What are the flaws in my retirement income plan?

RecliningInPeace

Hi,

 I'm 51 and hoping to retire when I turn 58, so am moving to more detailed income planning. Below are my circumstances and income plan; I would be really grateful for any input and help in filling the gaps in my knowledge and understanding. In the simplest terms, if I want net £40k p.a. increasing with inflation, retire at 58, live to 95 (why not be optimistic!), I’d need a pot of about £1.5m ((95-58)*40) if pot growth > inflation. But it would be good to challenge the simplicity and tease out a few more details, for example:

• Are there obvious flaws, incorrect assumptions, or room for improvement in the plan?
• Should I take the SIPP element (the ‘Uncrystallised Funds Pension Lump Sum’ (UFPLS)) once a year and deal with the tax reclaim, or take it in monthly chunks? My understanding is I can take UFPLS as often as I want to.
• Should I take a bigger tax-free chunk of my SIPP on retirement (up to the 25% limit) to cover the first few years, and then move into a drawdown product later? As long as I stay out of tax-paying range per my plan below, I don't see the benefit of this.
• Should I stop overpaying on my mortgage, 'retain' a portion of that borrowing, take advantage of low interest rates and use the money I would have spent on overpayments to instead put more into the SIPP?
• How do I continue to contribute to National Insurance once I stop working, as I'll be a couple of years short of 35 years' contributions by 58?
• By drawing so little from the SIPP each year, am I wasting an opportunity to have more income, even if higher drawings would increase the tax bill? Especially as we have no kids to leave it to.
• Is the split between ISA, SIPP and dealing account overcomplicating it? Should I just draw from the ISA (and some dealing account to use CGT allowance) first, then move to the SIPP once ISA is nil? Or is that wasting the personal allowance?
• Anything else?

 My circumstances:

• Earn about £100k a year, married, no kids or dependents, spend very little beyond good meals and good holidays (remember those?!).
• DC Pension: Contribution is £1.7k p.m.; I put in more than what the employer will match; projected value at 4% net growth by 58 is £300k.
• SIPP: I put in £1k p.m., so gross £1,250 p.m. (£15k p.a.); projected value at 4% net growth by the time I'll be 58 is £900k.
• I sometimes put ad hoc payments into the SIPP to get to the £40k annual allowance.
• ISA: I've only recently started using the full annual allowance; projected value at 4% net growth by 58 is £300k.
• Premium Bonds: Emergency fund (around £30k in there). Projected value by 58 £50k (Will increase balance if limit increases).
• Dealing account: To reduce the risk of exceeding the pension lifetime allowance by too much, I keep this account. Projected value by 58 is around £100k. Might switch to putting more into this if SIPP/DC grow above expectations.
• Mortgage: House is worth around £750k, we overpay mortgage by £600 p.m. to pay off when I turn 58. We plan to sell the house and use about half the proceeds to downsize in the UK and the rest to buy a second property somewhere sunny to spend 3-6 months each UK winter there.
• State Pension: I have 25 years of full contributions.
• My OH earns around £110k p.a., but has a bit less in the way of SIPP and ISAs due to a period of redundancy before and during COVID; had to stop contributing and use savings; has a DB scheme from years ago (good for around £10k p.a.) and will have full State Pension.

Income Plan: Around £40k net p.a. should be enough to maintain our living standard (along with £20-£30k from my OH’s side). The plan is to draw annually as follows, until state pension kicks in, when I can adjust (or just enjoy the extra £9k):

• SIPP: £16,666 in the form of UFPLS; Tax nil. Adjust up in line with personal allowance increases.
• ISA: £20,000; Tax nil.
• Dealing account: £1-4k; Tax nil as gross is within CGT allowance.
• ISA and dealing account portions can be increased to increase the £40k p.a. in line with inflation.
• Premium Bonds: Continue to use only as an emergency fund; any Ernie pay-outs will be a bonus. Any withdrawals will have no tax impact.

 I look forward to hearing your views. Thanks!

Thrugelmir

RecliningInPeace said:

• DC Pension: Contribution is £1.7k p.m.; I put in more than what the employer will match; projected value at 4% net growth by 58 is £300k.
• SIPP: I put in £1k p.m., so gross £1,250 p.m. (£15k p.a.); projected value at 4% net growth by the time I'll be 58 is £900k.

On what basis have you projected 4% linear growth. Are you using the same assumption for your GIA? The only certainty about stock markets is uncertainty.  I'd only worry about the LTA when you are fortunate enough to exceed it.  

RecliningInPeace

Thanks for your thoughts Thrugelmir.
The 4% assumption (yes I applied it to the GIA as well - on the assumption you were referring to the dealing account as General Investment Account) is based on a somewhat conservative take on long-run returns*, acknowledging potential substantial short- to medium-term volatility (as the past 12 months have reminded us). Just thought I had to start with some number  .

* Example long-run returns I looked at: FTSE 30 years at 9.9% to 2018 (an article which also points out volatility), global equities 5.2% post-inflation over 120 years, S&P returned annualised 9.8% for the 90 years to 2017 and 7.9% from 1957 to 2018, DJIA at 5.4% from 1896 to 2018. (I used hyperlinks to evidence the references, but when I tried to post, was told that I need be around for longer to post links.)

green_man

You certainly may need to keep an eye on LTA IMO. 

If you look like exceeding it then:-
- Might be preferable to max out ISA savings to give a bit of extra flexibility.  

- If you trust your OH you should be ensuring they are maxing out their pension contributions even at the expense of you saving less. 

I have recently started drawing my SIPP and I am doing it via 1 yearly UFPLS,  this has turned out the cheapest from a charges perspective in my case. Each UFPLS is multiple forms and charges it’s not just transferring money out like from a bank account.  So when it gets to this stage look at the charging structure of your provider.

RecliningInPeace

That is really useful, thanks green_man.

TVAS

Pension
When you get to 58 take out the gross of 40k net as tax free cash each year until your State Pension age. You will probably still have some TFC left so the amount can reduce as state pension can kick in. This means no tax to pay. Each year you will have a combination of crystallised and uncrystallised funds. Your idea of taking a partial amount let's say just to make the maths simple 10k 25% TFC 25% income is stoopid because you are paying tax when you do not need to from age 58 until you have exhausted 25% of the fund as TFC. Also I know you want to stop at 58. Let's say you are bored shitless an an exciting work opportunity comes your way for 6 months If you only take TFC the employer can contribute more than 4k to a pension scheme, As soon as you take income you are limited to 4k. I know this is unlikely but you don't how you will cope with retirement until it happens, especially if all your mates are still working. 

Non Pension funding
I would fund ISAs going forward although not tax advantages going in, there are tax advantages going out i.e. no tax, and able to take at any time. Also if you need a pot of 1.5 million currently 500k roughly exceeds the LTA so it makes sense to save in non pensions if you end up paying punitive tax on a third of your pension fund.

State Pension
You need 30 years NI conts for full basic state pension the rules changed in 2016.

National Savings
Premiums bonds do not increase so I don't understand how you get to 50k unless you put another 20k in it.

Mortgage the house value is not relevant the mortgage amount that has not been mentioned is relevant. I never take downsizing seriously unless you are selling a 35 acre estate with a house with 10 bedrooms. You live in a 750k house you will find it a struggle to find something for half the price in a nice area. We have housing shortage. This will get worse because the old codgers who used to die 5 years after retiring at age 65 hang around for ages cluttering up the place. By all means buy a house abroad. I have a house in Spain and living there in the winter will prolong your life. Spend the summers in the UK when its all going on:  Glyndbourne, Chelsea Flower Show, one could get down with the kids at Glastonbury or you could bust some moves in the Notting Hill Carnival,  Royal Academy Summer Exhibition, Brighton Arts Festival (May) Edinburgh Arts Festival (August). The only good thing about having a mortgage is that it reduces your Inheritance Tax bill however you say there are no children you might have nieces and nephews. This ones really depends how you feel? Some people are comfortable with this debt post retirement some are not. I have a mortgage of 165k and I am currently paying £39 per month because I took out a tracker of 0.19 over BBR. I see no reason to make capital repayments as I make more money even on the crappy interest rates we are currently receiving. 
Conclusion 
Take max TFC at 58 so no income tax for many years.
Increase ISA funding so reduce pension funding because the latter will probably be liable for lifetime allowance tax.
When we get back to semi normal now see what you can get for your downsize house price can you live in the lesser accommodation, remember you will be at home more so it has to nice. If you want to buy a house abroad rent first holiday eyes are different to living there for 3 months eyes. Rent in the winter. Or instead of buying you could rent somewhere 3 months a year that way you can live in as many countries as well as different parts of the country without the hassle of ownership and upkeep.  If you watch a New Life in the Sun you could probably rent a lovely gite from a pesky Brit. Good luck. 

green_man

Forgot to say... all Pension /SIPP providers have different charging structures. My SIPP provider (Halifax SIPP) charges for UFPLS, some dont. I chose HAlifAx as their account fees combined with UFPLS fees were the cheapest option for me ( whilst providing access to the funds/shares I want). ( e.g Hargreaves Lansdown would be 10x the cost on my portfolio despite not charging UFPLS or drawdown fees).  Point being ... consider all costs and choose what suits your needs.

RecliningInPeace

green_man said:

,...charging structures. ... Point being ... consider all costs and choose what suits your needs.

I recently moved the SIPP from HL to AJ Bell to reduce charges. Although at the time I did not consider UFPLS costs, I just looked and it turns out they don't charge for them. Their guide also says you can take them monthly, quarterly, half-yearly, or annually.

Notepad_Phil

RecliningInPeace said:

Thanks for your thoughts Thrugelmir.
The 4% assumption (yes I applied it to the GIA as well - on the assumption you were referring to the dealing account as General Investment Account) is based on a somewhat conservative take on long-run returns*, acknowledging potential substantial short- to medium-term volatility (as the past 12 months have reminded us). Just thought I had to start with some number  .

What happens if you don't get the returns that you are hoping for?

Before retiring I did an analysis of what would happen if the markets suffered a 50% immediate drop and then only inflationary increases from then on - it was very much a worst case scenario and made very sober reading, but the fact that we would not be completely destitute allowed me to retire in my mid 50s without a second thought.

NedS

RecliningInPeace said:

• How do I continue to contribute to National Insurance once I stop working, as I'll be a couple of years short of 35 years' contributions by 58?

You will be able to by additional years at the time, year on year, as you need them once you have stopped work. The current rate is £795 to purchase a full year which buys you an additional £5/week state pension for the rest of your life, so represents an excellent investment for most. Get a state pension forecast now or at the time to work out how many years post 58 you will need to purchase and budget for that.

RecliningInPeace

@NedS
Thank you; I should be only three or four years short by then. I suppose I would not have to make a decision until just before I qualify for the state pension at 67.