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

kidmugsy

Kangoo2 wrote: »

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.

Then there's a case for transferring the DB pension to some sort of personal pension. If you then die before age 75 the remaining pension pot will be passed to your widow, or child (or pretty much whomever you nominate to the provider), and that beneficiary will be able to draw from it tax-free. It by-passes your estate; there are no IHT complications.

It's such an attractive deal that I can't imagine that it will last long.

Well_excuse_me.

kidmugsy wrote: »

Then there's a case for transferring the DB pension to some sort of personal pension. If you then die before age 75 the remaining pension pot will be passed to your widow, or child (or pretty much whomever you nominate to the provider), and that beneficiary will be able to draw from it tax-free. It by-passes your estate; there are no IHT complications.

It's such an attractive deal that I can't imagine that it will last long.

Can I ask what happens after 75?

jamesd

After 75 the money is taxable to the recipients at their normal income tax rates like any other taxable income.

kidmugsy

Well_excuse_me. wrote: »

Can I ask what happens after 75?

Then when the beneficiary draws from it (perhaps annually, perhaps as a lump) the money is treated as taxable income. Therefore the tax rate might be 0%, 20%, 40%, 60% or 45% depending on the beneficiary's circumstances. But still no IHT.

If that beneficiary doesn't exhaust the pot, then on his death it passes on again, with the tax rules determined by that beneficiary's age at death. Mind you, that assumes survival of the current rules.

ukdw

Couple of questions about the DB pension thinking about how things might look in 5 years time.
1. Does the take at 60 figure £17,900 include any future inflation assumptions or will it increase by inflation by the time you take it at 60, and actually end up being quite a bit larger?
2. Would the £14,300 DB pension taken now increase with inflation? I.e. In 5 years time including inflation increases at say 2% would it be something like £15,800?

If the £17,900 is a projection also including 2% inflation then £15,800 is a bit closer to it, and the difference would get slightly smaller after tax.

jamesd

Numbers are in today's money so extra will be added for inflation as it happens. None is built in to the numbers provided today.

Well_excuse_me.

jamesd wrote: »

After 75 the money is taxable to the recipients at their normal income tax rates like any other taxable income.

Thanks.

kidmugsy wrote: »

Then when the beneficiary draws from it (perhaps annually, perhaps as a lump) the money is treated as taxable income. Therefore the tax rate might be 0%, 20%, 40%, 60% or 45% depending on the beneficiary's circumstances. But still no IHT.

If that beneficiary doesn't exhaust the pot, then on his death it passes on again, with the tax rules determined by that beneficiary's age at death. Mind you, that assumes survival of the current rules.

Thanks.
I'm in a similar situation to the OP, @ 60 I'm entitled to £14500pa, or £70k plus £10500pa with a transfer value of £420k (pension increases 3%min. to 5% max. pa, 50% pension for spouse).
If I transferred out and took £70k lump sum, surely £350k could provide £10.5k pa index linked, for me and then my wife ? Leaving a sizeable pot for the kids (as a pension for them).

kidmugsy

Well_excuse_me. wrote: »

surely £350k could provide £10.5k pa index linked, for me and then my wife ? Leaving a sizeable pot for the kids (as a pension for them).

Nobody knows.

The OP is in bad health and has worries about the finances of his scheme. Those considerations alter the balance of advantage.

atush

kidmugsy wrote: »

Nobody knows.

The OP is in bad health and has worries about the finances of his scheme. Those considerations alter the balance of advantage.

The balance is affected though, by the actual facts which have not been divulged, and the understanding of the OP of their actual LE re the health issues. And the health of the company scheme, which may (or may not) be as bad as they think.

jamesd

Well_excuse_me. wrote: »

@ 60 I'm entitled to £14500pa, or £70k plus £10500pa with a transfer value of £420k (pension increases 3%min. to 5% max. pa, 50% pension for spouse).
If I transferred out and took £70k lump sum, surely £350k could provide £10.5k pa index linked, for me and then my wife ? Leaving a sizeable pot for the kids (as a pension for them).

Yes, it appears that your situation is one where a transfer out is likely to be beneficial since the investment returns needed to match the pension are only 3% plus inflation to preserve all of the capital. Around 15,000 a year should be fine.

Cfiresim is a tool that can be used to examine various possible income levels and you can find a walkthrough of one example here.

To get started on your own I suggest that you change these settings:
Retirement end year: 2055
Portfolio Value: 350000
Spending Plan: Guyton-Klinger
Initial Yearly Spending: 17000 (which normally increases with inflation but not at bad times)
Spending Floor: Defined Value or 10500
Ceiling: 20100 (initial plus 30%)

With that combination you'll find the success rate is 98%, drop the initial spending to 15250 and it rises to 100% with a median average income level of 16775. 100% success rate means that even if the worst combination of investment returns seen in the last hundred plus years was seen the plan would still work and continue to deliver at least the minimum 10500 income, plus inflation on that. Median average remaining portfolio value is 353000, since most conditions aren't worst case.

Cfiresim uses US investments but see the initial post on the thread I linked to for more adjustments to make beyond using Guyton-Klinger's rules that should more than compensate for that.