Having to take early retirement.

draiggoch

Xenon123 said:

Its not.  I pay 6% of my salary into my pension.  With our mortgage paid off about a year ago, the £2.5 to £3k a month is just going into a savings account. We had little savings prior to that, and felt that we needed to have a nest egg built up prior to retirement.

As your wife is getting a £60,000 lump sum then I would say this would cover you for a nest egg. Better to put the cash in a pension to gain tax relief and draw it down afterwards at near zero tax. If you have a joint current net income per month of £5900  that means at least one of you is a higher rate tax payer (if not both of you). If you are currently paying 40% tax then you are missing out on a lot of relief by saving post tax cash.

Xenon123

Albermarle said:

I have an amount of £61k with L+G invested approx 60/40 with Unit linked funds/ With profit funds
I have an amount of £56k with Aon in a Defined Benefit pension.  Last statement I received in 2019 it said I would receive a pension of £2,827 pa.

These facts change the situation . You have two DC pensions that would be easy to merge and drawdown . The AON pension is a DB pension ( like your wife's ) so totally different . You do not have £56K in a pot in this scheme, What you have is a promise to pay you a guaranteed pension of £2827 pa ( probably inflation linked and from age 65) possibly with a lump sum of a few thousand Pounds ? The £56K is called a CETV ( Cash equivalent transfer value) and it is an offer from the scheme to buy you out . That figure will change every time you ask .  If you wish to transfer out of a DB scheme with a CETV > £30K , you need to take expensive financial advice . If the advice is not to transfer out ( which it probably will be ) you effectively are stuck.

When you say "if the advice is not to transfer out you are effectively stuck" do you mean I would have no option to transfer?

Aon in their last communication from 2019 advised I can take my benefits from the plan from age 55 with their agreement. If upon taking financial advice due to the amount being over £30k, is it not still my own decision whether I heed this advice or not?  I accept that a defined benefit pension is a better option than transferring out of it and into a DC pension under most circumstances.  But as I am retiring early on health grounds, for me waiting until 65 is not an option regardless of the fact that the pension is for life.

I presume I would also have an option of starting this AON DB pension now as I am over 55?

Paying for the financial advice would be ok with me as regardless of this AON pension, I would likely be taking advice before choosing a path anyway.      

Albermarle

Xenon123 said:

Albermarle said:

I have an amount of £61k with L+G invested approx 60/40 with Unit linked funds/ With profit funds
I have an amount of £56k with Aon in a Defined Benefit pension.  Last statement I received in 2019 it said I would receive a pension of £2,827 pa.

These facts change the situation . You have two DC pensions that would be easy to merge and drawdown . The AON pension is a DB pension ( like your wife's ) so totally different . You do not have £56K in a pot in this scheme, What you have is a promise to pay you a guaranteed pension of £2827 pa ( probably inflation linked and from age 65) possibly with a lump sum of a few thousand Pounds ? The £56K is called a CETV ( Cash equivalent transfer value) and it is an offer from the scheme to buy you out . That figure will change every time you ask .  If you wish to transfer out of a DB scheme with a CETV > £30K , you need to take expensive financial advice . If the advice is not to transfer out ( which it probably will be ) you effectively are stuck.

When you say "if the advice is not to transfer out you are effectively stuck" do you mean I would have no option to transfer?

Aon in their last communication from 2019 advised I can take my benefits from the plan from age 55 with their agreement. If upon taking financial advice due to the amount being over £30k, is it not still my own decision whether I heed this advice or not?  I accept that a defined benefit pension is a better option than transferring out of it and into a DC pension under most circumstances.  But as I am retiring early on health grounds, for me waiting until 65 is not an option regardless of the fact that the pension is for life.

I presume I would also have an option of starting this AON DB pension now as I am over 55?

Paying for the financial advice would be ok with me as regardless of this AON pension, I would likely be taking advice before choosing a path anyway.      

If you want to transfer a DB pension over £30K , then you have to go through a very detailed and expensive process with an IFA. They will then say whether the transfer is recommended or not.
The FCA has clamped down on DB transfers, due to a lot of problems in the past with NHS, British Steel staff being transferred out of perfectly good DB pensions into dodgy DC ones . 
Partly due to this , IFA's and particularly their indemnity insures, are nervous about DB transfers and will only give a positive recommendation where the case is obvious . The nervousness is around potential large claims for compensation some years down the line when the client has blown all the money  or been scammed and now wants their DB pension back .
If you go through the process and get a negative recommendation , you can legally still transfer as a so called 'insistent client'.
The problem is that due to the pressure and the potential for large claims, no mainstream DC pension provider will accept the transfer , or even non mainstream . So you would be stuck and with a large hole in your wallet.
The subject has been debated at length on this forum many times . If you have some spare time you could read this thread which has been running on and off for a couple of years .Who will accept a DB to SIPP transfer from "insistent client" — MoneySavingExpert Forum
It could be due to your health situation you would get a positive recommendation, but it would still cost about £4K . Most IFA's have not got the right qualifications and/or are shying away from this area . So will take some searching to find one .

Taking the DB pension at 55 would not be an issue, but normally for each year you take a DB pension early you would lose about 4% of the annual pension.

Xenon123

Thanks for that.  Certainly food for thought alright.  On checking my files, the £2827 annual pension estimate was from a statement I requested in 2020, and was an estimated amount for retirement in 2020 at age 55.
Looks like I may have to look at an option with drawdown on the combined DC pensions and also utilising the DB pension from Aon. The downside would be not being able to take a lumpsum (due to needing all the DC pots to fund the drawdown until 67.). Or taking a lumpsum with a smaller monthly drawdown and using the lump to make up the difference.  We would also still have savings and my wife's lump sum totalling £90k approx to fall back on.  The upside would be that the Aon pension would be for life.  As long as We can get to around the monthly retirement income figure previously quoted, I believe we can work with that. 

p00hsticks

Xenon123 said:

I am lucky in that we (wife and I) have next to no debt having cleared our mortgage a year ago.  We own 2 cars with no payments and the offspring have all left home and are self sufficient. My direct debits total little more than £150 a month, and that mainly on broadband, streaming's services etc.  My biggest monthly outgoing currently is my Sky bill!  We currently budget £800 a month to cover food and essentials.

Xenon123 said:

Our net income per month currently is approx £5900 pm.  However, we have been saving £2.5k to £3k pm towards retirement since paying our mortgage off.  I am planning for a joint income of £3.2k net pm after retirement which should allow us to maintain our current standard of living whilst still being able to save a bit and enjoy a few treats.

I'm struggling to reconcile these two parts of your introduction - you are mortgage free, have no debt and yet appear to currently be spending about £3k a month (and are aiming to maintain this in retirement) and yet say that your biggest monthly outgoing is your sky bill ! (but then go on to say you are budgeting £800 a month for food)

If you don't already do so, I'd suggest keeping a detailed record of your household expenditure for at least a year to get a real handle on where your money is being spent - this will not only give you a clearer idea of how much you need to budget for in retirement but also highlight areas where you can cut back if necessary (not that I'm suggesting you need to do so). And when considerinmg the future,  you do need to look at it across the entire household, to ensure that each partner can cope if necessary without the financia lsupprt of the other.

Kim1965

Same as above, I would have thought council tax for your relatively expensive house would be your largest bill?
 It would seem however that between you and your wife you have recent retirement income.

Xenon123

p00hsticks said:

Xenon123 said:

I am lucky in that we (wife and I) have next to no debt having cleared our mortgage a year ago.  We own 2 cars with no payments and the offspring have all left home and are self sufficient. My direct debits total little more than £150 a month, and that mainly on broadband, streaming's services etc.  My biggest monthly outgoing currently is my Sky bill!  We currently budget £800 a month to cover food and essentials.

Xenon123 said:

Our net income per month currently is approx £5900 pm.  However, we have been saving £2.5k to £3k pm towards retirement since paying our mortgage off.  I am planning for a joint income of £3.2k net pm after retirement which should allow us to maintain our current standard of living whilst still being able to save a bit and enjoy a few treats.

I'm struggling to reconcile these two parts of your introduction - you are mortgage free, have no debt and yet appear to currently be spending about £3k a month (and are aiming to maintain this in retirement) and yet say that your biggest monthly outgoing is your sky bill ! (but then go on to say you are budgeting £800 a month for food)

If you don't already do so, I'd suggest keeping a detailed record of your household expenditure for at least a year to get a real handle on where your money is being spent - this will not only give you a clearer idea of how much you need to budget for in retirement but also highlight areas where you can cut back if necessary (not that I'm suggesting you need to do so). And when considerinmg the future,  you do need to look at it across the entire household, to ensure that each partner can cope if necessary without the financia lsupprt of the other.

Let me explain better, probably not worded the best.  My monthly direct debits total approx £150 a month for the items listed above. Thats just basic items like Sky tv, mobile phone contract etc.  We budget £800 per month for food and essential sundries.  Maybe £1000 per month in total. I tend to pay the larger bills as they come up straight from savings.  Gas, Council Tax, Car insurances and car tax, Electricity, House insurance etc rather than splitting them to direct debit. This would be approx £6000 per year and comes from our savings pot as needed. Any other money spent outside of that currently has been on non essentials.
We have a surplus of funds currently simply because of being able to recently clear some debt and pay off our mortgage.  This has left us with £2,500 to £3000 per month to save at this moment .  Sometimes up to £3500. We will not have this money to save on retirement, I don't think I intimated that we would. The position we are in currently is not the norm, in that for most of our lives we have been paying out on raising a family, servicing debt and paying a chunky mortgage.
All essential annual, quarterly and occasional bills and payments averaged over the year will be approx £1500 per month including the above DDs etc.
At a net retirement income of £3100 we should have enough headroom to maintain this and also still save something from our monthly income. We will also have a nest egg to call on if needed. I am under no illusion that the "frivolity" of spending that can be enjoyed when working can only be enjoyed by the lucky few after retirement and like most, we will have to cut our cloth to suit our purse. Given that this retirement scenario is something that has been somewhat forced on me rather than through choice, this is something that I am acutely aware of.
I have been keeping a detailed record of household expenditure for a lifetime, not just a year.  All of these outgoings are essentially annual repeatable and are easily tracked.
You are right about looking to the future across the entire household.  As I intimated in a previous post, either of us should be able to cope in the event of death. I would get half my wife's pension and a life insurance payout as well as having a large house which I would be staying in alone and my wife would be in the same position, although until my retirement plans are settled I won't know how this will pan out, hence my initial post here.

Kim1965

Makes more sense now you have explained. £3100 net per month puts you, according to the many studies done, into the "luxury" retirement bracket.
 If £1500 pm pays everything Inc groceries ? Then £1600 pm buys a fair bit if leisure..enjoy.

Albermarle

Kim1965 said:

Makes more sense now you have explained. £3100 net per month puts you, according to the many studies done, into the "luxury" retirement bracket.
 If £1500 pm pays everything Inc groceries ? Then £1600 pm buys a fair bit if leisure..enjoy.

According to this study , it would put them approx half way between a moderate and comfortable retirement income .
Retirement living standards | Loughborough University (lboro.ac.uk)

From other threads on a similar theme, a real luxury retirement , would need Millions to fund it .

itsmeagain

Xenon123. There's a point that has been made by others that I'm not sure has got through with respect to your proud paying off of mortgage & rate you are putting away savings.

(1) It's too late for you, but for anyone else reading this, paying off your mortgage was a financial mistake. To save say 1.5% mortgage interest, you have paid it off using taxed & NI'd income that could have gone into pension and made 10%. This pension pot could have been used later to pay off your mortgage and still have money left over.

(2) THIS IS THE POINT FOR YOU NOW. YOU SHOULD NOT BE 'SAVING'! You should be putting all the income permissible into additional pension (either AVC/DC/SIPP). Preferably into company scheme if you can use salary sacrifice, 'effectively' pre tax & NI. Your current savings are inefficient, using income that you have already lost 32% (post tax & NI)! You should max out on your contribution (all your salary), although your company may impose a min salary limit, but the rest you can put in a SIPP (even the initial 12.7k that you were not taxed on), but you'd not get the Ni benefit on the external SIPP part.
Your pot can later be drawn down at 25% tax free & 12.7kPA, effectively getting the pension back out tax free.

For most of your income that you could put in pension. you'd be charged at 20% tax & 12% Ni (lost 32%). Lets say that you could have put 10k in pension, or earned it to put into savings. That 10k would be £6.8k into your savings or £10k in pension, meaning that 45% more would have gone into a pension at the same affordability to you. Apologies if this was all clear to you.

So, you only have 1-2 months left this year to max out your company contribution. The rest of your 'taxable pay' needs to go in a SIPP, where they will add a free 25%. You can only put in 80% of your taxable pay, to allow for the extra 25% = your full taxable pay.

There are some technical inaccuracies in the above, including how salary sacrifice really works, but the concept works. In my last year of working, I put all my taxable income into pension for the above reason (subject to £40k limit & carry forward) rules.

Albermarle, can you please rationality check the above concept, plus explain the £2880 continued input available.