How do we fund the gap between age 55-65?

Lois_L

Hi everyone,
I hope someone can help me with this as I am very confused trying to plan for our retirement.
I believe that between myself and my husband we have already invested enough in occupational pensions to give us sufficient income at age 65 (even if we stop contributing at age 55).
However we want to retire at 55 and so need to find an income for those 10 years.
If we were to invest in a standard pension, we would need to invest a high percentage of our salary between now and age 55 (20 years away) and it would also mean that we would have more than we need when we reach 65.
Is it possible to have a drawdawn pension just to fund those 10 years? If so how much should we consider saving each month to give an annual income of £25k (in today's terms) for 10 years. If not what type of investment should we be looking at?
I hope this makes sense.
Any help much appreciated.

Ian_W

Hi Lois,
I don't know the technical answer to your questions about drawdown etc but as you're well provided for on the pension front already wouldn't maxi-Isa's fit the bill? You don't get tax relief on the way in but it is tax free when you want to spend it or draw income from it and unlike a pension you have full control of the capital.

There is a pension v isa thread a bit further down the page which I suggest you read. Hopefully one of the experts will be along shortly.

EdInvestor

Assuming 7% growth, to save 250,000 over 20 years, you should invest 490 pounds a month (5,880 p.a). You would need to uprate this amount by the inflation rate every year over the 20 years.

This amount will fit comfortably into your annual maxi-ISA allowance (7k) and this is undoubtedly the way to go, as not only is the ISA income and capital tax free, you can actually spend it, which is not allowed with a pension.

Lois_L

Thanks both for replies, I will look into ISA's.
EdInvestor, I presume the figures you quote would give us an actual income of £25k per year which we would take from the ISA rather than taking into consideration inflation? If that is the case, how much should we look at investing to give us the equivalent of £25k in todays money in 20 years time if that makes sense?

jamesd

Louis L, you should check your anticipated retirement income from pensions, including the two state pensions. If it will be more than 20,000 you will suffer the age allowance reduction and marginal tax rate of 33% on income between 20,000 and 25,000. You can reduce this by having non-taxable income like that from ISA investments. For this reason you should also investigate the options to take your pension early, since that may well provide you with a higher after tax income in retirement.

It often is possible to take occupational pensions early. Whether it would be worth doing will depend on the values offered from the schemes. That would reduce the pension portion of your later income but increase the tax free ISA portion. This is playing with the tax rates - at age 55 up to about 7000 a year of taxable pension per person can be taken but you'll only pay 0% and 10% tax on it. That gives you the gain of the tax rebate on the pension contributions and that's a reason why using the pension early and saving some of the tax free ISA money for later can work. Then when you retire the pension will still be lower, the ISA money won't all have been used and you'll still be getting the reduced taxable income and not paying more tax than you need to.

Is either of you a higher rate tax payer? Is the 25k target after tax or before tax?

Assuming the target is after tax and that you want it to grow by inflation at 3% for ten years you'd need a fund value of 240,000 in today's money (450,000 at that time, if inflation isn't allowed for). A fixed contribution of 670 for 20 years, not increasing annually, at 7% growth before inflation should achieve that.

Target fund values are:

5 years: 44,100 today's money, 51,200 then.
10 years: 97,600 today's money, 132,000 then.
15 years:163,000 today's money, 254,000 then.
20 years: 240,000 today's money, 450,000 then.

If you are not meeting those targets you'll need to either increase the contributions or alter the investments. Do remember that they assume inflation of 3% and if it has been higher the target values needed will also be higher.

Also remember that this will leave you with none of this money remaining at the end of the ten years. If you wanted to live on income and retain the capital you'd need 416,000 in today's money, 750,000 in 20 years on money, assuming 6% drawdown rate. You'd need 1.7 times the contribution - 1140 a month - to achieve this. That's more than the 533 per person monthly stocks and shares ISA limit, though.

Your investments should be able to achieve better than 7% growth before inflation if you are wiling to accept at least fairly high risk, so you should be able to comfortably exceed the target value. If you achieved 9% before inflation you'd have a surplus of 138,000 in today's money at the end of the ten years.

All numbers are approximate so you should expect some differences in the numbers EdInvestor and I give.

EdInvestor

Lois_L wrote:

Thanks both for replies, I will look into ISA's.
EdInvestor, I presume the figures you quote would give us an actual income of £25k per year which we would take from the ISA rather than taking into consideration inflation?

As I suggested, increase the annual payment into the ISA by the rate of inflation year by year to take into account inflation.