2 years to go….

Workerbee999

Hello,

 I would welcome a sense check please of our plan. Both 53 now, OH retiring next year at 54, me retiring the following year at 55. We want to keep our income level in line with what we live on now, £6k net per month in todays prices. I know that’s high but we have a lot of travel plans, especially the first 10 years, and some expensive hobbies.

We are both in DB schemes which are payable between 60-62, about £32k each including the next 1-2 years accrual (todays rates) and both will have full SP, we have checked the forecasts. So at 67 we should have guaranteed income to meet our targets, which is why we plan to wait till when they are payable rather than taking early. Most DB has 5% inflation cap, although approx £13k is uncapped. Whoever is left will get 50% or 67% of the other’s DB.

We also have DC to fund the gap for the period from 55 to SP. OH has £85k - enough to take out tax free / PA for 5 years until DB starts. I have £450k, this is what we are mainly going to live on from 55 to SP to fund the gap after taking the 25% TFLS (to fund house move to somewhere we want to be rather than convenient for work). Plan to withdraw up to HR tax band each year till DBs start, and likely to run the pot almost fully down.

Outside pensions we will have approx £250k savings by the time OH finishes in a combination of Premium Bonds, cash ISAs and NS&I savings at good interest rates. I’m working the extra year to 55 while our son is still at uni and also building a house deposit for him. The £250k includes what we will have by then, not what we have now, so if I finish earlier we don’t reach that target and have the double whammy of spending savings to live on instead. I’m fine with working that year as the time will be spent planning our travels and getting our house ready to sell. We intend to keep a £100k savings pot but the rest will go towards house, initial replacement car and probably a year of busy travel. 

£400k of my DC from a previous employer is with Aviva. I have started de-risking it (although we have the DBs, if we are going to spend this fairly quickly over 5 years in 2 years time it feels like the right thing to do, but welcome views on it as I am less confident approaching de-accumulation than I was building the pot). This is how it is invested:

£160k Blackrock Sterling Liquidity - doesn’t look like I can just hold cash so this was lowest risk - what happens if interest rates start falling again, does this just increase by smaller amounts or can it actually go down? I have picked this over bonds due to the increasing interest rate impact. This gives me the TFLS and year 1 funds.

£180k World exc Uk equity index
£. 40k UK equity index
£ 20k Emerging markets equity.

I would also welcome views on whether our strategy of running down the DC to have just guaranteed income is sensible? I don’t want the worry of managing investments as I get older, but if I wasn’t withdrawing it so quickly it could stay invested longer (especially if LTA doesn’t come back as I’m up near the previous one). It would also mean nothing for our son to inherit, although he would get the house which is about £600k as the guaranteed pensions would go a good way towards care home fees etc.

Thank-you, if you have managed to read the whole (long ) post.

On-the-coast

rough sense check for you... you will have £780k in pension and savings and will probably lose about 10% of that in tax.. so call it £700k.  
you have a £600k house and it's not clear how much you're putting addionally into a new house purchase (from that £700k)
you want to spend about 70k/year from savings for 6 years (until DB pensions kick in)... and then you'll need about 20k per year for 6 years to top up DB pension until SP kicks in... 
i make that a total of £160k left (assuming no growth and no capital losses)
excluding expenditure on house move.
I think you'll be fine... the DB pensions are probably worth approaching £1M each btw, so maybe invest in some paid advice.

NedS

Workerbee999 said:

£160k Blackrock Sterling Liquidity - doesn’t look like I can just hold cash so this was lowest risk - what happens if interest rates start falling again, does this just increase by smaller amounts or can it actually go down? I have picked this over bonds due to the increasing interest rate impact. This gives me the TFLS and year 1 funds.

This is what is known as a short-term money market fund. It's about as close to cash as you can get. They normally aim to track the overnight SONIA index which loosely tracks BoE base rate. Assuming you hold an accumulating variant - the fund increases in value rather than paying out regular income - the fund should currently be rising by around 5.25% compounding. If interest rates fall, so will the return on this fund as it aims to track the underlying interest rate. Most people expect interest rates to stay 'higher for longer', so it's probably a safe bet for the next 12 months for a circa 5% return on your 'cash' and certainly is a very sensible place to hold cash you will need to access in the next 1-2 years.

There are risks, but they are very small (hence the lowest 1 out of 7 risk rating). Presently, due to higher interest rates, there has been large amounts of cash invested in such funds globally and in the UK. Not all of the assets within the fund are immediately liquid, so a run on liquidity could theoretically see such a fund drop in value but it is unlikely. Normal behaviour would be for the fund to increase in value daily approximately tracking the prevailing BoE base rate of the time.

Marcon

On-the-coast said:

rough sense check for you... you will have £780k in pension and savings and will probably lose about 10% of that in tax.. so call it £700k.  
you have a £600k house and it's not clear how much you're putting addionally into a new house purchase (from that £700k)
you want to spend about 70k/year from savings for 6 years (until DB pensions kick in)... and then you'll need about 20k per year for 6 years to top up DB pension until SP kicks in... 
i make that a total of £160k left (assuming no growth and no capital losses)
excluding expenditure on house move.
I think you'll be fine... the DB pensions are probably worth approaching £1M each btw, so maybe invest in some paid advice.

Indeed - there may be other possibilities which would be more than worth the cost of the advice.

Pat38493

So if I understood you expect to have about £635K (£85K plus £450K plus £100K leftover after house adjustments) gross in your DC, to cover your £72K net per year spend with 2 personal allowances fully used.

Feels fine to me at first glance.

An IFA might suggest some other solutions and could model various scenarios.  For example fixed term annuities for part of the amount to reduce risk, or on the other end of things, putting one or both of your DB into payment earlier, might give a better longer term outcome and a high chance of a pension inheritance at the end, whilst maintaining the same overall lifestyle. (this because early DB pension is a bit of a shield against SORR).  Could also shield your guaranteed income a bit against HR tax if tax bands continue to go down in real terms.

IFA Might also suggest that you can actually retire earlier with your OH and still be fine!

Your required annual spend is coincidentally almost the same as our current annual spend, but I am expecting our long term yearly spend to be lower due to some large capital costs in the last year and kids still at uni etc.

Edit:  One other comment is that personally I wouldn't be focussed on building up savings if it's may last year or two of working - rather I would cram as much as I possibly can into pensions to get the tax relief.

saucer

Pat38493 said:

  For example fixed term annuities for part of the amount to reduce risk, or on the other end of things, putting one or both of your DB into payment earlier, might give a better longer term outcome and a high chance of a pension inheritance at the end, whilst maintaining the same overall lifestyle. (this because early DB pension is a bit of a shield against SORR).  

What’s SORR?

Pat38493

saucer said:

Pat38493 said:

  For example fixed term annuities for part of the amount to reduce risk, or on the other end of things, putting one or both of your DB into payment earlier, might give a better longer term outcome and a high chance of a pension inheritance at the end, whilst maintaining the same overall lifestyle. (this because early DB pension is a bit of a shield against SORR).  

What’s SORR?

Sorry - SORR stands for "Sequence of Returns Risk" - it describes the risk of there being big drops in your fund value in the first years of drawdown.  Mathematically, it's much worse if there is a market crash in the first 5-10 years of your drawdown, than later on.  A lot of the discussion about how much you can safely withdraw from a pot of money in retirement focuses on this risk.

JohnWinder

That’s my understanding. But often it will be useful to think of ‘risk’ with investments as value increases as well as decreases, especially since a common risk measure is variation in average returns, and the variation can be up or down.

This give SoRR the additional meaning of great benefit of a long lasting market crash near the beginning of your accumulation, allowing asset purchasing at discounted prices. That’s a highly desirable SoRR.