Long-term planning

NYorkshire

Hello, looking for advise/ideas on best options going forward.

I'm a 51yo female in full time employment with a salary (including benefits) of around 80K/year. I'm starting planning for my retirement and would like to see what sensible options are available.

I plan to continue working full-time for the next 7 years, which will take me to the end of my mortgage period, when I will be mortgage free. I currently have a tracker mortgage, remaining debt is approx 90K (without interests). Given the extremely low interest rates at the moment, I'm not planning to use my savings to pay off the mortgage (more below).

I have two pension pots I'm contributing to. The first one was set up by my previous employer and is now a Personal Pension Plan, to which I currently contribute 950 pounds/month, the current value is approx 185K. The other pension scheme is with my current employer, to which I contribute 550 Pounds/months and my eployer contributes 4%.The current value of this pot is approx 60K.

I claim higher tax payer status on the pension contributions, therefore increasing my pre-tax allowance.

I currently have approx 70K in savings, divided in between ISAs (cash and stocks), premium bonds and bonds with varying maturing dates. I also own a property abroad which, if it was to be sold today, would probably generate 80K Euros. The property is rented, and after tax the income from it is quite modest (approx 200 pounds/month). I also have just inherited a modest amount of money from a relative (approx 18K net).

My plan is, as said, to continue working in a full-time position until the age of 58, when I'd like to reduce my working hours (planning to work part-time in the charity/public sector, which will obviously significantly reduce my income, possibly down to 12-15K/year). If I'm in good health I'd like to continue working part-time until the age of 62, at which point I'd like to start drawing from one of the pension pots I have.

Based on this plan I will reach 24 years of NI contribution while in paid work. I plan to voluntarily contribute to NI until the age of 67, therefore I will reach approx 27 years of NI contribution. At 67 I will decide if taking the state pension or deferring is a better idea, depending on the value of the pension pots.

My questions are:

- assuming I remain in the same job/position (therefore salary) until the age of 58, how much increase in contribution to the 2 pension pots should I look at from my salary, considering that I plan to pay the full value of the small inheritance into the 2 pension pots as well? I could probably afford to increase my monthly contribution by an additional 200-350 pounds/month

- what are the best options to supplement my income between the age of 58 and 62 when my salary will drop more than 75%? Selling the property is obviously one option, using the savings is another one, or possibly a combination of both?

- what value of the two pension pots should I aim at when starting drawing from them? If I keep contributing to these pensions at the same level as I do now (approx 1,800 pounds/month combined contribution from myself and my employer) for the next 8 years, what would the projection might be (I know this is difficult to predict, and I'm looking for what the lowest possible value might be, considering the ups and downs on the market)

- is there any other thing I should be doing/looking at now?

I think I will be happy to live a relatively frugal life in retirement, so perhaps something like 18K/year (of current value) assuming I'm mortgage free with the cushion of a bit of savings on the side would be OK.

Thanks in advance

Dazed_and_confused

Based on this plan I will reach 24 years of NI contribution while in paid work. I plan to voluntarily contribute to NI until the age of 67, therefore I will reach approx 27 years of NI contribution.

As you under the transitional rules the number of years isn't really all that relevant.

Have you checked your State Pension forecast on gov.uk to see what you have accrued to date? Usually to 05:04:2019 at the moment.

You need to read past the headline figure, likely to be £168.60, to see your current entitlement. And ignore any COPE figure shown.

kinger101

A few comments;

£245K in pension pots is on the low side for someone on an £80K salary who expects to retire in about seven years. The positive side is you can contribute quite a chunk getting HR relief between now and then.

Let's say you do work for exactly another 7 years, and contribute that £1800 a month.

At 58, at a 4% annual growth rate (after inflation and fees) this gives you a pot of around £495K If growth is only 2.5%, then it's only £456K. The lower number might actually be more realistic, given you'll probably need to derisk somewhat to minimize risk of an equities crash.

An oft-quoted figure for a drawdown, which many think is too ambitions is 4% per annum. So bridging from phased retirement to SPA aside, those pots at best give £20K a year.

This might be enough for most people, but I think you really need to work out what you actually spend in a year. Because the question I ask myself is if you could really live as frugally as you suggest, why aren't you doing that now?

If you're in a position to do so, you should consider dropping yourself back into basic rate income. Each £1 in your pension will attract 15 p of income tax (25% TFLS, then rest at BR) on withdrawal. But it costs only 60 p of net salary. 85/60 = 41.67% uplift.

If I rerun the 4 % and 2.5 % growth rates at £2,767 (£30K pa plus employer's contribution), it's £589K and £545K.

The more you save now, the more options you'll have at 58.

xylophone

You are currently 51, so one might expect that you would have 30+ years NI by now - have you been out of the workplace bring up a family/caring for a family member by any chance? If so, there could be NI credits.

Do check your State Pension Forecast for the current position.

https://www.gov.uk/check-state-pension

Albermarle

If you're in a position to do so, you should consider dropping yourself back into basic rate income. Each £1 in your pension will attract 15 p of income tax (25% TFLS, then rest at BR) on withdrawal. But it costs only 60 p of net salary. 85/60 = 41.67% uplift.

This was also my immediate thought . You should if possible use the max 40% tax relief on pensions contributions , if you can afford it . For a 40% taxpayer , who will be a 20% taxpayer in retirement it is by far the best way to go .

Currently you contribute £18,000 pa . If you contribute another £250 per month , then it will be £21K.
You could then add say 50% of the £18K inheritance in one tax year and 50% in the next.
This is just a guideline as it will depend on your exact salary and each year tax thresholds change .
There are some tax experts on the forum who no doubt will be able to give you more detailed figures

Marcon

NYorkshire wrote: »

I think I will be happy to live a relatively frugal life in retirement, so perhaps something like 18K/year (of current value) assuming I'm mortgage free with the cushion of a bit of savings on the side would be OK.

If you get to retirement and find you aren't happy living the frugal life, it'll be a bit late to do anything about it. If your health fails and you need help at home, or have to go into care, that will eat through your retirement savings. Perhaps 'a bit of savings' might more safely become 'a healthy cushion' ?

NYorkshire

Thank you All for your comments.

As for:

If you're in a position to do so, you should consider dropping yourself back into basic rate income. Each £1 in your pension will attract 15 p of income tax (25% TFLS, then rest at BR) on withdrawal. But it costs only 60 p of net salary. 85/60 = 41.67% uplift.

as suggested by kinger101, what contribution do I need to make to drop to the base rate tax? Apologies if this is redundant, but I can't figure it out myself.

Thank in advance!

Dazed_and_confused

I'm a 51yo female in full time employment with a salary (including benefits) of around 80K/year.

as suggested by kinger101, what contribution do I need to make to drop to the base rate tax?

Much more detail needed to say with any certainty.

What type of pension contribution will it be? There are several types and depending on which it is will impact the amount you need to pay.

Also, what other taxable income do you have?

And salary is irrelevant for tax purposes, it is taxable pay/salary (and benefits) which counts. For example if you pay 10% into a net pay pension scheme your taxable income may well be closer £70k than £80k.

MarkCarnage

As suggested by others above, maximising the contributions now, and benefiting as far as possible from higher rate tax to the maximum possible extent would be the priority for me.

Regarding the bridging of the income gap between 58-62, and just as important, filling the gap between 62 and 67, it might be worth considering a phased drawdown, using the tax free lump sum to bridge the income gap. You have some flexibility with your overseas property and savings reserve as to how to fund different stages. Perhaps top up your income between 58 and 62 from that, then start drawdown from age 62.

For round numbers, let's say your combined DC portfolios are worth £500k at age 62. Moving £100k a year into phased drawdown would allow £25k to be taken as tax free cash each year - this sounds like it would be ample against your estimates. You could either start earlier or finish later if you felt that was more than you needed from it. On the above, you would then have a drawdown portfolio of c£375k left at age 67 (I've ignored any fluctuations in its value in the 5 year period for simplicity). Drawing this at 3-4% a year thereafter, plus a reduced State pension as you describe would give you around £18,000 a year.

Risks? Main one to me is volatility in the value of your DC portfolios in the next 10 years. You have some limited sources of funds to cushion this. Would you contemplate working a year or so longer in the current job if that was an issue? If you were then mortgage free, there would be a lot of headroom to contribute more to the pension fund.

There is some risk in a drawdown rate of 4% too I would argue, though lessened by not starting it until age 67. I use 3-3.5% in my own projections.

Drawdown gives the flexibility to vary what you take from the pension fund over time. I am currently doing similar to the above with mine, using the tax free cash from each phase to maximise tax free income until State Pension age (I will probably draw down some income from the portfolio too at some point, if only to manage my tax bill without going into higher rate band, and to reduce the risks of LTA charge at age 75). I am fortunate enough to have a DB pension underpinning all this too though.

NYorkshire

Thank you MarkCarnage, there is a lot of logic in your advise and I'm going to give this a serious consideration.

Thanks!