A frugal early retirement ....

Triumph13

jamesd wrote: »

The savings mean that a higher income can be taken immediately. There's no need to throw money away by taking the pension any sooner than necessary. All you achieve by taking the pension sooner is wasting the part of the savings needed to match the given up income.

If there's a desire to have even higher income now that can be achieved by borrowing against the future income.

It's only those who lack the resources to do something more beneficial who end up forced to take the pension before NRA.

All you achieve by deferring the DB is pushing money from a period when you are short of money, to a period when you already have plenty. I agree that the lifetime total income is likely to be bigger by deferring, but disagree that this is necessarily the correct thing to be aiming for. It isn't always worth waiting for the second marshmallow if you know that you've got a marshmallow tree coming into fruit soon anyway.


Borrowing may be a good compromise solution to help fund deferral for a short period without reducing spending now, but any solution that involves living on £25k for the next 15 years so that they can have £50k in their seventies is unlikely to make practical sense even if it does all add up to more in the end.

andrewf75

I wouldn't hesitate in your position. I fully intend to retire as soon as I have enough to live on. The biggest risk by far in my view is wasting too much of our lives working!

jamesd

Triumph13 wrote: »

All you achieve by deferring the DB is pushing money from a period when you are short of money, to a period when you already have plenty. I agree that the lifetime total income is likely to be bigger by deferring, but disagree that this is necessarily the correct thing to be aiming for. It isn't always worth waiting for the second marshmallow if you know that you've got a marshmallow tree coming into fruit soon anyway.

There is no waiting for the second marshmallow involved. A person with sufficient money can start at the higher income whenever they retire and that's what I suggested they do.

Triumph13 wrote: »

Borrowing may be a good compromise solution to help fund deferral for a short period without reducing spending now, but any solution that involves living on £25k for the next 15 years so that they can have £50k in their seventies is unlikely to make practical sense even if it does all add up to more in the end.

Assuming normal pension age is sixty for most of it that's five years away for one of them and eight for the other. So the cash flows look like this:

Years 1-5: 41k income taken each year. Total cost 205k.
Years 6-8: one of them at NPA, takes their pension. The pension for the other still has to be funded, so do two state pensions. I'll assume that the first pension is 13k now but with no actuarial reduction is 14k and the second 12k now and 13.5k with no actuarial reduction. Cost with that assumption is 16k plus 12k minus 1k, 27k per year, total for three years is 81k. The first pension lump sum probably won't fully cover this.
Years 9-12: Second one takes their pension. Cost is now the two state pensions, 16k per year less the avoided 2.5k of actuarial reduction, so 13.5k per year, total 54k. The second pension lump sum probably won't fully cover this and the later years.
Years 13-15: First claims state pension. Cost now is state pension for one minus the avoided 2.5k of actuarial reduction, so 5.5k per year, total 16.5k.
Later: Now they have the 41k plus the extra 2.5k of avoided actuarial reduction as guaranteed income.

To do all of that will need the lump sum from the first pension and they don't have enough in savings to go the full five years to that one since it costs 205k and they only have 170k. So they have a range of choices they can make, not limited to:

A. Taking the first pension earlier, one to four years before first NPA. That cuts the first five years cost by 13k, 16k, 29k or 42k minus a bit of the lower actuarial reduction I used in later years. That's enough to make the plan work when the pension lump sums are included.
B. Investing. I'd expect to make 17k a year from P2P with 170k after allowing a couple of percent for bad debt. They won't get that much every year because they will be drawing on the capital but it should still add around 30k, enough to allow waiting four years before taking the first work pension.
C. Asset sale, they are already planning to move and this could free up enough from equity.
D. Borrowing, say equity release on the new home to optionally be repaid once both state pensions are being paid.
E. Waiting a little longer to retire, they are already close to what is needed given a few months to summer and more earning.
F. Putting savings into pension to get the tax relief before reinvesting. This might also do the whole job for them, depends how much pay is available since they can't put in more than pay each tax year.
G. Starting below 41k.

They can do some combination of these things and if money gets low just take the first pension and its lump sum then. There's also probably not enough in lump sums from the two pensions to cover the later years but again, it's fairly close and they have the options to cover it.

If they want to start above 41k at the same time it'd probably take equity release but I think that 41k will do nicely for them. Using equity release and some of the other things they could probably start out at the 41k plus the actuarial reductions they avoided level if they wanted to.

I largely ignored tax. By using 41k I really started them out on a higher after tax income than the one they will have once all pensions are being paid because much of the money in the early years will be free of tax. Just using equal after tax incomes would also end up covering much of the difference between capital needed and capital available.

jamesd

It's not obvious but that sort of planning leaves their personal allowances largely unused for five years. That's enough combined to let them take at least £100k plus the 25% tax free lump sum out of personal pensions with no tax to pay. They really can get much of that 170k into pensions with tax relief and out free of tax, if they have enough income to get it in there.

Say all they can do is get in 80k net, and just using basic rate relief that's grossed up to 100k. They could get all of that out tax free, an extra 20k towards the required capital level.

By accumulating the savings they have, they have got themselves into a really excellent position with lots of choices, all of them good.

AnotherJoe

marvinandroid wrote: »

Fantastic advice thank you. I've been paying extra into my civil service pension for over 15 years and hadn't considered a private pension so that feels like a blind spot on my behalf and I will look into it. is it as easy as investing now in a PP with tax relief and then getting the benefit a year later (I'm a 40% tax payer)? Currently, savings are dotted around various tracker and cash ISAs - the latter almost pointless in current low rate environment.

Yes. Do it NOW ! £10k for £6k. Free money. Just be careful to understand what your contributions into your current scheme count as so you dont go over the £40k annual limit.

jamesd

They probably have annual allowance carry forward available from the previous three tax years on top of the 40k so given their pension income levels the real limit is just going to be how much pay they have this tax year and for as long as they choose to work next year.

marvinandroid

Invaluable advice thank you and just to add: we both have DB pensions with 60 pension age (can be taken at 50) which provides the £25k, plus much smaller DB career average schemes available at 55 which we're minded to leave alone unless we really need the income. So, note to self to investigate:
- additional pension to take account of tax relief
- P2P but looked before and average seemed to be 4-7% with lots of noise about them being a car crash waiting to happen
- house sale definitely on the cards to free up further investment though it's hard to see what's more attractive than property...

Overall you have all greatly reassured me and agree with all the comments re live life for today (if you can afford to).

frugal90

Well done, we are in a not too dis-similar position. We are both teachers and will be gone come summer 2018. I'll be 56 and wife 50. We have a combination of SIPPs and cash to run ahead of teachers pensions aged 60. Life is too short not to choose the adventure, you have worked hard for it! Just do it.

jamesd

marvinandroid wrote: »

- P2P but looked before and average seemed to be 4-7% with lots of noise about them being a car crash waiting to happen
- house sale definitely on the cards to free up further investment though it's hard to see what's more attractive than property...

I normally suggest Ablrate and MoneyThing to newcomers. Both are helpful and reliable in their descriptions of loans, barring occasional glitches that each has handled well. Raw interest rate ranges from ten to sixteen percent at Ablrate and ten to twelve percent at MoneyThing, with twelve percent most common. Both do lending secured on some sort of property. Both offer resale markets with no charges, typically a small profit available at Ablrate.

You might be thinking of the stories about Lord Turner, who recanted at a P2P conference late last year, saying he didn't understand it well enough originally.

marvinandroid

Exactly right - it was Lord Turner. I'll look at the two you recommend, thank you.