Pls help me to retire early - DC pension - 3 years later

RNV

Hello wise MSE Forum people,

My 1st ever post and lots of naïve questions (please be gentle).

I'm 49 and it recently hit me hard that I absolutely hate my job - the pressure that comes with it, lack of time to spend with family etc etc. etc. WFH & lockdown put another perspective on importance of "little" things and made the lack of work/life balance so painfully obvious.   I wish I could retire today but it is impossible, so at 55 is a second best option.  And I would be very grateful if you share your knowledge to help me make it happen. 

Some background info before I ask my questions:

1. Age - 49; 
2. 40% tax payer
3. Non-existent knowledge in investments, however reading a lot now
4. DC pension pot, today's value £260k;  As of last month, I drastically increased my salary sacrifice making it total ~£3,200/month (40% employee/10% employer capped). I'm now boldly thinking increasing it further to 50% employee for a period of time.   This is not really sustainable long term due to high living costs (in SE); mortgage etc.  If I do that, I will have to supplement my income with ~£500/month from laughable savings I have (£12.5k).
5. DC pension is invested in so called "Pension Investment Approach with a Balanced level of risk."; Scottish Widows Pension Portfolio Two Pension (Series 2) - default.
6. State pension value today £136/week; with a note of further 9 years required to reach max £179/week; based on contributions from 2006 (I worked abroad before). If I do retire at 55, I will "buy" remaining years of required contribution.
7. 12.5k savings only to my name (sitting in a saving account with pennies in interest); no debts other than joint mortgage
8. Happily married with 2 primary aged children; DH is 10 years older. Joint mortgage, ~ £120k remaining over ~5.5 years; currently paying ~£1.8k/month. Due to this late in life family we kind of drifted into separate finances. Joint account to which both contribute ~2.5k.  DH is better with money, so some savings/investments/2 accidental rented properties (via inheritance). He considers it "our money now + children's inheritance later" (not "his"), however I cannot just take advantage of his "better with money" and stop working without any income in my name. Hence 55 is the earliest, I consider (can access my DC pension then). 

And now questions:

1. Am I definitely in the "transitional" category wrt to accessing pension at 55,  i.e. 100% will stay at 55 for me irrespective of new imminent legislation increasing the age to  57 years?
2. Does the State Pension current value of £136/week sound right based on a relatively short length of contributions (I have almost always been a high tax payer, so NI payments were quite significant) ?
3. If I decide to use up all my savings (and a potential bonus this year) to use my last years unused £40k/year, how is the year calculated - financial or calendar?  And which ones are the 1st and the last months ?  My salary sacrifice deductions are happening on the last working day of the month, however the actual transfer to pension is only around the 10th of the following month. So, if financial year is considered, where does my Mar 21 deduction belong to - to 2020/2021 financial year (since deducted from Mar 21 salary) or 2021/2021 (since reached the pension on 10th of April 2021).
4. I'm trying to achieve £20k drawdown from DC pension, starting from 55 then reducing to whatever is left of it by the time the SP kicks in  - is it too late with only 5 years left (I wish I got wiser earlier)? 

I'm sure I will have more questions,  once I master above basics.

Many thanks for your time and patience

El_Torro

It’s great that you’re focussing so much on your pension now. Be careful if you contribute more than £40k a year (you’re close to that if £3,200 is going in every month). You may be able to contribute more than that and still get tax benefits, just need to be aware of the rules.

Good question on whether you will definitely be able to access your pension in 6 years time. I don’t know the answer, or if there is a definitive answer today.

You seem to be thinking along the right track. However i would say that you need to make a retirement plan, with your husband’s help. It’s great that he sees your finances as combined rather than separate, but I would say that you need to look at the whole picture (including when he plans to retire) before taking such a big step.

It’s good that you want to fund your retirement yourself, but if your husband has plenty of money to help with this, which he is happy to share, why take the hard road?


Pension contributions are by financial year, not calendar. Good question on when your end of March / early April payment goes in. I assume that what matters is when the scheme receives the money, not when you get paid. That’s just me making an assumption though.

Albermarle

Regarding your pension contributions . Ideally they should be enough so you do not effectively pay any 40% tax as this higher rate relief is very generous. Contributing more than that means you only get basic rate tax relief , so the tax benefit ( taking into account you will pay tax on withdrawal ) is still there but is significantly less. So then it can become arguable whether pension contributions might be better redirected elsewhere . Your cash savings certainly need increasing. You should have enough to live on for 3 months, ideally more , in case your income stops for any reason.

El_Torro

Albermarle said:

Regarding your pension contributions . Ideally they should be enough so you do not effectively pay any 40% tax as this higher rate relief is very generous. Contributing more than that means you only get basic rate tax relief , so the tax benefit ( taking into account you will pay tax on withdrawal ) is still there but is significantly less. So then it can become arguable whether pension contributions might be better redirected elsewhere . 

This is true, but it’s worth mentioning that the OP is using salary sacrifice for pension contributions. So for basic rate contributions they’re not only saving 20% on income tax, but also 12% on National Insurance. So the saving is still decent, when compared to an ISA.

RNV

Thanks for replies.

To address a few points raised above:
1. "Sharing DH's money" while I could/should earn would mean reducing financial support to children we could offer - this bothers me a lot (and they will need it).   And by no means DH has got loads. Rented flats are in a relatively cheap part of country and will be subject to CGT when sold. 
2. DH plans to retire in 6 years time. DC pension of approx. 400k + full SP + some investments  (but nothing spectacular). The value of our house is significant but only due to location; no scope to downsize until children are at home
3. My highly paid job (as any other) may not exist tomorrow, so my thinking today is salary sacrifice as much as I can this year, then re-assess next year. I will not be out of 40% tax completely. Cannot reduce my take home below £2k/month

Marcon

RNV said:

3. My highly paid job (as any other) may not exist tomorrow, so my thinking today is salary sacrifice as much as I can this year, then re-assess next year. I will not be out of 40% tax completely. Cannot reduce my take home below £2k/month

As you say, your job may not exist tomorrow - and you 'absolutely hate it'. 

Rather than focussing all your energies on retiring at 55, is there any chance you might simply consider doing something else or just changing employer/reducing your hours to give you a better life sooner? Your children will never again be as young as they are now (and nor will you) - which sounds blindingly obvious, but it might perhaps bear thinking about.

Radiantsoul

I guess one obvious question is whether there is something else you would rather be doing workwise.

I think the other side is how much money you need. There are a lot of people living on less than you would be who are happy, but you it is not much consolation if you need more. 

RNV

Thanks for the "different direction" thoughts.

It constantly comes to my mind whether I should try to find another application for myself. However, every time the conclusion is around the lines of it's too late to try to re-brand, I cannot really do anything else. At some point in the past, I did reduce to 4 working days but what it did was only reduced the salary, the scope remained.  If I change employment, I'm not sure I will be able to cope with a need to "prove myself" (have been here for a long time, so no need to now).

Another way of my crazy thinking currently is to save a couple of years of living costs (instead of channelling everything into pension now) and quit before 55.  We, as a family, will save a lot if I'm at home - being time poor we have to outsource a lot.

Secret2ndAccount

Anybody want to answer the OP's questions rather than giving lifestyle advice?
Yes you will be able to draw a pension at 55. You might fall into that weird category that is entitled to retire at age 55, then at age 56 finds that the age goes up to 57, so you should be unretired again. The government hasn't said what they are going to do with these people yet, but they have acknowledged that they are aware the situation exists, and will clarify it. You do have a protected right to access your pension at 55, so I don't see any way they will or could unprotect it a year later.
Get the state pension numbers from https://www.gov.uk/check-state-pension  and click through to see which years they say you've paid and not paid NI. Paying large amounts of NI doesn't get you any more pension than paying modest amounts these days (it used to a long time ago). It's more about how many years you paid for.
It's financial years, but I'm not sure exactly how they decide what dates a payment is for. If you just keep paying every month it shouldn't matter as you say you have previous year's Annual Allowance to draw on. So you are not bound by a strict 40k/yr limit anyway. If you go over 40k this year, the first thing they will do i s look back 3 years and use up any spare you had from there. Then next year, you can use up 2 yrs ago, and dip into 1 yr ago if needed.
If you pay in approx 40k x 5 yrs + 260k that will, with a prevailing wind, be close to 500k. Should be able to draw 20k/yr from that. It's cutting things fine if the stock market doesn't do well, but that's okay as you have the State Pension coming to the rescue after 12 years. Note that this is 20k before tax. If you don't take a lump sum up front (which you can't really afford to do) then 25% of each 20k will be tax free. So you will only pay a little bit of tax. In today's numbers 15k - 12570 tax free allowance = 2230. So you would pay 446 in tax.
Bear in mind you have five years of inflation from now until you retire, so 19,554 won't be as much then as it is now.

Secret2ndAccount

https://www.gov.uk/government/publications/increasing-the-normal-minimum-pension-age-for-pensions-tax

Here's the legislation for anyone who really wants to dig into the weeds.
What it says is that if you have a pension, right now, which is accessible at age 55, then it remains accessible at 55, even when the minimum age goes up to 57.
That protection works for anyone who joins a scheme before 5 April 2023. After that, the 57 age will apply, so two different people in the same scheme, could have different access ages, even if they were born on the same day. People might need to be careful about transferring from one pension scheme to another.

Disclaimer: I'm not a lawyer, but I'm pretty sure that's what it says.

RNV

Thanks a lot for the link.

Another angle.... if I manage to copy/paste here... is the currently selected  SW plan working extremely badly or about the average ?  I don't think I will be in a position any time soon (lack of knowledge) to try to DYI anything so will probably leave all as is if "about the average"