Early retirement - should i use an IFA?

Fretman12

Hi All

I'm planning to retire at 58 yrs if I can reasonably afford to do so. I have one NHS and another final pot pension plus some savings and a second house that I own and rent. I have some ideas of how I can make my money work but feel this is quite a big step so I may need an IFA. I met one today and was very happy with the initial meeting and i will be seeing another couple before deciding. What I found interesting was his comment that I may not make any more savings by going on my own to set up my final finances after any IFA's fees. I probably would break even cost wise.

I don't mind paying a reasonable fee to get this right but did wonder if you agree with the IFA?

My pot is 180K the house is worth 100K with £400 rental income. My NHS is 10K lump sum with £300 pm. Im looking to see what the best options for the pot and house are and how to draw the money.

So with these finances would you consider using an IFA and that the statement on almost breaking even going alone or with them is fair? Thanks for any feedback

AlanP_2

A few more details may help:

How old are you now? If you are 57+ that is different to if you are 40 now.

Any dependants? For example if you have a partner what is their retirement / pension situation like?

Apart from the DC pension pot any other savings or investments?

Are the NHS figures based on a retirement age of 58 i.e. after any early retirement reduction the scheme would make or for the scheme's normal retirement age?

Have you obtained a State Pension forecast?

Would you consider selling 1 of the houses if you had to?

Any debts?


In simple terms I make it that you will have an income of £13,800 pa based on the numbers above:

£180,000 @3% (notional, "safe" withdrawal rate to see you though for potentially 40 years plus = £5,4000

NHS (12 @ 300) = £3,600

BTL Rent (12 @ 400) = £4,800

Assuming you will get ~ £120 p/week State Pension at 66 that would be an extra £6,240 pa.

Are you thinking of aiming for a "steady state" income the whole way through retirement? If you are you could draw more from the DC pot before SP becomes payable and less after that income stream starts up?

I'm not into BTL property but have seen a few comments on here about how, once you are older, and less inclined / able to do any maintenance, chasing tenants for rent and the like it becomes more hassle than it is worth.

As for the IFA's comment - MAYBE. No one knows how the investments he recommends are going to go over the next 40 years and you don't know how any DIY choices would fare either.

Many people on here are DIY'ing the sums you are looking at and more but they are not typical of the general public.

How confident do you feel about going DIY and what experience, if any do you have?

Whichever way you go I would suggest having a read through some of the stuff on monevator.com, this forum and the "Savings & Investment" one and reading Smarter Investing by Tim Hale. If you go down the IFA route then it won't be wasted effort as you will at least have a basic understanding of some of the issues, options and terminology used.

dunstonh

What I found interesting was his comment that I may not make any more savings by going on my own to set up my final finances after any IFA's fees. I probably would break even cost wise.

That can often be the case. For example, annuities are usually cheaper via an IFA than direct. That is because the IFA is fee based whereas direct is commission based. The fee is usually less than the commission on all but the smallest. or say you use a platform and use HL at 0.45% p.a. An IFA platform will be cheaper than that in most cases.

DIY pricing can vary from low cost to expensive. It is not a guarantee of being cheaper.

If you got the cheapest DIY deal on a platform then you would be cheaper than an IFA on a like for like basis due to the cost of the advice. However, you would have to do your own research and depending on the quality of your research and what you do, your outcome could result in lower returns.

Linton

In addition to the questions above....

Have you carefully thought through what you would want to do in retirement and what standard of living you would want? How much it would cost per year? A reasonable starter for this is how much in total you spending now minus some big expenditures that may nnot apply (eg mortgage, pension payments). Dont rely on just thinking life will be much cheaper in retirement - it may not be.

Fretman12

Hi Alan

Thank you for taking the time to reply and for the in depth thoughts/questions. I'm 58yrs in 14 months time, my partner retires at 63 yrs at the same time on a much smaller combined pensions of £800 pm. Apart from what I mentioned above I will have some savings of 25K when 58. We own the house we both share.

My original thoughts/draft plan had four stages. First stage: Retire at 58 use Rent and Pot pension until 60 yrs. Stage two: NHS pension + Rent and consider to reduce the Pot pension until 66yrs. Stage three: Rent + NHS + State pension + consider to reduce Pot pension; Stage four: at some point post 66yrs sell house that I rent then get it spent before I end up in care or finally pop off

The advice I was looking for from the IFA was around does the above make sense, how do I arrange it and will it last? Health wise I have a stent but pretty fit otherwise but don't expect to make 90yrs and if I do then Im quite happy to live on the State and NHS pensions.

I thought it would come down to advice on taking a draw down vs annuity or combinations of these and a few others.

Thanks for any suggestions/thoughts

Fretman12

Hi Dunstan and Linton

Thank you for replying. Im currently working out a lifestyle costing so will have a better idea after that but I would say I'm not too extravagant in my expectations but a car and the odd holiday would be nice. The IFA did mention about the DIY aspect and I agreed with his statement that their advice and also the security they provide is an extra to consider.

Fretman12

To also I add I would prefer to have more money now then later as I suspect these are my best years to enjoy it.

Linton

Fretman12 wrote: »

To also I add I would prefer to have more money now then later as I suspect these are my best years to enjoy it.

From personal experience: the years after retirement are the best time to enjoy extra money. One has the time to do the things one really wants to do rather than snatching small amounts of time between work. Also one is in a much better frame of mind to really enjoy life without any work related stress.

From observation rather than experience: as one gets to real old age having the money to pay for assistance in general living and to get those jobs done which one is no longere able to do oneself is very very valuable.

Fretman12

All true I suppose it's getting the timing right along with the amounts.

It's probably just dawned on me today that Ive been a bit naive. I thought that my pension, sitting with Standard Life,only needed to be steered into an annuity or Draw down or whatever other combination of products and there would be no charge for that from them. Im wrong on that? Also I may not get the best deal staying with my original provider? The IFA can possibly get me a better deal even after their costs but I have the added value of their experience and their professional insurance. Has the penny dropped for me?

dunstonh

I thought that my pension, sitting with Standard Life,only needed to be steered into an annuity or Draw down or whatever other combination of products and there would be no charge for that from them. Im wrong on that?

1 - standard life products retailed via their own staff have commissions built into them or fees for using their direct sales.
2 - Standard Life annuities are dire in most cases.

So, yes, you would likely end up with a worse outcome doing that.

The worst form of DIY is typically going direct to a traditional insurance company.

jamesd

One thing to watch out for when using IFAs is that they may not use the most up to date investment options and this can do major damage to your income and security. Some things to watch out for:

1. Recommending an annuity when you say you want secure income. If you use drawdown until you reach your state pension age you can get a guaranteed income for life of 5.8% inflation-linked by deferring your state pension. For those in normal health this is likely to be a good idea for perhaps five years, so you can spend five times your state pension level on this, which would increase your state pension payment by 70%.

2. Not recommending the use of peer to peer investments for income. Peer to peer lending-based investing is now available for secured lending (meaning there's actual property that can be sold if the borrower defaults) and also often with protection funds on top of that. with income levels of 8-10-12% and sometimes higher, tax free in an ISA from April 2016, taxable now, this combination of capital security and high interest rate beats just about all of the other income options. While IFAs are able to advise on P2P if they want to, they do have to ask the FCA to have that added to their advice permissions. If your IFA says it's illiquid or rates are only lower than 8% that's a good clue that they don't now much about P2P.

3. The Albion VCT does almost 100% secured lending and expects to pay 10% tax free a year in two 5% chunks. You get 30% of the purchase price refunded by HMRC, capped at your taxable income in the year of purchase, you have to repay this if you sell within five years. As usual, not all IFAs know the VCT options well and if you get one who describes it all as high risk without knowing about the secured lending option, you might want to do a double-take to one who's better informed.

4. Using fixed drawing amounts like 4% or your pot value. The modern alternatives are variable spending strategies like the Guyton and Klinger rules. The income difference is huge: about 50% more income for the same chance of failure.

5. Being a financial adviser instead of an independent financial adviser. This lets them not consider all of the available options, they can instead restrict the options they consider without having to tell you about the things that they are ignoring. And even an IFA might ignore some of the options.

Between outdated drawdown rates, annuities instead of state pension deferral and bonds instead of P2P an IFA using the old ways can easily cost you a third of your possible retirement income. One way to protect yourself is to specifically ask about these things and ensure that you get sensible and well-reasoned responses that compare what's available in these ways with whatever else they suggest.