Starting to plan retirement - some expert advice appreciated!

deeboy1

I've begun to think about the R word in the last few weeks, mainly as a result of stumbling across this forum and getting some inspiration from y'all.

So I wanted to test out a few numbers and aspirations to get some honest advice from Those Who Know Better Than Me.

Hope you will be indulgent enough to my newbie ramblings to give me a few pointers!

About me

Age 42

• No kids and not married
• Started new job Jan 2012
• Current basic salary £128k
• Cash bonus for 2012 £53k (variable)
• Share bonus for 2012 £67k (vesting over four years)

Savings

• Cash ISAs £71k
• Stocks and shares ISAs £49k
• VCTs £5k
• Index trackers £17k
• Cash and fixed rate bonds £32k

Property

Mortgage paid off last month, property worth £210k, London

Pensions

• Defined benefit deferred £16.5k pa to take at 60
• DC pot deferred £42k to take from 60
• Current DC pot £31k with 5% employee 15% employer contribution (to take at 60)

Current savings discipline

• £1,500 a month into regular savers paying between 3-4%
• £1,500 a month into index trackers, OEICs and ITs
• Using full ISA allowance each year (half cash)

Hopes and fears

• Want to retire at 50 (would downgrade to semi-retire for a low key job!)
• I count myself very fortunate to have £16.5k pa DB pension from 13 years of discipline/ AVCs in my first job
• Hope to stay in this job at current salary and bonus levels for up to five years and with 20% going into pension
• Assume no future need for another mortgage
• Not sure how reliable state pension will be when I get to my 60s

Questions

• I guess you want to know my Number. Well, I'm grateful for my £16.5k DB pension from 60 as the basis.
• Then I'd like to understand whether I'd be able to bump it up to £22.5k from the DC pot from 60. Maybe I'm being naive about how much I'd need and maybe I don't have any idea what to expect from the DC pots by that point...
• How would I get by from 50 to 60. That's the bit I don't understand and feels impossible right now. What do I need to do in eight years to make it possible, based on saving patterns above and the savings achieved so far?
• Semi-retirement in a low key job is certainly an alternative. Is this more realistic?

All views, comments and random thoughts appreciated, and of course if you need more info just shout...

Thanks all

Deeboy
:cool:

jamesd

For cautious long term planning you can recon on getting 4% of the capital value as income without much chance of the capital value decreasing long term. To get to 22.5k from 16k takes 6k more income before tax, so that's 6k / 0.04 = 150k of capital required to have high confidence. If you can be more flexible and accept lower incomes if things go against you you could use 5% or 6% with increasing chance of the capital value and consequent income dropping. I'm assuming that you use income drawdown for this, not buying an annuity.

For the time between 50 and 60 you can plan to take an income and decrease the capital value to provide the income you need. One fairly easy way to work out how much capital you need for this is to use a loan calculator. Put in £100,000 as the loan amount, 4% as the interest rate and 10 years as the term and click on calculate. That shows that there will be no money left after ten years with a monthly income of £1,010, the loan repayment amount. Now adjust the loan amount until you get the income level that you need.

It seems that you want 22.5k gross income, or 1875 a month. Using the loan calculator it takes £186,000 to get to a monthly payment of £1,875, so that's how much you'd need to accumulate before you get to 50 to get that income between 50 and 60 with quite high confidence of the money lasting.

However, you don't need all of that outside a pension because you can take DC pension income and 25% tax free lump sum at age 55.

You have £174k accumulated so far. I'll ignore growth until you're 60 as safety margin and deduct 150k from that for the ongoing income target after 60 provision, leaving £24k for the age 50 to 60 part accumulated so far. That makes you short by 186k-24k = 160k.

The best first choice for someone of your income level is pension investing. You could usefully look to try to use the maximum annual contribution amount and also use some past years' annual allowances to get higher pension tax relief. You could fund some of those pension contributions via the non-ISA, non-VCT savings and investments you have now, looking to use as much as possible of your 45% income tax band. Spread it out over two years and you might manage to get your taxable income below £100k for two years and avoid personal allowance loss.

Because of limits on how much you can take out of a pension you'll need to recon on half of the income coming from non-pension sources from age 55 and of course all of it from 50 to 55. Use the loan calculator method to work out what you need in each...

The income from the pension part can continue after age 60 so you can use the 150k age 60 and over pension portion to help a little. That's an after tax free lump sum amount, so you can take one third of that from a total pension pot size as a tax free lump sum. So accumulate 200k in the pension by 55. Take 25% lump sum, 50k and you can use that as part of the capital you need from age 55 to 60. The remaining 150k is what you need from the first paragraph to top up the defined benefit pension. That 150k also provides 4% of 150k as ongoing income from age 55, so that's 6k of income provided for already.

So now you can work out how much capital you need for 22.5k for five years from 50 to 55 with the loan calculator. Then you can work out how much capital you need for 22.5k-6k (6k is the pension income from 55) for the years from 55 to 60 and see if the 25% lump sum is enough of if you add more. Add the lump sums together and that's what you'll need to accumulate.

Once you have the amounts it's prudent to add at least 30% to all lump sum amounts as a safety margin in case of investment value drops.

Best for you to do the rest of the calculations and ask others to check them, ot be sure you follow things.

You shouldn't have trouble getting to your target unless you have a really extravagant lifestyle and a lack of willingness to adjust it. You have ample income to aim for a good deal higher income if you want to get there - that's a trade off between consumption now and later, or retiring earlier or later, for you to make.

AlwaysLearnin

Just a quick response as off to bed.

You're doing well for yourself. At the rate you're saving (~4k a month, with 5 years to go, plus existing savings, plus chunks of the bonus monies?), you should certainly have enough to live off between 50 & 60 at the levels you're talking. A concern is that is a BIG drop from your current income, so will take some adjusting.

Numerous ways to use the DC pot, and I'll leave the details to the more knowledgable folk here, but £6k per year on what you have plus your continued 20% contributions sounds pretty feasible. I would go further though, and again I'm no expert, but looks to me that you've got some room in your lifetime & annual pension allowances to think about making the most of the tax advantages of pension contributions (e.g. via AVC's) and aim for a higher income in retirement.

Edit: jamesd beat me to it, and did a much better job!

Daniel_Elkington

Have you considered EIS investment - I see you've got some VCT's, a few stocks and probably too much cash.

It depends how excited you are by market returns and what you do for a living.

It also depends on where you want to retire - most people don't aim to retire in London but somewhere nicer and more than likely cheaper (Frampton is nice - down the road from me!)

It also depends what you want to do with your London flat when you retire - do you want to sell or rent it out as rental yields can be fairly good dependent on where it is situated.

I think there are a lot of lifestyle type things that need considering.

To be honest you've got plenty of money and are never short of options when you've got money.

Also, unless you are wanting to take up a career in financial advice you don't need to know all the rubbish about products - that's our job.

You just have the even harder job of defining how you want to retire and what you are going to do when you do retire.

Linton

You are currently on a salary of £128K. Are you going to be able to continue living the life you are used to with an income of £22.5K + State pension? I would recommend that you plan on wanting to spend much the same in retirement as you are now, at least as a first pass for the Number.

deeboy1

Thanks all, very helpful and much to think about, which is exactly what I hoped for. Special fanks to jamesd for the amazingly useful guidance and I shall do some calcs this weekend and no doubt come back with some further questions.

A few answers to Qs posed so far...

@ Daniel, not keen on EIS as seems like a riskier version of VCTs which in turn only seem feasible given the tax break, although I'm not averse to some potential further investment there next bonus round.

Both jamesd and alwayslearnin raise a good point about additional contributions to pension. I assume this would be better via my existing work pension (via Blackrock, low AMCs in the 0.3% range plus for mainstream OEICs) instead of private SIPP where fees will undoubtedly be higher? I was a little sceptical of this because I wondered (a) can HMG change the rules arbitrarily at any point it likes so I can't take my pension at 55 (as jamesd helpfully points out, I had assumed it was 60) and (b) am I better to be in control of my money instead of tying more up remotely from where and when I can access it. But I get the message (tax relief) and will defo consider now.

@ Daniel, yes I'll defo be leaving London for somewhere more pleasant and hopefully cheaper, and would consider renting out if it made financial sense to balance the hassle.

@jamesd and alwayslearnin, £22.5k does seem like a reasonable starting point yes, I won't have many monthly outgoings and am very good at living to a budget. But I'll certainly give it some more thought. The one thing i may have overlooked here is what tax I need to pay, do i need to pay 20% tax on my DB+other income that makes up this total?

thanks again y'all, will run some numbers and be back soon...

deeboy

atush

I did read this the other day, and did think more pension was the answer so did not reply as the others did it so well.

I will say, you can have as much control of your pension as you like- the problem is doing it. With your company pension you can call (or with some do ti online) and change/swap your investments as you like. Sipps can be more flexible in their scope, but do you need this? You can always do the math on charges and have both. You can contribute to as many pension as you like. With 40% tax relief in your case, i'd be going up to 40K each year.

Yes, the govt can and possibly will change things in future. but most often there is advance notice, and things are already 5 years better than you thought.

AlwaysLearnin

Pension rules could well change, but you're not talking that many years in the grand scheme of things, so I can't see it being that drastic in that timeframe (too many votes to lose!). Frankly (in my opinion), you have plenty of money to play with and so not using the tax benefit at the rate you're looking at on pension contributions would be a real waste. I think you actually get £50k this year too - doesn't the annual allowance only reduce to £40k in 2014/15? [STRIKE]Not 100% sure on this either, but also just check whether a deferred defined benefit scheme can eat in to your annual allowance if/as it increases with
inflation - if so, you'd need to factor that in to how much allowance you have
left to use. [/STRIKE] - see below

May also be worth finding out if your company have a salary sacrifice scheme for AVC's, as that would save a bit more on national ins.

Have you thought about visiting an IFA? You have lots of options and, given the amounts involved, they may be able to give you ideas and/or put things in place that could actually cover their fee in the long run. At least you've got some pointers from here to have an idea of the direction you should be going/they should be taking you. It might be worth an initial consultancy at least - maybe a one off fee, or perhaps even free at a high level, for them to tell you what they can offer. unbiased.co.uk could be a start point.

Re tax, the £22.5k would be taxed, roughly in line with how it would if it were salary

Anyway, hope you have a fun weekend looking in to it all!


Edit: A couple of links that may help:

Annual Allowance:

http://www.hmrc.gov.uk/pensionschemes/annual-allowance/pension-input.htm

The way I read it, my point above re the inflation increases eating in to your annual allowance was a red herring, hence crossed out.

The first section on the calculator page confirms it's £50k this tax year (including employer contributions), dropping to £40k next year. You can carry forward any unused allowance from the three previous tax years too, so you could look to use some of your surplus cash to hit it hard this year (£50k, plus previous years carry forward), either via your company pension (using cash savings to subsidise any resultant shortfall in living expenses) or separate personal pension (needing to claim additional tax back for amounts contributed), then max out on the £40k in future years when you can. Keep good records.

Lifetime Allowance:

http://www.hmrc.gov.uk/pensionschemes/understanding-la.htm

For defined benefit, believe you multiple the pension payment amount by 20 (the Multiplier) to get the value of the fund. You look to have plenty of room at the moment

Finally, I'll just caveat; I'm certainly no expert/professional, just an average Joe who's been reading up for his own benefit. Please therefore double check anything before acting!

Good luck

gadgetmind

A few general observations -
1) You have a good income but need to be living off not much over half of this (damp finger in air!) if you're not to face a big drop when you retire.
2) Maximise your pension contributions and use as much carry forwards as you can or you'll lose it. These are difficult calculations, particularly if you contributed to multiple pots, so use an accountant or IFA and make sure they understand Pension Input Periods. Many don't IME! Don't work on 20% into pension, work on the most going in that you are allowed to contribute.
3) Don't hold more than 2-3 years of essential spending as cash or cash-like assets. My view would be that you should consider only doing S&S ISAs from now on as you seem to have a decent cash buffer.
4) Bridging the gap to when various pensions kick in can be achieved by using the 25% Pension Commencement Lump Sums at age 55, plus income from pensions and ISAs, plus spending your unwrapped assets.
5) Paying a good IFA a few £k in fees to work all of this out for you would be a good investment. However, understanding your own situation is also key.

Your situation and mine differ in many key ways, but I also have a fairly decent income. Rather than raising my spending to match it, I put close to half my salary into a pension, and a fair bit of what's left over into ISAs, etc. Even so, I'm going to struggle to retire before age 55.

You might manage 50 if you take it seriously and do your homework.

deeboy1

thanks all, and most recently to gadgetmind.

been working through some numbers this weekend, altho plenty more of that to go.

have also made a few key decisions based on some good advice here:

- upping my monthly pension contributions by 5%, so I'm now contributing 10% and employer is contributing original 15%. 25% in total.

- have started to realise some cash and fund assets of around £12k for a pension lump sum, and will commit another sum later in the year to top up to £50k.

- considered opening SIPP but feels impossible to calc best value until all the charging structures are clear post RDR. in any event, my work blackrock pension seems to offer a reasonable selection, well priced. will revisit sipp in a year.

- S&S ISA only this year and going forwards, to rebalance the cash pile.

- in process of moving S&S ISA and general fund account from HL to ATS and will invest lump sum for ISA asap and monthly feed into fund account.

- need to come back to the Number later. Had based original calc on wanting £22.5k annually from 50 but forgot about paying tax. Will get back to this later.

- generally going to try and stick with £2k spend a month max in the meantime from monthly salary and see how that works as a starting point, i think it will be perfectly feasible.

- also setting myself a stretch target of a small apartment in costa blanca (can you guess I was in spain last week lol). no intention of looking seriously until property prices there have really bottomed out and seeinmg how all of the above goes!

thanks again all and will be back sometime soon!

deeboy:cool:

atush

As a side note, and not really trying to get personal, but is relevant.

You don't have a spouse/partner now, and no dependents. Will that always be the status quo, or could there be a change? It could affect both retirement date/number.

Beware of buying abroad. I have, and it does limit where you spend your leisure time lol.