Must I stay or can I go

bigchipper

I am 53yo married civil servant with earnings of £42k pa . My wife (52) works part time and earns £13k. In addition to full state pension entitlements, I have accrued 27 years of government pension in the Classic Scheme to date (worth about £14k pa pension and 3 times as a lump sum) and my wife has around 14 years of deferred pension in the NHS scheme (worth around £3k pa and £9k lump sum at age 60).

I would love take one of the voluntary retirement packages currently available but, as I don’t want to take a significant drop in net income, this is unaffordable at present due to:

• o/s mortgage cost of about £53k (fixed at 3.6% until 2017) and due to end in 2019
• all of the compensation payment I would receive for going early (21months salary, circa £72k ) would be used to buy out the actuarial reduction on my pension.
• I have two children both hoping to start university next year (in Scotland so no fees) that will require assistance with rent/upkeep.

We will, however, shortly come into an inheritance of around £200k (and have a small endowment policy worth around £12k). Can this be invested effectively to make early retirement a realistically affordable option? Or, if I have to continue working, I would welcome thoughts on how best to use money to create an income to help offset university costs in the short term and to boost my pension income thereafter.

I appreciate some investment risk is necessary to gain a reasonable return but I would suggest I have a fairly low risk appetite.

Thanks

psychic_teabag

What would be the reasons for quitting ? Do you hate your job, or do you just need more free time for hobbies, etc ? If the former, is there something you'd rather be doing ? Or is it too late for a career switch ? If the latter, can you reduce your hours or find a part-time job to supplement your income ?

bigchipper

psychic_teabag wrote: »

What would be the reasons for quitting ? Do you hate your job, or do you just need more free time for hobbies, etc ? If the former, is there something you'd rather be doing ? Or is it too late for a career switch ? If the latter, can you reduce your hours or find a part-time job to supplement your income ?

Thanks for the reply. Basically hate the job and am totally demotivated by organisational change. Not interested in a new career as I want to stop working and have more free time away from the rat race to do things i want to do while healthy enough to do so.

I am, however, reasonably well paid and could just see the last 6 years out until my nomal pension age (when I know I will be able to afford to go) but I was hoping to take the package and get full accrued pension and use the available cash to generate additional income to make up any shortfall from current net salary if possible.

When retired I will consider part time working but I would prefer to do something where i could pick and choosewhen and what i did on my own terms and not necessarily for the money ie voluntary.

bigchipper

Assuming I do soldier on, another consideration is whether I should use the inheritance/endowmnent cash to buy added pension for me (or start one for my wife) or whether relatively low risk investment returns offer a better alternative ?

gadgetmind

You can work on a sustainable income of around 4-5% pa from a lump sum and this should rise roughly with inflation. This is a rule of thumb for a portfolio of shares and bonds, and risk does rise towards the top end of the withdrawal range. However, I guess what you're really after is a bridge until state pension kicks in, so you can play to draw a little pa.

I have a planned drawdown on 5.3% pa from our investments between the ages of 55 and 67, which is our "bridge".

Have you worked out what you actually need pcm and what the short fall is between this and the income you'll have if you take redundancy?

I think you need to do a cash flow forecast.

bigchipper

gadgetmind wrote: »

You can work on a sustainable income of around 4-5% pa from a lump sum and this should rise roughly with inflation.

Is this net or gross?

gadgetmind wrote: »

Have you worked out what you actually need pcm and what the short fall is between this and the income you'll have if you take redundancy?

I think you need to do a cash flow forecast.

Although not a detailed cash flow I have a number of spreadsheets I use that are based on the premise that our current total net salary less mortgage costs is ample for our needs as it is currently.These indicate retiral around now would leave a shortfall per month of around £700pcm (assuming my wife continues to work until age 60 which she wants to do !) but rises to £1500pcm for five or so years until state pensions kick iln before returning to around the £600 mark, To keep spreadsheets simple I ignored inflation in respect of both income and expenditure. Potential university costs will significantly increase our needs for those first 4-5 years so i would certainly need to revisit this unless some of the capital was put aside.

gadgetmind

bigchipper wrote: »

Is this net or gross?

Gross, but if you're careful, there won't be any tax to pay. Anything that earns interest (bonds etc.) can be held in ISAs and anything to generates dividend income can be in your wife's name.

Based on your other comments, I think that you're biggest problem is that £600 shortfall after state pensions kick in. If it wasn't for that, you could use your inheritance to bridge the gap, but a gap after SP age means you need to retain a lot of this capital.

Does your wife pay into a pension? Did you know she can put her entire earned income into a pension and get 20% tax relief on the lot even though she doesn't pay tax on most of it. This 25% boost to your capital is hard to beat but it does limit the rate you can take it out later.

bigchipper

gadgetmind wrote: »

Based on your other comments, I think that you're biggest problem is that £600 shortfall after state pensions kick in. If it wasn't for that, you could use your inheritance to bridge the gap, but a gap after SP age means you need to retain a lot of this capital.

Agreed after Im 66 I would either need to retain sufficient capital that could generate the required income shortfall, or accept I would need to deplete the remainder over the expected remainder of our lives, say 25 years. The kids would still inherit our home.

gadgetmind wrote: »

Does your wife pay into a pension? Did you know she can put her entire earned income into a pension and get 20% tax relief on the lot even though she doesn't pay tax on most of it. This 25% boost to your capital is hard to beat but it does limit the rate you can take it out later.

No she is not currently in a pension and at present we use her salary its not spare.

Radiantsoul

Six years is a long time to do a job you don't enjoy.

The £72k looks like a pretty good deal to me(the first 30k will presumably be tax free). If you carry on working your post tax income will be about 31k per year. So you will actually have to work for a couple of years before you are in credit.

bigchipper

Radiantsoul wrote: »

Six years is a long time to do a job you don't enjoy.

Agreed

Radiantsoul wrote: »

The £72k looks like a pretty good deal to me(the first 30k will presumably be tax free. If you carry on working your post tax income will be about 31k per year. So you will actually have to work for a couple of years before you are in credit.

You are correct the first £30k is tax free) but to get the £72k I would either need to accept an actuarially reduced pension (down from £14kpa and £42k lump sum to £10k pa and £30k pa), or to park the pension untouched until I am 60. Either way there is a funding shorfall that some other income source would need to fill. If investing available cash cant bridge that gap do into retirement and i need to keep working its maybe best to just see it out where I am as its highly unlikely I would get anything remotely near what I earn now somewhere else.

gadgetmind

bigchipper wrote: »

No she is not currently in a pension and at present we use her salary its not spare.

Not at present, but might be if/when the inheritance arrives.

You could put (say) £10k pa into a pension for your wife and HMRC would then add another £2.5kpa as tax relief. After 55 (or later) you get to take 25% of the pot tax free and the rest as income for your wife.

However, this is marginal for you as your wife will be paying 20% tax on it after SP age as SP+NHS will use her personal allowance. You will gain on the 25% tax free and on getting more pension income tax free before SP.

Anyway, I thought I'd float it so you can model it and see if it works.