatively low risk VCTs around, they aren't all high risk speculation.

A SIPP in your husband's name to get the 40% income tax relief is OK but I don't think it's the best plan. Better for him to use VCT buying first to eliminate his income tax while you maximise the value of your salary sacrifice pension contributions. that way he has the chance of a combined 60% relief.

For your pension contributions the salary sacrifice is nice but are you saving more than the 2% employee NI? getting any of the saved employer NI or any more matching beyond a fixed level? Wondering whether VCTs might make sense for you as well.

Child benefit looks potentially interesting, if one of you is at the level to eliminate that you might be able to do things like both making high pension contributions one year so you're below the threshold, then lower the next year, smoothing your income using savings.

But the biggest frustration for me by far in your planning is that hugely expensive mortgage choice. It just wouldn't take long to accumulate enough money to make monthly payments until you retire and get the financial security and more that way. I could pay my mortgage off several times over but it would just make me worse off so I don't. Instead I know I can now pay the bill indefinitely and also normal living expenses, so I don't need to worry about it.

gadgetmind

jamesd wrote: »

When those changes were announced they referred to a survey about pension saving and why people didn't do it more. I was one of the survey respondents.

I responded to the single-tier green paper but missed the survey on drawdown. Or maybe us mere plebs/users couldn't take part?

I can't fault the government for paying attention to the feedback and delivering on it!

My jaw hit the table, my fingers typed "100%" into the max drawdown cell of my spreadsheet (replacing a complex GAD table look at and ever-changing multiplier) and I then punched the air.

Well done to all concerned.

gadgetmind

jamesd wrote: »

On the face of it you've enough income and potential to mostly eliminate your income tax bill with VCT buying on top of pension contributions. There are some relatively low risk VCTs around, they aren't all high risk speculation.

I really ought to look at these. The massive drop in the value of sterling, coupled with LTA coming down, means I may hit this before retiring. I'm currently doing max AA and avoiding (just!) the 60% bracket, but maybe need to throttle back the pension and do some VCTs.

I'll have to research how they work tax wise.

ex-pat_scot

gadgetmind wrote: »

I really ought to look at these. The massive drop in the value of sterling, coupled with LTA coming down, means I may hit this before retiring. I'm currently doing max AA and avoiding (just!) the 60% bracket, but maybe need to throttle back the pension and do some VCTs.

I'll have to research how they work tax wise.

Likewise for me. Max AA to narrowly avoid the 60%.
LTA won't kick in for a good while yet though, for me.
In the absence of any other trigger, that's my broad plan - to get to the LTA. I figure £1m (in today's numbers) gives £40,000 pa @4% SWR. That's a good place to start.

EdSwippet

Pondering on the LTA... inheritance tax issues aside, if you are over age 55 is there ever any reason not to crystallise a pension once it hits the LTA?

Future pension pot growth above this level is going to be taxed on withdrawal at 25% plus 0.75 * marginal income tax rate. This will always exceed the plain marginal income tax rate, whereas growth on money held outside a pension is taxed at worst at the marginal income tax rate. And assuming some capital gains, very likely at less than that when blended with lower capital gains rates. The LTA appears to be the point at which a tax-advantaged pension switches to become tax-disadvantaged, relative to unsheltered investments. Even if you don't need the income, taking the PCLS and deferring drawdown on the remainder seems to be the right thing to do.

Aside from obvious unknown unknowns, such as market volatility or the government moving the goalposts yet again or reneging entirely on past promises, have I missed anything in this? It seems like a total no-brainer, but I have yet to see anyone describe it that bluntly. Perhaps it's just soooo obvious that nobody else thinks that they need to...

jamesd

gadgetmind wrote: »

I responded to the single-tier green paper but missed the survey on drawdown. Or maybe us mere plebs/users couldn't take part?

I happened to be signed up to a survey site that sent out an invitation to it. It wasn't a formal government consultation.

gadgetmind wrote: »

My jaw hit the table, my fingers typed "100%" into the max drawdown cell of my spreadsheet (replacing a complex GAD table look at and ever-changing multiplier) and I then punched the air.

It's certainly helped me to increase my own pension contributions, knowing I can get at the money when I need it!

gadgetmind wrote: »

I really ought to look at these. The massive drop in the value of sterling, coupled with LTA coming down, means I may hit this before retiring. I'm currently doing max AA and avoiding (just!) the 60% bracket, but maybe need to throttle back the pension and do some VCTs.

Yes, you really should. You have the assets and the temperament for both medium term planning and optimisation. And it'll surely tickle your fancy to know that ultimately you may be able to get more than 100% tax relief... Besides, you'll like the "income tax is optional" concept now your saving dedication has got you to the point where you can afford it.

gadgetmind wrote: »

I'll have to research how they work tax wise.

Key rule is that it's 30% of the purchase price capped at income tax actually paid during the tax year of purchase, has to be repaid if sold within three years. Usually relief is paid after the tax year but there is provision for PAYE tax code adjustment. first year I bought I asked HMRC by phone and the person said but what if you don't do it? Second year I asked but it was too late in the tax year because I waited until after purchase, though at least they agreed. Lets see if this year they will do it before I buy so I actually get the PAYE tax code relief that the law specifically mentions as being available. VCT dividends are tax exempt and that can be handy if you're using a cautious one that pays out mostly dividends rather than capital gains. I'm on track for around 2.5k of tax exempt VCT income a year at the moment.

jamesd

EdSwippet wrote: »

Pondering on the LTA... inheritance tax issues aside, if you are over age 55 is there ever any reason not to crystallise a pension once it hits the LTA?

Yes, that market volatility that you mentioned. You can have high confidence that in a reasonable planing horizon there will be a drop of 20% or 40% that you can exploit to potentially eliminate your LTA charge liability and leave some LTA percentage unused.

It's an interesting area for staged drawdown then reinvestment outside a pension. You might find yourself trying to sell at market bottoms to rebuy outside the pension and cut your potential LTA liability.

One nice thing about this sort of planning is that many people will still be working but after 55 they can get on with exploiting each worthwhile dip that comes along to some extent. For those who retire it can be done gradually and depending on either income need or the degree of market dip.

Workerbee999

Jamesd

Thanks. Understand your frustrations about the mortgage choice. OH is even more risk adverse than me so it has been the plan for some time. However, the £140k is split into 2 halves. The 1st £70k is due to finish in 2 years and is by far the largest monthly payment. Can't do anything about this one now. But the other £70k is currently on a 20 year term with monthly payments of £500. The current plan is to attack this one with everything when the main one finishes in 2 years. This is not yet set in stone....

So if we were willing to defer it I guess we have 2 options -

1) Put the monthly amounts in a S&S Isa instead - so if circumstances change (jobs, interest rates etc.), we could access straight away to clear it. This doesn't seem too risky, but are the returns that much better than an interest rate of say, 2%, especially if we want low risks.

2) Or chuck it all into our pensions down to HR tax. Benefit of 40%tax and 2%NI (don't get Ers benefit). With a mortgage of £60-70k either of us would be able to clear it with our redundancy payment if necessary, and we can comfortably live on one salary. Even if mortgage rates rise, the tax relief and growth are way better. I assume I could get a low risk investment as its the tax relief I want, growth is just an added benefit.

My main concern would be the Gov. changing the rules on tax free lump sums by then so we can't clear it.

I don't even know what a VCT is - will have to some research!

Don't think child benefit is an option as we are both over the limits.

Thanks

jamesd

Given your ages and lack of potential for more than 42% relief on the pensions, if I ignore the child benefit aspect I think that some VCT use looks interesting before pensions. Mainly because I assume you wouldn't mind two five year holding periods to get 30% tax relief twice. You have to hold at least five years to avoid having to repay the 30% but then you'll have a stream of them reaching the five year mark that you can take instead of reinvesting in more VCTs if you need the money.

VCTs are broadly regarded as high risk as a class of investment but they do differ. Take a look at the Albion Venture Capital Trust for one that I think is not high risk, in part because it's 100% asset-backed with various types of property.

You'd hopefully do a mixture of things, so some ISA money, some P2P and some VCT as well as the pensions. Mixed up according to your potential need for the money, so that you have prospective maturities/accessibility when you might need it.

Say you're both on 80k you could both in the same year enough in pensions just to get maximum employer match then in the next year both pay 30k into pensions to get your income that's counted down to 50k and full child benefit paid. Or once every three years or whatever else works. If either income is high enough - over 150k - to have your pension annual allowance cut from 40k to 10k with carry-forward banned, that would make it impossible to do.

If the government changes the pension tax free lump sum rule you can do it with income instead, just over a longer time period. Ignoring salary sacrifice, that 25% tax free lump sum is what delivers most of the tax gain for a person who pays in at 20% income tax rate then takes it out at 20% income tax rate so it's not a trivial thing to eliminate it.

EdSwippet

jamesd wrote: »

Yes, that market volatility that you mentioned. You can have high confidence that in a reasonable planing horizon there will be a drop of 20% or 40% that you can exploit to potentially eliminate your LTA charge liability and leave some LTA percentage unused.

We actually had a discussion about this 'catching a downturn' thing a while back, and I have to admit that I struggled with it then, and still do. I see what you're driving at, but am unsure how I can apply it to achieve any benefit.

Perhaps I'm just an 'edge case'?

I will take out FP2016, so retaining an unused LTA percentage isn't going to be any benefit to me; I can't fill it with new contributions. And the aim is to crystallise before reaching (and ideally dead on) the LTA to maximise PCLS, and if I capture that correctly there would be no LTA charge liability to eliminate. I do not intend to use my pension to bypass inheritance tax.

If I don't crystallise at the point where the portfolio grows to the LTA and the portfolio rises further, it's now in punitive tax territory. Market falls might take it back to (or under) the LTA at some point, but if/when they do I'm only back to the position I would have been in when it grew up to the LTA at first, but no better off. And while it is probable that this happens, it might not, in which case the tax bite on crystallising is higher than if I had crystallised earlier and invested the PCLS outside and deferred drawdown. In particular, a 20% or 40% drop in stock markets does not translate to a similar level of drop in a balanced stock/gilts portfolio.