Life's swerve ball - need to plan differently!

Triumph13

michaels wrote: »

12% not 1% so above hrt 40% + 2%, below 20% (basic rate tax) + 12% NI.

Once you are below higher rate tax it is less clear whether you pension contributions or the 3.6k for your DW make most sense as 75% of yours are likely to be taxed at basic rate (20%) whereas if she draws hers down before getting her state pension then all of hers might be tax free.

Sal Sac for OP probably still wins as he'd be getting 32% relief - 20% tax and 12% NI so £68 becomes £85 for a 25% profit. This is the same profit as for DW, but only if she can get it out before SP at £4.5k pa (£11.5k PA less the £7k rental income he plans to shift into her name) whereas OP only has to avoid the higher rate band in retirement so is a bit more flexible. The key thing to check though is whether or not OP's employer shares any part of their NI savings with the employee - eg mine gives 6% out of the 13.8% they save. If they do then OP contributions continue to be the clear winner.

Rodders2409

Just when I thought it was safe to have a cuppa!

So, I'm OK with the general assumptions and calculations and many thanks for the confirmation.
Now there could be an opportunity to fine tune and manage an increased level of return.

This was mentioned earlier in the thread, but I dread going back that far :-)

So there's the potential to increase my Sal Sac to the pension to the point I drop below the 40% threshold and then I'm paying standard tax but getting an uplift in my pension pot through the sacrifice...is that right?

I thought there was a maximum amount that you could put in as Sal Sac'?
And can you chop and change the amounts you put in?

The other comment about the rental property being part of this in some way with NI...to be honest , goes over my head...help!

jamesd

That's right.

There are two restrictions:

1. It's illegal for your employer to pay you less than minimum wage in any pay period. So they won't ever let you sacrifice below that.
2. The annual allowance of £40k a year plus any carry-forward of unused amounts from the last three tax years.

There used to be restrictions on changing amounts but HMRC removed that for pension contributions a couple of years ago because they were incompatible with pension auto-enrolment law. So you're now allowed by law to change whenever you like. Not all employers will allow it, though. Mine used to do it by email request but recently introduced a form for it so I assume it was quite popular to make changes.

jamesd

The rental property generates taxable income. If that takes your total taxable income after salary sacrifice into higher rate income tax you'll pay higher rate income tax on it. You can get rid of that higher rate income tax by increasing the amount of pay that you sacrifice. When you do that you'll save the 40% income tax you'd pay and also save 12% employer NI because at work this sacrifice will be in the basic rate NI/pay range.

The same applies to any non-work taxable income. I'm getting the 12% NI saving on a fair bit of my P2P lending interest by sacrificing pay down to a bit above minimum wage for the whole year.

Triumph13

If it can be done cheaply, (I'm no expert on this) transferring the rental property to DW still makes more sense as she has unused Personal Allowance. That and paying voluntary NICs for DW should probably be top priority.
You then need to sit down and work out how much you want at retirement, when you want to retire and how much more you are prepared to pay now to get there. You are already well ahead of your original plan of retiring at 60 on £28k pa. Once you have more of an idea on where your priorities lie in the triangle between more money to spend now, more money when you're retired and stopping work earlier, then it will be time to get into the nitty gritty of the best way to achieve those aims. People here will be only too happy to offer advice to you on how best to meet those aims, but only you and your wife can make the decision on what those aims should be.

jamesd

Rodders2409 wrote: »

Really want to know if I'm way out in thinking I can retire at 60 ... Question is ...is that possible if I retire at 60?

You're about ten years out. You can retire at 50 if you want to, though do read the catch I mention later.

In general the answers you've received so far don't include all of your income and investments so they haven't done a particularly good job of evaluating your options.

Using cfiresim, try these inputs:

Retirement end year 2062 because males of your age generally have a one in four chance of living to age 95. One in ten is 100.
Investigate: max initial spending
Minimum Success Rate: 75
Portfolio value: 302000
Spending plan: Guyton-Klinger
Spending floor: Defined value, 16000, I assume that you expect your wife not to live as long as you and will accept a reduction of her state pension of 8k plus another 6k without her around below your specified 28k comfortable level and if necessary in many years would accept this with her around as un undesirable but tolerable trade for more income while you have high confidence of you both being around.
Pension 1 label her SP, amount 8000 start year 2027
Pension 2 label his SP, amount 8000 start year 2034
Other income 1 label rent, amount 7000 start year 2018 end year 2062 same as retirement end and I assume increasing with inflation
Click on run simulation.

Answer: maximum initial spending of 48,683. This is well in excess of your 28,000 specification. The graphs look very unusual because your guaranteed income is 23k and the target is only 28k with a floor of 16k. A critical point is that most of your money just has to bridge the years from now until your state pensions are both being paid, then only 5k a year of more income is needed from investments.

Adjusting to experiment a bit, change the minimum success rate to 90 and the income floor to 28000. Now the maximum initial spending drops to 17,421, failure to achieve your objective for the whole 50 years. You can't get your target income with no flexibility at all and only accepting failure in the equivalent of the worse case historic ten percent of investment periods.

So, with a 90% chance of not having spent all of your money by age 95 and being left only with state pension plus rent, what floor can you use? Change the floor to 20000, assuming loss of her state pension at some point. Initial income now a successful 44,702. That flexibility of income really matters. What about 75%, 95% and 99% success rates? 48,883, 43,241, 29,767. All above your target once you take that income flexibility, though there is a chance that income could drop to 20,000 while she's still alive if you do see a lot of bad investment performance.

What about living longer? Change the end year and rent to 2067, the one in ten chance of living to 100 and the success rate back to 90. Initial spending 44,177 still comfortable. And 100% success rate as well? 23,142 initial income, not high enough but not at all bad. At that level no historic cases would have produced an income below the floor of 20k before you reach age 100. But that should give you a lot of comfort that 28k is fine.

I assume that you place a very high priority on retiring early and spending more at younger ages when you're both around and able to get maximum benefit but anything from 30k to 48k looks OK, depends on how cautious you want to be in planning for really bad investment performance and hence having higher amounts of money left over when you die. You probably have some desire to leave an inheritance so more left over isn't too bad an outcome if so. But I expect that you and your wife together, retired and relatively healthy is most important.

It's vital to use Guyton's sequence of return risk taming approach in your situation, as well as something like the Guyton-Klinger rules. This is because most of your capital drawdown is in the 17 years I've used between now and second state pension and many stock markets are at high cyclically adjusted price/earnings ratios, implying lower than average expected returns, though not the very worst historic investment return cases. If you do see a very bad initial five years, adjust downwards a fair bit early on if you want to stay well clear of your income floor.

What working and saving longer does is get you higher very bad investment return case income levels. So if you do turn out to live through really bad investment returns your income stays higher than otherwise. Or higher income levels in general. But you pay a substantial cost in being retired later. Only you can weigh those decisions between chance and depth of reduced income vs having more time retired with your wife now or soon.

But there is a bit of a catch. Much of your money is in pensions and you're still five years from being able to get at your own pension money. The 20k of savings and 27k in her pension plus the rent isn't going to sustain a 28k income for five years. You solve that with borrowing, a mortgage, repaid over time, not as soon as your reach 55, better mostly after reaching state pension age because then your income uncertainty is reduced. Or by delaying and concentrating on boosting the non-pension savings you most critically need for the before age 55 case.

In addition you have lots of extra safety margin in the form of the capital value of your home, eventually that of the rental property and also knowing that spending tends to drop as people get older, for example about 35% between ages 65 and 80. By the time you'd get to failure cases your spending is likely to have naturally dropped anyway, keeping you away from them. I've also completely ignored the potential for your wife to make £720 a year from pension contributions tax relief between now and reaching age 75, and for you to do some of the same, though taxable so only £180 a year for you. That's still 900 a year of extra income in the riskiest early years of retirement, not at all bad.

For your children, letting them use student loans is fine, but add some extra spending for a few years for parental contributions and also perhaps some lump sums as they reach say age 25 to allow for possible mortgage deposit help, the best use of your money to help them, capital is harder to gather for them than paying off student loans is.

Be sure that you read Drawdown: safe withdrawal rates and form your own opinions after reading the things I link to from there.

Now you have some serious reading and thinking about how flexible you really can be with spending in retirement to do. Take your time, the people here are largely familiar with the issues and options while you probably do need more reading and thinking to get comfortable with the range of choices and decisions to make. But retiring now does look doable if the trade offs in potential lower income later on if investments do badly look OK.

jamesd

The rental property is interesting. Given your cash flow needs, I think it's better to prioritise getting the £720 tax free a year from pension contributions for her if you go for retiring around age 50. That helps your cash flow when you most need it. So you'd need to constrain her to leave unused income tax personal allowance of the £2,700 that pension trickery uses.

Easy enough given the rental income, you could probably switch most ownership to her sensibly given the £7,000 net of costs income level, which still leaves her with some unused personal allowance.

But there's a catch: during the early years if you do go at age 50 or so, you'll have to be drawing on her pension pot and 75% of that money is taxable. While for you during those same years, you have little income.

So a general plan for soon after age 50 retiring looks like you keeping ownership until you've drawn the money from her pension and then swapping ownership to her in time for you to start taking money out of your pensions. That combination keeps it as tax free as possible for as long as possible.

Once you're drawing on your own pensions, her owning all of the income looks best for tax minimisation.

Triumph13

And that, Ladies and Gentleman, is how to completely fry someone's brain.

jamesd

Fortunately they have plenty of time to let their brains cool off after being fried and do more reading.

Rodders2409

Don't know what to say :-)

Do I book some vacation and lock myself away to do this justice?

What's certain is that you've left yourself wide open to more questions....be scared..!!

But many thanks James..