Do I need financial advice?

Nurse2047

Sharing Incase of interest
https://www.vanguardinvestor.co.uk/investing-explained/what-are-target-retirement-funds

I’m a nurse and trying to do exactly what you are doing, I’m 42 and set up SIPP with vanguard to bridge gap until nhs pension at 68 😬 

vanguard have very low fees 

Albermarle

DrPips said:

Another question, am incorrect in thinking that the recent changes to pensions mean I can have access to all of my pension fund when I choose to? As I only want this to fund me between 55 and 60 when I’ll take my teacher’s pension? Or are there still limits on how much I can take out?

You can take the lot out out at 55 if you so wish , or take it all out over 5 years . 25% is tax free , 75% is taxable but if you have no other earnings then you can 'earn' £12570 before paying tax as that is your personal tax allowance ( like now ) 

Thanks again for your help and advice

In the personal finance world you only get personal financial advice when it is regulated and paid for .

This forum and the various links are only offering general guidance ( or hopefully pointing you in the right direction) 

sevenhills

DrPips said:

I’m a teacher, so job security is pretty good, I also have life insurance which covers unemployment due to redundancy.

If you want to save some money, get basic life insurance; I don't think teachers get made redundant very often, depending on the type of school.

DrPips

sevenhills said:

DrPips said:

I’m a teacher, so job security is pretty good, I also have life insurance which covers unemployment due to redundancy.

If you want to save some money, get basic life insurance; I don't think teachers get made redundant very often, depending on the type of school.

It can still happen. All it takes is for a bad Ofsted report and student numbers can half, leading to redundancies, but I know what you mean

DrPips

Albermarle said:

DrPips said:

Another question, am incorrect in thinking that the recent changes to pensions mean I can have access to all of my pension fund when I choose to? As I only want this to fund me between 55 and 60 when I’ll take my teacher’s pension? Or are there still limits on how much I can take out?

You can take the lot out out at 55 if you so wish , or take it all out over 5 years . 25% is tax free , 75% is taxable but if you have no other earnings then you can 'earn' £12570 before paying tax as that is your personal tax allowance ( like now ) 

Thanks again for your help and advice

In the personal finance world you only get personal financial advice when it is regulated and paid for .

This forum and the various links are only offering general guidance ( or hopefully pointing you in the right direction) 

Don’t worry, I won’t report you to the FCA if my dream of retiring at 55 doesn’t come off 😉

tebbins

Teachers Pension flexibilities compare favourably with investing in a SIPP bearing in mind the key advantage with the Teachers Pension is that you are buying government-guaranteed, inflation-linked income for life. However, by the time you retire you should have a decent combination of your standard Teachers Pension  + a full state pension to look forward to at 68 (or older), so you may prefer the flexibility of having a "pot of money" style pension alongside your monthly-income style pensions.
More information here: https://www.teacherspensions.co.uk/members/calculators/flexibilities.aspx

There's no financial advantage of picking one flexiblity over another, even though it may look like it. I have a family member who uses Faster Accrual because it applies to your whole pension, whereas additional pension you build up alongside the main one somewhat seperaterly. You have to re-elect every year, unlike most online subscriptions it doesn't renew automatically.

I'm guessing you turn 40 this academic year, that your salary is £35,000, you're in the CARE scheme with a normal pension age linked to your state pension age.If you elect to do Faster Accrual next tax year and select the 1/45 (i.e. the "most" additional contributions option) you will pay an extra £2,492 over the year, less than half what you expect to have leftover after overpaying the mortgage, for an extra income of £164 added to your pension from age 68. If you make average life expectancy (smoking, drinking, a lot of sitting/driving, work stress, red meat, physical inactivity?), plug these numbers into Excel and use XIRR. You can try this for a variety of salaries and ages, it mostly works out at around or close to a 0% real return for average life expectancy.

Stick £5,400 a year, increase it by inflation every year,in a SIPP every year for 16 years until 55, in a decent fund such as a higher-risk multi-asset fund (HSBC GS Dynamic or VLS 80 may be appropriate for that timescale), and you can expect to do better than inflation. Say you average a 3% real return, you should still have at least £100k in today's money by 55. However there is draft legislation to increase that to 57, which may not sound like much now but you're 55 I'm guessing it will feel like a lot. Others in the forum know more about this and there are schemes that guarantee if you open or pay in by April 2023 you can access by 55.

jamesd

tebbins said:

Teachers Pension flexibilities compare favourably with investing in a SIPP ... There's no financial advantage of picking one flexiblity over another... £164 added to your pension from age 68. 

They compare very badly with the flexibility of a DC pension, whether it's SIPP or not and there are clear financial advantages from the choices.

A DC pension can be taken from age 55 if it's one with that preserved benefit, else 57. You can take this money to retire then or take it later to defer claiming the teachers' pension and reduce its actuarial reduction. You can take high amounts at younger ages and lower or none at higher, to better match the reduction in spending as people get older. None of this is possible with the DB scheme, which is just turn on a tap and get a fixed amount increasing with inflation from the day of turn on, the amount depending on how early you start.

What this means is that there is a high chance that DC to reduce the actuarial reduction of taking the DB early can be a very good move. In the mortgage paying context, DC's tax free lump sum can be used for that without having to take any income from the 75% taxable portion, saving that to grow and use later.

A SIPP is a personal pension that in addition to funds is allowed to offer direct ownership of shares and some other things, instead of being restricted to only having funds inside. Other than the extra range of investments a SIPP offers no inherent advantage over any other type of personal pension, though individual product features might.

It's entirely routine to suggest planning of this sort that's utterly impossible with just DB: add up your total savings and investments and deduct 9500 time the number of years until your state pension and the amount o any DB pension times the number of years until you take that. Take 3.4% of the remaining amount as extra lifetime income, increasing with inflation every year and added the DB and state pension at the ages you used for the deduction. If the total income is too low, you need more DC for your desired retirement age. This sort of flexibility requires the variable withdrawing rate that DC offers.

jamesd

DrPips said:

Mortgage has 27 years left currently, with a LTV of less than 60%.  Balance of £175k.  Interest rate is 1.54% but I’m on a tracker so I can switch when I want to and could get a 0.94% 5 year fix with my current provider. ...  I want to bring the mortgage term down to 15 years so that I can look to retire or at least significantly reduce work at 55ish.
...
The loan I’m paying off will net me an extra £850 a month.  If I were to use £400 of this to reduce my mortgage, this will bring it down to the desired 15 years.  The rest I could then use to invest as I wouldn’t want to start taking my pension until I’m 60 due to the significant reduction I’d incur if I started taking it at 55.

Does this all seems logical and sensible?

Not really, but quite a lot of people find comfort in having a mortgage gone, while others find similar comfort in having investments and knowing that they could pay it off whenever they want, me for example having savings and investments worth more than ten times my interest only mortgage balance and not planning to repay it until end of its term in ten years.

The alternative is one I used, then extended: make pension investments or others and use the pension tax free lump sum to repay the mortgage balance when desired. The advantage if we assume 2% inflation is your mortgage having a -0.5% real interest rate and UK equities growing at a hair over 5% plus inflation long term, perhaps 4% for a mixed asset fund. That's potentially 4.5% gain a year if you don't use money for mortgage repaying. I'll use 4% because I doubt that rates will be so low for the whole time involved.

You're 39 now at 55 is 16 years away, 57 18 and the end of the mortgage 27 while you want to be able to retire at 55 if you can

So, regular series of payments, easy enough but I'll use the regular payments calculator I normally refer people to. This tells me that £100 a month for 16 years could grow at 4% to £26833. Using an ISA that's all available. Using a pension the gross increases by tax relief to £33525 of which 25% £8381 is immediately available as a tax free lump sum and the remaining £25143 is taxable income taxed as withdrawn, which in tax efficiency terms means withdrawing no faster than the income tax basic rate band allows, which is unproblematic in mortgage repayment terms when 17 years remain until the end of the term, so in practical terms for you, that's "effectively immediately" £25143 * 0.8 + £8381 = £28495 from the pension. If all relief and withdrawing is at basic rate this gets you 28495 / 26833 * 100 -1 = 6.19% more for your money. It's actually 6.25% and the discrepancy is rounding of earlier figures.

So, now we know that each £100 a month generates £28495 of capital for anything from mortgage repaying or income. How much do you need and what will that cost you each month? I could guess the mortgage balance without extra payments remaining reasonably well but you can tell me so I won't try. I'd also have to guess the income need and I don't know that. So instead I'll offer someone thoroughly proficient with playing with equations a calculation approach to use.

Assume that you'll get a full state pension of £9500 a year and deduct that times the number of years to get it from the capital available at retirement date, I'll pretend 12 years and a £114000 deduction.

Take your DB pension income value at the age when you plan to take it and deduct that times the number of years from when you retire to when you take it from the capital. This is one of the variable you can experiment with. I'll use age 65 and £20000 for this illustration because I don't know the income level nor how it varies with age. For that you'd deduct £200000 from capital.

At this point we know that provided you accumulate £314000 of capital by age 55 you can take £29500 a year of income inflation linked for life. That'll cost you £314000 / 28495 * 100 = £1102 a month of pension contributions.

If that income is insufficient for life, add to the capital requirement £1 / 0.034 * 100 = £2940 per Pound of extra income required, which takes an extra £2940 / 28495 * 100 = £10.32 extra a month per hundred Pounds of extra income requirement. Assuming the same blend of after tax and tax free as I used earlier, which is actually a bit pessimistic because it ignores the income tax personal allowance.

If the income is excessive and you prefer to reduce the monthly investment, you can experiment with the effect of adjusting the DB taking age, with lower ages reducing both total income and monthly investment requirement.

At this point you have descriptions of a series of equations that you can optimise by determining the cost at age DB taking age and producing yourself a graph, with you able to pick any point along the line as the one you consider to be optimal.

If you want more precision you can include the personal allowance in your calculations but it's not worthwhile given the other approximations being used, best to just treat it as a bit of extra safety margin.

The rules aren't yet clear but it will become clear sometime in the next month which DC (personal) pensions will allow access at age 55 and which will constrain you to 57. If none, you'd use ISA investing to bridge the gap even though it's a bit less efficient than using a pension. When you take a personal pension (SIPP with its extra investment options or ordinary with only funds)  you can take any portion whenever you like above the minimum age and that portion is 25% taxable and the 755 is PAYE (no NI) taxable income when taken. That can be immediately or you can place it into a flexi-access drawdown account and draw it at a tax efficient rate, which is the way to go if you want a large lump sum initially and tax efficiency.

There's also the lifetime allowance to consider, currently a little over a million and not to increase with inflation. Assuming BoE target of 2% is met you can work out the real value at any desired age. Lifetime allowance use is calculated as DB pension income * 20 plus DB lump sum for DB with no account of years in payment and DC is just the amount crystallised (tax free lump sum taken normally) at that time it's crystallised, whether the 75% (income) taxable is withdrawn doesn't affect the calculation.

In the example calculation above the lifetime allowance usage would be £314000 + £20000 * 20 = £714000. More precisely, lifetime allowance of a million nominal today would reduce to real £723797 in sixteen years leaving that minus £314000 = £409797 for the DB in 10 years, which at 2% a year depreciates to £334833. Since the DB assumed value is £20000 it'd use £400000 of allowance and you don't have enough so you'd be subject to some lifetime allowance charge on the excess. What this means is pile into the pension now, but be aware that in perhaps ten years you're going to need to switch to ISA usage to avoid a lifetime allowance charge. Assuming 20k is close to accurate, you really need to use the real numbers. If its higher you may need to start on ISA usage sooner to avoid going over.

Effect of the lifetime allowance is that once exceeded, on just the excess there is no 25% tax free lump sum and you  pay either a 55% tax charge when you withdraw, no income tax on that, or you pay 25% lifetime allowance charge and pay income tax when withdrawn. 25% and income tax is usually the best deal. The effect of the charge is greater than the tax benefit of personal pension investing so to optimise you'd try to exactly hit the lifetime allowance in pension contributions and use ISA for the rest.

Now, I've suggested using pension money to replace the state pension but much of that replacement happens from age 60 when the lifetime ISA is drawable without penalties. Since the lifetime ISA beats the regular stocks and shares ISA, that's where the lifetime ISA can come into play. You must be under 40 to open one so if you haven't got one yet do it before you hit 40 so you don't miss the opportunity. This ISA has a £4000 a year contribution limit and since at 20k pension we know you'd have a potential lifetime allowance charge to pay, it would make sense for that income level to start using a lifetime ISA for £4000 a year now rather than waiting, else you'll miss out on the benefit that the lifetime type offers over the normal one because time near the end will require higher annual switch from pension to ISA investing than that.

Subject to the pension annual allowance of 49k plus any available carry-forward of unused allowance for the last three tax years and subject to the amount being less than gross pay, you can move ISA money into a pension whenever you like, so if it becomes clear that the lifetime allowance won't be a factor you can do that.

The ISA discussion in the last few paragraphs is conditional on the DB pension income being around 20k a year. If it's much lower there won't be a prospect of exceeding the lifetime allowance. If a little lower and looking likely to be inside, you still might want to use the full lifetime ISA allowance each year anyway since it has the switching flexibility that a pension doesn't offer and can deliver more benefit than a a pension via its 25% addition that isn't at all taxable when withdrawn. Which makes it better than a pension for the over 60 part.

And that takes me to the conclusion if the income presumption is anywhere close to accurate:

1. Start maximising your Lifetime ISA usage immediately
2. Use extra pension contributions for the additional monthly investment required

Except where noted all numbers are in real terms (today's money) and this also means increasing monthly contributions with inflation. The lifetime ISA limit is nominal so you'll need to increase the pension portion by its share.

3.4% of capital as income is using constant inflation-adjusted income, commonly called the 4% rule. It's for a 30 year plan and increase with uncapped inflation each year. Assumption is 50% equities:50% bonds and at lest 50% equities is required else a reduction is needed. This also uses the 3.7% cost-free rate instead of the US 4% one and deducts one third costs of 0.9% which includes both costs incurred inside investment funds and direct costs paid by you. One third is because in the worst case used for safe withdrawal rates the capital is depleted and the costs aren't paid on the whole initial capital for the whole term and that works out to them being around a third of their nominal value.

There are plenty of approximations that I haven't specifically mentioned because they just don't matter at this stage of planning, which involves just the big choices of how to handle the mortgage and determining approximately how much you need to invest each month to achieve your objectives.

Please do consider letting us know how the equations turn out to be solved for you. I've never yet seen anyone produce the graph I mentioned earlier of the effect of when DB is taken so perhaps a maths teacher might like to be the first?

tebbins

jamesd said:

tebbins said:

Teachers Pension flexibilities compare favourably with investing in a SIPP ... There's no financial advantage of picking one flexiblity over another... £164 added to your pension from age 68. 

They compare very badly with the flexibility of a DC pension, whether it's SIPP or not and there are clear financial advantages from the choices.

They compare well bearing in mind it is government-guaranteed, inflation-linked income for life. I then went on to cover the flexiblity of SIPPs, some moderate return projections for context, and suggest that the OP may already have ample income between the Teachers + State Pension by retirement age and so could well look to a SIPP for "bridging" the age gap between retirement, and starting to take the Teacher's Pension.

I've found a video by a Maths teacher (https://www.youtube.com/watch?v=rHuqGnfhivM) going in to the differences between the main two options - Faster Accrual & Additional Pension - in a lot more detail. There are calculators on the Teachers Pension Scheme website that the OP could use to work which gets them the most extra income for what they want, bearing in mind faster accrual grows at inflation +1.6% while an active member. I worked out for a relative who has ample savings and DC pensions provision, and is close to early retirement, that Faster Accrual yielded more for less in their particular circumstances.

It's entirely routine to suggest planning of this sort that's utterly impossible with just DB: add up your total savings and investments and deduct 9500 time the number of years until your state pension and the amount o any DB pension times the number of years until you take that. Take 3.4% of the remaining amount as extra lifetime income, increasing with inflation every year and added the DB and state pension at the ages you used for the deduction. If the total income is too low, you need more DC for your desired retirement age. This sort of flexibility requires the variable withdrawing rate that DC offers.

Obviously that kind of "gap-filling" approach is a useful, rough-and-ready tool and I use it myself but where have you gotten 3.4% from? That seems a very specific SWR.

jamesd

Studies for UK investors using UK investments found that 3.7% was the equivalent of 4% in the US for taking an income increasing each year with inflation for a 30 year plan with a mixture of 50% equities and 50% bonds. Other work found that the effects of costs was in the third to thirty percent range. So 3.4 is the UK version of the 4% rule minus costs of 0.9%.

There are other rules, like Guyton-Klinger which starts at 5.2% in the UK on the same costs using a 65:35 mixture and 40 years but sometimes skips inflation increases or takes a cut of up to 10% once a year or adds increases instead depending on how the times that you live through are. The US average for just increase with inflation every year was 7% but these are worst cases and that illustrates where GK gets its higher start: the flexibility lets it start closer to average performance and cut if needed.

For both a higher starting level is possible if a varying profile is built in to the plan or if a person is willing to take a success rate of 100%, which would mean extra cuts beyond any in the plan if times were beyond the threshold chosen.

DB has its advantages but the complete inability to vary income when you've started taking it is a substantial limitation in a world where people normally reduce spending as they get older. I didn't include that or GK in my post because the analysis was already very long.

For much more on the subject of drawdown you might find a read of Drawdown: safe withdrawal rates and what I link from there of interest. It includes references for the assertions here.