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Early Retirement Plan
MarkAdams
Posts: 18 Forumite
I am yet another early retirement wannabe looking for some advice and comment on my plan. It seems to me that the best way of getting that is to post up as much info as possible along with my workings out. So apologies for the long post. Please feel free to comment about any aspect of it. Here we go:
Current position
Both self-employed and working. Making significant contributions to ISAs and SIPPs. Both have several occupational pension schemes from previous employment which are all Defined Benefit schemes. Both have 35 years of paid up NI contributions so can expect full state pensions at age 67. One kid still at home. Mortgage and debt free.
The intention
Retire in 2 years aged 57. Kids will have flown the nest.
I will have 200k in ISAs and 350k in SIPPs
Partner will have 350k in ISAs and 200k in SIPPs
The number
I know that has been extensive discussion about “the number” and I have read various comments with great interest. For us the number is 40k pa net.
The strategy
Phase 1 - Take income from SIPPs between age 57 – 65 before DB pensions kick in. Leave DB pensions and ISAs alone.
Phase 2 - Take income from DB pensions and SIPPs from age 65 before state pensions kick in at 67.
Phase 3 - Take income from DB pensions and state pensions from age 67 onwards. Top up from ISAs.
Key principles
Minimise income tax liability at each stage.
Maximise SIPP tax free pension commencement lump sums by crystallising SIPPs in a phased way to generate income. Particularly important in the early years when there are no other income sources. Don’t leave any uncrystallised SIPP sums before we die.
Leave ISAs untouched until post-67 when DB and state pension income will put us both over the Personal Allowance threshold.
Leave an inheritance for kids in the form of house, SIPP in drawdown sums and ISAs that minimises inheritance tax (IHT). Need to be mindful of the balance of SIPP/ drawdown and ISA sums left because ISAs count as part of our estate (along with the house) but SIPPs do not.
We accept that life rarely goes to plan and early death or illness may trip us up. Or we may end up having to fund our later-life care and that would erode the inheritance pot.
The plan
Phase 1: 57-65 (8 years)
We will both stop working around age 57 (2 years from now). Work earnings will fall to zero.
We take money from both SIPPs to generate tax free income to the £40k level required by transferring tranches into drawdown to generate PCLSs and take income from drawdown up to the PA.
If I run the numbers year 1 might look like this:
Me
Transfer 30k SIPP into drawdown
Take 7.5k PCLS generated by this event (does not trigger recycling)
Take 12.5k income from drawdown (triggers MPAA)
= 20k income with no income tax liability
SIPP 350k falls to 320k
Leaves 10k in drawdown
Partner
Transfer 30k SIPP to drawdown
Take 7.5k PCLS generated by this event (does not trigger recycling)
Take 12.5k income from drawdown (triggers MPAA)
= 20k income with no income tax liability
SIPP 200k falls to 170k
Leaves 10k in drawdown
This would give us the 40k income required with no income tax liability and without touching our ISAs and DB pension schemes. It would trigger the MPAA for us both. But would not constitute recycling.
We will both have drawn ‘income’ from our SIPPs and therefore the money purchase annual allowance (MPAA) will be triggered (and that’s irreversible once triggered). And it could trigger the recycling rules. But the lump sums are below the >7.5k threshold in the recycling rules and therefore this would not be recycling. I mention recycling because I think that it would be relevant as we are both making significant contributions to SIPPs and the recycling rules can be retrospectively applied to the two years pervious to the year in which the PCLS was paid. Please correct me if I am wrong.
We could then do the same in years 2 to 8. At which point we would both be 65 and our DB pension schemes would start to pay income.
If the above cycle is repeated each year for years 2 to 8 then:
My SIPP falls from 350k to 110k and I will end up with 80k in drawdown.
Partners SIPP falls from 200k to zero and she will end up with 50k in drawdown.
[She will only be able to repeat the 30k transfer cycle six times in full. Then one final time with 20k rather than 30k – giving 17.5k fax-free income rather than 20k. The final year’s income will have to be made up of income from her drawdown pot, to the PA of 12.5k, and an ISA withdrawal of 7.5k – giving a tax-fee income of 20k as required].
Phase 2: 65-67 (2 years)
Our various DB occupational pension schemes kick in and start to pay incomes.
This is estimated at 8k pa for me and 10k pa for my partner.
We would both be able to withdraw small amount of income from our drawdown pots up to the PA without generating tax liability.
I would be able to generate tax free PCLSs by transferring sums from my SIPPs to drawdown but not taking income from drawdown above the PA as that would trigger a tax liability
My partner would not be able to do the same as her SIPP pots will be depleted at this point.
Recycling will not apply as we will be more than 2 years beyond our ‘accumulation’ period and therefore the 7.5k self-imposed cap does not need to be considered.
ISAs are left untouched during this phase.
If I run the number year nine might look like this:
Me
DB pension income = 8k
Transfer 55k SIPP to drawdown (i.e. half the remaining pot)
Take 13.75k PCLS generated by this event
Take 4.5k income from drawdown
= 26.25k income with no income tax liability
SIPP 110k falls to 55k
Leaves 121.25k in drawdown
Partner
DB pension income = 10k
SIPP already at zero so no transfer and PCLS option
Take 2.5k income from drawdown
= 12.5k income with no income tax liability
Leaves 47.5k in drawdown
And year ten is the same cycle.
At the end of the two phase 2 years:
My SIPP falls from 110k to zero and I will end up with 162.5k in drawdown;
Partners SIPP is zero and she will end up with 45k in drawdown.
Phase 3: 67 onwards (?unknown? years but average life expectancy is 83 years for me and 85 for her)
Our various DB occupational pension schemes will still be paying an income.
This is estimated at 8k pa for me and 10k pa for my partner.
Our state pensions will kick in.
Estimated at 8.7k pa each (using current figures)
This will generate an unavoidable income tax liability at age 67 onwards:
Me
8k DB + 8.7k state = 16.7k – 12.5k = 4.2k x 20% = 0.84k 16.7k – 0.84k = 15.8k net
Partner
10k DB = 8.7k state = 18.7k - 12.5 = 6.2k x 20% = 1.24k 18.7 - 1.24k = 17.4k net
Combined DB and state pension incomes after tax = 33.2k
The shortfall in income (6.8k) can then be made up from ISA pots (currently total 550) without incurring any additional income tax liability.
This can likely be maintained indefinitely as growth in the ISA pots will likely offset these small withdrawals.
Even assuming zero growth of all ISAs these levels of withdrawal can be maintained for well beyond foreseeable long life.
If all further income is taken from ISA pots then that would still leave:
Me - 162.5k in drawdown that can be left as an inheritance. Any income taken from this drawdown sum would result in additional income tax liability so only touched as a last resort
Partner - 45k in drawdown that we would treat the same.
Assumptions
No capital growth or long-term falls, i.e. SIPP and ISA investments stay at their current levels. Assuming zero growth makes the plan highly conservative. The risk of falls in value can be hedged to a degree in the short term (by investing in bonds etc rather than shares) but I accept it might !!!!!! up the plan if capital growth were negative for a long period of time. I am betting on stock markets falling for short periods but rising over longer time-scales as they have done in the past.
No changes to current pension, SIPP or ISA rules. This is a big unknown and a significant risk factor in the plan. Changes are likely going to be related to politics and whilst it seems unlikely that any government would vote to cut their own throats we do live in strange times.
Personal allowance and DB and state pensions stay at current values. I have been very conservative here as I know they will go up so will work in our favour in terms of the plan.
I have ignored inflation as that should be offset by my highly conservative approach to investment growth, DB index-linked increases and PA rules etc.
I think that assumptions of zero investment growth and no increases to PA or state pension etc. make this plan very conservative.
Finally I have not made any allowance in the plan for money that we might inherit from our parents (who are still alive). Any inheritances will be of unknown sums at unknowable times. So I have just ignored them and we will cross that bridge when we come to it. Any windfall can be treated as a bonus that offsets some of the risk identified above.
Thanks for reading!
Mark
Current position
Both self-employed and working. Making significant contributions to ISAs and SIPPs. Both have several occupational pension schemes from previous employment which are all Defined Benefit schemes. Both have 35 years of paid up NI contributions so can expect full state pensions at age 67. One kid still at home. Mortgage and debt free.
The intention
Retire in 2 years aged 57. Kids will have flown the nest.
I will have 200k in ISAs and 350k in SIPPs
Partner will have 350k in ISAs and 200k in SIPPs
The number
I know that has been extensive discussion about “the number” and I have read various comments with great interest. For us the number is 40k pa net.
The strategy
Phase 1 - Take income from SIPPs between age 57 – 65 before DB pensions kick in. Leave DB pensions and ISAs alone.
Phase 2 - Take income from DB pensions and SIPPs from age 65 before state pensions kick in at 67.
Phase 3 - Take income from DB pensions and state pensions from age 67 onwards. Top up from ISAs.
Key principles
Minimise income tax liability at each stage.
Maximise SIPP tax free pension commencement lump sums by crystallising SIPPs in a phased way to generate income. Particularly important in the early years when there are no other income sources. Don’t leave any uncrystallised SIPP sums before we die.
Leave ISAs untouched until post-67 when DB and state pension income will put us both over the Personal Allowance threshold.
Leave an inheritance for kids in the form of house, SIPP in drawdown sums and ISAs that minimises inheritance tax (IHT). Need to be mindful of the balance of SIPP/ drawdown and ISA sums left because ISAs count as part of our estate (along with the house) but SIPPs do not.
We accept that life rarely goes to plan and early death or illness may trip us up. Or we may end up having to fund our later-life care and that would erode the inheritance pot.
The plan
Phase 1: 57-65 (8 years)
We will both stop working around age 57 (2 years from now). Work earnings will fall to zero.
We take money from both SIPPs to generate tax free income to the £40k level required by transferring tranches into drawdown to generate PCLSs and take income from drawdown up to the PA.
If I run the numbers year 1 might look like this:
Me
Transfer 30k SIPP into drawdown
Take 7.5k PCLS generated by this event (does not trigger recycling)
Take 12.5k income from drawdown (triggers MPAA)
= 20k income with no income tax liability
SIPP 350k falls to 320k
Leaves 10k in drawdown
Partner
Transfer 30k SIPP to drawdown
Take 7.5k PCLS generated by this event (does not trigger recycling)
Take 12.5k income from drawdown (triggers MPAA)
= 20k income with no income tax liability
SIPP 200k falls to 170k
Leaves 10k in drawdown
This would give us the 40k income required with no income tax liability and without touching our ISAs and DB pension schemes. It would trigger the MPAA for us both. But would not constitute recycling.
We will both have drawn ‘income’ from our SIPPs and therefore the money purchase annual allowance (MPAA) will be triggered (and that’s irreversible once triggered). And it could trigger the recycling rules. But the lump sums are below the >7.5k threshold in the recycling rules and therefore this would not be recycling. I mention recycling because I think that it would be relevant as we are both making significant contributions to SIPPs and the recycling rules can be retrospectively applied to the two years pervious to the year in which the PCLS was paid. Please correct me if I am wrong.
We could then do the same in years 2 to 8. At which point we would both be 65 and our DB pension schemes would start to pay income.
If the above cycle is repeated each year for years 2 to 8 then:
My SIPP falls from 350k to 110k and I will end up with 80k in drawdown.
Partners SIPP falls from 200k to zero and she will end up with 50k in drawdown.
[She will only be able to repeat the 30k transfer cycle six times in full. Then one final time with 20k rather than 30k – giving 17.5k fax-free income rather than 20k. The final year’s income will have to be made up of income from her drawdown pot, to the PA of 12.5k, and an ISA withdrawal of 7.5k – giving a tax-fee income of 20k as required].
Phase 2: 65-67 (2 years)
Our various DB occupational pension schemes kick in and start to pay incomes.
This is estimated at 8k pa for me and 10k pa for my partner.
We would both be able to withdraw small amount of income from our drawdown pots up to the PA without generating tax liability.
I would be able to generate tax free PCLSs by transferring sums from my SIPPs to drawdown but not taking income from drawdown above the PA as that would trigger a tax liability
My partner would not be able to do the same as her SIPP pots will be depleted at this point.
Recycling will not apply as we will be more than 2 years beyond our ‘accumulation’ period and therefore the 7.5k self-imposed cap does not need to be considered.
ISAs are left untouched during this phase.
If I run the number year nine might look like this:
Me
DB pension income = 8k
Transfer 55k SIPP to drawdown (i.e. half the remaining pot)
Take 13.75k PCLS generated by this event
Take 4.5k income from drawdown
= 26.25k income with no income tax liability
SIPP 110k falls to 55k
Leaves 121.25k in drawdown
Partner
DB pension income = 10k
SIPP already at zero so no transfer and PCLS option
Take 2.5k income from drawdown
= 12.5k income with no income tax liability
Leaves 47.5k in drawdown
And year ten is the same cycle.
At the end of the two phase 2 years:
My SIPP falls from 110k to zero and I will end up with 162.5k in drawdown;
Partners SIPP is zero and she will end up with 45k in drawdown.
Phase 3: 67 onwards (?unknown? years but average life expectancy is 83 years for me and 85 for her)
Our various DB occupational pension schemes will still be paying an income.
This is estimated at 8k pa for me and 10k pa for my partner.
Our state pensions will kick in.
Estimated at 8.7k pa each (using current figures)
This will generate an unavoidable income tax liability at age 67 onwards:
Me
8k DB + 8.7k state = 16.7k – 12.5k = 4.2k x 20% = 0.84k 16.7k – 0.84k = 15.8k net
Partner
10k DB = 8.7k state = 18.7k - 12.5 = 6.2k x 20% = 1.24k 18.7 - 1.24k = 17.4k net
Combined DB and state pension incomes after tax = 33.2k
The shortfall in income (6.8k) can then be made up from ISA pots (currently total 550) without incurring any additional income tax liability.
This can likely be maintained indefinitely as growth in the ISA pots will likely offset these small withdrawals.
Even assuming zero growth of all ISAs these levels of withdrawal can be maintained for well beyond foreseeable long life.
If all further income is taken from ISA pots then that would still leave:
Me - 162.5k in drawdown that can be left as an inheritance. Any income taken from this drawdown sum would result in additional income tax liability so only touched as a last resort
Partner - 45k in drawdown that we would treat the same.
Assumptions
No capital growth or long-term falls, i.e. SIPP and ISA investments stay at their current levels. Assuming zero growth makes the plan highly conservative. The risk of falls in value can be hedged to a degree in the short term (by investing in bonds etc rather than shares) but I accept it might !!!!!! up the plan if capital growth were negative for a long period of time. I am betting on stock markets falling for short periods but rising over longer time-scales as they have done in the past.
No changes to current pension, SIPP or ISA rules. This is a big unknown and a significant risk factor in the plan. Changes are likely going to be related to politics and whilst it seems unlikely that any government would vote to cut their own throats we do live in strange times.
Personal allowance and DB and state pensions stay at current values. I have been very conservative here as I know they will go up so will work in our favour in terms of the plan.
I have ignored inflation as that should be offset by my highly conservative approach to investment growth, DB index-linked increases and PA rules etc.
I think that assumptions of zero investment growth and no increases to PA or state pension etc. make this plan very conservative.
Finally I have not made any allowance in the plan for money that we might inherit from our parents (who are still alive). Any inheritances will be of unknown sums at unknowable times. So I have just ignored them and we will cross that bridge when we come to it. Any windfall can be treated as a bonus that offsets some of the risk identified above.
Thanks for reading!
Mark
0
Comments
-
Just an observation , why are you mentioning the MPAA and recycling, when I can't see at any point after you commence drawdown that you add to the pensions ? Therefore it is of no consequence to you ?0
-
Reading your detailed and well planned retirement strategy, I am thinking maybe you should be the one giving advice, rather than the other way around !I am yet another early retirement wannabe looking for some advice and comment on my plan
The only point I would make is that with over a Million quid in SPPS and ISA's between you, and probably around half a Million in future DB benefits + full SP 's , then I would not worry too much about the exact detail and minimising tax at all stages .
One of the joys of having plenty of money is that you do not have to worry about it too much , or spend too much time counting every penny, or worrying over paying a bit more tax .0 -
From a quick run through it all seems reasonable.
Details
- you assume you will have full State Pension as you have 35 years NI. However you also both have DB pensions which could reduce your SP if you were contracted out of SERPS. So have you got an SP forecast: https://www.gov.uk/check-state-pension ?
- life expectancy isnt a very good criterion for assessing a pension plan as there is a 50% chance you will exceed it.0 -
Thanks NoMore and point taken
I mentioned recycling because my understanding is that HMRC can look back two years before a PCLS has been taken. So a large PCLS (>7.5k) in year 1 of retirement would be recycling if a large contribution had been made the previous year. And we are both doing just that.0 -
Thanks Abermarle
It's reassuring to hear and learn from other's experiences.
I guess like most people who get to this point we are facing a big lifestyle change and the £ is the main worry. Want to get it right and not make any schoolboy errors.
As for me being the one to give advice - most of this stuff has come from reading these MSE forums.0 -
have you looked at this: https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/Thanks NoMore and point taken
I mentioned recycling because my understanding is that HMRC can look back two years before a PCLS has been taken. So a large PCLS (>7.5k) in year 1 of retirement would be recycling if a large contribution had been made the previous year. And we are both doing just that.0 -
Thanks Linton.
Yes - good point. We were both contracted out for part years. But we are in the process of paying up full years and will be done well before SP age
And yes I take your point about life expectancy being an average figure. I have every intention of living to 113. Hopefully there will be £ to fund that.0 -
My only question (tongue in cheek) is why are you waiting until you are 57.
A very well thought out plan and based on your numbers I would be retiring at 55 and start drawing down on my SIPPs.Money SPENDING Expert0 -
Thanks Spreadsheetman
Yes - good link
And the pruadviser pensions-recycling webpage (sorry but as a new poster the forum won't let me post links)
- where it makes it clearer that the 2 years are both forwards and backwards of the tax year in which the PCLS was taken
As I understand it so far.0 -
That's a valid question bluenose1
And the answer is that we are not empty nesters yet and so our time is not really our own. Not to mention the £s. The plan is to travel a lot post-retirement and we can't do that with <18 at home.
And I don't think either of us are in the right place mindset-wise to step away from work yet. This plan is part of the build up to that step change0
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