SIPP, LISA and early retirement income

rundmc-k

Hello everyone, this is my first post in this part of the forum, but I have spent quite a lot of time reading lots of threads here relevant to my situation.

I'd appreciate your thoughts/advice on my savings/pension plan to theoretically retire at 58 or earlier.

My background: I am about to turn 36, work in the NHS, and am a higher rate taxpayer (by 5-10k). I am partly in the 1995 NHS pension scheme, where I will be able to draw (roughly) 24k lump sum & 8k per year from age 60. I am mostly in the 2015 CARE scheme where I will draw pension at state pension age (currently 68 for me).

Firstly, I'm aware I'm making some massive assumptions in the following (e.g. health/personal circumstances, continual work, gov not changing rules/thresholds to all of this), but that in mind, I feel that age 68+ is covered. At that point I will be drawing 95 & 2015 scheme pension, and state pension. I will hopefully not need any more than that. It is age 58 - 68 I'm thinking about. I am thinking of starting a SIPP & LISA now and use them this way:

Lets say at age 58 I have a SIPP worth 100k.
I take one off 25% tax free lump sum + a 12.5k salary from SIPP per year for age 58/59 = 25k salary (no tax to pay)

At age 60 I have 75k into a LISA (5k for next 15 years) and a 1995 scheme TFLS of 24k. Add a completely made up (but hopefully underestimate) 5k interest accruement to the LISA and that's 104k tax free. Spread that out between ages 60-67 (13k per year)

So age 60-67:
13k + 8k (95 scheme pension) + 4.5k (reduced withdrawal from SIPP) = 25.5k salary (no tax to pay)
SIPP will now, by the age of 68, have given me 86/100k (ignoring interest) tax free
So to achieve that it would involve putting 4k per year into a SIPP, that would be topped up to 5k, and 20 years down the line would sit at 100k.

With this theory, I could ensure a 25k+ "salary" from age 58 til death, without considering any other savings such as S+S ISAs. Those could be a bonus to use during those years, or to retire earlier than 58 if necessary/wanted. So far I haven't done any of this, but hoping to get started if it seems logical. Any thoughts or advice would be gratefully appreciated!

Mr.Saver

rundmc-k said:

At age 60 I have 75k into a LISA (5k for next 15 years) and .... Add a completely made up (but hopefully underestimate) 5k interest accruement to the LISA...

I really hope you would use a S&S LISA, because 25 years (to age 60) is a very long time frame. If you are thinking about a S&S LISA, then you are massively underestimating the compound interest. Contributing 5k gross per year for 15 years, then 10 more years with no additional contributions, you should end up with a LISA pot of more than 100k in it when you are 60 years old, assuming annual real growth rate of 2%. Even if you take less risk, assuming annual real growth rate of 1%, you should still have a nearly 90k LISA pot.

rundmc-k said:

So to achieve that it would involve putting 4k per year into a SIPP, that would be topped up to 5k, and 20 years down the line would sit at 100k.

Again, you are underestimating the power of compound interest. Assuming annual real growth rate of 1%, 4k net (5k gross) per year for 20 years will give you over 110k SIPP pot.

Since you are underestimating both the LISA and SIPP end values, I guess you'd be fine as long as the pension and LISA rules don't change.

rundmc-k

Thankyou for your response. Yes I was talking about a S+S LISA. I only added on the 5k just to make the figure easily divisible by 8. If it had already been divisible I probably wouldn't have added anything on. So yes, I agree, I was deliberately massively underestimating/ignoring compound interest for the sake of showing (myself mainly) that even without factoring in additional interest that there would still be a functional 'salary' using this plan.

Good to know you think it would be reasonable. Is it a better system than say, putting as much into the SIPP each year to bring me out of higher tax band? (Whether that be 5k or 10k)

Alexland

I don't see why you wouldn't both contribute enough into pensions to avoid higher rate tax and invest in a LISA with your basic rate income provided it was affordable? You might say that with a good NHS scheme you don't need that much retirement income but the LISA can be used for other things such as gifting money to children, buying cars, recycling into your partner's pension, etc.

rundmc-k

I guess my main thought was there wasn't much point in putting say, 10k instead of 4k into the SIPP each year, just to avoid higher tax rate, as I wouldn't necessarily need that amount at age 58 considering the further incomes arriving at 60 & 68.
Plus it would mean more of the SIPP being taxed at 20% on the way out... but if that means avoiding the 40% tax I'd pay on that extra 6k by not putting it in the SIPP, perhaps it would be much more sensible! I'm not sure now