FIREside Chats

taka

Deleted_User said:

Very true @edinburgher. I live on the edge of Dumfries and Galloway so pretty cheap here! However, I am comparing it to having lived in Reading previously. Where abouts are you @taka?

Edinburgh! I'd like to move sooner rather than later and the prices are scary for the next step up property! 😮🏡

edinburgher

taka said:

Deleted_User said:

Very true @edinburgher. I live on the edge of Dumfries and Galloway so pretty cheap here! However, I am comparing it to having lived in Reading previously. Where abouts are you @taka?

Edinburgh! I'd like to move sooner rather than later and the prices are scary for the next step up property! 😮🏡

Starter properties are scary enough in Edinburgh 😉

hugheskevi

Why am I investing? To provide income in the period before wife and I start to receive our State Pension at age 68 (assumed, it is 67 and something at the moment, but expect it to increase to 68), which along with DB pensions will be sufficient.

How much do I think I'll need? - We are targeting resources of £40,805 p/a (in today's earnings terms), with more in the first 3 years of retirement to go traveling.

How am I going to get there? A combination of State Pension, Defined Benefit pension, Defined benefit voluntary pension, personal pensions and S+S ISAs to get there in the most tax efficient way I can.

Initially house will be sold, generating a lot of unwrapped funds. This will be used for Premium Bond purchase, cash saving, ISA annual contributions and travel costs, for which I have allocated £60,000 p/a for 3 years. Upon return to UK, the remaining unwrapped funds will be used along with some ISA funds to purchase a house (probably in mid or north Wales, for which a budget of £500,000 has been allocated to cover all purchase, furnishing, refurbishment, etc).

Until age 50 we will use ISA to provide resources

At age 50 we can access DB pensions with protected minimum pension ages, and this along with some ISA money will provide our resources until age 55 at which time we will use DC pension to augment our DB pension until State Pension age.

The chart below shows how each element contributes to the plan. Note that my wife reaches age 50 slightly before me, so the chart shows withdrawing from her personal pension first (which will be via UFPLS). However, I have the larger personal pension so after that I draw from my personal pension (again via UFPLS) to balance things out, finally returning to my wife's pension for the last year or two before State Pension age.

The figures from each source are calculated such that post-tax income increases in line with earnings growth (3.84% p/a in longer term), based on Office for Budgetary Responsibility assumptions, until State Pension age, and by prices (2%) thereafter. This should ensure that our income relative to wider society shouldn't decline until after State Pension age, an important consideration when retiring many years early. If either of us dies early, the survivor will have a net income of at least 70% (depending on date of death) of our combined net income. There is also savings of 6 months of target income at all times in place (not shown on chart).

The rates of return required to achieve this, based on current values, are unwrapped assets 0.75% p/a, DC assets 2.7% p/a after charges, and ISA 2.85% p/a after charges (all nominal, so should be very comfortably achieved and likely to provide more than required).

How long do I have? - we are nearly at the end of the journey, expect to reach end-goal in February 2022. COVID is more of a barrier than finances, given we want to start by 3 years on the road so are primarily awaiting a world situation that enables this.

ElmoR

Love your graphs Hugheskevi, how did you make the first one, any special software? What does tax do to it? Do you have a deaccumulation plan to max tax relief/minimise losses?

Very detailed plan too. Good to see it all laid out this way. When you do reach the happy day, can you please spend lots of cash on Burberry, Diageo drinks and Heineken to boost an IT!

hugheskevi

ElmoR said:

Love your graphs Hugheskevi, how did you make the first one, any special software?

No, just a fairly large Excel spreadsheet. I calculate just about everything from base data, eg, effectively running my own mini-payroll, calculating income tax, NICs, pension contributions, net salary, etc, from fundamentals. The same applies to DB pension calculation. I found that making sure I understood every aspect of calculations was the best way to ensure I optimised as much as I could.

That makes it quite easy to put together cashflows many years into the future on a deterministic basis, so it is just simple assumptions about rates of return, no stochastic analysis or sequence of returns assessment. Those things are very important, but not so much for me, due to decent amounts of DB pension and investing quite defensively due to short investment horizon.

What does tax do to it? 

Actually, tax does very little to it. Over the last decade I've tried to ensure my wife and I have fairly equal pension. The only major imbalance is in the size of our DC pensions.

That all means we will both use our Personal Allowance each year, but neither of us should be close to higher rate tax. With no National Insurance payable and 25% tax free lump sum on all DC pension withdrawals, the amount of tax paid is surprisingly small - getting up to at most £7,500 p/a which is only about 20% of what we pay now.

Do you have a deaccumulation plan to max tax relief/minimise losses?

Tax relief is largely in the past now.  Prior to 2008/09 I managed to avoid higher rate tax by taking periods of unpaid leave to go travelling, and timing my departure and return dates to avoid higher rate tax. For example, leave in December to avoid higher rate tax, take 6 or 18 months off and return in June, thus avoiding higher rate tax in two years (and paying no tax on the year in-between on longer 18 month trips, due to not working).

From 2008/09 to 2016/17 I avoided higher rate tax through pension contributions. 

From 2016/17 I decided I had enough pension, so although I continued with some quite good value voluntary options I didn't pension off all higher rate tax. However, my wife and I don't pay too much higher rate tax (we each end up with about £60K taxable nowadays).

We plan to leave in 2021/22 at a date which mostly avoids higher rate tax, just to continue to be efficient.

In terms of decumulation, there isn't much to do. State Pension and DB pension are dull in that respect - just a very safe source of annual taxable income that there isn't much to do with. Due to terrible commutation rate we will not take a tax free lump sum from the DB pensions. ISA and unwrapped assets don't have any tax issues. We have always planned to take DB pension as soon as possible to maximise tax efficiency (the actuarial reduction reduces pension, which we replenish with voluntary contributions)

That just leaves personal pensions. We will take those using UFPLS (maybe drawdown if it works better should either of us die - will assess closer to time), ensuring no income is subject to higher rate income tax. We will probably put £7,200 into pension each year from age 55 (maybe sooner if surplus funds) for the 6.25% boost (assuming it still exists) but that is small beer.

Busy_Mee

Wow that is an incredible plan Hugheskevi and I now have spreadsheet envy 

Suffolk_lass

@hugheskevi Did you know about making up missing NI years when you went travelling (and did you for the middle year?) and do you have any plans for making up your national insurance records to make sure you get full state pensions?

hugheskevi

Suffolk_lass said:

@hugheskevi Did you know about making up missing NI years when you went travelling (and did you for the middle year?) and do you have any plans for making up your national insurance records to make sure you get full state pensions?

Yes, I purchased Voluntary Class 3 NICs for all except one single past year (I incorrectly thought it was a qualifying year under some reciprocal rules with Australia and too late to purchase now). I'll need to arrange future qualifying years through one mechanism or another as I will be a bit under 10 years short which is partly due to having been contracted-out in the past, but that will largely be post 55 when I have access to DC funds to use for the purchase.

My wife sadly didn't know me in her younger days, and her past qualifying years are not so tidy. She will still be able to get a full record, but we will need to start voluntary payments for her quite a lot sooner than for me.

becky_rtw

Quick question on state pension that I feel I should know the answer, but I dont:

Do you get it if you live abroad? 

We are planning on living in France and since I will be 42 when I retire, I'd always worked on the basis I wouldn't get it, so hadnt looked into buying additional years, but now I am wondering if I should look at this?

becky_rtw

Okay asking that stupid question kicked me a bit and I have reviewed my state pension forecast, I already have 20 years (yeah for starting work young) so should end up retiring on 23 or 24 full years so will then need to look at whether buying the gap is worth it versus the age I will be when receiving it and our planned income at that time. 

Thanks for the useful chat @hugheskevi and @Suffolk_lass