Advice sought..........

mlv-1967

I'm 54 years old, currently with a pot worth £415k and a small index linked final salary pension worth (in today's money) £7.3k at age 60, but upgraded by 8% for every year of deferral thereafter.  Mortgage due to paid off on my 62nd birthday and no possibility to pay it off sooner.  I'm currently paying in around £22k a year into my pension fund including tax relief.  

My current strategy is aiming to retire at 60, using some of the tax free 25% from the pot to clear the mortgage and then living off the rest for around four years, thereafter drawing down from the remainder until reaching age 75, then I will buy an annuity because the rates should be favourable at that age.  With the small final salary scheme, I am planning to defer it until age 67 which should increase it to around £11.4k a year.  At 67 I will also draw the state pension, currently at £9.6k a year. 

Any advice?

Thrugelmir

mlv-1967 said:

Mortgage due to paid off on my 62nd birthday and no possibility to pay it off sooner.  I'm currently paying in around £22k a year into my pension fund including tax relief.  

Wouldn't reducing your pension contributions achieve the desired effect? 

MX5huggy

You want to drawdown taxable pension up to the value of the personal allowance each year even if you don’t need it. Noting this will trigger MPAA and you’ll be limited to £4K per year further contributions even if you earn more than this. 

jamesd

It's an OK to good basic plan, better than many, but some room for possible tweaking.

You're allowed to defer claiming your state pension. For each year that you defer claiming it'll be increased by 5.8%, plus the increases accrued during the time you're deferring. The extra bit is increased by CPI not triple lock and is paid for life. There is no spousal/survivor benefit for those reaching their state pension age after April 2016. This is far better than most people can achieve with annuity buying and quite likely to be good even compared to age 75, since it's around 80-85 tat annuities really start to make big progress as people start to die at a higher rate. Of course, if your state pension is £9,500 a year you'll only be able to "spend" £9,500 a year on "buying" the extra £9,500 * 0.058 = £551 a year of state pension income.

Some people will wrongly say that it's not worth deferring the state pension for more than a couple or five years. that's wrong because it depends on what else the money would be used for. In your case, annuity buying, so the test is whether you'd get more from the state pension increase than the annuity alternative and the answer is likely to be yes.

If your gross pay is more than £22k it'll probably pay you to make higher pension contributions, assuming the lifetime allowance won't be exceeded, which seems unlikely. Using savings to fund it is one option but there are a couple of others:

1. From age 55 you can use the small pot rule to take all of a pot worth up to 10k and this does not trigger the money purchase annual allowance reduction to 4k a year for personal or other defined contribution pensions.25% of this payment is tax free and the remaining 75% is taxable income. You're allowed to move money around to create the pots and you're allowed to do this up to three times in your lifetime. There are no restrictions other than the usual pension annual limits on recycling this money into new pension contributions, whether it's the tax free or taxable part. While this is taxed like a UFPLS lump sum the UFPLS does trigger the MPAA so should be avoided while you work.

2. From age 55 you can take up to 25% tax free from any part of a personal (with pot) pension. So you could take 25% from 100k and leaver 315k untouched, or 200k and leave £215k untouched or whatever you like. There are restrictions on recycling these tax free lump sums into new pension contributions. The easiest two to understand are:

a. You can take up to £7,500 of this type of tax free lump sum every rolling twelve months. Not tax or calendar year, twelve months. You can then use this to help fund more contributions.

b. Alternatively, you can make pension contributions that are higher than expected by up to 20% of the total value of the tax free lump sum taken. With £415k 25% is £103,750 and 30% of this is £31,125 so that much extra in pension contributions is allowed. There's a five year window from two tax years before to two tax years after the tax year of the tax free lump sum which is used for the calculation of increase beyond what is anticipated.

You could also fund higher pension contributions by decreasing your mortgage payments, using a longer mortgage term or even temporary equity release.

jamesd

You have an income tax tax free allowance each tax year. It's a use it or lose it allowance so ensure that you use it every year. that may take drawing some taxable income from the defined contribution/personal pension in the years before you start the defined benefit or state pension. However you achieve it, don't lose it.

Even if you don't want to extend the mortgage, it'd probably be better to use taxable (but maybe untaxed) annual withdrawing to get rid of it over time. That gives more opportunity for investment growth. But there's absolutely nothing wrong with use of equity release or say a retirement interest only mortgage for a while. RIO is a relatively new option that's an interest only mortgage for people retiring. It's handy in cases where modified cash flow is desirable, as it could be in your case if higher pension contributions are possible. You could probably start a RIO mortgage while still working to help increase your pension contributions. You could then repay the RIO or part of it out of taxable income within the personal allowance while deferring the work and state pensions, say.

Of course there's always the chance that markets could fall, so ensure that you have sufficient cash and bonds  (corporate or government) in your investment mix to meet several years of needed spending, more using bonds inside the pension.

That's a few more possible tweaks that could optimise things.

Audaxer

jamesd said:

You're allowed to defer claiming your state pension. For each year that you defer claiming it'll be increased by 5.8%, plus the increases accrued during the time you're deferring. The extra bit is increased by CPI not triple lock and is paid for life. There is no spousal/survivor benefit for those reaching their state pension age after April 2016. This is far better than most people can achieve with annuity buying and quite likely to be good even compared to age 75, since it's around 80-85 tat annuities really start to make big progress as people start to die at a higher rate. Of course, if your state pension is £9,500 a year you'll only be able to "spend" £9,500 a year on "buying" the extra £9,500 * 0.058 = £551 a year of state pension income.

Some people will wrongly say that it's not worth deferring the state pension for more than a couple or five years. that's wrong because it depends on what else the money would be used for. 

@jamesd, if the OP has a spouse, surely deferring the State Pension for more than 5 years will mean the deferred amount is unlikely to be recouped in his lifetime, meaning less of the overall pot left to his spouse?

barnstar2077

Why wait till you are 60?  Seems like you will have more than enough to retire at 57, for instance.

In the last week, I have heard of a friend, and two relatives, that have been diagnosed with cancer.  One of them is terminal.  Yes, you could live to be a hundred, but then again, you might not.

Silvertabby

Audaxer said:

jamesd said:

You're allowed to defer claiming your state pension. For each year that you defer claiming it'll be increased by 5.8%, plus the increases accrued during the time you're deferring. The extra bit is increased by CPI not triple lock and is paid for life. There is no spousal/survivor benefit for those reaching their state pension age after April 2016. This is far better than most people can achieve with annuity buying and quite likely to be good even compared to age 75, since it's around 80-85 tat annuities really start to make big progress as people start to die at a higher rate. Of course, if your state pension is £9,500 a year you'll only be able to "spend" £9,500 a year on "buying" the extra £9,500 * 0.058 = £551 a year of state pension income.

Some people will wrongly say that it's not worth deferring the state pension for more than a couple or five years. that's wrong because it depends on what else the money would be used for. 

@jamesd, if the OP has a spouse, surely deferring the State Pension for more than 5 years will mean the deferred amount is unlikely to be recouped in his lifetime, meaning less of the overall pot left to his spouse?

We thought about this when Mr S reached SPA, but decided not to defer.

Horses for courses but, in our cases, all of our (non State) pensions are public sector DBs so no need to juggle drawdown/annuities.  Whatever he did, all of his State pension would be liable to BR tax, and so deferring wouldn't have changed that.  He is fit and healthy, but you just don't know what's around the corner - so we decided to enjoy the extra cash now.

As for me, my own SPA looms - and I won't be deferring either.  I've had the benefit of being able to top up my State pension to the maximum £179.60 per week (despite being contracted out from 1978 to 2016) by buying voluntary Class 3 NIs.  That's enough of a bargain for me !

Albermarle

and a small index linked final salary pension worth (in today's money) £7.3k at age 60, but upgraded by 8% for every year of deferral thereafter. 

Just maybe good to be aware that £7.3K of guaranteed income is actually quite significant ( not really small)

Also being paid at 60 is good ( rather than 65) as is the generous 8% deferral rate. Assuming it is inflation linked and there is a spouse payment on your death , to buy a pension like this ( as an annuity ) would cost about the same amount that is in your SIPP.

This high figure is partly a reflection of current poor annuity rates, but also reflects the high value of guaranteed income, which is often underestimated. 

mlv-1967

Thrugelmir said:

mlv-1967 said:

Mortgage due to paid off on my 62nd birthday and no possibility to pay it off sooner.  I'm currently paying in around £22k a year into my pension fund including tax relief.  

Wouldn't reducing your pension contributions achieve the desired effect? 

My mortgage rate is low so I would prefer to let it run.  I'd rather focus on building up my pension pot as much as I can afford.

mlv-1967

barnstar2077 said:

Why wait till you are 60?  Seems like you will have more than enough to retire at 57, for instance.

In the last week, I have heard of a friend, and two relatives, that have been diagnosed with cancer.  One of them is terminal.  Yes, you could live to be a hundred, but then again, you might not.

I take your point but I would prefer to save up more and achieve an income of around £30-32k a year from my pensions.  Also, I don't think I'll be able to clear the mortgage at 57 but 60 should be possible.