Early retirement help appreciated

montehampster

I anticipate being made redundant shortly and my aim is to take the payment on offer (I think my minimum statutory figure is just under £9,000 but I am hoping for a more generous settlement) and then take early retirement as I will be 62 in October.


The last time I consulted my IFA (sourced by my employer), approximately 9 months ago, I mentioned the possibility of early retirement and was told my pension funds in total amounted to £330,000 of which I could take 25% tax free as a lump sum and put the balance into an income drawdown product. I think I’m correct in assuming the April changes will not adversely affect this?


I have savings of circa £11,000 (ISA/Premium Bonds/Current Account as this pays 3% interest, which is more than more the ISA!), no debts or mortgage and bonds which mature in 2020 and 2022 to cover funeral expenses and any probate costs when I die.
I am divorced with two children so on my death the house and anything else I possess will be split equally between them.


On reaching 65 I am entitled to a full State Pension plus an annual pension of £7,300 from the Financial Assistance Scheme (as a result of the demise of a former employer).


To enable me to continue to enjoy my current lifestyle I would like to have a monthly net income of £2,000.


I appreciate I will probably need the help of an IFA, either the previous one or possibly one closer to home but having read some of the posts on this forum your thoughts would be appreciated as a meeting with an IFA I find rather like a visit to the garage – I know they are speaking English because I grasp 75% of the conversation it’s the other 25% I now need to get to grips with!

LHW99

If you want to find a local adviser used unbiased.co.uk

I have found it useful to go through the paperwork I have before any meeting, and write a list of the questions I have / want answered.

Get an idea of the costs involved in dealing with things in your first meeting, and ideally contact a couple to begin with, to see who you get on with best.

xylophone

With regard to state pension https://www.gov.uk/new-state-pension/overview

Would you wish to use your redundancy payment to make an additional contribution to your pension?

http://www.pensionsadvisoryservice.org.uk/about-pensions/when-things-change/redundancy-and-your-pension

Re post 6 April changes https://www.hl.co.uk/partners/search/new-pension-rules-changes-2015?theSource=PCGSI&Override=1&adg=G+SIPPENI+BDG&gclid=CJXh5fH7tsMCFSPnwgodwVAAsQ

The guide might be worth a read before you see your IFA.

Linton

The April changes wont adversely affect your options.

Do you know what your state pension will be? You may be due a significant amount of SERPS/S2P. Lets say £7500 SP + £7300 FAS = £14800. Subtract £1K tax gives you £10000 net/year after 65 and £70000 to cover you until you are 65 which you need to fund.

Taking out your tax free lump sum at 62 gives you £82500 to fund the 3 years, which is fine.

You need £10K/year net from, in round figures, £250000. That sensibly invested should give you 3.5% drawdown of the initial figure roughly inflation linked if you want a steady figure, rather more on average if you are prepared to vary your drawdown depending on market conditions. Which works out to be £8750 - 20% tax = £7K.

So looking at things pretty crudely it seems you could be a bit short of meeting your aim of £24K net.

Skinnydad

Hi Linton read your response with a couple of questions. When you say a drawdown of 3.5% which equals approx. 7K after tax..does this leave your fund of 250000 still invested and intact? also available to your spouse or children in the event of your demise?

Is that all 250000 would get you in a drawdown.. approx. Even with a good fund like montehampster it does buy you a great deal eh!

Thanks..

Triumph13

Skinnydad wrote: »

does this leave your fund of 250000 still invested and intact? also available to your spouse or children in the event of your demise?


Thanks..

As they would say on QI - 'Nobody knows'.


The actual returns on your investments could vary wildly. The 3.5% is based on having a very low probability of the money running out before you die, even if investments do really badly. If investments do really well then you could end up leaving a lot more than you started with. On average you would expect to be leaving a substantial sum, but averages aren't that relevant here - it's a case of prepare for the worst but hope for the best.

jamesd

It looks as though you can achieve your target using reasonable assumptions.

You need a state pension forecast. Get one. I'll just assume that you'll get £8,000 a year, it could be more or less. So starting in three years you have a base gross income of £14,800. A £2,000 net a month target requires £27,500 gross income so you're initially short by £12,700. A commonly used guideline for income drawdown is that you can take 4% of the initial pot value increasing by inflation each year. That £12,700 would require allocating £317,500 for this purpose to provide your long term income target.

That leaves £330,000 - £317,500 in the pension pot for the time until 65. £12,500. That plus the £9,000 redundancy won't get you to the required £24,000 a year net.

However, I simplified something important: 25% of the pension is available as a tax free lump sum, which means that in reality you can take 25% of the income tax free overall, though there are details that make it better to take the tax free part sooner. I also ignored likely investment growth over the three years.Once this is allowed for you can meet your objective well enough.

Here's the general plan.

Year 1:

Set up an interest-paying current or savings account and pay the £9,000 into it. Once you get a pension lump sum add another £4,000. Set pensions and ISAs to pay into this account. Set up a standing order on this account to pay the £2,000 a month into your normal account. This is a buffer account that smooths out investment income and avoids the need to sell investments during down years. The balance is to be about one year worth of investment income. At times when markets are high top it up to that. At times when markets are down just let it fall. You now have your steady income source and only need to check on things once a year, not a lot of work.

Now take the full 25% tax free lump sum from the pension, all £330,000 / 4 = £82,500. Place the rest into flexi-access drawdown, available only from 6 April 2015, or capped income drawdown before then. Set the drawdown part of the pension to pay you £12,000 a year. This is to use your income personal allowance in the first three years and a bit more so you don't have to change it much. some providers charge for changes and it simplifies life anyway. That's £11,600 of after tax income.

Put your full £15,000 ISA allowance into a stocks and shares ISA and buy income-producing investments that pay interest rather than dividends. Something like Invesco Perpetual Distribution. Choose income units (inc), not accumulation (acc) That pays about 4% tax free adding another £600 to your net income. If you have a spouse, do the same with their allowance.

Put £11,800 more from the tax free lump sum into the buffer account. That reaches your £24,000 net income target for the year.

For the remainder of the lump sum use an investment/fund and share account and buy funds that produce growth rather than income. Use income units, though, because that simplifies CGT accounting. I'll assume no spouse so the lump sum going here is 82,500 - 4000 (to get initial buffer amount) - 11800 (income) = £66,700 here. I'll assume lower than historic growth of 3% plus inflation and that increases to £68,701 in today's money.

The 75% left in the pension pot started at 247,500 and you drew 12000 gross from it leaving £235,500. Add 3% after inflation growth and it increases to 242,565.

Year 2:

Move another full ISA allowance into the S&S ISA, I'll assume it's still £15,000 limit. That's £30,000 in here now and it'll pay you at 4% £1,200 tax free income. Another £11,600 out of the pension after tax leaves an income shortfall of £11,200. Take that from the part of the lump sum that's still invested and that's your £24,000 income taken care of.

At the end of this year you have:
1. £30,000 in the ISA.
2. (68,701 - 15,000 - 11,200) * 1.03 = £43,776.03 in the fund and share account.
3. (242,565 - 12,000) * 1.03 = £237,481.95 in the 75% pension pot.
4. whatever is in the buffer account.

Year 3:

As before, another £15,000 into the S&S ISA, now £45,000 in there producing £1,800 tax free income. Another £11,600 out of the pension 75% pot. Shortfall this year is 24,000 - 1,800 - 11,600 = £10,600. Take that from the fund and share account.

At the end of this year you have:
1. 45,000 in the ISA.
2. (43,776.03 - 10,600) * 1.03 = 34,171.31 in the fund and share account.
3. (237,481.95 - 12,000) * 1.03 = 232,246.40
4. Whatever is in the buffer account.

Now you hit 65.

For simplicity I'll just assume that you can move the rest of the fund and share money into the ISA to get to steady state tax free income from that source, even though it'll take a few more years. You now have:

1. £13,840 income from the state and work pensions, after tax, using your whole personal allowance for this.
2. (45,000 + 34,171.31) = £79,171.31 in the S&S ISA producing £3,166.85 of tax free income.
3. £232,246.40 in the 75% pension pot. At 4% drawing rate this produces £9,289.85 taxable, £7,431.88 after tax income.

Your after tax income is now 13,840 + 3,166.85 + 7,431.88 = 24,438.73 net income, a bit over your £24,000 requirement. I didn't increase the income requirement by inflation, though. If that was 2% a year the 75% pension part of the requirement would go up a bit. The state pension and work pension would have increased with inflation anyway, so no adjustment there, which is why I didn't bother to raise the income - the effect is too small to matter over a three year timespan.

Of course investments go up and down so you aren't going to see exactly 3% up a year. This is just a plan, not the exact numbers that you'll see for investment values. You also don't have the 50-100% safety margin for investment income that I'd prefer to see, so you need to be prepared to drop income if you see a sustained over many years drop in investment markets.

There are various tweaks to this:

A. Some people would prefer to take the lump sum in stages but I don't because there are probably costs for doing each lump sum, so I prefer to set it up once and also set up the income so it doesn't get changed often, just to save a bit of money and/or time.
B. You could pay the £9,000 into a pension to get some tax relief on it and boost its value a little, worth doing, just not a big deal.
C. If you have other savings or investments you could do the same up to the annual pension contribution limit. Do it while you have the earned income to use! You'll make 6.25% on any money you do this with, assuming everything is at basic rate.
D. People like to use different investment growth rates and safe drawing rates. So don't be surprised if every reply and IFA uses different ones, it's normal.
E. You reach state pension age after the flat rate comes in. Each year of deferring increases the income by 5.8%. Notice that's higher than the 4% investment assumption and it's guaranteed for life. It tends to be a good move to defer for a few years if you're in normal good health, say three to five for a woman. Good move for long term income protection and way better than buying a standard annuity. Maybe not so good if you qualify for an enhanced annuity because of reduced life expectancy, check closer to the time. This is a good deal, do it for a few years if your health is normal. It'll increase the certainty of your income and reduce the investment risk part of your combination. You already have so much guaranteed income that it's not a huge deal but it's nice to do anyway.

Triumph13

Epic post Jamesd with some great ideas. I think you went a little awry with the fund and share account for the lump sum though as I make it you've only deducted one of the three lots of £15k you transferred to the ISA It's still definitely a 'cut out and keep' though!

DesG

Epic post JamesD!

One question if I may, why this part:

Put your full £15,000 ISA allowance into a stocks and shares ISA and buy income-producing investments that pay interest rather than dividends.

If it is in an ISA, why does that matter?

jamesd

Triumph13 wrote: »

Epic post Jamesd with some great ideas. I think you went a little awry with the fund and share account for the lump sum though as I make it you've only deducted one of the three lots of £15k you transferred to the ISA It's still definitely a 'cut out and keep' though!

Thanks, you're right, I'll fix it later on Thursday. Fortunately deferring the state pension will add sufficient margin to cover that. Though given that we don't know the state pension income we can't be sure.

jamesd

DesG wrote: »

If it is in an ISA, why does that matter?

I was thinking that I might have to take income from the part of the lump sum that is outside the ISA and explain that dividend distributions are better outside the ISA since no more tax is due on them at this income level. Meanwhile interest tends to imply bonds so it is a sort of counterpoint to growth outside the ISA. But rump of somewhere I ended not going is what happened.