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A little of everything

Triumph13
Posts: 1,865 Forumite



Fingers crossed, I'm about 10 years out from early retirement (no sense in retiring before my youngest finishes school) and so I'm trying to get a serious handle on what income to expect / plan for and what post-retirement investment strategies to adopt.
My problem is that I don't really like any of the obvious strategies, but I have come up with a plan that I do feel fairly comfortable with pyschologically. The question is does it make financial sense?
If all goes well, my wife and I shouold ultimately end up with DB pensions (including state pension) of around £30k. Atfer earmarking a sizeable chunk of my DB funds to fill the gap between retirement and the DB funds coming on stream, I hope to have around £700k left to invest (including most of the TFLS). I'm looking for a balance between having fun whilst still young enough, having a comfortable old age and leaving something for the kids when we're gone.
What do people think about the idea of splitting the funds into three separate portfolios:
As I said, this 'feels' the right kind of answer for me, but I'd love to know if other people have better suggestions or can point out anything mad about it.
My problem is that I don't really like any of the obvious strategies, but I have come up with a plan that I do feel fairly comfortable with pyschologically. The question is does it make financial sense?
If all goes well, my wife and I shouold ultimately end up with DB pensions (including state pension) of around £30k. Atfer earmarking a sizeable chunk of my DB funds to fill the gap between retirement and the DB funds coming on stream, I hope to have around £700k left to invest (including most of the TFLS). I'm looking for a balance between having fun whilst still young enough, having a comfortable old age and leaving something for the kids when we're gone.
What do people think about the idea of splitting the funds into three separate portfolios:
- £250k 100% equities drawdown with 5% withdrawal rate
- £250k less agressive (maybe 40% bonds if bond prices are less crazy when I retire!) with 3% withdrawl rate
- £200k equities (mix of global index and high dividend index) taking natural yield.
As I said, this 'feels' the right kind of answer for me, but I'd love to know if other people have better suggestions or can point out anything mad about it.
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Comments
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This is the sort of strategy I proposed in another thread. The pots would have to be notional rather than physical as you would gain advantage by regular re-balancing.
On the details...
1) By having a % withdrawal from a highly equity oriented portfolio you are making your income dependent on the ups and downs of the market. How will you fare during the next 40%-50% drop in share values?
2) I feel your 3 pots are too close in risk, so there's not a lot of point in keeping them separate, certainly not the 2 100% equity pots.
For these reasons I would be happier to take a fixed amount annually (inflation matched) from a low risk pot backed up by separate high risk and cautious pots with annual rebalancing undertaken in the light of market conditions.0 -
Thanks for the reply Linton, the split I was proposing wasn't really aimed at spreading risk as I feel I already have a 'safe' core from the DB earnings. I'm therefore pretty comfortable with the risk of being 100% equities on the DC portion and if (when) the markets tank would be happy to reduce my expenditure.
I would also very much NOT intend to rebalance between the three portfolios.
The idea was more to have a fairly 'solid' bit that should hopefully plod on for ever with indexation (the 3% withrawal), a reasonably solid natural yield one that should definitely go on for ever, but probably won't keep pace with inflation and may fluctuate and a 'live now' fund that would have a reasonable risk of running out but would pay for lots of nice holidays in the meantime.
I can see a case for a more cautious investment spread in the 3% portfolio, but with the DB amount we'll have I incline more towards equities in the hope of some upside.0 -
Assuming you have an average priced UK house of circa £200k, you are going to be leaving your kids £900k to split between them. The tax man will want a large lump of that - circa £158k.
The experts will be along but will probably need a better idea of your ages; the pensions you each will receive; and retrial ages.0 -
As the house is worth £500k + I'm already pretty resigned to the taxman taking a fair chunk. I'll max out my drawdown (up to 40% tax limit) to shift things to ISAs for an effective tax rate of 52% instead of 55% (whoopee!) and hopefully gift a reasonable amount from income if the investments perform well.
I'm nearly 48 and very unlikely to make old bones, though I do hope to make it to 70. My wife is two years older and should have a normal life expectancy. About £10k of the DB pensions will die with me.0 -
I guess where I was going was that if you both were able to reach £20k pa pensions rate then you could use flexible drawdown to generate a joint income of £80k pa (both just keeping below the higher tax rate). A bit less for the treasury and a bit more for your kids.0
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Unfortunately all the DC funds are in my name (40% taxpayer with salary sacrifice vs 20% tax for my wife) so there won't be much to be gained from flexible drawdown even if I did shell out for the necessary annuity.0
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Unfortunately all the DC funds are in my name (40% taxpayer with salary sacrifice vs 20% tax for my wife)
If there's any chance of your wife having a run of years with an income smaller than the income tax personal allowance, you should be contributing to a pension for her.
If you expect to die long before her you might also be wise to plan on not crystallising all your pension pots so that she can receive them as tax free lumps after your death.
Of course, if you and your wife contrive a divorce (nudge, nudge, wink, wink) she'd get half the pension pots and that would be much more convenient. Unless someone tried to jail you for it.Free the dunston one next time too.0 -
Thanks for that Kidmugsy. My wife will indeed have 5 years with no income (other than the dividend income on my TFLS which will be invested in her name), but I can't see a sensible way to use it. If I tried to build a pension for her without reducing my own contributions we'd be left with less to live on than we expect to have in retirement, and I can't make the numbers add up in favour of reducing my contributions (40% tax, 2& NI and 6% of employer's NI) to make contributions for her.
I need to try and run some numbers on the idea of splitting my pot and leaving some of it uncrystallised (if that is possible?). The complicating factor is that if I did that with any sizeable amount then I wouldn't be able to draw the high starting amount I wanted for the first 5 years (to fill in gap before wife's DB comes on stream) and so I'd have to fill the gap from the TFLS instead - spending one bit of freed cash in the hope of creating another one!
Why is this all so complicated?
PS I don't think I'll mention the idea of the tactical divorce - I don't want to give her ideas!0 -
I can't make the numbers add up in favour of reducing my contributions (40% tax, 2& NI and 6% of employer's NI) to make contributions for her.I need to try and run some numbers on the idea of splitting my pot and leaving some of it uncrystallised (if that is possible?).The complicating factor is that if I did that with any sizeable amount then I wouldn't be able to draw the high starting amount I wanted for the first 5 years (to fill in gap before wife's DB comes on stream) and so I'd have to fill the gap from the TFLS instead - spending one bit of freed cash in the hope of creating another one!
Consider somebody with £400,000 in pension pots. If he crystallises the lot he gets £100,000 tax-free, half of which he plans to spend over (say) 5 years = £10,000 p.a., in addition to the drawdown on the £300,000 at (invented figure) 5% p.a.= £15000 p.a. So his total available for spending (ignoring income tax, to try to stop this getting too complex) is £25000 p.a. He's left with capital of £50k from the unspent lump sum.
Now suppose instead he leaves £100000 uncrystallised. His drawdown reduces to £11250 p.a. and his lump sum sinks to £75000. If he still wants £25k p.a. he needs to spend £13750 p.a. from his lump sum, using £68750 from it. So after the five years he's got £6250 left. In the first case he'd have had £50k left. So he is worse off by £43750. But when he shuffles off, his widow picks up £100000 as a tax-free lump sum, which is appreciably bigger. I'll leave two complications to you. (i) Tax on the drawdown income. (ii) The extra growth in the fund in the second case (because he's drawing down on only £225000k while £100k is growing unmolested.)
It looks to me as if "phasing" the drawdown is a winner subject to all the usual caveats about ruddy governments changing the rules.Free the dunston one next time too.0 -
Well, I rechecked my scheme rules to see whether I could transfer it out in bits and pieces to different SIPPs rather than all in one go (although logically I suppose I could always have tranferred it all and then transferred part on again before crystallisation).
They have made quite a few changes to the rules since I last checked and the kind of arrangement Kidmugsy suggests definitely looks possible so I need to look at that carefully.
The much bigger news is that they have also scrapped the rule they had which said I couldn't transfer out my DC whilst leaving my DB in deferment. That's great news on two counts - I get the option of deferring my DB to scheme age (63) rather than having it commuted by about 30% as I was resigned to, and I also get the option to take a drawdown income from the DC if I'm made redundant any time from 50 without crucifying my DB.
It's bad news though becauseI have to completely start again with all my thinking! Not only do I have to think about life expectancies and whether I would want to defer my DB to 63 (and have an even bigger short-term funding gap), but I also have to completely rethink my 'survival strategy' for the next 10 years for if I get laid off and can't find another job. The DB would now be safe and so I could fund myself from inside the pension rather than having to make provision outside. Bang go all the hours I've spent trying to work out my optimal pension contribution / cash ISA / S&S ISA strategy!
Seriously, it's great news for me, but I think I'm going to need a cold towel and a dark room before I've finished working out the implications.0
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