Does my financial planning for early retirement make sense?- ideas and comments welcome (first post)

OES

Good Evening 

I welcome your advice and thoughts please on my financial planning. At one point I believed I had it all organised and now I am having a wobble thinking I do not want to commit too far to the wrong pension.

Currently in receipt of:

Salary £35k

Pension £21k (index linked at 55) - 5 years to go

Mortgage - overpaying the full 10% yearly - this will I anticipate be paid off in 6 years time

Disposable income £1,000 a month

Savings £30k in ISA 1.5% changing to 1.25% next month- needed for interest free CC debt and interest free loan due next year. Then emergency fund to be replenished over time and ISA’s to be used as a low risk vehicle for this in addition to pension(s)

I am also trying to be tax efficient and contributing as below to reduce my taxable income below £50k

In addition to the pension above I make the following pension contributions;

Private stakeholder pension contributions pre tax relief £300 a month (started Jun 19) options at the end are full receipt but taxed on 75% of it or drawdown or straight annuity - nothing seems as good as the AVC described below. Albeit I could look at a fixed period of pension annuity say 5 years before state pension?

LGPS pension 6.5% of wage approx £200 a month (started Apr 19) tax relief & employer contribution on top.

Prudential AVC default medium risk fund £150 a month (taken from salary pre tax commences Apr 20)

My dilemma is that ideally I would like to fully retire at 60 and my thinking is skewed towards taking my LGPS albeit 7 years early along with my lump sum AVC if the balance is right, I raise this as I intend to contribute £500 plus a month into the AVC soon and I know albeit don’t understand the equation re how much I could take of the AVC tax free when aligned with my LGPS pot. This then brings me onto my stakeholder pension and I scratch my head thinking why did I start this other than potentially a more risk averse investment in comparison to the AVC?

In addition to the above queries on my thinking and with the game plan to retire fully at 60 with the potential maximum benefit of pension income and lump sum - I know a crystal ball is not in existence for how investments will perform.

I appreciate taking the LGPS early comes with a financial penalty but rough estimates on the website with a 1% yearly wage increase show approx £7,000 a year which would be fine. I have 5 more years of contributions to receive a full state pension.

Rough figures on my part again on the AVC return for 10 years at 4% ambitious perhaps but £90k

My stakeholder pension again with continued contributions increasing with inflation and an estimated 4% return may give a pot of £50k at 60.

Do my thoughts make sense, I know my figures are pure estimates?

Should I continue with the stakeholder to spread the risk and make the main pension in receipt of the larger monthly contribution the AVC?

Will I be able to take the full AVC tax free in comparison to the LGPS pot size?

Does taking the stakeholder fully over a set time period i.e 5 years make sense financially?

Can I claim tax paid on pension contributions at 40% back from HMRC, if so is this via self assessment which I complete re HICB. I reduce my taxable income below £50k by paying additional funds into my stakeholder pension.

I hope my ramblings make some sense and I have provided sufficient facts ......could people please assist and advise accordingly. (please be gentle with me)

cloud_dog

There's lots of details here but we are missing the.... What's my number?

What income do you think you will need per year from age 60?

Could you look to not take your LGPS early and contribute to and use your DC pots / savings to achieve this?  Or do the numbers associated with having LGPS AVC and LGPS reduction work in your favour?

OES

Thanks for replying cloud_dog - I am not sure I have or know ‘the number’ wish I did, that said I am drawn to the AVC as I would like a lump sum to use to travel but not at the expense of common sense, if it’s fool hardy to take the associated LGPS early.
i probably could delay taking the LGPS/AVC but then I suggest I would be less active at 67 than 60....although I have no health issues (at present) I hope I am not answering my own questions.....do people take LGPS early? To me it looks like a £2k loss a year....

Dazed_and_C0nfused

I reduce my taxable income below £50k by paying additional funds into my stakeholder pension

That would be very unusual.

Stakeholder pensions tend to be relief at source pensions where you contribute say £100 and the pension company adds basic rate tax relief giving you a total gross contribution of £125.

These types of pension contributions do not reduce your taxable income at all, they just increase the amount of your basic rate tax band.

You would include these contributions on your Self Assessment return and your tax calculation will reflect the increased basic rate tax band.  Note HMRC often change the following years tax code on the assumption you will pay a similar  amount again.  This tax code adjustment is not to allow tax relief from the original contribution (you get that through your Self Assessment calculation) so if you won't be paying a similar amount in the next year you should get your tax code adjusted to remove the pension tax relief otherwise you will end up with a bill for the next tax year.

Relief at source contributions do reduce your adjusted net income which is what the High Income Child Benefit Charge is based on.

Your standard LGPS contributions are much more likely to reduce your taxable income as these will probably be "net pay" contributions i.e. salary £35k less pension contribution £2.2k = taxable pay £32.8k (the figure on your P60).

OES

My error I don’t think I explained myself correctly Dazed....I reduce my taxable income re stakeholder contributions to bring my taxable income (hopefully this is the correct terminology) below £50k re my HICB liability....as I understood this assists and yes I do declare it on my self assessment.....I hope this is correct as I was led to believe...

Dazed_and_C0nfused

I think you may be getting confused between taxable income, which isnt used to calculate HICBC, and adjusted net income which is used to calculate HICBC.

Do you receive tax relief from the stakeholder pension company (courtesy of HMRC) i.e. your £300 has £75 added to give you a gross contribution (or you contribute £240 which is a gross contribution of £300)?

If so those contributions don't reduce your taxable income.  You can check it on your 2018:19 Self Assessment calculation.

Thrugelmir

OES said:

My stakeholder pension again with continued contributions increasing with inflation and an estimated 4% return may give a pot of £50k at 60.

After a decade or so of an extremely strong bull market. Personally I would be cautious of the next five years delivering the long term 100 year average return. Over a 5 year period you are exposed to considerable volatility. Markets should be as long term investments. You may strike lucky. Just don't bank on the money being available. 

What funds are you investing the money into? 

OES

Dazed - thank you for explaining that, I am referring care of being corrected to adjusted net income which I believe does reduce my declared income re HICBC - unless I have incorrectly read your email...I pay £300 and they claim/apply the relief to the pension from HMRC. I declare this on self assessment & have used the HMRC calculator inputting the figures and it reduces my liability re HICBC....

OES

Thrugelmir thank you for replying.... I have not chosen what I am investing in & perhaps naively not that I would know good from bad if told.....don’t shoot me....I have trusted others......please tell me you have not all got your head in your hands saying no no no.....

Thrugelmir

OES said:

Thrugelmir thank you for replying.... I have not chosen what I am investing in & perhaps naively not that I would know good from bad asked.....don’t shoot me....I have trusted others......please tell me you have not all got your head in your hands saying no no no.....

Not at all. Plan conservatively. Seems you are well on the way to a decent retirement. You could remain in employment beyond 60 and accrue further benefits if needs must. 

Dazed_and_C0nfused

OES said:

Dazed - thank you for explaining that, I am referring care of being corrected to adjusted net income which I believe does reduce my declared income re HICBC - unless I have incorrectly read your email...I pay £300 and they claim/apply the relief to the pension from HMRC. I declare this on self assessment & have used the HMRC calculator inputting the figures and it reduces my liability re HICBC....

Relief at source contributions do reduce your adjusted net income so can reduce or completely remove any High Income Child Benefit Charge.

And although they don't reduce your taxable income they do also increase your basic rate tax band which in turn can reduce the amount of higher rate tax payable.

So your net contribution could leave you with a pension fund of £4,500 for an overall cost of c£2.3k (£3,600 paid to the pension company less £900 personal income tax reduction and HICBC of £387 avoided (assuming child benefit paid all year for one child)).