Age 38, very little retirement savings, but want to retire early

Lois_and_CK

hodd wrote: »

My state pension forecasts show how many years of NI I still have to pay to reach the full 30 years. I've never seen any figures like those Lois and CK quote. I should add I'm not classed as a UK resident for tax purposes, but I still pay NI.

Hi Hodd

Those figures also take into account the state second pension. The reason mine is lower than CK's is because I'm contracted out of S2P, whereas CK isn't. I'm at work, so don't have the breakdown of S2P to hand, but they came from the UK gov forecasting tool.

Lois_and_CK

jamesd wrote: »

Getting enough income and capital to draw on to last until you can take pension income. Since you can't take pension income this has to be outside a pension, which mainly means within S&S ISAs.

Our idea is to have several areas of retirement savings, including pensions and ISAs. We were going to include cash ISAs in this as well as S&S ISAs - would you say this is a bad idea? I know we won't get anywhere near as good a return, but I'm very cautious - after spending so long in debt, every penny saved means a lot to me. I'm reading a beginner's investment book to learn more about investing, but also to try and become more rational about this and less emotional.

jamesd wrote: »

At younger ages like those you're considering, income drawdown is the way to go and the GAD limit will regulate how much income you can take from a pension.

What is the GAD limit?

jamesd wrote: »

ISA money can be converted to pension money but not vice-versa, so be most determined to accumulate the ISA parts first.

I'm not clear on this. Does that mean money from an ISA can be transferred into a pension fund?

jamesd wrote: »

What matching is done in those work pensions? Is either a salary sacrifice scheme? Is either of you a higher rate tax payer? Salary sacrifice or higher rate tax would favour pension contributions by that person over the other one because of the increased pension value obtained.

With mine, my employer gives 10% of salary which can be put into in a pension, into private healthcare, or taken as cash. I chose the full 10% to go in the pension. I don't contribute anything extra as they wouldn't match anything from me.

With CK's, it's a stakeholder pension, and his employer matches his contribution up to (I think) ~3% of salary (I'm at work so don't have the exact figure to hand).

We're both 20% taxpayers, but CK gets near the high-rate level when he does overtime. If he does much more overtime he'll go over the 40% threshold, so I'm wondering if we might be better putting some more of his salary into his company pension, as well as making the most of the employer contribution?

jamesd wrote: »

First thing is to cease overpaying on the mortgage. Investments make more long term than mortgage interest cost so any capital payments on a mortgage delay your early retirement.

If you want to clear it early one good time is to use part of a pension lump sum at age 55. That way you're clearing it with money you've received tax relief on.

Thanks, that's really interesting. One of our ideas was to massively overpay the mortgage and try and clear it in 10 years instead of 20, so I take on board what you say.

The thing that worries me is our lack of investment knowledge and that we might not be savvy enough to choose good S&S ISAs. Like I said above, I'm reading books, but would it be worth seeing an IFA for guidance?

jamesd wrote: »

You're not kidding yourselves. It's entirely possible given your level of commitment.

Terrific - you've made my day

jamesd wrote: »

My suggestion:

A. Use all employer pension contributions that get a match from the employer but no more. The 100% immediate return from an employer match is hard to beat, so is possible NI saving. This may delay early retirement, but provide higher income later.
B. Stop all mortgage overpayment.
C. Maximise use of S&S ISA every year until you reach your first target.
D. Then accumulate more until you're able to retire at the age you've reached.

Looks like a really good plan. Thanks so much for taking the trouble to reply - I really appreciate it and will take on board what you say.

Lois and CK

Linton

GAd Limit: With drawdown the government is afraid that ill-advised or foolish pensioners may use up their drawdown pot too quickly and then become eligible for benefits. To avoid this there is an annual drawdown limit determined by government actuaries. Unfortunately because of the distortions in the markets this limit is arguably far too cautious at the moment.

If you have more than £20K guaranteed annual income in annuities, DB pensions etc than the limit does not apply because even if you depleted your drawdown you would not be eligible for means tested benefits.

So if you dont meet the £20K requirement, significant money in S&S ISAs will provide more flexibility than drawdown.

Pay off mortgage: I would be less definite than Jamesd for 2 reasons:
1) I found paying off the mortgage a great psycholoigical boost: its proves you really are getting towards your objectives.

2) When a mortgage is paid off it stays paid-off and you gain the income. Investments may fall in value.

At the moment with low interest rates the case for not paying off the mortgage is strong. But circumstances can and will change many times over the time until you retire.

jamesd

There's a bit more about the GAD limit here, including a table showing the limit values for men. The ones for women are a little lower, you can check them using a link in the post.

You can take money out of an ISA and pay it into a pension.

While Linton found the mortgage motivating, what I do is have a chart that I update monthly that shows how my various pots are increasing as I get to my target. That provides a nice pictorial guide to how I'm doing.

Now is a good time to start using S&S ISAs because their benefit depends in part on how long the money is invested. But now you don't have that much money invested so the consequences of mistakes and the daily variations in value are lower than they will be later. So nice to learn and experiment now. Just get started and try not to worry too much about early mistakes later.

My work pension is somewhat similar to yours and I'm doing something similar. CK will probably find that over time the amount that is in higher rate tax increases. This is because governments have been deliberately increasing the higher rate threshold by less than inflation so that more people become higher rate tax payers as their pay levels rise. That'll make CK's pension a good one to pay in more than the minimum on as time goes by.

fairleads

Lokolo wrote: »

and you must admit, not making the most of matched contributions is pretty stupid!

Not if a significant portion of retirement capital is derived from the disposal of a rental property.

Lois_and_CK

Linton wrote: »

GAd Limit: With drawdown the government is afraid that ill-advised or foolish pensioners may use up their drawdown pot too quickly and then become eligible for benefits. To avoid this there is an annual drawdown limit determined by government actuaries. Unfortunately because of the distortions in the markets this limit is arguably far too cautious at the moment.

If you have more than £20K guaranteed annual income in annuities, DB pensions etc than the limit does not apply because even if you depleted your drawdown you would not be eligible for means tested benefits.

So if you dont meet the £20K requirement, significant money in S&S ISAs will provide more flexibility than drawdown.

Pay off mortgage: I would be less definite than Jamesd for 2 reasons:
1) I found paying off the mortgage a great psycholoigical boost: its proves you really are getting towards your objectives.

2) When a mortgage is paid off it stays paid-off and you gain the income. Investments may fall in value.

At the moment with low interest rates the case for not paying off the mortgage is strong. But circumstances can and will change many times over the time until you retire.

Thanks for the explanation on the GAD limit - that's clearer now.

I see your point about paying off the mortgage and the psychological boost of it. Maybe the answer is to not overpay at the moment because of the low interest rates, but to keep my eye on it, and if they increase massively in the future then rethink overpaying.

Lois_and_CK

jamesd wrote: »

Now is a good time to start using S&S ISAs because their benefit depends in part on how long the money is invested. But now you don't have that much money invested so the consequences of mistakes and the daily variations in value are lower than they will be later. So nice to learn and experiment now. Just get started and try not to worry too much about early mistakes later.

Ok, that's a good point. I'll carry on reading, then choose something simple to get started with.

jamesd wrote: »

My work pension is somewhat similar to yours and I'm doing something similar. CK will probably find that over time the amount that is in higher rate tax increases. This is because governments have been deliberately increasing the higher rate threshold by less than inflation so that more people become higher rate tax payers as their pay levels rise. That'll make CK's pension a good one to pay in more than the minimum on as time goes by.

Thanks for that tip; this is something we'll have to keep our eye on then.

gadgetmind

Lois_and_CK wrote: »

I see your point about paying off the mortgage and the psychological boost of it.

I've twice paid off a mortgage early, the 1st time after it had only been running 7 years, and I then took out a ten year mortgage a bit later as we upsized, and I also paid this off early.

The 1st time it made financial sense, but the 2nd time it really didn't. I did it anyway as these things are always a head/heart balance.

As for ISAs versus pensions versus BTL, pensions make massive sense if you avoid higher rate tax and/or get company contributions, ISAs are a key way to bridge the gap between retiring and state/other pensions kicking in, and BTL is OK if you then still have loads of money left over and don't have the skills to do anything else with it.

Lois_and_CK

gadgetmind wrote: »

As for ISAs versus pensions versus BTL, pensions make massive sense if you avoid higher rate tax and/or get company contributions, ISAs are a key way to bridge the gap between retiring and state/other pensions kicking in, and BTL is OK if you then still have loads of money left over and don't have the skills to do anything else with it.

Thanks gadgetmind. So it seems the sensible thing to do in my situation is to max out ISAs for now.

atush

Lois_and_CK wrote: »

Thanks for the explanation on the GAD limit - that's clearer now.

I see your point about paying off the mortgage and the psychological boost of it. Maybe the answer is to not overpay at the moment because of the low interest rates, but to keep my eye on it, and if they increase massively in the future then rethink overpaying.

you could always save the overpayements into a funs/acct then pay off a lump sum if and when intereat rates increase.

I myself am still overpaying. but not with all my spare cash per month, just a bit. Even though my rate is low, I know that I am comfortable with putting a certain amt of overpmt. I did decrease it though.