How to balance FS and SIPP for pension planning

mark55man

A recent article suggested that rather than treat (as I am doing) my FS pension as my "safe" investments alongside a riskier portfolio in the SIPP, I should instead subtract my FS and state income from my target retirement income and target my SIPP at investing towards that number.

That is, should my SIPP investment try and assume more risk/growth (because I have a FS as backup) or should be aimed at reaching a specific and independent objective (eg a certain pot size (TBD) in 10 years) ignoring the FS as backup

Details
- I am nearly 50 have £100K+ in SIPP (Work DC scheme + self managed SERPS), current contribution 10K per year
- I have a FS pension worth around £20kpa in todays money payable at 65 increasing with RPI not Salary
- My wife will have a FS pension approx £10K mainly payable at 65 (we are the same age)
- We have enough NI years to get £10-12K state pension jointly at 66/65
- My number to live off once mortgage is paid (10 yrs) and kids are independent (10-50 yrs!) is £45K so I am on track assuming retirement at 65

However My main objective is to bring retirement forward as much as possible (ie my outcomes are SIPP success = earlier or more gradual retirement (60 ideal), SIPP failure = later retirement). I am therefore happy with more risk maybe than many at 50

I would be very interested to hear what others are doing - in particular I am wondering if I need to address the current SIPP Investment balance (which seems justified if I include FS as a balance, but looks a bit unbalanced on its own):

* 70% UK equities - mainly FTSE 100 of which mainly financial (individual) and mid cap (fund)
* 25% Asia inc Japan (have just moved 15% from US to go overweight on Japan)
* 5% European Growth

kidmugsy

mark88man wrote: »

My main objective is to bring retirement forward as much as possible (ie my outcomes are SIPP success = earlier or more gradual retirement (60 ideal), SIPP failure = later retirement). I am therefore happy with more risk maybe than many at 50

It seems to me that the classic advice to diversify between equities and bonds is unsuitable now because bonds (or at least fixed interest government bonds) are such lousy value. I suppose you could diversify between equities and cash or equities and property funds.

By the way, if I were very keen to retire at 60 and was wondering how to bridge the gap to the onset of pensions at 65-66, I'd wonder about using cheap borrowing to help (on the assumption that borrowing might still be cheap then). So I'd look at my mortgage - should you swap to an offset mortgage that runs until, say 66? Or at least a mortgage that allows you to reborrow overpayments and, again, run it till 66? I'd also be considering saving to ISAs rather than pensions, though if you're avoiding 40% tax on your £10k p.a. I can see why you would want to continue with that.

mark55man

OK that's a good idea - my mortgage runs for another 9 years until I am 58 (my plan had been to try and bring that forward - but overpaying is not yet in reach so I may not have much luck with that) - so I am very interested in your idea - at it could enable me to bring a little more saving forward. especially as we are in a nice house with no plans to move, UNTIL we retire and downsize at which point the mortgage will pop.

I am on fixed rate for 6 years, so can't do anything straight away - however my last remortgage could be onto a longer term to reduce payments or I could borrow a bit more to create a little slack in the offset. I will need to plan that out a bit better to see if it works

EDIT: The £10K is mine + company gross contribution so 4K the taxman doesn't get to see

I am very light on ISAs - that's water under the bridge - so having a bit of time when OH and I can put 20K a year away would be good, as would reduce pressure to take any FS too early when we do start taking income

ermine

My number to live off once mortgage is paid (10 yrs) and kids are independent (10-50 yrs!) is £45K so I am on track assuming retirement at 65

This is your problem relative to early retirement. Early retirement means living on less, about 5% less for every year you want to retire earlier than 65 On the upside you're on a good track to meet your number at 65, which is more than a lot of people could say.

I am retired now, and only a little bit older than you are. I have an income of nowhere near £45k. Heck, even when earning more than that I never spent that much.

Each to their own, but if you want that much as your number you ain't gonna retire early on the resources available to you.

BTW early retirement is great. Every year you work for a company is a year you won't live again. No bought stuff tastes as good as owning your own time feels I don't run my own car. I do run my own day...

Not paying a mortgage is part of the key, BTW. A lot of your number while working is part of the paraphenalia of working - needing to run two cars, paying over the odds for other people to do things because you don't have time. I overestimated my Number because I extrapolated what I was spending while working.

mark55man

Thank you ermine.

I do need to have a more thorough review with my OH. 4 kids busy jobs don't put us in the right place to discuss this in as much detail as we want - perhaps we need to take some time to figure out - long time-rich money-poor retirement or short time-poor money-rich.

we have time to make those decisions (not plenty of time) but enough.

I should perhaps add that neither of us expects to live past 80 based on family history (although I know its different now), so being 105 and regretting decisions is not on my risk list. Getting to 70 and being unable to enjoy my higher number is

I may reread "the number" thread as well

ermine

It's hard to make the computations in the thick of daily life, and it is very worth standing back and taking the time out to work out what you want. It isn't always necessarily more of what you have at the moment.

You have 15 years to the normal target date, so it's worth making a spreadhseet of the years to 65 and do some optioneering, as to what resources and commitments you'd have, retiring at 50, 55, 60. Your children will be at different life stages then.

All change is difficult to qualify because the future has no voice, you don't have the experience of living it, compared to the experience of the status quo. I expected to work to 60 (the default NRA of my company for most of my working life) and retire normally. Some changes showed me that I needed to consider alternatives. I am glad I did. Working was doing my head in and not giving me enough in return.

However, for the three years before I retired I lived on the amount I expected to retire on, packing away the difference into ISAs, pensions, NS&I ILSCs and then cash savings. I had already paid down my house - not having a mortgage is transformational, assuming you have no other debt at all, that is. Not having to pay £6000 a year mortgage meant I didn't need to earn £10,000 a year of which the Government stole £4k, but could save that 10K in the pension. A lot changes in your 50s as far as savings capability, particularly if you are a HRT taxpayer.

Owning your own time is delightful - you have the choice of what to do and when to do it. You need to also prepare your human setting too, who will you know and spend time with, and that's worth giving some thought to that before you retire. It's particularly important for early retirees because a lot of their existing friends and acquantances will still be working, some people I knew who retired even earlier than I did felt lonely, particularly those that retired in their mid forties, and I learned from their experiences - these were typically single guys, it took me longer than for them. Give thought to how you will maintain and develop your human connections, because as you get older it is Who is in your life that matters, not so much What is in your life.

The upside - my skin looks better and younger, the bags under the eyes fade, I slowly lose some of the weight that accumulated over my years behind a desk and in the lab. I walk more and bike more. I hear the birdsong, if there's a good blackbird I will sit and listen to him for a while. I sit down for meals at a table rather than scoffing overpriced sarnies at my desk, I have more time to spend with the people I care about, I can read books, I can build things, learn how do use woodworking tools better, enjoy the company of people more, listen to people better, learn more, play more.

I watch less TV than I did while working. I tolerate no ads - I use ad-block plus on the Internet and less TV cans that at source, on the occasions I do watch TV I use a PVR and ff over the ads. If I have a requirement that may need buying something I use google - I buy things on my own terms, not because somebody is creating a desire in my head for stuff I don't need. I don't buy anything on impulse, I wait at least a couple of days to see if the want is really a want. But if it is, and it fits my values, I buy it. If an offer has gone and I need to pay 10% more, so be it, that's the price of living on my own terms and agenda. I don't muck about with low-rent stuff like quidco and cashback, I have three credit cards but if I use them I pay them off in full. I'll never get another credit card because I have no wage income, just investment income (I left my pension deferred) so I presumably look like a deadbeat on a credit check. Do I care? No - if the existing cards kick me off then I'll pay by debit card or by cash, because I Don't. Borrow. Money. ever since discharging my mortgage.

I can't recommend early retirement enough. But you do need to be prepared to make the 'sacrifice' of living on less. I surrendered eight years of income when I retired, if you add all that up it's a lot of money. I was happy to pay the opportunity cost, because that's also eight years of life I'll never live again. For me that was the right call - indeed perhaps I should have looked ahead and done it earlier.

Early retirement means I have less Stuff in my life. But I have more joy. Somebody needs to speak up for it, because you never see the ads for Earn Less and Buy Less but Live More. People in Britain are so much richer now than they were thirty years ago, when you and I started our working lives, I heard an estimation on the radio we have about twice as much disposable income as people had then. Stuff rather than Time seems to have got the thick end of our extra income.

For each of us the sands are running through the hourglass, one day at a time. Making the call on as to where you place the balance between More Stuff and More Life is one of those things that is Important but not Urgent, so it always goes to the back of the to-do list. It's worth dusting that question off and taking the time out to work through the options.

I don't know what the right answer for you and your family is. But I do know that it's easy to miss out taking that time out, and just sticking with the same old. Kudos to you for at least asking the question!

FWIW

However My main objective is to bring retirement forward as much as possible (ie my outcomes are SIPP success = earlier or more gradual retirement (60 ideal), SIPP failure = later retirement). I am therefore happy with more risk maybe than many at 50

I consider my FS pension as the bond component of my pension investments, so I have a much higher equity exposure too. I have no SIPP because for technical reasons it made more sense for me to do pension saving in AVCs. However, if you want to bring retirement forward then do seriously consider ISA savings in your optioneering. The ISA allowance is derisory - at a typical 5% income from capital you can buy just £500 p.a. tax-free income a year, £1000 if you use both your ISA allowances.

It appears that the HRT threshold is going to drop in real terms because the Government needs to boost the tax take, so your part of that £45k pension income may drift into HRT. You really don't want to be paying HRT on your pension income. You obviously don't want to be paying HRT at all, but if you are going to be paying it on your pension then you may as well pay it now and use ISAs, which don't contribute to your taxable income in retirement, and which can help boost your income before retirement to help you defer your FS pension, if that makes sense in your circumstances.

One of the other ways you can save yourself paying HRT in retirement is indeed to draw your pension a little earlier and use the actuarial reduction. It is instructive to create a spreadsheet showing you your cumulative net income from your pension allowing for a BRT tax threshold of 10k and an actuarial reduction of 5% for each year you draw early (confirm this with your FS pension of course). Taxation pushes out the crossover age where the total amount you get from the pension is more if you defer it to NRA, basically because by drawing earlier the total tax take is lower. If you really have reason to believe you may have a lower than usual time in retirement then that simulation may be illuminating.

atush

am very light on ISAs - that's water under the bridge - so having a bit of time when OH and I can put 20K a year away would be good, as would reduce pressure to take any FS too early when we do start taking income

I agree that ISAs seem to be the place for you to look going forwards, as you both have good pensions in place. Their flexibility in regard to spending should stretch you so as to not take any FS too early.

AlwaysLearnin

Blimey Ermine, that's almost an article for your site!

You've certainly helped me with perspective when considering my longer term aims (hopefully not as long as it could have been now that I'm planning though..!), for which I thank you.

mark55man

I'm not going to quote your post ermine, because then this note of thanks would be overwhelmed by your wise words. If it is to be an article for anything let me know and I will +1 it.

Your observation about avoiding HRT in retirement is spot on. Your observation about friendship and time is also close to my heart - have already listened in disbelief to a couple of friends who are planning to up sticks and move somewhere new

I had started a few months ago a year planner to 75 spreadsheet, but it was not quite organised enough so didn't add any value. I will do what I can to improve it including adding likely Tax at some early retirement options. That is (sadly) my idea of a good evening (and cheap!!)

EDIT: PS - I am in a space at work where I think I can have a lot of fun and do a lot of good, but maybe only for the next 5 years. After that I will need to think hard about it - so I will make sure that when that point comes I am ready to act in whichever way I decide

gterr

Ermine: post #6

Brilliant exposition of the benefits of early retirement. As someone who is on the brink of a similar move, juggling the finances to make it possible, and wondering if I'd perhaps lost the plot, your post really cheered me up. Many thanks.

jamesd

mark88man wrote: »

I have a FS pension worth around £20kpa in todays money payable at 65 increasing with RPI not Salary

That means you should learn about pension Flexible Drawdown if you haven't already. £20k of guaranteed income is the qualifying threshold for this. The amount needs to be from final salary pensions, state pensions and annuities, all counting only if being paid at the time.

This hugely increases the potential value of personal pension contributions because you can take out an unlimited amount of money, taxed as normal income, except for the 25% tax free lump sum. So you can pay money in, take it out after getting tax relief, then put it into an ISA instead of putting it into an ISA without getting the pension tax relief.

mark88man wrote: »

- My wife will have a FS pension approx £10K mainly payable at 65 (we are the same age)
- We have enough NI years to get £10-12K state pension jointly at 66/65

The Flexible Drawdown threshold is calculated per person so you'd need to track the individual positions. It's possible that the availability of Flexible Drawdown will make it sensible to give some priority to your pension contributions over hers, since she already has enough anticipated pension income to fully use her personal allowance.

mark88man wrote: »

A recent article suggested that rather than treat (as I am doing) my FS pension as my "safe" investments alongside a riskier portfolio in the SIPP, I should instead subtract my FS and state income from my target retirement income and target my SIPP at investing towards that number.

You can do it either way. The second way is appropriate for those who want to spend more today and put less away for retirement. Or for those who don't want to retire early. The first is best to retire as early as possible or to maximise long term financial position.

mark88man wrote: »

However My main objective is to bring retirement forward as much as possible (ie my outcomes are SIPP success = earlier or more gradual retirement (60 ideal), SIPP failure = later retirement). I am therefore happy with more risk maybe than many at 50

This tends to favour the invest for gain approach rather than the minimise the amount needed to hit a target income approach.

For the early retirement target the first threshold is accumulating enough to live without any pension income before age 55. If you can manage that you can retire before 55. It'll take ISA and non-pension savings and investments to do it.

From age 55 you can get at pension money in personal pensions, including SIPPs and work DC pensions. The GAD limit caps the income so you will need non-pension money to top up the income unless you can qualify for Flexible Drawdown. You probably can't sensibly do that at 55 but can easily once the work and state pensions start.

mark88man wrote: »

once mortgage is paid (10 yrs) and kids are independent (10-50 yrs!)

Those are two costs you can defer to help make earlier retirement possible. You could:

a. Use an interest only mortgage due to be cleared when you have work final salary pension lump sum available.
b. Use a repayment mortgage with a term lasting well into retirement so you can use the work pension and state pension to clear it later.

Each of those reduces current expenditure at a time when you'll have least available income early in retirement, deferring it until your income increases.

For the children you can do things like letting them use university loans and help them with a property deposit or loan repayments out of income once your final income and lump sums are available. That can minimise the compromise of your early retirement objective while still providing them a huge amount of help, with the property deposit part far more valuable than avoiding loan costs because it's more challenging to accumulate a lump sum.

mark88man wrote: »

70% UK equities - mainly FTSE 100 of which mainly financial (individual) and mid cap (fund)
* 25% Asia inc Japan (have just moved 15% from US to go overweight on Japan)
* 5% European Growth

Looks way too concentrated on the UK for me. I doubt that you think that the UK is likely to be the source of growth in share values and income over the time until you retire. Moving from US to Europe seems like a potential good move but Asia and emerging markets seem likely to offer better prospects, at higher volatility.