Best option?

okydoky

Hi, I'm aged 56 with no debts(house £200K+, looking to downsize over next few years and raise say £50K), kids of independent means, pension funds totalling £180K, plus £20K protected rights, and savings of £160K, mainly ISA's.(Pension projection of about £750pm at age 66).
So intending to retire now, should I look to take some pension now, say up to tax free allowance, or live from savings up to say 60 or 62, and take a more decent pension then? Wife(54) works p/time and earns £10K pa after tax. Based on last five years spending, we seem to need about £22K pa after tax.
I know this is a fairly brief outline but would appreciate thoughts on the general principle of taking pension early or using up savings for a few years first.
Many thanks

atush

what is your income per year as of now from your ISas?

What is your income outside of ISAs? I assume from your OP you are mtg free?

Would you think of a smaller part time job (56 is awfully young to retire these days)?

okydoky

Income from ISA's is currently reinvested, about £2k from cash isa's and £4K from S&S ISA's.
I currently earn between £40-£50K pa is sales job which I am ditching - too much pressure!
I understand your comments about early retirement, but my attitude is very simple-having worked very hard for nearly 40 years I want to spend some of my hard earned cash whilst still fit enough to do so!
My quandary is whether it is best to spend my savings, say by taking about £12-£15K pa for say 6 years, and continue to invest in my pension at £3.6Kpa and take annuity at say 62, or whether to take tax free lump sum now and drawdown at about £7K pa thus avoiding tax?
Other option is p/time job and earn a few bob for a few years and save draining the cash quite as quickly.
We are mortgage free.
Big worry is inflation and damage it could do to my plan if it persists and/or gets worse over the ten years?

jamesd

Rough check first, ignoring your wife's income.

Being pessimistic you could get around 4% income from £360,000, so that's a low end of £14,400 without reducing the capital at all. The pension £8,000 is taxable, less £7,475 personal allowance so £108 tax, net around £14,290. Ignoring taxable income on anything not in an ISA.

More optimistically you could take 6%, so £21,600 a year. £12,000 of this taxable so £905 tax to pay, net around £20,700. Again ignoring any taxable income outside an ISA, just allowing for pension tax.

Neither of those two numbers is so short of your required income target that it would make your plans unrealistic. You'd see some decrease of capital until the state pensions start but they should easily be able to top it back up to a value greater than your required income level.

From April 2012 the distinction between protected rights and other pension money goes away so from then you can treat it all as just one chunk. It's worth delaying pension activity until then for convenience.

You should get a state pension forecast for each of you. Since you'll be stopping work use the current value given, not the expected future value. The state pension information is important because you might get more than £7,000 from the state pensions and your wife somewhat less assuming a less complete work record. Yours might be over £10,000 if you're been working at high incomes for a long time. The state pension incomes will tell you the minimum level of income that you must be able to generate from capital once they start. That'll tell you the remaining capital you'll need and that in turn will tell you the maximum amount of capital you can spend until then.

Based on very rough estimates you should be able to meet your target income with no income from your wife, drawing on capital until the state pensions start. It looks quite comfortable with the main challenge to work out how high the income can be. I'd do that calculation but I can't because I don't know your state pension incomes and they are critical to the calculation. My guess is that you will be able to prudently take an income well above your target.

There's no reason to delay taking an income from pensions beyond April. You can just take the full tax free lump sum and move that into a stocks and shares ISA to start generating income as fast as possible. For the remaining 75% you can just leave it invested inside the pension and generating income for you. The amount of income you're allowed to take out will depend on the GAD allowance calculation, something that your pension provider is required to do when you start drawdown.

There's no point in buying an annuity at your age and the current time unless you're extremely cautious. You have so much capital that you can clearly handle things. At the moment the low interest rates are harming annuity rates and your age also does so even if you like the idea of annuities your best option would be to delay buying one than in a few years start spending perhaps 5% of the pension capital once every few years to gradually switch from variable to fixed income. One substantial advantage of income drawdown over an annuity is that you get a free 100% spousal pension because your spouse just inherits the capital after your death. It's also better for inheritance, since the capital isn't all spent on buying the annuity.

You shouldn't delay taking your pension income because that would just cause you to draw on your more flexible non-pension assets faster. It doesn't harm your income to start now, that still depends on how your chosen investments inside and outside the pension do. It just effectively moves more of your assets out of the pension so they are more flexible. I'm assuming that you're going to continue using investments. If you were to switch to using savings accounts there would be a major reduction in income. If you were to buy an annuity, similar but for different reasons.

If you're not comfortable with using a spreadsheet to work out save sustainable income levels, ask. If you're not comfortable with selecting investments for income generation, seek the advice of an IFA from personal recommendation or unbiased.co.uk. Then you can discuss the recommendations here for a double check of reasonableness. One key check is use of an investment bond. Be extremely cautious if one is suggested - it's a big red flag because it's so often inappropriate. the IFA would have a hard time justifying one and must present a good justification that explains why using ISAs and unwrapped investments isn't better. Given the amounts here you should look to pay the IFA on fee basis, not commission. That'll be cheaper for you. As with all shopping, price and service levels vary, so shop around, don't just go with the first one you discuss things with.

As well as ignoring your wife's income I've ignored any non-state pensions she has. Those could be very significant.

When it comes to downsizing the time to do it is as early as possible. That way you maximise the long term savings in council tax and other running costs. It's also a good chance to move into a property with good accessibility features so that if moving around ever becomes difficult you won't need to do much work to adapt the place. If your wife also wanted to stop working you could experiment with living in different parts of the country to see which you like. Some are considerably cheaper in property and living costs than others. SW for example has the highest water rates in the country, three or four times those in some other places. NE England can be one of the cheaper areas, if you want to live there.

doshunta

Wow..what a quality reply!... :T

If I could ask a related question... I'm coming up to 49 and looking ahead with a fund of £310k. Planning pessimistically given all the pension changes that seem to be against me - change of state pension age, GAD rates at record low levels, etc.

Assuming I have a similar £350-£400k pension pot in personal pensions by age 56/57, what sort of income could that generate?
The figures above look very attractive compared with what I've seen from online capped drawdown calculators... I think that maybe it's the use of capital to bridge the 57-67 gap that I'm missing/too catious to assume is available. I'm mindful that I don't want the pot to run dry, while on the other hand don't necesarily want to leave bulk of pot for taxman...

I may well just be thinking to simply about how to maximise the return from my pot. What I do know is I don't want to invest in an annuity earlier than possible...

Thanks guys...

atush

Sorry doshunta you need your own thread lol. Or things get confusing!

After the answers to my Qs and JamesD's excellent reply I do think you can 'retire' with your 25% lump sum and invst for income in drawdown. If you downsizeimmediately and w/taking into acct your wife salary I think you would not need the income from the pension now as you would get the 6K you are getting currently plus income on the Lump sum and income on the 50K released from DD.

After you have left your HPressure job, I do think you will be able to find something PT that you actually like to do and is low stress so look out for that. Even take a few community college courses as that is fun and will keep your mind going. I got hooked on this when I was trapped at home with 3 littleuns and took a few courses while they were at nursery. Learned computer programming, picture framing, upholstery all sorts of skills I have now lol.

jamesd

Use 4-6% of capital as your income expectation then work out how much the GAD limit reduces the amount of that which you're allowed to take. You can reduce the initial effect of the GAD limit by starting to take income as soon as you're 55 and then saving the income until you need it. Drawdown calculators would just calculate the GAD limit, not what income investments might generate.

You can trigger a new GAD calculation by adding money to a pension that's in drawdown so even if you start drawdown for most of the money it can be useful to keep some back so you can use it to get a GAD recalculation when rates rise, as they surely will at some point because they can't stay at historic lows forever. It's also possible that the Treasury will reconsider how the drawdown limit is calculated since it's patently nonsense to cap income levels to below the levels that normal investments can generate without any drain on capital and that's what the current calculation is doing for younger retirees.

Buying annuities can start to become more attractive over age 75, when they can start to pay you more income than investments can generate. That depends on life expectancies and those are increasing. If you have health conditions that reduce your life expectancy that can make annuities better for you at an earlier age. Drawdown has the advantage of having an inheritable pot that can be inherited 100% by a spouse to provide then an ongoing income after your death. Also better for inheritance since the money isn't spent buying the annuities.

Taking the lump sum and starting to invest that via a S&S ISA to generate tax free ongoing income looks good as part of taking the pension money as early as possible to reduce the GAD limit effect.

If you'll be a higher rate tax payer you might consider whether it's worth paying more money into a pension even after starting drawdown. The tax relief is very attractive when you can take out 25% of the after tax relief capital shortly after putting the money in. But this would reduce your ability to save the income.

For £350-400k and a 4-6% income level that's between and £14,000 and £24,000 a year. At 4% the GAD limit may not cap your income level, at 6% and current rules it may do if current gilt yields stay as low as they are and the rules don't change. But by the time it matters for you I expect gilt yields to be higher, producing a higher cap.

Taking the maximum income at the start then reducing it when you get the state pensions can be a useful way of smoothing out your average income over retirement. Whether you need to draw on capital outside the pension will depend on how high your income target is. It might not be necessary if your pension income level can provide all that you need.

I agree with atush that if you're thinking of downsizing sometime, the soonest you can do it is best since that will maximise the long term savings in costs from a smaller place.

doshunta

Thank you so much !!- this has given me a completely new perspective - and hope for a better retirement!

Thanks again...much appreciated!
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