Retirement Plan Critique

JPG82

Hi,


I am currently going through the NHS choice 2 process and as a result I have started to look more closely at our retirement plans. I was wondering if I could have some advice on our plans.


A bit about us:-


My wife and I both work in the NHS and have done for the last 10 years. We have a son and are hoping for another soon. We are both 32 year old.


The only debt we have is our mortgage which is approx 155k. We are currently overpaying this by 250 a month.


We save 200 a month into a stocks and shares isa and have done for the last 2 years. We also have an emergency fund that would pay mortgage for 5 months if needed.


Plan

• Continue to overpay the mortgage and hopefully be mortgage free by 50 {don't foresee needing to move again}
• Continue to save in stocks and shares isa for 30 years increasing amount saved as children leave nursery/become mortgage free.
• Retire as early as we can - this is the area I need advice on.

Our SPA is currently 68 however we would like to go as early as possible.


I have started planning for this with the above savings and have looked into our NHS pensions {taking the 2015 scheme changes into consideration}.


From my calculations we can leave at 63 on approx 2500k a month joint pension post tax. My sums show me that we would need 2000k a month to live the lifestyle we currently live so we are happy with that. However if we stay until 65 {and buy out 3 years of pension - unsure how to do this - I need to speak with nhs pension people} we could get approx 900 a month more post tax. We are currently debating this however my gut feeling is to still go early.


My main question apart from any advice on our plan is assuming the stocks and shares isa grows at an average rate
what Is the best way to use this pot in retirement? Draw a monthly sum from it until SPA or its all gone? I am unsure exactly of how but I have heard of investments that generate a monthly income - does anyone have any information on this?


Finally are there any ways I can improve our plan? Would I benefit from a SIPP for example?


thanks for taking the time to read and thanks for any advice/tips etc

Triumph13

If you are happy that the DB pensions will give you a comfortable income in retirement, then the obvious thing to do if you want to retire early is to use the savings you are currently putting into the ISA to fund the first few years of retirement . You can then take the NHS pension without actuarial reduction ie only reduced by having a lower number of years service, not by taking it early.


£200 a month (increasing in line with inflation) for 30 years would be expected to give you your £2k a month for between 5 and 6 years depending on investment returns if you keep using the ISA.


If you put it into a pension instead though, you do MUCH better. Let's use the fairly conservative figure of £120k after 30 years contributions to the ISA with an average of 3% real return. This translates to 5 years retirement at £24k pa.
Assuming you are both basic rate tax payers then, on current tax rates, if you put it into a pension instead the £200 a month would be turned into £250 a month by the tax relief. This means your £120k becomes £150k. If you spread this over 5 or more years of retirement you get to take it all out tax free - 2 people's personal allowances each year plus the 25% lump sum. The tax relief by using a pension has therefore moved you from funding 5 years of early retirement @ £24k pa net to being able to fund 6 years @ £25k net.

atush

What rate is your mtg?

Your S&S isas will help you retire earlier, but i'd think about putting the 250/m into a personal pension or Sipp (or split it into one each for both of you as you both have a PA to sue) and use that to retire early?

JPG82

Thanks for he replies.

Triumph - this is the point where I get confused. Am I right in thinking you are suggesting we still go at 63 and use the investment pot to supplement our pension until SPA?

Could we go at 60 in that case and not take pension until 63 but live of savings for 3 years (would the nhs pension be reduced as we would not have contributed for 3 years)?

I have recently discovered the tax benefit of SIPP saving however my wife is uneasy about locking money away until 55. From what I've read I think once kids are in school etc I will save between s&s isa ans sipp.

Atush - our rate is currently 3.29% for the next 4 years. I agree re sipp but as explained wife doesn't like the thought of money being locked away - out of interest if we saved in a sipp and he named person died could the remaining spouse access the money straight away or would they have to wait until 55?

On a side note I've does anyone have any good advice sites or books on pensions as I've can't seem to find detailed info out there for a 30 something like me looking towards the future. I asked at work but it's only for these close to retirement. This forum has been helpful though.

Thanks again

JPG82

Thanks for he replies.

Triumph - this is the point where I get confused. Am I right in thinking you are suggesting we still go at 63 and use the investment pot to supplement our pension until SPA?

Could we go at 60 in that case and not take pension until 63 but live of savings for 3 years (would the nhs pension be reduced as we would not have contributed for 3 years)?

I have recently discovered the tax benefit of SIPP saving however my wife is uneasy about locking money away until 55. From what I've read I think once kids are in school etc I will save between s&s isa ans sipp.

Atush - our rate is currently 3.29% for the next 4 years. I agree re sipp but as explained wife doesn't like the thought of money being locked away - out of interest if we saved in a sipp and he named person died could the remaining spouse access the money straight away or would they have to wait until 55?

On a side note I've does anyone have any good advice sites or books on pensions as I've can't seem to find detailed info out there for a 30 something like me looking towards the future. I asked at work but it's only for these close to retirement. This forum has been helpful though.

Thanks again

Triumph13

I'm not an expert on the NHS pension so can't comment on the options / value of making the extra contributions to bring your pension age forward 3 years. I'm also not clear whether or not you are including state pension in the figures that you quoted. I had assumed not. If you are then you need to get out your spreadsheet and plan out year by year how you smooth your income.


My comments were on the assumption that you were ignoring state pension. If you pay the extra contributions to bring your pension age forward to 65 and can still afford the £200 per month then my suggestion to go as early as possible would be:

• Retire at 59 and live on £2k a month off the proceeds of the private pension for 6 years, fully depleting it; then
• Take NHS pension at 65; then
• Take state pension at 68.

If you value a more even income over going earlier then you could go early 60s and use the private pension to fully finance the years to 65 then replace the state pension for the years 65 to 68. This way is less tax efficient as some of the private pension would be taken in years where you had no unused PA.


Using a pension rather than an ISA gives 25% more cash if you can get it all out tax free as described which is why I would definitely be using one. Personally though I wouldn't be putting the money into a pension YET in your situation. If you park it in a S&S ISA for the time being you should be able to transfer it across to a pension (and get the tax relief) over the latter part of your career. Not only does this give more flexibility (as your wife wants), but you have the possibility of tax relief being higher in the future - either because one or both of you become higher rate tax payers or if they bring in a flat rate of relief higher than BRT which some people are pushing for.

JPG82

The amount stated wasn't taking SP into account just nhs pension.

I have thought about us going at 60 then taking pension at 65 in the meantime living of savings however the 1 thing I can't get my head around is this:-

We need x amount to live off and going at 65 will provide x amount.

So if we go at 60 and not take pension until 65 would we still get x amount still or would that be decreased as we haven't contributed for 5 years?

Sorry if I'm being stupid - I think the answer is x would be reduced by 5 years of contributions if I understand CARE schemes correclty.

As for waiting for a sipp I think that's the right choice for us - wait a few more years.

Triumph13

JPG82 wrote: »

So if we go at 60 and not take pension until 65 would we still get x amount still or would that be decreased as we haven't contributed for 5 years?

That is correct. Assuming salary just rises with inflation your pension is number of years service x accrual rate less any actuarial reduction for commencing the pension early.


If you go early but don't take the pension until its normal date you avoid the actuarial reduction, but you do suffer from having less years of service. If your pension forecast says something like predicted pension of £18k based on 30 years service at retirement date then if you go 5 years early but defer taking the pension until the normal date your forecast pension would be 18 x 25/30 = £15k.


I have no idea how this kind of arrangement interacts with the special rules in the NHS scheme about paying extra to go at 65 instead of 68. Someone here may, but otherwise it's a question for your pension administrators.

JPG82

Thanks that's what I thought.