Early retirement - what is the best way to use pension and savings

Kangoo2

Hi, I would like to retire at 55 which is this summer. I have a defined benefit scheme with a transfer value of £380k. I also have 3 smaller pots altogether come to 70k in DC pensions and savings of 300k.
I cannot afford to live off the annuity now or at 60 (when it reaches it maximum) so will need to top it up. I lose 4% per annum taking it early, ie I lose 20% taking it at 55


I would like to know


1. Is it better to use savings first to live off and then use pensions later when they are likely to be worth more later?
2. or take the annuity now and use DC pension pots as drawdown till it runs out, then use savings to top up my annuity?
3. Is there any better way of using the all the pensions and saving?


I hope you can help me with this
Thanks

maximumgardener

It will boil down to how much income you need ? and for how long.?

makes sense to leave your DB pension till it maxes at age 60, IMO

you could invest the £370k in a range of decent funds and drawdown from that or a mix of ISA's & DC.

£25k per year?

HappyMJ

Kangoo2 wrote: »

Hi, I would like to retire at 55 which is this summer. I have a defined benefit scheme with a transfer value of £380k. I also have 3 smaller pots altogether come to 70k in DC pensions and savings of 300k.
I cannot afford to live off the annuity now or at 60 (when it reaches it maximum) so will need to top it up. I lose 4% per annum taking it early, ie I lose 20% taking it at 55


I would like to know


1. Is it better to use savings first to live off and then use pensions later when they are likely to be worth more later?
2. or take the annuity now and use DC pension pots as drawdown till it runs out, then use savings to top up my annuity?
3. Is there any better way of using the all the pensions and saving?


I hope you can help me with this
Thanks

I would use your savings first allowing the fund to grow to it's maximum when you're 60.

Turn the calculation around something that is 80% of X in 5 years needs to grow by 25% to reach 100% of X in 5 years. You will also have inflation increases and age based increases so I'd leave it where it is as it will be worth much more in 5 years.

You could take 25% of the DC pensions when you're eligible but as you have plenty of cash savings I'd use that first.

When you do take it you will still have some cash savings left which you won't need to take quite so much of each month to supplement the income you are getting.

edinburgher

In the immediate term, you will want to investigate how much you can pay into DC pensions before retiring (and whether you have any unused allowances from previous years). You may be able to give your total pot a huge tax boost by doing so.

Sounds like you have ample savings to bridge the gap between retiring and taking pensions.

Personally? I'd leave the DB pensions until 60, top up the DC by as much as possible and live off the savings (sheltering these from tax as much as possible via ISAs etc.)

xylophone

Have you obtained a new state pension statement to establish your "starting amount"? https://www.gov.uk/government/publications/application-for-a-state-pension-statement

It seems that you have contracted out for many years so that your starting amount will be less than NSP.

If you propose giving up work altogether at 55, you might wish to investigate making voluntary NI contributions if the above is the case.

It would be better to leave your DB pension deferred until Scheme NRA - you would then live off your savings /investments until you could draw it.

You might wish to consider opening a personal pension in this tax year and contributing as much as possible in your circumstances - even when you have no earned income, it will be possible for you to contribute £2880 net per annum and receive tax relief of £720 added to the pension.

http://www.thepfs.org/yourmoney/find-an-adviser/ might be of use.

kidmugsy

You've had some excellent suggestions above.

I suggest that you check how to do draw what you need tax-efficiently. For example, be aware that your Personal Allowance against income tax is £11k for 16/17, and is pencilled in to be £11,500 for 17/18 (except in case of Brexit when it would fall to thruppence ha'penny and anyway you'd turn into a toad).

On top of the £11k tax-free you are allowed up to another £5k tax-free for interest payments (if your earnings in 16/17 will have already driven your income above £11k then that £5k starts to taper down). On top of that you are allowed another £1k of savings allowance (if higher rate taxpayer, £500) which also refers to interest.

For example, suppose that your annual earnings will come to exactly to £11k. Then with £6k of interest you'd pay no income tax, and could supplement your income by drawing capital.

If your "savings" are partly investments, then another balance that would be free of income tax would be earnings £11k, dividends £5k, and interest £1k. Thereafter your dividends would have to pay 7.5%.
Of course, any interest or dividends in ISAs are tax-free anyway, but you'd probably want to leave them to accumulate there while spending money that's outside tax shelters.

In short, by a combination of planning income and drawing capital you should be able to meet your needs without paying much income tax. You'll also have time to tuck more capital into ISAs before your DB pension begins in five years time.

kidmugsy

Two other thoughts

(i) Is the financing of your DB scheme secure?

(ii) If some of your savings are in fact investments, you'll want to avoid Capital Gains Tax if you sell some. The annual tax-free allowance for CGT is currently £11,100.

bigadaj

How much is the db scheme worth in annual terms?

jamesd

Kangoo2 wrote: »

Hi, I would like to retire at 55 which is this summer. I have a defined benefit scheme with a transfer value of £380k. I also have 3 smaller pots altogether come to 70k in DC pensions and savings of 300k.
I cannot afford to live off the annuity now or at 60 (when it reaches it maximum) so will need to top it up. I lose 4% per annum taking it early, ie I lose 20% taking it at 55

So, easy thing first, don't take the defined benefit pension until it reaches the normal retirement age of 60. Spend other money, borrow on cheap credit cards or use mortgage lending because all of those things will be less costly to you than taking it before age 60.

The defined contribution pensions worth £70k and the savings of 300k are a far better choice to live on until age 60 is reached.

Kangoo2

Many thanks for the excellent advice...there is a lot to consider.


The DB pension will pay £14300 pa at 55 and £17900 pa at 60. However my main concern about the DB pension is that it may not be secure and I have a couple of health problems that mean I am unlikely to have a long retirement.
All the savings are in the bank, no investments.
Live in a rural area and so there are very few independent financial advisors around, hence many tahnks for all your help.

HappyMJ

Kangoo2 wrote: »

Many thanks for the excellent advice...there is a lot to consider.


The DB pension will pay £14300 pa at 55 and £17900 pa at 60. However my main concern about the DB pension is that it may not be secure and I have a couple of health problems that mean I am unlikely to have a long retirement.
All the savings are in the bank, no investments.
Live in a rural area and so there are very few independent financial advisors around, hence many tahnks for all your help.

£14,300 times 25 is £358,000
£17,900 times 20 is £358,000

If you live past 80 you're going to get £3,600 more every year.

You would need £120,000 invested at 3% to get £3,600 per year.

I would use the cash savings until you can claim at 60.

You could also get state pension of £8,100 per year at some point. You can continue to contribute to ensure that's maximized.

That could give you a fairly reasonable £26,000 per year in today's money plus inflation. Is that enough to live off?