Early-retirement wannabe

ermine

Niltava wrote: »

I have the fortunate position of having a small mortgage which I can pay off in the next 4-8 years, whilst still contributing to my personal pension (mixed portfolio) and my employer's final salary scheme. I live outside the EU working in a diplomatic role which means I pay no income tax, allowing me to maximise my modest basic salary.

Firstly congratulations! Secondly - since you are not a taxpayer I am somewhat nonplussed by your contribution to your personal pension. You are not a taxpayer. Why contribute to a pension where you will pay tax on the money when you take it out, and are restricted on when you can access the cash? Would not an ISA be more suited to your needs (assuming you can do that given you are not UK resident) or failing that a regular nominee investment account?

Obviously keep up the contribs to your employer's DB scheme as they probably put more in than you do, and if there are opportiunities to increase this, that might be worth considering. But the personal pension strikes me a less tax-efficient than exactly the same investments held outside a pension wrapper!

cyclonebri1

Your fund at present is quite modest, without offence, but at 40 is still ok in my view. (I'm a pensioner not a financial advisor).

Look, my wife is in a similar position, she now has to work until 66. inspite of being only two year younger than me, a male who can retire at 65, dam wrong.

The dept of work and pensions rang a week or two ago, I gave the very nice lady the dates, 1954, the worst ever year for a female to be born in, under our present rules.


But but but but but, this isn't the earliest age you can retire at, it's the min age you get the state pension.
Everything you can do up until then is beneficia, you need to bridge the gap from when you want to retire until the state say you have the right to do so.:D:D:D:Dl

kidmugsy

Niltava wrote: »

I have the fortunate position of having a small mortgage which I can pay off in the next 4-8 years

I suggest that you look for some of the comments on other threads by jamesd arguing that it is usually unwise to pay off a mortgage.

Niltava

OffGridLiving wrote: »

Just a thought on this, if you're gearing your finances for early retirement (rather than for a scenario where your reducing your income - i.e. going part time, lower paid but less stressful job, etc.) then wouldn't it be better to just let your mortgage run as normal and concentrate instead on your pensions and savings? As long as you have a repayment mortgage, this will take care of itself.

I read that a mortgage should be timed to end the day before you retire. I guess the thinking behind this is to maximise your investment return and tax free allowances in a pension or ISA in the time you have left before retirement. This mitigates the risk that you take 6 years paying down the mortgage and lose 6 years worth of tax rebates, 6 years of investment returns and then just as you start to concentrate on your pension you lose your job or get ill and can't put money onto the pension.

Thanks for this thought OffGrid, and to Kidmugsy for reiterating the point,

This is something I had picked up from the early pages of this thread, and at the moment I'm grappling with that. My OH is from a family that thinks that having credit/being in debt is BAD BAD BAD and I think I will have a tough job of convincing her otherwise. Also, from using the "mortgage overpayment" tool on MSE it looks like we can save GBP 20,000 in interest, which is attractive. However you are right to bring this up and it is something that I should examine carefully.

The other thing to mention is that I will not be putting all my spare resources into paying off the mortgage if I do clear it in 4-8 years. I will still be putting away significantly more into my cash savings, offshore savings plan and employers pension scheme than I would be repaying on the mortgage.

N

Niltava

ermine wrote: »

Firstly congratulations! Secondly - since you are not a taxpayer I am somewhat nonplussed by your contribution to your personal pension. You are not a taxpayer. Why contribute to a pension where you will pay tax on the money when you take it out, and are restricted on when you can access the cash? Would not an ISA be more suited to your needs (assuming you can do that given you are not UK resident) or failing that a regular nominee investment account?

Obviously keep up the contribs to your employer's DB scheme as they probably put more in than you do, and if there are opportiunities to increase this, that might be worth considering. But the personal pension strikes me a less tax-efficient than exactly the same investments held outside a pension wrapper!

Thanks ermine,

Actually I mislead you a bit, sorry! My "personal pension" is an offshore regular savings plan with Friends Provident so it is tax-free, and does not have any of the trappings of a structured personal pension (I just call it my "personal pension" as that's what I plan to use it for, and it is not related to any employer). As an expat I cannot contribute to an ISA.

Regarding my employers scheme, I have looked at the value of buying additional years through AVCs and actually I was a bit unimpressed at the return I would get for the extra investment - I think it might be more attractive if you are a tax payer in the UK, though it is something that I plan to discuss with an advisor when I visit the UK later this summer.

Best wishes

N

Niltava

cyclonebri1 wrote: »

Your fund at present is quite modest, without offence, but at 40 is still ok in my view. (I'm a pensioner not a financial advisor).

No offence taken

GBP 70k is pretty small, but if things work out as my spreadsheet suggests I will have about GBP 200k in contributions to my employers pension, 500k of premiums to my offshore savings plan and 200k of monthly savings to my offshore deposit account (which does not include any compounding of interest) - I just have to stick to the plan, stay healthy and not get obsessed with the whole thing :rotfl:

I have absolutely no doubt that I will be able to fill my time after retirement - I have a very consuming hobby which will keep me busy and happy, and could potentially provide me with a modest income after retirement if I wanted it to.

Very best wishes to all

N

OffGridLiving

Niltava wrote: »

Thanks for this thought OffGrid, and to Kidmugsy for reiterating the point

No problem . I thought I'd mention it, but you seem to have everything under control anyway. In my view, as long as people are increasing their net worth by either investment or debt reduction, they're not going far wrong.

I thought I'd post my own details so that I can pick up any pointers from people with more experience than myself. I've just turned 45 and I wish to retire at age 60, so 15 years left to go. I have a SIPP that has a balance of £117k which I currently don't contribute to, a final salary pension with a former company that will pay £4k per year in a pension (index linked) and a new company pension where I put in £2600 and the company pays in £3900, so £6500 per year. My wife has a SIPP with a balance of £15600, we are currently not paying into this. My wife is a year younger than me.

We also have cash ISAs to the value of £20k, this is our emergency money. We have a repayment mortgage that has a term that finishes when I turn 65, so I'll be looking to make some overpayments to bring that term down so that it ends when I turn 60.

I receive my state pension at 67, so would be looking to phase my personal pensions in from 60 onwards. The final salary pension pays out in full when I turn 65 and I wouldn't want to take this early. I'm therefore looking to fill the gap from 60 to 65 with my SIPP, ISAs and company pension.

I'd like an income of £20k, including the state pension, so would look to have more money from the pension between 60 to 65, with it tapering down as the FS and state pensions kick in.

I'm a 40% tax payer and so I read that it's better to pay into my pension rather than my wife's (non-tax payer) as we receive more tax rebate, but I'm conscious that we will end up paying more tax when the pension is in payment, plus if she lives longer than me, then her income could reduce significantly.

Any thoughts on the above? I'm only just taking a serious interest in structuring my finances to aim for retirement at 60, so I'm happy for any help!

I guess the glaring questions are:

1. Am I saving enough?
2. If not, then how much should I save.
3. Should I put money into S&S ISAs, my wife's SIPP or my SIPP?
4. How do I structure my pensions so that they pay more out at 60 and taper down when my FS & State pensions kick in. Use drawdown?

5. Would it be beneficial to withdraw the 25% tax free from one of my pensions at age 55 and drip feed this into my wife's pension to try and balance them out a bit more, plus we'd gain an extra 20% tax rebate. I know this isn't strictly allowed, but as long as I'm still working the revenue won't know whether this money comes from income or pension.

ermine

OffGridLiving wrote: »

4. How do I structure my pensions so that they pay more out at 60 and taper down when my FS & State pensions kick in. Use drawdown?

5. Would it be beneficial to withdraw the 25% tax free from one of my pensions at age 55 and drip feed this into my wife's pension to try and balance them out a bit more, plus we'd gain an extra 20% tax rebate. I know this isn't strictly allowed, but as long as I'm still working the revenue won't know whether this money comes from income or pension.

There don't seem to be any good solutions to the conundrum of how to handle the suckout of income before most of your pensions come onstream - or at least any tax-privileged solutions. It's post-tax savings, in ISAs probably, which you run down over the five-year intercession. I've never heard of a short-term pension paying out for five years from the start

With 15 years ahead of you you could probably save up the five years of required income, particulalry if you're not overpaying your mortgage. Alternatively you could resign yourself to the suckout. Stopping work is a massive boost to quality of life, and a lot of your costs drop away. I saved a lump sum ahead of time, I am running it down at a lower rate than I expected.

Planning to pay the mortgage off short sounds like a bad idea to me, it represents a lost opportunity cost to get a 20% bump up on that by paying what you don't have to overpay into your wife's SIPP, and then using your pension commencement lump sum to discharge the mortgage when you get your pension at 65-ish.

Fortunately the ISA plan helps you hedge on of the hazards you haven't mentioned - which is something going wrong with your job in the intervening 15 years...

The best way to do this sort of planning is to set up a spreadsheet of all the years up to 67 in columns and then run a few scenarios in groups of rows, depending on drawing various pensions from 60 onwards in the various ways.

Trying to flatten out that income suckout is going to be challening (at worst case it implies you need to save £100k over the next 15 years), but not impossible. And on the upside it hedges you against redundancy...

jamesd

To cover the gap you have quite a few options:

1. Income drawdown from the pension. You can start this at age 55 to accumulate money to draw on at a higher rate from age 60.
2. Offset mortgage. Take out a mortgage or remortgage and instead of paying it off, put the money into the offset account. Draw on the account to top up income, then pay it off with state pension money. Watch out for the end dates of mortgage terms.
3. If no standard mortgage is available for some reason, equity release mortgage with flexible drawing is an option. Again you can choose to repay from the state pension income later.
4. Your other savings and investments, drawing on capital as well as income. But I prefer to borrow on mortgages rather than doing this, to preserve capital flexibility by making pensions do the paying.

Planning to pay off the mortgage faster when you can use that money instead to boost income until the state pensions start doesn't make much sense to me. That's all money you can't spend at the time when your finances are going to be most tight. I'd be looking to extend the term, not reduce it! 85 or older are nice ending ages... lots of time for the state pension income to do the clearing then. Interest only is best, of course.

No law or regulation bars you from using pension income to make more pension contributions in your name or that of anyone else. There are limits on how much of the tax free lump sum can be recycled, notably within two years either side of the year in which you take the lump sum. So pay attention to the rules and don't trigger them. Easy.

To boost income for your wife if you die first you can use an income drawdown pension pot. That's 100% in heritable into a pension pot in her name. Add your other savings and investments and project to the likely ages for this and she's likely to be very well provided for.

As ermine mentioned, one risk is having to support yourself on savings and investments if you don't or can't work for some reason. At any age. That becomes easier once you reach 55 and have some pension income available. Until then it takes ISA and other non-pension investing to let you draw enough income until the first pension can be started. Boosting these funds is another good reason for keeping a nice long mortgage term and ideally going interest only so you can accumulate money as rapidly as possible, then let the pensions take care of the mortgage.

Best to exploit the higher rate tax relief and not contribute into pensions for your wife while she is paying basic rate tax. If that ever changes she can be given priority. Otherwise, income drawdown will let your pension be transferred to her eventually anyway. Meanwhile the best use of her money and allowances is her ISA allowance to cover the income boosting and before pensions contingency case.

So a general plan if funds allow:

A. interest only offset mortgage with longest possible term. Or if not available in interest only or offset, repayment with term to 85+. To free up money to accumulate now.
B. Maximum ISA usage for both of you to handle the pre-pension contingency case.
C. Pension contributions in your name to maximise tax relief.
D. As you approach 55 you can move some money from the contingency pots to the pension to get more tax relief, based on the amount you no longer need for each year that gets you closer to 55.
E. From 55 you can take personal pension lump sum and drawdown income to accumulate more money.

OffGridLiving

Brilliant. A lot to think about. Thanks Jamesd.

Just wondering if you could explain:

E. From 55 you can take personal pension lump sum and drawdown income to accumulate more money

How does this make more money than leaving the pension savings invested ?