FIREside Chats

Retireinten

QueenJess said:

I'm hoping for the same as it'll really help!  Here's the consultation document link if anyone is interested: https://www.gov.uk/government/consultations/increasing-the-normal-minimum-pension-age-consultation-on-implementation

Consultation ends April 2021 so watch this space...

Ooh, need to have a read of this, thanks for the link

Suffolk_lass

@Retireinten - you say your LGPS is active with a NPA of 60 - did you have a reserved right to this age (as I did with my old PCSPS or Classic, as they renamed it)? 

Suffolk_lass

Retireinten said:

perfume_waggon said:

Retireinten said:

 I'm currently learning about crystallised and uncrystalised pension funds and various ways to drawdown. 

Please share your knowledge about this once learnt!

I suspect there are people on here that could explain this better than me, but I will attempt an explanation once I've got the hang of it myself.  I've asked for a drawdown for dummies guide on the pensions forum but alas one is not forthcoming yet


It wouldn't be a bad thing to share some tips in normal English on here. For instance I hadn't thought to do the £2,880/£3,600 annual pension payment once we were in draw down as it would push us both into paying basic rate tax, so I'd assumed not worth it. But even basic rate tax payers gain £180 a year from doing this. As a couple that's £360 a year for a bit of pension admin, so in my book still very much worth it . 

I thought Crystallising your pension is the decision about how and when you take it. That is, deciding whether you are going to have an annuity (use it to buy a permanent income either with or without a lump sum) or whether you will draw down lumps and at what rate, and what timing.

I think the things here are what do you need it for (income, top up, just "to have", big trips or purchases) and how much will your prevailing tax rate be at the point(s) when you take it. So:

(DH's DC) Example - his occupational pension is less than his personal tax allowance so to maximise how much of that pension pot is taken at 0% tax:

1. 1st drawdown at 57 25% of the pot - TFLS (paid down remaining balance on mortgage - no tax implications)
2. 2nd drawdown in the tax year that started after that in which he finished work - so stopped 1st Sep 19, drawdown (25% of remainder) in Jan 21 paid prevailing standard rate tax that will be reclaimed in his tax return this June
3. 3rd drawdown will be 33% of the remainder in Jan 22 (as for second but tax will be accounted for by TPS receiving an updated tax code)
4. 4th drawdown will be half (50%) of remainder in Jan 23 (as for 3).
5. 5th and final drawdown of remainder in Jan 24 (- as for 3 & 4)

He will be 66 in the 2024-5 tax year and so his income will increase above the personal tax allowance with SRP

Hopefully that is simple to understand

Retireinten

Suffolk_lass said:

Retireinten said:

perfume_waggon said:

Retireinten said:

 I'm currently learning about crystallised and uncrystalised pension funds and various ways to drawdown. 

Please share your knowledge about this once learnt!

I suspect there are people on here that could explain this better than me, but I will attempt an explanation once I've got the hang of it myself.  I've asked for a drawdown for dummies guide on the pensions forum but alas one is not forthcoming yet


It wouldn't be a bad thing to share some tips in normal English on here. For instance I hadn't thought to do the £2,880/£3,600 annual pension payment once we were in draw down as it would push us both into paying basic rate tax, so I'd assumed not worth it. But even basic rate tax payers gain £180 a year from doing this. As a couple that's £360 a year for a bit of pension admin, so in my book still very much worth it . 

I thought Crystallising your pension is the decision about how and when you take it. That is, deciding whether you are going to have an annuity (use it to buy a permanent income either with or without a lump sum) or whether you will draw down lumps and at what rate, and what timing.

I think the things here are what do you need it for (income, top up, just "to have", big trips or purchases) and how much will your prevailing tax rate be at the point(s) when you take it. So:

(DH's DC) Example - his occupational pension is less than his personal tax allowance so to maximise how much of that pension pot is taken at 0% tax:

1. 1st drawdown at 57 25% of the pot - TFLS (paid down remaining balance on mortgage - no tax implications)
2. 2nd drawdown in the tax year that started after that in which he finished work - so stopped 1st Sep 19, drawdown (25% of remainder) in Jan 21 paid prevailing standard rate tax that will be reclaimed in his tax return this June
3. 3rd drawdown will be 33% of the remainder in Jan 22 (as for second but tax will be accounted for by TPS receiving an updated tax code)
4. 4th drawdown will be half (50%) of remainder in Jan 23 (as for 3).
5. 5th and final drawdown of remainder in Jan 24 (- as for 3 & 4)

He will be 66 in the 2024-5 tax year and so his income will increase above the personal tax allowance with SRP

Hopefully that is simple to understand

It sounds like you have a clear plan there.


We all want to access our pots differently and for me it's getting my head round the impact on the 25% tax free lump sum.  Hubby's pension fund is there to provide an income only, we won't need any lump sums from it to fund big purchases. 


Six months ago the plan was to take £12,500+25% tax free lump sum from husbands pension between ages 57 and 68.  But ideally we need a bit more in those years and we're saving enough to take that bit more.  So I reworked our figures for him to take the full 25% tax free lump sum (let's say that's £75000) and then drawdown the £12,500 tax free each year. Spread the £75,000 over the 11 years + the £12,500 drawdown and we get to around the £19k mark for those 11 years before his state pension kicks in. All tax free and exactly the sort of drawdown amount we need.  But without understanding drawdown I was sort of planning to take the £75k as the lump sum tax free amount, stick it in ISAs and effectively draw a wage from it until it runs out. 


But if I take that £75k lump sum, I crystallise the entire pension pot, which means the remaining pot is subject tax (at whatever your tax rate is when your draw from it).  I could leave the remaining £225k untouched for 5 years and it could grow by another £40k but I wouldn't get a 25% lump sum on any growth.  Whereas if I crystallise enough of the pot each year to take the extra tax free amount I want, then the majority stays uncrystalised, can grow as much as it pleases and I still get a bite of the tax free lump sum cherry at a later date! 


I think... 


Now I need a lie down .

Retireinten

Suffolk_lass said:

@Retireinten - you say your LGPS is active with a NPA of 60 - did you have a reserved right to this age (as I did with my old PCSPS or Classic, as they renamed it)? 

I've been in the scheme for around 25 years now so I have some R85 rule protection, which means part of my final salary pension is protected from actuarial reduction from 60. The rest will be reduced.  There's no point in delaying until later because I have plenty of retirement income from 60 onwards with the reduced LGPS.

Suffolk_lass

@Retireinten your husband's drawdown sounds sensible but if he is post work and pre retirement income, the (current) personal taxable allowance of £12,500 per tax year would be applied with each withdrawal from the pot. What we found also is that DH's was moved to a lower risk fund basket as soon as he took the 25% TFLS (with an associated fee) - it is something we were not really surprised by (either) but had not factored in - my spreadsheet just applies 20% tax to all his pot now so when he claims the tax back it will be a small bonus. 

There is a lot to be said for spending more in the early years when you are fitter and more active, but not for everyone.

I can't remember you mentioning your NI record plans for the remaining years after you both stop work. If your DH is in a DC and not an occupational pension it is likely his NI record will all go towards the new state pension, whereas 25 years in a public sector occupational (DB) scheme may mean up to April 2016 your NI years, although counting, will be towards the lower basic rate pension. You need to check and consider your options for boosting your years in the new scheme to make sure you have the maximum possible.

Many people miss that the projection of state pension assumes you will pay in until the end of the tax year preceding your birthday when you reach SPA. More relevant is the years accrued so far (to extrapolate forward from) as it may influence whether you pay voluntary contributions to top up (two options) or many are carers for nearby people, claiming carers' credits for looking after family, friends or neighbours.

The two options to pay are to pay the lower self employed voluntary class 2 (about £3 per week) or the higher class 3 (about £780 per year you "buy" - if, like me, you are too close to SPA to make up them all, you don't receive the full new state pension, despite having every year since I was 16 except two at Uni (because I did not go straight from school and at that time, it mattered). The choice would also depend on whether you are drawing an income, because 100% of the self employed income would be taxable

edinburgher

@Suffolk_lass - so my state pension says I need to pay another 12 years (50). Are you saying if I retire at 58 I won't get full state pension? 🤔

Retireinten

I have checked my state pension recently and it stated 7 years to go to get my pension. That ignores this last tax year, so I need 6 years.  As much as I would like not to work for another six years I think I will more than manage it

But I had assumed I'd get the full state pension if I did work those extra years, irrespective of my being contracted out for part of it. 

ilselm

Great thread with some really interesting, informative and inspiring posts. I’m more MFW (first) and investments/pensions (second) orientated and less MSE so current expenditure is quite high although this is something that is still work in progress. Here’s my starter for ten (although I think it will be a long one)!

[Edit: it is a long one so TL;DR - a zealously optimistic million pounds  ]

Why am I investing?

To achieve personal financial independence in a short amount of time as possible whilst still being able to contribute to household expenses and ensure that later life pension targets are met whilst not earning from employment. This will allow me to step back from my current job which is extremely full-on so to be able to explore alternate opportunities and spend more time with my young family. While I have been lightly dabbling in the practices of FIRE for about the past 5 years and focusing upon early repayment on the mortgage for a lot longer, my ambition to hang up the work suit has exponentially grown since I experienced a significant health event and underwent major surgery last year.  Nothing like a crisis to drive change and reframe the priorities.  

I have toyed with the idea of changing profession to one that is less all-consuming but I find what I do to be, on the whole, extremely stimulating and is currently a hot commodity and as such is becoming very well compensated (nothing to do with Tory cronyism!). Yes, it has its stresses, frustrations and moments of sheer ludicrousness but I figured that it would currently be best to ‘go hard’ so that I can then ‘go home’ early. 

How much do I think I'll need?

I’m looking at an average of £27.5k pa net in today’s money to see me from the point of early retirement until I shuffle off this mortal coil. This needs to increase annually with inflation and will be taken from wrapped and unwrapped investments, DC pensions and state pension (if not means-tested by then); and any hobby jobs that I have once I leave my current profession. 

I would also like a £50k minimum slush fund to cover unexpected/emergency/mid-life crisis spends and to manage any sequence of return risks early on in pension drawdown. 

Finally (and without wanting this to sound like a Santa wish list), I would like to be mortgage free on our main residence (currently ~£111k outstanding) before pressing the ‘RE’ button on FIRE. This is more for peace of mind and would remove the monthly commitment of having to service the mortgage. But as the mortgage is IO offset and runs to age 58, then I could dial back on the capital repayments and utilise the TFLS (if it still exists) at the commencement of DC pension drawdown to clear the outstanding balance. At the moment, my foot is firmly in the mortgage overpayment camp especially as, growing up in the late 80s, we were faced with a cliff-edge drop of income and risk of home repossession which was quite stressful and, although unlikely now, not something that I want to go through with my own family.

As mentioned further up, this £27.5k net is a personal, not household, figure as my wife has no intention to retire early from her vocation and is happy to cover all of our household expenditure without affecting her own investment and pension strategies should my FIRE plan go off the rails. I would say that her planned pension provision is fairly solid with 3 x DB pensions (MRC, NHS and USS) but now after reading the earlier posts on USS, I will ask her to double check! 

How am I going to get there? 

I have made the assumption that state pension age will indeed be 68 and DC pension withdrawal age will be 58 by the time I get there. So, I’m looking at a hybrid approach of drawing down from investments from early retirement age to age 58; DC pension from age 58 to age 68 and then state pension and DC pension from age 68 onwards. 

I don’t have any DB pensions, BTL, crypto, P2P, inheritances, commercial property, business ventures, gold bullion stash, PFIT schemes or any other current, or planned future, income streams. 

For state pension, according to HMRC I need to contribute another 4 years of NI to reach maximum forecast amount. As a fail safe, if I don’t achieve these through employment, then I can sign up for child benefit in my name to get the NI credits as my youngest will still be under 12. 

For DC pension, I have roughly calculated a required pot size for me of £750k (in today’s money) by age 58 to support the draw down for £27.5k net. I may choose to mix drawdown and annuity, for fixed income, in my twilight years but this will be addressed nearer the time. By my (again, quite shoddy) calculations, I already have enough in my existing DC pensions that I could coast to this figure between now and age 58 with no further contributions but with a good wind behind me of 3.5% pa real returns. I will, however, continue to contribute to my work DC pension, via salary sacrifice, up to my annual allowance amount whilst employed to both get the employer contributions and the additional rate tax benefits. I would also look to contribute, from early retirement age to age 58 and beyond, £2880 pa net (£3,600 gross) into a SIPP as a non-tax payer. 

For the non-pension years from early retirement to age 58; I am again aiming for a desired amount of average £27.5k pa net in today’s money. To support 10 years of withdrawal (not preserving the capital) and again assuming a 3.5% pa real return then I would need £230k in non-pension investments. To achieve that, based on current balances, it would require maximum annual contributions to S&S ISA (currently holding VLS80 funds) and a £5k pa contribution to a GIA (holding cyber and robotic ETFs) from now until early retirement.

For the £50k minimum slush fund available at point of early retirement, this is already achieved and is currently held in SIP and LTIP schemes offered through my employer. Upon leaving work this would have to be liquidated and the proceeds probably transferred as cash to whatever vehicle that offers the best interest rate at the time (or even NS&I PBs).

How long do I have? 

I am currently 44 and have made the calculations outlined above based upon a FIRE age of 48. If needed, I could continue for one or two more years to build up the war chest but I really would like to retire whilst my age still starts with a ‘4’. I am lucky enough to have recently dropped my working pattern to 3 days per week with no salary impact so that should help with making the transition to early retirement. From a numbers perspective, I think I need about another £100k capital injection (£211k if wanting to clear mortgage) over the next four years and then will cross fingers and hope to grow the total amounts with a 3.5% pa real return on the investments. 

Simples. What could possibly go wrong? Death, divorce, unemployment, equity crash, unfavourable market timing, hyperinflation, change to pension and investment rules, underestimating cost of raising children, tax changes, accidentally deleting the FIRE spreadsheet...

Thanks and well done for reading to the end!

Suffolk_lass

edinburgher said:

@Suffolk_lass - so my state pension says I need to pay another 12 years (50). Are you saying if I retire at 58 I won't get full state pension? 🤔

No, I am saying each person should confirm the accrued (already banked) years and also be aware that the rules change within the projected state pension figures.

• They have changed at least 3 times to my certain knowledge in my working life, and the last two have definitely been to my detriment. - The number of years needed for a full state pension have changed twice. Down to 30 from 37 then up to 35
• The amount you pay for previous years is now the rate in the year you pay, not the rate in the year you are paying for
• The actual pension changed too late for me to be able to get a full new state pension - so mine is mostly going to be the basic with a few additional purchased years to make up the shortfall (repaid if I last five years from the start of SP) - with over 40 it still feels wrong 
• You can also only go back up to 6 years - something I was obviously not aware of when I went to Uni - meaning two years were lost (at that time, if you went straight from school it was credited - I did not so would have had to pay, had anyone told me at any point that I had the gaps - they did not).
• And of course, all my planning was thrown to the wolves when the assurances that my SPA would increase by 2 years (following the equalisation of SPA between men and women legislation in 1997) had the implementation date changed by the coalition government with less than ten years to go for me (by 6 years, in less than 10 years).

If I offered advice I would say build in contingency to your plans and be prepared for the rug to be pulled from under you.

There is another thing in that some DB pensions are adjusted down to take account of SPA but a number of banks had an age hard coded into their rules. I am aware of some women (most affected because of the above moving of the date on a steep sliding scale) whose bank pensions were reduced when they reached 60 but their SPA was still some years out.