Can anybody check my very rough figures?

Rowbo

Hi there,

I’m trying to pull together our retirement finances to form a bit of a plan. I’ve been reading this page and other early retirement pages/blogs for little while now but still don’t feel confident enough to know if we are on the right track. We are a couple with 12 and 9 year old kids. Husband works full time (just changed jobs last November) and I have a small therapy business. We’d love to retire early if possible - or semi retire. We have a mortgage of £103k with 14 years left paying approximately 2%. We are aged 41 and 40.

Main salary: £66600
2nd salary: £6000 (ish)

Pensions:
DC
1: £9000 (mine)
2: £17000 (husbands)
3: ??? Trying to track this one, likely to be very small. (Mine)
DB
1: 3500 per year age 65 (husbands)
2: 4000 per year age 65 (husbands)
Current DC (husbands)
15% from us - just about to increase from 7.5%
7.5% from company

Other:
LISA - one year in, paying max amount to ensure bonus each year. Therefore, £5000 going in each year to a vanguard 80 investment. This is in my name.
Investments - ready to invest £250 per month now emergency fund is in place.
Mortgage - have £250 a month to over pay or to invest with the option to pay off mortgage in approximately 8/9 years.
State pensions - should both receive full amount at around age 67 or 68. Maybe!

I think that’s it. There is still potential for my husbands salary to increase over the years and once the mortgage is paid off we will have another £650ish to save each month.

One think I haven’t accounted for is any kid related costs, uni, cars, weddings, homes, etc?

As for how much we would need to live on, basic amount would be £24k, more comfortable amount would be £32k gross. Based on some very rough calculations.

So, how do you think we are looking?? Do you think it’s worth us speaking to a financial advisor to make sure everything is in place?

stoozie1

You don't seem to be making use of your personal tax allowance in retirement.

Also worth considering your position if your husband were to predecease you.

You could contribute up to £6k gross into your pension per annum to offset this.

Rowbo

stoozie1 wrote: »

You don't seem to be making use of your personal tax allowance in retirement.

Also worth considering your position if your husband were to predecease you.

You could contribute up to £6k gross into your pension per annum to offset this.

Thank you for your reply. I had wondered about this. We’ve been focusing on my husbands pension because of the 40% tax relief but would be open to setting up a pension for me if this was the most sensible plan.

I need to do a bit more reading up on how DC pensions pay out. I thought with the current pension rules that we would be able to take those lumps of money to do what we chose with? Could we not choose to split it into our names then to cover both tax free allowences? Or have I got this very wrong?

DairyQueen

Rowbo wrote: »

T
I need to do a bit more reading up on how DC pensions pay out. I thought with the current pension rules that we would be able to take those lumps of money to do what we chose with? Could we not choose to split it into our names then to cover both tax free allowences? Or have I got this very wrong?

Yes, you can do what you choose. Big problem will be income tax when drawing down. Only 25% will be tax free and the rest will be taxed as income. The trick is to try and max-out your individual tax allowances.This is one reason why it's advisable for each partner to have a decent pension. Often a couple has far too much in one name (and far too little in the other).

If I understand you correctly you are asking whether you can transfer your pensions between you for tax purposes? You can't. The 'owner' of each DC will have to pay tax discrete from their partner. Exactly like PAYE when you are working. If one partner is over-pensioned, and the other under-pensioned, the result is a higher tax bill as the lower-pensioned partner can't transfer unused tax allowance (other than the married person's allowance if partner is not a HRT).

michaels

As many years as you can afford it your dh should sal sac into pension down to 50k so you get child benefit.

jamesd

The mortgage looks like a big opportunity for improvement, switching to say a 30 year term to free up more money for pension contributions. Could then repay with pension tax free lump sum if desired.

You can't move money still in a pension between people except after the death of the person whose name it was in. For death before age 75, 100% of the pension pot can be taken tax free at any age, all at once or whenever desired.

The person with the pension can take 25% of any portion of it as a tax free lump sum from age 55 and can place the remaining 75% into a flexi-access drawdown account from which taxable money can be drawn whenever desired. Taking any of the taxable money causes a cut from 40k to 4k in the amount of pension contribution allowance.

Using tax free lump sum money to shift money between spouses will usually beat getting less income tax, NI and child benefit savings on the way in. It's nice to be even on the way in if the reliefs are the same but they often aren't.

With two state pensions of 8.5k each and 7.5k of DB this takes you to 24.5k from state pension age. Getting to the target using the Guyton-Klinger drawdown rules would take twenty times the shortfall, so 20 x 7.5k = 150k.

A regular savings calculator shows that each 15.90 a month invested with 4.5% after inflation and costs growth produces 10k in the pot, so ignoring current pots that 150k requires 15 x 15.90 = 238.50 month of gross pension contributions.

The lump sum calculator says that with the same 4.5% growth over 27 years the current 26k would grow to 87k, reducing the monthly requirement by about 87 / 10 x 15.90 = 138.33 to 100.17.

To allow for earlier retirement go back to the regular savings calculator and use one year less for each extra year early, playing with the monthly amount until the total reaches the desired income. So one year early with 32k target and 7.5k DB is a desire for 24.5k which takes an extra 41.50 a month for 26 years at 4.5%.

Worth doing the calculations for both the target 32k and minimum 24k to give you the acceptable range.

Using something like the Vanguard Lifestrategy 80% fund would be a reasonably suitable investment choice to achieve that growth rate but I haven't tried to assess whether you can handle the occasional 40% or so drops that can be expected. At least until you're comfortable making more active decisions.

All numbers are in today's money, meaning after allowing for inflation.

Kynthia

While your husband should be maximising the 40% relief by contributing enough into the pension to be a basic rate tax payer, this also has the benefit of getting you child benefit and the higher amount of childcare vouchers (if his employer offers them). Child benefit should be in your name to get the NI credits in case your earnings ever drop and you don't get a qualifying year otherwise.

At the moment the concern is you won't have enough to live on should he predecease you as most DB pensions pay 50% or less to a spouse. This may sort itself out over the next decade or two if he's only now contributing to a DC scheme.

However once your husband has put enough in to maximise the employer contribution and use the 40% tax relief (don't forget childcare vouchers and other salary sacrifice schemes will also go towards this) he should stop. Then further contributions should go into a pension in your name where you will get the contributions crossed up even though you don't pay tax. What pension and how much depends on whether you are self employed or a limited business so more info would be needed to advise on this.

Do you both have life insurance?

campbell19925

Rowbo wrote: »

1: £9000 (mine)
2: £17000 (husbands)
3: ??? Trying to track this one, likely to be very small. (Mine)

Was it a workplace scheme or a private pension?

Use this link: https://www.findpensioncontacts.service.gov.uk/

I's great for tracing old pensions.

Triumph13

If you have an emergency fund in place then your top priority has to be to get DH's taxable pay down to £50k. Assuming no other income / taxable benefits then after his current 15% pension contributions his taxable income is £56,100. Contributing another £6,100 to a pension will only cost about £1,860 as with two kids the child benefit clawback means his marginal tax rate is about 58% at the moment!


Next priority is to use up any remaining higher rate tax band with pension contributions.


Only after that should you then look at making pension / LISA contributions in your name.


Overpaying the mortgage or building up investments outside a pension scheme only make sense if a) you are worried about stability of employment, or b) you expect to be able to retire before the age at which you can access your pensions - currently 55 but expected to rise to 58.

jamesd

Kynthia wrote: »

once your husband has put enough in to maximise the employer contribution and use the 40% tax relief (don't forget childcare vouchers and other salary sacrifice schemes will also go towards this) he should stop.

If the husband is in a salary sacrifice scheme and she isn't, he'll get 12% NI saving on pension contributions in the basic rate range while she won't, so him making the contributions will continue to be best for the household.

She's in the income range where salary sacrifice is undesirable because it would deny her the income tax relief.

jamesd

Triumph13 wrote: »

Overpaying the mortgage or building up investments outside a pension scheme only make sense if ... you expect to be able to retire before the age at which you can access your pensions

Even then, extending the term and repaying with pension money is likely to be best.