when is enough, enough? long term planning

Mistermeaner

See a lot of posts about ‘do I have enough to retire’ and ‘what is the number’

A slightly different question on which I would be interested in the views and opinions of others;


For context I 40, 4 kids ages 1-13. Partner is 35. I work she doesn’t. Lucky enough to earn well and have been prudent enough to also save well. Between us in our DC pension pots (no DB) and our LISA’s we have £400K as of today.

We comfortably can pay £50K a year into our pots (£40K into my pension and £5K each into our LISA’s)…. I’ve ignored but we will also put the £2780 max into her SIPP each year as well.

Some quick fag packet maths; if we pay this £50K per year in for just the next 4 years, and our pot earns growth of 5% we will be over a £1mil in 11 years….. when I’m 51 and she is 46 (and the kids will be 11-24)

Change that growth to 4% and the million is reached at age 53

3% growth and we hit the million at age 58 (when I can start withdrawing my pension)



Its really got me thinking about whether we need to start considering when ‘enough is enough’…. As nuts as it sounds….. but because of the power of compounded growth and being in the fortunate position of what I presume is a pretty big pot for folk our age it looks like we will comfortably hit ‘the number’ (£1mil ish) and this is assuming modest growth and only paying in at our current rate for 4 more years.

As the majority of the pot is in my pension I am at risk of hitting life time allowance and the horrific tax cliffs this imposes…. However likewise if I choose not to pay into the pension or reduce payments in I miss out on the tax benefits and pay a punitive marginal rate

Taxation is so punitive for modest-high earners like myself (around £100K-£150K) because of things such as child benefit withdrawal, reduced personal allowance, tapered annual allowance etc. – almost feels like without the benefit of tax savings of paying into the pension it isn’t worth the sacrifices to time and stress that these earnings require…. And if one is potentially going to hit the lifetime allowance then paying into pension is likewise folly.

I am kind of thinking that 4 more years of payments will do and then I could look for another line of work that pays a fraction of what I am on now but gives me a better work life balance… at that point the youngest will be starting school and my partner could potentially return to work – there’s a huge difference in take home and tax efficiency in e.g. 2 of us earning £40K each vs 1 of us earning £80K

Rants about the (IMO) stupid rules around pensions and the arbitrary cliff edges built into the current taxation system (tapering etc.) aside what would others potentially do in this situation?

We still have a mortgage to pay and kids to raise (which I am well aware will only get more expensive!) and can’t access this pot until age 58 (assuming the legislation ever gets passed) but what would be the best thing to do over the next 18 years?

Certainly in the short term (next 4 years) it seems worthwhile I keep working as I am, my partner stays at home and we max the pension and LISA’s… however after that I am not sure there is a benefit in continuing this way…

Interested in views, thoughts and opinions

MarkCarnage

£1m doesn't buy as much income as it used to......sounds and is a big number which many would give eye teeth for, but it would buy £25,000 with 3% escalation rate aged 58 with 50% spouse benefits.....

Yes, a well constructed drawdown portfolio could do better, with a little extra risk, but I would still suggest that it wouldn't be lot north of £30k.

LTA will have increased with inflation and in 15-20 years time will probably exceed £1.5m, whilst your ISAs have currently no cap. If you are worried about LTA at some point then start putting more into ISAs - you mention £5k LISA but worth using your ISA allowance of £20k too as tax free on way out.

I agree that LTA is a wrong headed stealth tax, and a tax on the success of your pension, but keep an eye on it and it shouldn't be a big problem, though the age 75 test may catch more people.

You are in a decent position already, I would keep going with that for now, review it periodically and if the work/life balance needs adjusting in a few years, then do that. Sounds like that's what you are angling for and it might well make sense.

Albermarle

Taxation is so punitive for modest-high earners like myself (around £100K-£150K)

I think you should forget about the 'modest' bit and just accept you are actually a high earner. Not Super high maybe but 5 times the average wage …..

As the majority of the pot is in my pension I am at risk of hitting life time allowance and the horrific tax cliffs this imposes…. However likewise if I choose not to pay into the pension or reduce payments in I miss out on the tax benefits and pay a punitive marginal rate

Worth keeping in mind that you only pay LTA charge on amounts above the limit . If you are getting employer contributions and 40% tax relief it can still be worth while to keep contributing ( although better if you and/or partner would only be a 20% taxpayer in retirement ) You need to get the calculator out.

and our pot earns growth of 5%

5% after inflation is a high growth : 5% including inflation is more middle of the road and means you will catch up the LTA more slowly as it also grows with inflation.

Linton

What I would do:
1) Determine desired income in retirement
2) Identify options: eg ignore LTA and accept any penalty tax or not, put extra money into S&S ISAs rather than or as well as pension for early access at cost of higher tax, different retirement dates etc etc
3) Create a number of specific scenarios
4) Make a year by year income/expenditure/investments spreadsheet plan from now until death of each scenario incorporating the relevent tax calculations
5) Decide an optimal scenario and follow the plan.

Your situation is complex so unless you have some numbers it will be difficult to make a rational decision.

gm0

2009 a bit older than you (44 then) but a similar story 1 of 2 of us working, kids going to secondary.
Always away working. Lots of travel. Tired (or travelling) at the weekend. Single earner household. Not in a good place - starting to burn out after >20 years of it. Elder care starting. Stress monster.

And the decade since - sabbatical + 10 years of contracting, working less, at home more, making a small fraction but enough. No corporate middle management guff. No HR paperwork. No rictus grin while delivering the latest C suite half truths to the young.

Enough cashflow pre 55 is the bit to get right. I had paid my mortgage by that point so "uncertain" employment held little fear with a redundancy cheque in hand. I did get slightly worried at one point along the way as work comes in bursts and periods of drought.

The massive pay off assuming you can make it add up financially is the "time" you get back with your family and the reduced stress etc. Any amount of money later can't buy back time not spent on building family relationships before the kids leave. You also don't know what will happen. May or may not get the chance later. Funny how you rediscover mortality when elder care hits in your 40s

One health warning - depending upon the sector you work in - don't underestimate the ageism of the employment market. Mid-40s plus. Can be difficult to get another permanent job. Can be very tricky indeed. I was a bit casual about this having not tried to get a job for over 20 years. Jump knowing where you will land and with a buffer or be reconciled with contracting or more casual forms of work away from former career.

Good luck

michaels

I work 3.5 days a week due to the marginal tax rates I face and a desire for a better work life balance - I see it as having some of my retirement early - I may have to work more years before I can afford to retire but as they are 'short years' the total amount of work done will be less for the same overall income as it is more tax efficient this way.

Audaxer

Mistermeaner wrote: »

As the majority of the pot is in my pension I am at risk of hitting life time allowance and the horrific tax cliffs this imposes…. However likewise if I choose not to pay into the pension or reduce payments in I miss out on the tax benefits and pay a punitive marginal rate

If you decide to stop paying into your pension because of reaching the Lifetime Allowance, surely you could still benefit from paying a total of £40k per year into S&S ISAs (between you and your wife)?

I am kind of thinking that 4 more years of payments will do and then I could look for another line of work that pays a fraction of what I am on now but gives me a better work life balance… at that point the youngest will be starting school and my partner could potentially return to work – there’s a huge difference in take home and tax efficiency in e.g. 2 of us earning £40K each vs 1 of us earning £80K

If you want a better work life balance, and both can walk into jobs paying £40k pa (still a very good salary for most people) then it seems a sensible thing to do. On that amount of income I'm sure you would still be able to top up your retirement pot by putting more into S&S ISAs to supplement your pension.

Mistermeaner

Albermarle wrote: »

Worth keeping in mind that you only pay LTA charge on amounts above the limit . If you are getting employer contributions and 40% tax relief it can still be worth while to keep contributing ( although better if you and/or partner would only be a 20% taxpayer in retirement ) You need to get the calculator out.

5%

Hi - understand that lta charge only applies on amounts above the allowance but why do you say we need to get the calculator out?

As I understood the charge is basically 55% of anything above the allowance so even with 40% income tax it's better to take the cash in pocket rather than in the pension isn't it ? (Or have i misunderstood)

TN1984

Mistermeaner wrote: »

As I understood the charge is basically 55% of anything above the allowance so even with 40% income tax it's better to take the cash in pocket rather than in the pension isn't it ? (Or have i misunderstood)

Partly. If you take surplus as a lump sum, then yes it is a 55% tax charge. But you can also opt to take it as income (which includes moving it over to the drawdown element of your pension if that is what you have), in which case the tax charge is 25%, as you still pay your marginal rate of income tax on the way out. If you deduct 25% and then 40% from a number and compare it with taking 55% off the whole number, you will see it works out the same.

What this means though, is if you can extract some of the money within basic rate in the future, you have improved the position compared to just accepting the 55% lump sum charge (e.g. £100 less 25% then less 20% leaves £60 as opposed to £45).

Also worth bearing in mind the lifetime allowance is increasing each April with inflation, so by the time you reach 58 it could be somewhere in the region of £1.3 to £1.5 million depending on inflation (and future legislation changes of course).

Dazed_and_confused

Personally I'd push the boat out and put the maximum £2,880 into her pension!

I’ve ignored but we will also put the £2780 max into her SIPP each year as well.

Alexland

We are in a similar position (but still in 30s with younger children) and have somehow accumulated even more in pensions and LISAs. Under the current rules we could recycle some of the LISA money into my younger wife's pensions between my 60th birthday and her 75th birthday.

Our spending is low so we may have already have enough for a modest early retirement but we keep contributing each month for tax efficiency (although the LTA worries me) and so that my wife has enough for after I am gone. We might eventually buy her an annuity, which is wasteful, but she would prefer a reliable inflation linked income for life.

For childcare reasons we are both working reduced days in fairly convenient jobs. There is still some mortgage although I have just applied for planning permission for an extension (not that we need more rooms). We have also been saving & investing to pay university costs. After the kids go to school it might give me a bit more freedom. Like you I fancy a mid-career change maybe taking a pay cut to change industry and become a financial planner to IFA or something similar. My current job doesn't give me the scope to help people.

Alex