Any ideas please on what to do in the next 4 years before retirement

ChocolateWombat

Yes, I think early retirees often speak of struggling to get into the spending habbit and adjusting to the reality that retirement is now and no longer in the future.

Regarding taking DB actuarially reduced early, to smooth income and bridge the gap to state  pension, the only downside of doing this at think, is taking more than you need.  If you end up not spending it all, wouldn’t it have been better to leave it until NPA and receive the full amount, not actuarially reduced?  Or, does it make sense to take it sooner anyway and out anything you haven’t used into an ISA or ideally a SIPP for growth?  Which would be better…leaving it in DB pension for later, or taking less sooner and investing. I feel like I go round in circles with this.  

I know that once you start taking pension, there’s a limit to what you can add in.  Does that apply to taking from DB pensions or only to taking from DC pension?  I guess this makes a difference to what makes sense.

I Realise how having more than you need at any point is a luxury and lots of people would live to face this dilemma.

Albermarle

Which would be better…leaving it in DB pension for later, or taking less sooner and investing. I feel like I go round in circles with this.  
There would be no definitive answer to this . It would depend on 
1) How much the pension is reduced for each year taken early
2)How well the investments in the SIPP perform , which is impossible to predict
3) Your tax position 
4) Inflation prospects 
etc
I know that once you start taking pension, there’s a limit to what you can add in.  Does that apply to taking from DB pensions or only to taking from DC pension?  I guess this makes a difference to what makes sense.

If you take one penny of taxable income from a DC pension , you are then limited to £4K pa of pension contributions due to the Money Purchase Annual Allowance.
This does not apply to taking income from a DB pension.

There are also rules restricting recycling tax free cash back into pensions .

To claim tax relief on pension contributions above a relatively low amount, you need a suitable amount of earned income .
Pension income does not count.

Purplelady65

Thank you for your suggestions and observations chocolate wombat, cfw1994, NedS, uss_tish, Abermarle and for those of you that are in a similar situation to me interested to hear your plans. I had forgotten to include in the first post that we also have two more DB pensions – one each. They will each pay out £750 at age 60 so that is another £1,500 pa gross. I tested positive for Covid over Christmas so think I still had brain fog when I first posted and I am still recovering hence the late reply.

We are always looking to defer spending and gratification and to live on less, so there is more for later. This is not a description that would fit either myself or my husband although it has made me think should we be doing this a bit more. We are regarded as the spenders on both sides of the family. I think if one person in a couple is more frugal than the other this can influence the other person but we have always been spenders from when we first met. Our view is you never know what might happen to you at any age so you might as well enjoy life as much as you can while you’re able to. We have always stretched ourselves on the mortgages though which has paid off over time with going for bigger houses which have then increased in value. Covid has impacted in a positive way on our finances due to significantly reduced commuting costs, not being able to travel abroad, no week-ends away, theatres, music festivals cancelled or postponed, significantly reduced socialising, reduced spending on clothes, hair e.t.c but the negative impact has been reduced experiences and enjoying life as much as we normally would. Also with the kids now having finished uni this is really the first time in our lives that we have quite a bit more cash coming in than going out. We are still helping them with their car running costs – MOT, service, insurance but I think we’re going to look to start cutting that down particularly as we’re looking to save over the next few years before retirement.

The suggestion is a good one to work backwards from age 67 to work out what we need for bridging between 60 - 67. Re the comments on buying the extra DB pension yes, you’re right this wouldn’t really be needed at age 67 when we can claim full SP and the funds will be needed more at age 60 - 67 so is it worth paying additional funds into a DB pension to then take an actuarial reduction on it at age 60. However I have seen on some other threads much higher costs to get an extra £1k of pension. This would cost £11.5k yet I saw someone in another scheme had been quoted £17k. However the OP point that a DB pension is inflation proofed isn’t something I had thought about previously so that’s a consideration to factor in as well. Cfw1994 – thank you for sharing your spreadsheet. I hadn’t thought about looking at inflation in regard to any investments either.  

Re would we spend everything at age 60 if we took the reduced pensions as well – yes, I think we definitely would! I think because saving isn’t a habit we have developed that this is why we will probably spend up to any income in retirement. I think the closer we get to retirement we’ll have a better idea as if Covid continues to restrict activities for some time to come potentially we could save more in the next few years or maybe even retire earlier than 60.  I suppose one option could be to take the pensions that pay out at age 60 and see how we get on because even if we take the age 67 pensions out a year later it would reduce the reduction by 5%. Also as I put in a previous post the crossover points of being worse off by taking it early isn’t until 79. As my husband’s parents died relatively young from natural causes (late 60s and early 70s) my husband is convinced he won’t live to 79 anyway (although I appreciate none of us have a crystal ball and he may well live to 100).

Anyway thank you for your observations and contributions - much appreciated. I need to now make some decisions as I usually take too long to make a decision and there isn’t that much time before I’m 60 in the grand scheme of things. I'm now at 47 months rather than 48 already!

Albermarle

 I hadn’t thought about looking at inflation in regard to any investments either.  

You will not be the first person to ignore inflation, but it is very important. Inflation of 3% can reduce the value of your cash by 30% in just 10 years , so you need to keep ahead of it, where possible.

Normally it is better when looking at investments to look at any growth after subtracting inflation , then you see the real growth . 

cfw1994

Albermarle said:

 I hadn’t thought about looking at inflation in regard to any investments either.  

You will not be the first person to ignore inflation, but it is very important. Inflation of 3% can reduce the value of your cash by 30% in just 10 years , so you need to keep ahead of it, where possible.

Normally it is better when looking at investments to look at any growth after subtracting inflation , then you see the real growth . 

Inflation definitely erodes cash assets, plus perhaps your annual income might want to grow with inflation...
...then there is the growth of your pension (& perhaps ISA) funds. 
Most pension funds (DB & State) will have a stated annual growth, often tied to CPI/RPI, but some (especially DC pots!) will not.  There you have to roll your dice & figure out what is most likely: annuities are pretty awful right now, so some flexibility may be needed (you may see my other comments on another thread regarding the SORR....)

There is also your "personal rate of inflation". 
Some things you cannot affect (without moving!) - council tax.   
Some may rise painfully this year - energy bills being most likely.
Some things YOU can impact.   
I spoke with Virgin Media last week & dropped our tv/broadband/phone costs by around 36%.   
Mobile phones (we still fund our offspring's phones) also down before Christmas through negotiation. 
Shopping can often be tweaked with some effort.   Most people don't want to bother taking steps on those things - easier to do what was always done.  For us, we are happy to 'shop around' a bit (a thrifty Scottish streak running through our veins, even if only one was born there!).
Plenty to think about & plan, eh!

Purplelady65

Abermarle You will not be the first person to ignore inflation, but it is very important. Inflation of 3% can reduce the value of your cash by 30% in just 10 years , so you need to keep ahead of it, where possible.

Thank you for pointing this out. Seeing that written down - a potential loss of 30% in 10 years has really made me think. I had just never thought about inflation. I’m going to relook at buying the additional LGPS pension as it will be inflation proofed so I need to factor that into looking at what is the best way forward. 

Purplelady65

Cfw1994 There is also your "personal rate of inflation"
Some things you cannot affect (without moving!) - council tax.   
Some may rise painfully this year - energy bills being most likely.
Some things YOU can impact.   

Thank you also for your comments on inflation erosion. Lots to think about there - it really is trying to do the research, making what you think is the best decision and then rolling the dice. If we knew when our last day on earth would be it would make planning and decision making so much easier! 

Re personal rate of inflation we do shop around for insurance, tv packages, gas, electric etc and the kids are paying for their own mobiles now. Working from home for the past two years I’ve already seen the utilities bills increase - gas, electricity, water. Re food yes that is something we could spend less on. We have started to eat vegetarian meals a few days a week rather than meat and fish every day more for health reasons (and also we do like vegetarian food) than food savings but it will be interesting to see if our food bill reduces a bit. 

Terron

OldBeanz said:

Obviously no one would offer unregulated advice on here as that is illegal.

Nonsense. Unregulated advice is by definition not regulated and not illegal. 
Giving regulated advice without following the regulations is what is illegal, but I believe that requires that you charge for it or at least claim to be a financial advisor.

Terron

Purplelady65 said:

 Both our siblings have invested in buy to let properties and we also have friends who have done the same but we’re not sure if we would want another property to maintain although it would provide a regular income assuming it’s rented out all the time and the tenants pay up every month. It’s something we’ve thought about but not sure if we want the hassle. 

I was made redundant at 54 and having worked in IT all my life it wasn't likely I was going to get a new job that paid even half of what I had been earning. I had recently had an inheritance. I had some DB pensions that I had planned to take at 60, but they wouldn't quite pay enough for me to live on comfortably and had limited inflation proofing. I also had a DC pension and was close to a full state pension. I worked out that I could live moderately comfortably on what I had saved until the DB pensions kicked in and then with the SIPP could continue to do so until the state pension started (66 for me).

However I felt uncomfortable living off my capital so went into BTL. I used agents for full management so it was little hassle. However you can't assume the income will be regular with just one property. Even if the tenant stays and pays on time there will be repair costs. I started with 3 properties. One of the original tenants is still there, but she required a rent holiday after losing her job during Covid (she did catch up). I now have 5 properties that provide most of my income (more than my pensions which have also started). Together they allow me to live more than comfortably.

BTL is not for everyone. You need to want to do it, and know a suitable area for the strategy you are considering.

Both my sisters received an equal inheritance and now have properties they let. Once bought a flat in the French Alps they use for ski holidays and let out to mitigate the costs. The other moved home and let out her old (mortgage free) house, but has continued to work longer. Her LGPS will provide what she needs to live off and the house she lets will provide a bonus.

I sold my first BTL last year and am using some of the money for a big trip - going to watch England play in the West Indies for most of March.

cfw1994

Terron said:

I sold my first BTL last year and am using some of the money for a big trip - going to watch England play in the West Indies for most of March.

That sounds like possible torture after the recent Ashes 😱  Good luck 🤣

@Purplelady65: we have our son working from home at the moment…he has been veggie for many years & is a very good cook: he currently makes a good 75% of our meals, and they are invariably delicious!  Christmas purchase was a great rice cooker, which has got much use 👍
We now tend to only eat meat as a “treat” when we eat out or for some takeaways.  I can’t remember the last time we bought meat for use at home.  Certainly does lower the costs a bit, and although I still like some meat and fish, I do feel it is better for the bigger state of life on earth 🤷‍♂️