Starting my Plan - any advice?

LateStarter

After getting bitten by the dream on Financial Freedom/Early Retirement over Christmas, I've come up with the beginnings of a plan I'd like some feedback on:

About me: Age 53, mortgage about paid off, salary approx £60k.
Current Pension: fund at £150k, employer contribution 5%, me 8% via salary sacrifice.
The goal is to retire in April 2029, 10 years seems a nice even number.

Steps I'm taking:

• Increase pension contribution to 24% to drop net salary under the 40% bracket for 2019/20
• Build up a cash pot to cover a year of expenses - about 22k
• Invest anything else I save in a ISA/SIPP?

Is there anything else I should be looking at? At my age does it matter if I use a SIPP or an ISA?

Thanks
LS

MallyGirl

generally people use ISAs to provide the funds to see them through in the run up to their pensions (DB/DC/state) being available. You haven't mentioned DB so I assume that this is your only pension?
If so then the tax and NI breaks from sal sac probably outweigh other options. Why not just pay more into your company pension?
ISA money could also be used (as it is tax free on the way out) to supplement income whilst avoiding paying tax but you would have filled the ISA with money you had already paid tax and NI on going in.

Albermarle

For a higher rate taxpayer the pension is a no brainer. However as you will have used up the 40% tax relief , it then comes down to a simple decision.
The pension money is tied up until you are 55 but there is still a 6.25% financial benefit compared to an ISA ( presuming the money is invested in an identical way) Which do you prefer ?
Regarding SIPP vs company pension. You need to check out the relative charges and if the choice of funds is OK for you anyway in the company pension. The SIPP will offer a lot more choice but for most people this is not really an advantage . It will probably be a little cheaper but this is not guaranteed if your workplace pension has already competitive charges.

MallyGirl

even if you sal sac well down into the basic tax bracket then the contributions in that bracket are still free of 20% tax and 12% NI. Hard to beat outside of a pension

LateStarter

Yes it's the only pension I've got (the price of a misspent youth ) and it's defined contribution with Legal and General.

So it seems a Personal Pension/SIPP has an advantage. One of the reasons I'd consider an investment outside my company pension is that I'm becoming quite fed of of my current job. I've given myself a year to come to terms with the new management, and I'll look elsewhere if I convince myself the grass might be greener. Also I guess I feel more more comfortable that I could use different pots for different goals; so I could (for example) use the SIPP to cover the years before State Pension and let the company pension continue to grow if circumstances allow.

I'll be sticking to trackers (as has been mentioned here and other sites);the pension is L&G Multi-Index, so I'm currently comparing what seems to be the other top mentions - HSBC Global Strategy,
Vanguard LifeStrategy and Blackrock Consensus. I've read a lot of advice which say I should set my goals, decide the funds, then choose the platform, so I'm taking that approach.

Also, does it matter if I drop feed funds into this (300-400 a month) or put in a couple of thousand every 6 months?

Thanks again
LS

Alexland

Your scheme might allow you to make contributions into your workplace pension efficiently via salary sacrifice and then occasionally partially transfer out lump sums into a SIPP for more choice and potentially lower cost.

Alex

Albermarle

Also, does it matter if I drop feed funds into this (300-400 a month) or put in a couple of thousand every 6 months?

The pension provider will not care which way you do it . From an investment perspective there is different opinions on the best way so I would not worry about it too much .


Normally when you leave a job with a DC pension , it effectively becomes a personal pension and you can still add to it , switch funds etc. I still have one that was started 25 years ago and I still use it for lump sum contributions rather than my current workplace pension. Reasons are lower charges and you can pay by debit card and the customer service is better/quicker. The caveat here is that some older pensions are not set up for drawdown etc and when you come to want to take money you might have to move it anyway .

Spreadsheetman

Have you worked out how much ££ you need in retirement and how large a pension fund you need to accumulate to support that amount?

LateStarter

Spreadsheetman wrote: »

Have you worked out how much ££ you need in retirement and how large a pension fund you need to accumulate to support that amount?

Yes, I've put together my retirement spreadsheets, and worked through various scenarios. It's why I've put 2029 as my hopeful retirement date; I should get to the magic number in 2028, but I've stuck in an extra unscientific year, just in case.


FWIW, my calculated expenses round up to 20k, and I've added 10% contingency to that. 22 - 8.5 (state pension) leaves 13.5k from pension. I've gone for a conservative 3% drawdown, so my target pot should be 450k. Does that seem right?


I'm not quite sure how/if to include inflation in this - none of the online calculators seem to do it.

Spreadsheetman

LateStarter wrote: »

Yes, I've put together my retirement spreadsheets, and worked through various scenarios. It's why I've put 2029 as my hopeful retirement date; I should get to the magic number in 2028, but I've stuck in an extra unscientific year, just in case.

FWIW, my calculated expenses round up to 20k, and I've added 10% contingency to that. 22 - 8.5 (state pension) leaves 13.5k from pension. I've gone for a conservative 3% drawdown, so my target pot should be 450k. Does that seem right?

I'm not quite sure how/if to include inflation in this - none of the online calculators seem to do it.

To make the plan a bit more realistic you need to allow for inflation and growth of investments. That is obviously difficult as both of those future factors are unknowable. You can make assumptions based on historic data though and 10 years is just long enough that those assumptions are more likely than not.

If you assume 2.5% inflation annually over the next 10 years then that compounds to 28% so the 13.5k would need to be 17.3k to keep the same purchasing power. That means that the pot will need to be correspondingly 28% larger to keep the withdrawal rate to 3% - i.e. 577k.

If you have a play with various compound interest savings calculators (or spreadsheet it) starting from 150k and reaching 577k after 10 years then at 5% growth (not unrealistic for an investment portfolio) you'd need to be contributing about 26k pa. (including employer contribution and tax uplift)

You'd then need to add the 8.5k SP equivalent (assuming 10.8k after 10 years inflation) to savings either inside or outside the pension to bridge the years to SP. Is your SP age 67 or 68? If you are retiring at 63 you'd have either 4 or 5 years to bridge, so you'd need another 44k or 55k saved - maybe another 3-3.5k pa contribution (assuming the same level of return as the main pension).

Can you make that level of pension contribution work?

[note: all those calcs are quite crude and ignore income tax - you'd be paying some tax depending on where the personal allowance is by then.]

FatherAbraham

Albermarle wrote: »

For a higher rate taxpayer the pension is a no brainer. However as you will have used up the 40% tax relief , it then comes down to a simple decision.
The pension money is tied up until you are 55 but there is still a 6.25% financial benefit compared to an ISA ( presuming the money is invested in an identical way) Which do you prefer ?

Your analysis is badly wrong, because you're not taking account of the possibility of avoiding the 12% National Insurance levy, which salary exchange offers.