Early Retirement: strategy

mania112

I think I would take £36k pa from March... this is topped up in the early years by part time work.

I would then consider investing the £75k you seemingly have spare in a personal pension. I would split this between your wife and yourself - assuming you both earn more than £37.5k you can do this in one contribution (minus any other contributions this year, up to £40k is possible.)

The pension contribution is uplifted by your marginal rate of tax - so 40% this year if you earn enough.

Treat it like a bank account. You can take 25% tax free as and when you need it. Once this is exhausted you can take a taxable income (as much and as often as you like).

When you die, your beneficiaries inherit the remaining funds without a tax bill to worry about.

Why?

1) You will have 2 years less full time work! (unless you use savings and leave now)
2) If you continue with PT work the £4k pa extra you receive by waiting will likely be taxed at 40%, so perhaps not worth waiting for (if we exclude the calculation of annual increases to these figures).
3) One of your options is to 'buy' the extra pension. This carries a risk that you need to survive for a number of years before reaping the benefit of this strategy.
4) I worry about buying extra state pension, for the same reason as #3 but also in case the Gov decide to alter the rules on this (although i'm sure once you've committed to it, it couldn't be changed)
5) Why not keep control of your capital and invest it in a pension? Handing it over to buy extra years or extra pension means you've spent that money. Putting it in a PP means you've still got the £75k as a rainy-day fund and with flexible access.
6) Your desired income in retirement is already below what the FS will pay at age 58 (£24k v £36k)

kidmugsy

View_From_the_Fen wrote: »

1. I appreciate my preferred option takes me close/over the higher tax rate. However I could consider commuting some of the pension into a lump sum to avoid this, although the 1:12 rate is not that generous.

I'm guessing, but I suspect that the actuarial reduction is more nearly financially neutral than a commutation factor of 12:1 is. A rough sum is as follows:

Cost of shedding £4k p.a. is either (i) taking two years early, bringing in £72k before tax, OR (ii) taking lump sum at age 60, of only £48k tax-free. The first looks like the clear winner to me.

In other words, avoiding (some) higher rate tax by drawing your pension early will be more advantageous than taking a lump sum for the same purpose. I wonder whether one of the professionals would care to comment on this point?

Anyway, having rejected the lump sum idea, back we go: to avoid the actuarial reduction or not, by gambling on an unchanged scheme retirement age? In your shoes I might start by seeing if I could use my £75k more effectively on my wife's pension provision.

mania112

Yeah, taking the TFC to reduce the overall tax bill is a bit of a false-economy, because you then have to decide what to do with that cash.

1) Leaving it in the bank removes the annual growth the pension would have had with this money. You'll lose in the long-run because of inflation.

2) It will likely be too much for an ISA.

3) Recycling it in a pension is against the rules (but not impossible mind you).

You could consider a Bond, but then again you'll be wrestling with staying in the Basic Rate tax band to ensure no further tax to pay (plus you have then moved the cash from risk-free to invested).

mania112

Sometimes you have to say 'that's it. I'm there. Time to start spending'

rpc

mania112 wrote: »

I think I would take £36k pa from March... this is topped up in the early years by part time work.

With a target income of £24k, I'd take the £36k and maybe not bother about topping it up!

I would then consider investing the £75k you seemingly have spare in a personal pension. I would split this between your wife and yourself - assuming you both earn more than £37.5k you can do this in one contribution (minus any other contributions this year, up to £40k is possible.)

I would do this if (and probably only if) OP can draw it down at 20% tax rate before the state pension kicks in. Same for the wife - if she can drawdown at 0% before state pension kicks in (assuming she is currently a basic rate taxpayer).

The benefits of a personal pension when your input and output tax rates are the same is limited to the PCLS. In that circumstance, I'd be looking to an ISA instead.

mania112

Sure ISA is ok.

I guess you can double the £15k pa Max ISA contribution for the Mrs and double again for April 2015... so £60k pa can be invested this way.

One thing i'm not sure of:

Now that Drawdown death tax has been removed, is it part of the estate for IHT purposes? I've not seen a definitive response on this. Because an ISA definitely would be.

mania112

rpc wrote: »

With a target income of £24k, I'd take the £36k and maybe not bother about topping it up!

Wow I missed that. I'm adding that to my 'reasons why'!

kidmugsy

Another thing: for your wife, see whether your DB pension offers "allocation" whereby you give up a bit of your pension now so that she'll get a bigger widow's pension eventually. It would be particularly attractive if either (i) you've objective reason to expect that she'll substantially outlive you, or (ii) you have unbalanced pension provision. You certainly tick the second box.

You could think of it as a sort of life insurance that happens to fit your circumstances very neatly.


Here's an example http://www.nhsbsa.nhs.uk/Documents/Pensions/Allocating_part_of_your_pension_to_a_named_dependant_factsheet_(V1)_08.2011.pdf

UPDATE Or you could think of it as buying your wife a "deferred annuity", a very useful investment that's commoner in the US than here. Because it's deferred rather than immediate, it will often be better value.

rpc

mania112 wrote: »

Now that Drawdown death tax has been removed, is it part of the estate for IHT purposes? I've not seen a definitive response on this. Because an ISA definitely would be.

Good point. Pensions are not included in the estate, so this reform is an IHT dodge.

Being able to leave "excess" pension alone to avoid IHT (or any tax at all if you die before 75) is an important consideration for tax planning. Assuming it becomes law, of course.

This is one part of the reforms I quite strongly disagree with, but ironically it seems likely that I will end up benefiting from it.

Linton

rpc wrote: »

Good point. Pensions are not included in the estate, so this reform is an IHT dodge.

Being able to leave "excess" pension alone to avoid IHT (or any tax at all if you die before 75) is an important consideration for tax planning. Assuming it becomes law, of course.

This is one part of the reforms I quite strongly disagree with, but ironically it seems likely that I will end up benefiting from it.

I agree that creating a tax dodge for the wealthy should not be part of the government's pension policy but it isnt that much of an IHT dodge. There is a less than 20% chance that if you live to retirement at say 65 you will die before you are 75. The great majority of people who have taken drawdown pensions will die at an age when there will be a 45% tax on a beneficiary's lump sum.