Sense check needed - very rough estimates

MX5huggy

Same starting year for me looking forward to an extra 5 days off next year.

More options would be nice but we can’t have it all. I’ve looked at a pension of £14000 at 68. That would pay £9506 at 60 (32.1% reduced). So buy the time you’ve reached 68 you’ve received £85554 it then takes till 84 for the unreduced pension to catch-up and overtake the full pension after £238k. If you put inflation in at 2% then it moves to about 82 years. Obviously if you work till 68 the pension would grow by those additional 8 years. 

Hopefully the government will roll the COVID debt up into long term guilts and pay it off very slowly like World War debts. Or just keep printing money as they have been. The days of comparing the national debt to a credit card need to be over. 

jamesd

CCW007, just ignore covid and count the state pension. The national debt is high in recent times terms but low compared to war and people are still lending the government money at very low interest rates so it's not a large strain on the national finances even though it's expensive in the short term.

Better to stop overpaying the mortgage and first invest the money in the ISA for accessibility. As you get closer to 55 and initial pension access age you can switch money from ISA to pension via salary sacrifice at high levels, since the pension will become accessible. At 55 or later you can use some pension tax free lump sum money to clear the mortgage.

To work out when you can retire using moderately cautious assumptions you can do this:

1. Use a regular savings calculator to work out the future value of ongoing ISA and pension defined contribution (AVC) contributions and add to the balance for each. Use 3% interest rate to get moderate investment growth, with inflation already allowed for.
2. Deduct 10k from pension or ISA for each year from retiring to state pension age, use this to start paying yourself SP immediately.
3. Deduct your DB income times the number of years until you take that from pension or ISA. Use this to pay yourself the DB immediately. You do this so you can optimise the actuarial reduction, not being forced to take the DB too early.
4. Make the deductions from pension first and when you've exhausted that, from ISA. This is because you can probably retire before 55. Don't use any pension money before age 55, this might leave you with inaccessible pension money, if it does, that means you can retire sooner with lower pension contributions so adjust the contributions in step 1 for less going into pensions.
5. Deduct the mortgage balance at age 55 from the pension pot, switching to ISA if you run out of the 25% pension tax free lump sum amount. Deduct the monthly payments until 55 from the ISA pot.
6. You can take around 3% to 3.5% of the remaining balances as income for life, increasing with uncapped inflation each year. Use 3% for ages earlier than 55.

You can retire on state pension plus DB plus 6 income whenever you have a positive amount of money available for the calculation in step 6.

If you don't like the answer but can accept a lower income, try taking the DB earlier.

If the mortgage balance substantially exceeds the available pension tax free lump sum in step 5, consider deducting the mortgage balance times 1.25 from the taxable 75% of the pension pot instead of using ISA money to repay. This gets you to retirement faster than using ISA money because it leaves more ISA money available for the before age 55 part of retirement.

The steps here are optimised for earliest retirement, not income when retired.

For a more realistic plan you're going to need your OH's financial plan integrated with yours.

Thrugelmir

CCW007 said:

My concern is the cost of paying pack COVID19 related costs, in 23 years I suspect we will still be paying it back and then everything could be on the table.

Investment returns may well suffer as a consequence. Sunak announced increases in corporation tax that kick in from April 2023. Biden maybe writing a lot of cheques at the current time. This too is going to be paid for in part with a sizable increase in tax rates on US Corporations. A reversal of Trump's pro market stance.  Rather than attack something as fundamental as universal state pension. Easier to ratchet up tax collection via IHT measures to fund it's sustainability. 

michaels

Your mortgage rate is very high, what sort of ERP is there?
Have you compared the returns on your SIPP vs the max contributions you could make to your defined benefit pension (which may be higher if they are sal sac) - to compare I would assume sipp payments will grow at 2% above inflation per annum and will allow you to take a pay out of about 3.25% of your pot every year from 57.
Does topping up the ISA over pension contributions make sense - it gives flexibility and potentially could be used to bridge a gap to the sage you can draw from your sipp but at the expense of lost tax releif?

CCW007

Lots of useful comments and things to consider. Jamesd I need to take some time to read and digest your post.

I'm actually okay with the mortgage rate - we took a 10 year fix so ERC (currently £16k) would likely outweigh any savings at this time; I think I'd have to get down to 1.2% for the next seven years to make it worthwhile.  I will reconsider in the future when ERC drops.  

I know I said I OP the mortgage it but it's rather that I knew I wanted to pay £2k per month and pay it off by around 57 however I wanted the flexibility to lower my payments and "extend" the term if absolutely necessary without the need to remortgage.  If we ever hit dire straits we could revert to our "standard" payments, drop down to a lower payment to take into account what we have already OP or even take a mortgage holiday.  So stopping "OP"ing is unlikely at this time as I am happy with a mix of OPing mortgage, savings (S&S ISA) and saving to pension.  More goes to my pension than OP proportionately.

Definitely need to review OH's arrangements as well.

cfw1994

Some good tips here, especially from jamesd.
My advice to a younger me would always be to worry less about overpaying the mortgage and try harder to stuff more into S&S ISAs for easier access and options at 55.....

saucer

cfw1994 said:k

Some good tips here, especially from jamesd.
My advice to a younger me would always be to worry less about overpaying the mortgage and try harder to stuff more into S&S ISAs for easier access and options at 55.....

I wonder if you mean SIPPs if thinking about flexibility at 55. I was thinking along the same lines. We don’t pay anything off the capital of an albeit smaller mortgage and nearly all our spare money goes into occupational pensions  (including a LGPS avc) and SIPPs. Having said that we have the safety net of assured tax free lump sums that will cover it. 

jamesd

S&S ISA used to be a key part of planning to retire at 55, so you could get the money when you needed it.

The most available option at 55 was capped drawdown, subject to the GAD limit. At 55 with the May 1% gilt yield the calculated limit is 5.25% of the pot. Capped drawdown plans do have the advantage that taxable withdrawals don't trigger the MPAA. You can't open capped drawdown accounts any more.

I participated in the survey that was used as part of the planning for that batch of pensions freedoms and my key point was that if it was desired that I invest more in pensions, the government should stop forcing me - with the GAD limit - to use lots of non-pension investing to get an even retirement income. That requires higher and unsustainable drawing before state and DB pensions start and GAD prevents that.

The government delivered. Thoroughly.

5.25% is over most safe withdrawal rates but that doesn't allow for higher withdrawing to bridge the gap between retiring and DB then state pension availability.

kidmugsy

@Terron.  Yup, if that's what your crystal ball tells you.

Silvertabby

MX5huggy said:

Same starting year for me looking forward to an extra 5 days off next year.

More options would be nice but we can’t have it all. I’ve looked at a pension of £14000 at 68. That would pay £9506 at 60 (32.1% reduced). So buy the time you’ve reached 68 you’ve received £85554 it then takes till 84 for the unreduced pension to catch-up and overtake the full pension after £238k. If you put inflation in at 2% then it moves to about 82 years. Obviously if you work till 68 the pension would grow by those additional 8 years. 

Hopefully the government will roll the COVID debt up into long term guilts and pay it off very slowly like World War debts. Or just keep printing money as they have been. The days of comparing the national debt to a credit card need to be over. 

Forgive me if I'm wrong - but I HAVE seen this mistake made before....

You say that your pension at 68 would be £14K, but £9506 if taken at 60 due to the early payment reduction.

So far so good - but where did you get the original £14K from?  If it's from your annual benefit statement, then that is based on the assumption that you will carry on working/contributing to the LGPS until 68.  If you retire at 60, then it's not only the early retirement reductions that you have to factor in to your calculations - it's also the fact that you won't have 8 years of pension accrual.