Thoughts on our early retirement plans

Roger175

Hoping for some advice on our early retirement plans

A very brief summary of our situation. I’m just about to turn 58, my wife is 6 months older. My wife intends to retire from her £13k pa job in Aug this year. I’m self-employed earning around £60k and I want to go approx. 1 year later, maybe the end of 2023. Have checked and we are both expecting full state pensions at 67.

Current assets etc as follows

£900k principal home - totally unencumbered 
£220k equity in rental property (£180k BTL mortgage on house worth £400k), after mortgage/insurance etc, we clear about £750/month on this. We reckon to sell this property at around age 70 and release the capital to top up savings.
£65k share in inherited property (protected by trust) – this will be liquidated when mother passes – realistically 10 years?
£356k DC pension pots (me, spread across 3 different SIPP pots)
Wife’s has 2 DB pensions, which should pay a combined income at age 60 of £9,000pa with lump sums of £38k
£90k in S&S ISAs (roughly 50/50 me/wife)
£122k in cash/PBs (roughly 50/50 me/wife) 

We have been analysing spending and can be comfortable with £32,000 pa, (incl mortgage on 2nd house, which will disappear at some point).

I have been running all the scenarios using the trial version of Voyant and this confirms we should be able to retire fairly comfortably. Voyant has however thrown up some interesting points – it shows us drawing down cash first, followed by my DC pensions and finally the ISAs. According to their projections, at this level of drawings, we will actually hardly dip into my SIPPs and never touch the ISAs.

My specific questions are:-

1)     Is this the best way to optimise our assets? – the one that I’m struggling to get my head around is why Voyant is suggesting this order. Ie cash, then SIPP pension pots followed by S&S ISAs? I’m struggling to work out the Inheritance tax implications (we have 3 children) and would have thought it better to draw down ISAs before SIPP pots?

2)     I am generally intending leaving my SIPP pots invested for the foreseeable future, however one is a With Profits fund with Prudential (former Scottish Amicable). This accounts for about £135k out of the total £356k. I have no idea what to do with this one. I have to admit to not really understanding With Profits funds, other than I was advised a few years ago that the Prudential (former SA) was not half bad and not to transfer it into one of my other pensions – all to do with the terminal bonuses if I recall.

Would appreciate any thoughts.

Marcon

Roger175 said:

Hoping for some advice on our early retirement plans

A very brief summary of our situation. I’m just about to turn 58, my wife is 6 months older. My wife intends to retire from her £13k pa job in Aug this year. I’m self-employed earning around £60k and I want to go approx. 1 year later, maybe the end of 2023. Have checked and we are both expecting full state pensions at 67.

Current assets etc as follows

£900k principal home - totally unencumbered 
£220k equity in rental property (£180k BTL mortgage on house worth £400k), after mortgage/insurance etc, we clear about £750/month on this. We reckon to sell this property at around age 70 and release the capital to top up savings.
£65k share in inherited property (protected by trust) – this will be liquidated when mother passes – realistically 10 years?
£356k DC pension pots (me, spread across 3 different SIPP pots)
Wife’s has 2 DB pensions, which should pay a combined income at age 60 of £9,000pa with lump sums of £38k
£90k in S&S ISAs (roughly 50/50 me/wife)
£122k in cash/PBs (roughly 50/50 me/wife) 

We have been analysing spending and can be comfortable with £32,000 pa, (incl mortgage on 2nd house, which will disappear at some point).

I have been running all the scenarios using the trial version of Voyant and this confirms we should be able to retire fairly comfortably. Voyant has however thrown up some interesting points – it shows us drawing down cash first, followed by my DC pensions and finally the ISAs. According to their projections, at this level of drawings, we will actually hardly dip into my SIPPs and never touch the ISAs.

My specific questions are:-

1)     Is this the best way to optimise our assets? – the one that I’m struggling to get my head around is why Voyant is suggesting this order. Ie cash, then SIPP pension pots followed by S&S ISAs? I’m struggling to work out the Inheritance tax implications (we have 3 children) and would have thought it better to draw down ISAs before SIPP pots?

2)     I am generally intending leaving my SIPP pots invested for the foreseeable future, however one is a With Profits fund with Prudential (former Scottish Amicable). This accounts for about £135k out of the total £356k. I have no idea what to do with this one. I have to admit to not really understanding With Profits funds, other than I was advised a few years ago that the Prudential (form SA) was not half bad and not to transfer it into one of my other pensions – all to do with the terminal bonuses if I recall.

Would appreciate any thoughts.

These may make interesting reading for you: 

https://www.investorschronicle.co.uk/ideas/2021/06/18/in-what-order-should-we-draw-from-our-assets-in-retirement/

https://moneyforums.citywire.co.uk/yaf_postst12435_What-to-draw-on-first--SIPP-or-ISA-or-both.aspx

Clearly not identical to your position, but there are enough similarities to make it worth a look.

Thrugelmir

Roger175 said:

£220k equity in rental property (£180k BTL mortgage on house worth £400k), after mortgage/insurance etc, we clear about £750/month on this. We reckon to sell this property at around age 70 and release the capital to top up savings.

Presumably after income tax as well. There'll be CGT to pay on the capital gain as well on disposal. 

Roger175

Thrugelmir said:

Presumably after income tax as well. There'll be CGT to pay on the capital gain as well on disposal. 

Yes, but not as much as it might have been as this was our former family home which we have owned for 28 years. The new house was a self-build and we avoided all but a few £ on stamp duty as we effectively bought a building plot, 6 year ago before the rules changed. We then lived in the original house for the first couple of years of the build, before we transferred over. Therefore, it will only be the increase in value since we moved out (approx 50k to date). 

MX5huggy

Are you topping up the SIPP’s for both of you with the maximum contributions of £60k and £13k before April and then the same for you after April and all the wife’s income till August? 

Roger175

MX5huggy said:

Are you topping up the SIPP’s for both of you with the maximum contributions of £60k and £13k before April and then the same for you after April and all the wife’s income till August? 

This is somethings I've considered, but again I'm struggling to get my head round it. My wife works in education so pays into her Local Auth pension and I've made a few lump sum contributions this year (mainly to offset HR tax), but other than that we're not sure.

Help me understand this - If we maximise contributions as you suggest then we would presumably get the benefit of the tax relief and the tax free lump sums, but once in retirement my wife will always pay tax since her DB pensions & share of the rental income will come to over 13k. I could benefit, but would need to draw down from the pensions rather than just spend the cash & ISAs. I suppose this just brings forward the time I would need to do this as I would have less cash and more in pensions. (Sorry, I'm just thinking this through as I type!)

We are certainly considering opening a SIPP for my wife before the end of this tax year and putting in a lump sum which I think I'm right in saying she could then draw as a small pot once she retires. But what's the benefit to a tax payer? She would get 25% tax free but pay tax on the rest? Not a huge gain, unless I'm missing something.

QrizB

Roger175 said:

But what's the benefit to a tax payer?

If you pay in £800 it gets £200 of tax relief, turning into £1000. You get 25% - £250 - back tax-free and pay 20% tax on the remaining £750 (£150) leaving £600, so you've turned £800 into £850 - a 6.25% gain.

Roger175

QrizB said:

Roger175 said:

But what's the benefit to a tax payer?

If you pay in £800 it gets £200 of tax relief, turning into £1000. You get 25% - £250 - back tax-free and pay 20% tax on the remaining £750 (£150) leaving £600, so you've turned £800 into £850 - a 6.25% gain.

Actually, this is beginning to make more sense, especially as my wife won't be staring either of her DB pensions until she's 60, so there are potentially a couple of years where she would benefit (certainly one full year).

Just a thought but could she contribute this year into one provider, then more next year into a different provider and then draw them both as small pots and then bung the money into the ISAs. From what I can see the sums would have to be under £10k to do this and presumably that's the the value when you come to draw it (rather than the contribution).

Albermarle

Just a thought but could she contribute this year into one provider, then more next year into a different provider and then draw them both as small pots and then bung the money into the ISAs. From what I can see the sums would have to be under £10k to do this and presumably that's the the value when you come to draw it (rather than the contribution).

If you withdraw a pension worth less than £10K , then you can do this under the 'small Pots rule'  However you still get 25% tax free and the rest taxable , the same as if you withdrew a larger amount . The advantage of using the small pots rule is that it does not restrict your future ability to contribute to a pension to £4K pa , but it does not save you in tax . If there is no possibility of your wife wanting to contribute that much in future then you might as well stick to one pension and withdraw it in stages.

When you have both stopped working you can both still contribute £2880 to a pension and gain £720 tax releif . As taxpayers if you withdrew this money the benefit would only be £180 pa but if you are thinking of using your pension as a way of passing on money as an inheritance then it could be  addition to the pot .

Finally do not forget in your plans that state pensions are taxable.