Best way to save/invest for early retirement bridging?

ChocolateWombat

Hello.
My Husband and I are looking to retire early and feel on-track, but want to ensure we are putting money away in the best way, which is most tax efficient and will then be available to us when we need it.

- We are both 50. I plan to stop work at 55 and husband at 60.
-   I have a DB pension which if taken without actuarial reduction will pay £14k at 60 and £18 K at 68, assuming I keep working and contributing  until 55.  My DB pension will also pay out £42k lump sum at 60. I have a an ISA and a SIPP - each with just £3k each in.
- My husband has a DB pension which if taken without actuarial reduction will pay £12k at 65 and £22k at 68, assuming he keeps working and contributing  until 60.  He also has a SIPP with a current value of £35k.
- We have £50k in cash savings and no mortgage.  Funding of children has been accounted for separately. 

- We also own a small BTL outright and currently take £6k after tax/costs from this.
- We will both achieve full state pension at 68 (myself by buying the 2 years I won’t have achieved by contributions)
- We are wanting to achieve £32k (£2.7k net per month) minimum after tax per year in retirement.  We know that once we get to 68, we will be looking at achieving well over £4.5k per month.  It is the earlier years, smoothing income and tax efficiency that interest us most.


- the retirement plan is for myself to stop working at 55.  Husband likes the job so will keep going to 60 and we can live on his income.  From 60, we should be funded by my DB pension, plus need to ‘bridge’.

So, I am looking to work for 5 more years and husband for 10 more years.  Our questions are;

1. If we have £1.5 ‘spare’ per month for the next 5 years, where should we be putting it, in order to then use it tax efficiently and for smoothed income the early years?
2. How would you ‘smooth’ income in a sensible and tax efficient way for the phases of 55-60, 60-65, 65-68?  ie,  how much and where from would you take income to add to salary (55-60) and then later, how much and where from would you take income to add to early DB pension?
3. Particular things I’m interested in, is whether it’s best to fund ‘bridging’ from the pension lump sum, or from the ISA/SIPP or by taking some DB pension early at actuarial reduced rates, thus leaving SIPP more intact.

Realise this is all rather involved, so appreciate anyone who is happy to Wade through and absorb the scenario and any thoughts about any phase of it/all or any general principles we should be considering.  Thanks so much.

SMcGill

Others are better placed than me to give their opinions but this jumped out at me as a punitively harsh early retirement factor for just 3 years - are you sure this is correct?

My husband has a DB pension which if taken without actuarial reduction will pay £12k at 65 and £22k at 68

ChocolateWombat

Thank you.
These are not actuarially reduced figures.  £12k is payable at 65 as this is the part of the pension which will be armed before April 2022 and will pay out at 65 under okd scheme rules which can be used because of the McCliud judgement.
Between 2022 and 2032 when Husband retires, he will accumulate a further £10k per year in pension in the scheme which will pay out at SPA which is 68.  This is why at 68 his DB will be £22k.

Hope this makes sense?  Thanks again and for any further thoughts about where to save now or best way to smooth and bridge gap before state pension means all retirement payments are paying out.

Albermarle

If we have £1.5 ‘spare’ per month for the next 5 years, where should we be putting it, in order to then use it tax efficiently and for smoothed income the early years?

The seemingly obvious answer is to add this £1.5K pm  to your SIPP's as you will benefit from tax relief. Even though when you take income from the SIPP's it is potentially taxable , the minimum tax gain you will make is 6.25% if you are basic rate taxpayers.

If you are currently 40% taxpayers and/or you can take income from your SIPP's without paying tax, by keeping the taxable income below your personal allowances then the gain is a lot more .

tigerspill

I had a similar situation.  I put every penny that I could into my pension.  In my case it was AVCs using Salary Sacrifice.  But using a SIPP is also an option.  Got all the tax back so free money.
My Wife has done the same using a HL Cash SIPP as this is not long term money.  Just a vehicle to get the tex back.

Thrugelmir

As @tigerspill suggested. Use a SIPP to hold low risk investments. Take the free money in the form of tax relief. 

sevenhills

ChocolateWombat said:

- We have £50k in cash savings and no mortgage.  Funding of children has been accounted for separately.

Is this cash an intentional emergency fund? If not it should be used to use up your full SIPP allowance in order to claim the pension tax.

You should be able to do that every year.

The general rule is that you can contribute up to 100 per cent of your earnings, with tax relief applying on contributions of up to £40,000 per tax year.

ChocolateWombat

Thank you everyone.
I’m hearing you all about putting money into the SIPP to get the tax relief.  I guess that as long as we keep as much cash as we might need for spending and emergencies before we can access the SIPP at 55 (and we will be in that bracket where we can access at 55 but if we don’t, by the time we are 56, it will be a case of waiting until 57 due to the increase in age that is coming in) we should be okay.

Although I have opened a SIPP (as mentioned - just £3k in mine) and my husband has one with £35k in it, going back to a short period when he was in a job without the DB pension) I guess I don’t feel so confident about these.  The bulk of our pension is in DB which is so straightforward - we have just paid the required contribution and know the outcome is guaranteed and index linked….all good.  SIPPs with their investment in the stock market just feel risky to me.  My current one is with Vanguard and is their lowest risk Target Retirement 2035 one.  I realise the gains won’t be so high, but there is still a chance of decline, which I know over time shouldn’t be an issue.

I know no-one can guarantee what will happen, but assuming we don’t need to take anything out for 10 years, is that enough time to ‘ride’ the ups and downs would you say?
Clearly I’m not a confident investor, but I understand I need to take some level of risk to do better than the below inflation returns on savings accounts.

Thanks again for your thoughts on this or any of my other questions or our scenario.

NedS

ChocolateWombat said:

Thank you everyone.
I’m hearing you all about putting money into the SIPP to get the tax relief.  I guess that as long as we keep as much cash as we might need for spending and emergencies before we can access the SIPP at 55 (and we will be in that bracket where we can access at 55 but if we don’t, by the time we are 56, it will be a case of waiting until 57 due to the increase in age that is coming in) we should be okay.

Another option, not mentioned yet, is the possibility of buying added pension in your current DB scheme rather than adding to a SIPP. Buying added pension would increase the amount of DB pension you get at NRA, but could also be used to soften actuarial reduction by then taking the pension early. You may be able to purchase sufficient added pension by increasing your monthly contributions such that you would receive the same amount of DB pension as you would have done but are able to draw it a few years early. Maybe combined with a SIPP to make up any shortfall - doesn't have to be all one or the other - I'll leave you to do the maths and see if the numbers look attractive.

Thrugelmir

ChocolateWombat said:

Clearly I’m not a confident investor, but I understand I need to take some level of risk to do better than the below inflation returns on savings accounts.

Risk involves potential loss of capital which ever you cut the cake. Inflation is a risk. Only you can set your tolerance, as depends on what amount you need to achieve your personal objectives. Don't search endlessly to find the end of the rainbow if there's no need. Enjoy life instead and accept that will be will be. 

intgomo

ChocolateWombat said:

Although I have opened a SIPP (as mentioned - just £3k in mine) and my husband has one with £35k in it, going back to a short period when he was in a job without the DB pension) I guess I don’t feel so confident about these.  The bulk of our pension is in DB which is so straightforward - we have just paid the required contribution and know the outcome is guaranteed and index linked….all good.  SIPPs with their investment in the stock market just feel risky to me.  My current one is with Vanguard and is their lowest risk Target Retirement 2035 one.  I realise the gains won’t be so high, but there is still a chance of decline, which I know over time shouldn’t be an issue.

I know no-one can guarantee what will happen, but assuming we don’t need to take anything out for 10 years, is that enough time to ‘ride’ the ups and downs would you say?
Clearly I’m not a confident investor, but I understand I need to take some level of risk to do better than the below inflation returns on savings accounts.

The following article may be of interest to you.  It describes a hands-off, passive approach to investing in a "fund of funds" that aligns with the level of risk you're willing to take.

Fund-of-funds: the rivals - Monevator