Early retirement planning?

davidscot

Hopefully my fellow MSE's will give me some ideas here. I am now at an age (52) where a retirement plan is now becoming prudent.
Currently employed, earning roughly £29/30k per annum and the job is rather physical so as I get older the harder it is. I am in the company pension scheme where I pay in 4% and company pay 6% of salary. It is a money purchase scheme and I have roughly £110k in the fund at present with a bonus added at retirement of another £25k. Mortgage runs until I'm 60 but have been overpaying so hopefully finish that sooner than that. Have some savings in ISA's but nothing major. Anyway, has anyone got any idea's as how to get an early retirement plan in place? Any suggestions will be appreciated, thanks

ermine

davidscot wrote: »

Hopefully my fellow MSE's will give me some ideas here. I am now at an age (52) where a retirement plan is now becoming prudent.
Currently employed, earning roughly £29/30k per annum and the job is rather physical so as I get older the harder it is. I am in the company pension scheme where I pay in 4% and company pay 6% of salary. It is a money purchase scheme and I have roughly £110k in the fund at present with a bonus added at retirement of another £25k. Mortgage runs until I'm 60 but have been overpaying so hopefully finish that sooner than that. Have some savings in ISA's but nothing major. Anyway, has anyone got any idea's as how to get an early retirement plan in place? Any suggestions will be appreciated, thanks

Overpaying your mortgage is not the obvious way to go for early retirement because it leads to an income suckout before 55. It's also an opportunity cost. Reduce your mortgage payment to the minimum, and pay the difference into a DC pension. In three years you can draw it, you will have gained 20% tax benefit, and can use the lump sum to discharge the mortgage you haven't paid off because you were paying into the pension.

In general terms early retirement is about how much you save and how much you spend. Reducing your spending by cutting needless and mindless waste and consumerism is a big win - work out what is off value to you and focus your spending on that.

Broadly speaking you can get an annual income of between 4 and 5% of your fund, so the sort of pension you'd get from your capital is about £5000 a year. if that's not enough you need to save more, work longer, spend less or have other sources of income. Your state pension will probably happen around 68 so there is some case to be made to run down your capital at a higher rate until then which would give you a slightly higher income before 68 (when the SP would raise your income)

FWIW it's not easy to turn around your retirement plans so late in life. At 49 I determined I would have to retire in three years or be driven mad by the stupidity of an increasingly toxic workplace. I did it, but it wasn't easy and I was prepared to make large changes to my lifestyle. I don't regret it in the slightest - I should have gone earlier, and health is something you just can't buy, and I'd seen too many colleagues succumb to the latent effects of stress in their 50s. It isn't easy, though you can probably do it if you want to hard enough.

atush

Does the 25K bonus have a fixed retirement age, or can you go early?

Are your isas cash or S&S? How many more years ha your mtg to go (as you have been overpaying)? Is 6% the max they will put in?

I would think if you can't take the work pension early with bonus, that you could open a separate DC pension alongside. Which can be accessed from age 55.

tony4147

I'm in a similar boat, age, mortgage, existing pension value.

Firstly you need to decide at what age would you like the CHOICE of retiring or continuing to work.
Then work out how much would you need when you retire to live on, don't forget you won't have a mortgage.
What sort of lifestyle do you want? do you want to cut back or do you want to live the lifestyle you have now. (I know after working 40+ yrs that I don't want to cut back, too much)
Take a look at the HL pension calculator and play around with the figures and retirment ages.
The biggy for me is - I think I will be fine once the state pension kicks in, but it is the in between if I decide to retire between 60-67 my personnel pension won't meet my requirements. Thats where I think I will now have to start SS ISA's

kidmugsy

Once you've decided to stop overpaying the mortgage there is the chance to consider swapping to a cheaper provider, and/or extending its term until well after State Retirement Age. That way you will keep open the option of paying it down over, say, ages 68-75, helped by your State Retirement Pension. Keeping options open helps me sleep at night, even if I don't use some of the more exotic ideas that have occurred to me.

davidscot

Thanks for the replies so far. Can I ask a few questions to the points raised. First off, do you think the extra £100p/month we overpay to mortgage would be worth more in a DC pension? What is a DC pension anyway? Next, would I be able to draw my fund at 55? giving me a lump sum of £100kish to use. I think the 25k bonus is fixed to the end of the term but would have to check on that. As regards to the work/life balance I totally understand what is meant and the stress levels that the job is bringing but its a needs must scenario at present.

Triumph13

The key questions you need to look very hard at are:

1. How much can you amass in savings and pension by the time you plan to retire; and
2. How much of that will be needed to fund your retirement AFTER you start getting state pension. (Have you requested a state pension forecast yet?)

Once you have those numbers you can then start to work backwards and see whether you can afford to retire early or if you need to either cling on longer or else find another, less demanding job to bridge the gap.

The answer to 2 will depend on a lot of things - your lifestyle, whether you have a partner with their own pension entitlements / savings, etc.

As an example, if you decided that you needed £5kpa on top of the state pension and that you were comfortable with a 4% withdrawal rate from your pension then that would take £125k of your £135k (inc bonus) pot. The remaining £10k would need to replace your state pension for the period from retirement to SPA so if your state pension including SERPS / S2P was £7k pa you could only go 18 months early on what you have saved so far.

davidscot

As to savings we have just roughly £10k in a mixed range of things including fixed rates and s&s ISA's. The original plan was overpay mortgage to get rid of this then use that cash to save towards retirement (early !! ) Might reconsider the plan based on some answers here but that was the game plan so far. Checked State Retirement age and it's 66, scary thought!

ermine

First off, do you think the extra £100p/month we overpay to mortgage would be worth more in a DC pension? What is a DC pension anyway? Next, would I be able to draw my fund at 55?

yes yes yes A DC pension is a defined contribution pension, the alternative is a defined benefit pension, that used to be known as a final salary pension. You don't often get those any more

The reason it's worth more that overpaying is say you open a DC pension now. Put £100 a month in for three years, that will be 36*100 ie £3600 that you have foregone, but your lifestyle is the same (you've have put it in the mortgage). The taxman will put in £900, you will lose about £200 to various costs and charges associated with the pension. You will, of course, owe £3600*3* your APR, say £540 @ 5% APR more to your mortgage over the £3600. So in that case you are left with a little bit more after the pension. Where this gets interesting is when you put a lot more into the pension, the benefit scales up and the fixed costs become a lower proportion. Toss in your 10k savings and the gain gets more like £2000 You must arrange your affairs so that your pension doesn't go above the personal allowance, but this is not a risk with the amounts you are dealing with

You may do well to seek an independent financial adviser to outline your options. Pensions are complex and it takes time to wrap your head around the wrinkles in the system.

kidmugsy

ermine wrote: »

Toss in your 10k savings and the gain gets more like £2000

If that £10k is your only emergency money I'd suggest that you don't yet toss it into the pension since you won't be able to take it out again until you are 55.

A bit of patience before you do it has a second advantage; you'll see exactly what pension reforms finally get through parliament.

The trick would be to make the contribution(s) in a tax year where you still have enough by way of earnings to justify the £10k in addition to your occupational scheme contribution and your regular monthly contribution.

It might be worth considering whether life would be kinder if you swapped to different (perhaps part-time) work at some point before age 66, especially if it too brought employer pension contributions.

Triumph13

I forget to say, also add in investment growth (net of inflation) on your pot up to the point you retire.

Out of interest, I have also modelled my own situation the other way round to work out what sustainable lifetime income I could expect if i retired at each of the next ten tax years. I found that very enlightening indeed!