Saving to allow for early retirement- are we maximising our options?

rundmc-k

My wife and I are both 40yr old NHS workers & would both like the option of retirement at 55 or earlier. I do all our finances and I just want to make sure I am doing things "correctly" or at least sensibly, and would be interested to know if there is any advice on if we could do things better.

I am a higher rate tax payer and my wife is lower rate. I'll collate our incomes/benefits for the following:
I don't have a detailed spreadsheet type "number" needed for retirement, but I know that currently we could live comfortably with combined gross £50k. We have no mortgage or dependents, but both of those things could change in the nearish future.

We take our main NHS pension at SPA, which is currently 68. We would be in receipt of well over £50k p.a. from DB pension and SP, even if we were to retire at 50, so I feel that 68 onwards is covered.

We can also draw an NHS DB pension at 60, which would be somewhere in the region of £22k p.a. plus ~£66k tax free lump sum, which works out around £30k p.a. from age 60-68 (almost all tax free).
In addition to that I have paid into LISAs for a few years for both of us and intend to maximise payments into that for the next 10yrs. As long as the LISAs are invested in a non-volatile way nearing age 60, there should be £100k+ in both accounts when accessible, so it feels like 60-68 is covered.

I opened a SIPP a few years ago, and have been trying to invest in that where possible also. Now, the earliest I can access that is 57 (more likely 58 or later I guess), but if 57 is possible, then that could already cover age 57-60 for us.

I am investing in S+S ISAs for both of us, I've had mine 4 yrs & and my wife 2 yrs. I feel if we had £150k+ in each ISA it could potentially cover the years 50-57 if we wanted to be stopping work by then. That seems doable, although the S+S element adds volatility which I am ok with at the moment, but would be less so when approaching 50.

So if you have read all this, many thanks. I just wonder... have I made any mistakes/unwise moves or does that plan seem feasible? Are there any "better" investing suggestions I could be doing for us (I'm not asking for crystal ball stuff, I know that would be lovely).
I know life circumstances could change as I said earlier, mortgage if we move (we're looking), children (we're thinking), illness (hope not), but this is our current situation.

hugheskevi

The main thing I would be considering is your £50,000 target, and how you think it should change (increase) in the future. It looks from the post above that you are assuming that as long as you have that in real terms in all future years you will be fine.

At age 40 you are fairly young, and almost 30 years from State Pension age. £50,000 today is very different to what £50,000 in 30 years will be, even with CPI increases. You may want to give thought to increasing that target income in line with expected earnings growth to State Pension age and by prices thereafter. That would prevent your income being eroded relative to the rest of society each year, which is what would happen with CPI increases.

I'd be making sure I put all higher-rate income into a pension as a priority.

You might also want to consider what each person's income would be in the event of a death of one of you at different points between age 40-70 and thereafter. Survivor pensions can be less than you might think, so it can be important that a premature death of either person would not derail plans.

DRS1

I do not have kids but if you do have one or more isn't a lot of this planning going to go out of the window?

BrilliantButScary

Have you thought about ERRBO:

https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension/early-retirement-reduction-buy-out-errbo

This could bring your NRA down to 65 years in the 2015 scheme without any actuarial reduction. Your current SPA could change, it certainly won't go down.
My SPA has changed from 60 to 67, over my working life, fortunately I have very little service in the 2015 scheme. Certainly being mortgage free and having no dependents aids early retirement. Children are certainly a costly commodity!

Does your professional body or employer run retirement courses/seminars, as you might well benefit from these. They often cover other things e.g. LPA, Wills, Trusts etc 

rundmc-k

hugheskevi said:

The main thing I would be considering is your £50,000 target, and how you think it should change (increase) in the future. It looks from the post above that you are assuming that as long as you have that in real terms in all future years you will be fine.

At age 40 you are fairly young, and almost 30 years from State Pension age. £50,000 today is very different to what £50,000 in 30 years will be, even with CPI increases. You may want to give thought to increasing that target income in line with expected earnings growth to State Pension age and by prices thereafter. That would prevent your income being eroded relative to the rest of society each year, which is what would happen with CPI increases.

I'd be making sure I put all higher-rate income into a pension as a priority.

You might also want to consider what each person's income would be in the event of a death of one of you at different points between age 40-70 and thereafter. Survivor pensions can be less than you might think, so it can be important that a premature death of either person would not derail plans.

Yes that's a good point, and something I'll have a think about. Thankfully the DB pension with the NHS rises at CPI + 1.5% so it's inflation proofed to an extent, but yes otherwise the investments I have would need to be considered in the context of inflation. 

You say put all higher rate income into a SIPP but will that put me at risk of having too much in the 60+ age region (& potentially having to pay higher rate tax in retirement) and not enough in the 50-60 region?

At the moment I think we do have enough life cover, moreso for my wife's benefit if I die rather than the other way round, but I think it's ok. I do need to look at whether the premiums we're paying are the most efficient though as it's been a long time since I looked at that.

rundmc-k

DRS1 said:

I do not have kids but if you do have one or more isn't a lot of this planning going to go out of the window?

Oh absolutely, as will an illness or losing a job etc, but I'd rather put a plan in place for our current circumstances and understand it, then work out how it will need adjusted if circumstances change, rather than not make plans/make the primary plan one for a hypothetical situation.

rundmc-k

BrilliantButScary said:

Have you thought about ERRBO:

https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension/early-retirement-reduction-buy-out-errbo

This could bring your NRA down to 65 years in the 2015 scheme without any actuarial reduction. Your current SPA could change, it certainly won't go down.
My SPA has changed from 60 to 67, over my working life, fortunately I have very little service in the 2015 scheme. Certainly being mortgage free and having no dependents aids early retirement. Children are certainly a costly commodity!

Does your professional body or employer run retirement courses/seminars, as you might well benefit from these. They often cover other things e.g. LPA, Wills, Trusts etc 

I appreciate the suggestion and I will look into it more, but from the basic research I have done, it seemed to me that ERRBO was less financially efficient than sensible use of SIPP/ISA investments. I could be wrong, and will consider it, but that was the impression I got.
There are occasionally pension seminars within our employment, but I have never found them to be overly helpful. I will probably try and seek out an IFA at some point too.

hugheskevi

rundmc-k said:

hugheskevi said:

The main thing I would be considering is your £50,000 target, and how you think it should change (increase) in the future. It looks from the post above that you are assuming that as long as you have that in real terms in all future years you will be fine.

At age 40 you are fairly young, and almost 30 years from State Pension age. £50,000 today is very different to what £50,000 in 30 years will be, even with CPI increases. You may want to give thought to increasing that target income in line with expected earnings growth to State Pension age and by prices thereafter. That would prevent your income being eroded relative to the rest of society each year, which is what would happen with CPI increases.

I'd be making sure I put all higher-rate income into a pension as a priority.

You might also want to consider what each person's income would be in the event of a death of one of you at different points between age 40-70 and thereafter. Survivor pensions can be less than you might think, so it can be important that a premature death of either person would not derail plans.

You say put all higher rate income into a SIPP but will that put me at risk of having too much in the 60+ age region (& potentially having to pay higher rate tax in retirement) and not enough in the 50-60 region?

If you have higher rate relief available, you can take £60 now, or have £100 in a pension. If that is taxed at 20% when withdrawn, you extract £85 from the pension after income tax and 25% tax free lump sum.

That is a boost of 85/60=42%. It is very hard to ignore. 

With that sort of incentive, things like using the pension saving to repay a mortgage becomes very worthwhile. The mortgage can provide funds for the period prior to minimum pension age. Even with the interest payable, you end up well ahead. 

If additional saving would put you into higher rate tax the incentive becomes weaker, 70/60=17% but still worthwhile. 

Personally, I will be a higher-rate taxpayer due to pension income in all years from age 55 based on my existing pension savings with no further contributions. Despite this, I am using an offset mortgage like this one with no fees to enable me to continue to make big contributions to pensions, then withdraw funds and reduce the offset in the years just before age 55. That gives me a tax relief boost of 17%. At age 55 the pension lump sum will restore the offset to 100%, thus enabling me to benefit from pension tax relief and also access funds prior to minimum pension age. There is a cost of mortgage interest (limited by using an offset rather than standard repayment mortgage), but also a probable gain from investment return, so the expected cost is trivial, and far smaller than the 17% tax gain.

Nil fee, 0% balance transfer credit cards might also work. However, you cannot rely on those more than about a year or so from minimum pension age as you can never guarantee rolling over a balance. Potentially longer-term loans could also work, or perhaps car finance with a balloon payment. Basically you want to create a situation in which you are borrowing in the years before minimum pension age and making the repayment after minimum pension age.

Also, remember that once you leave service your NHS pension will only increase in line with CPI. You should be fine on the survivor pension position if you were to die in service, the most difficult position would probably be death between leaving service and State Pension age.

GunJack

Re life insurance, don't forget the death in service benefits included in the NHS pension scheme, may save a worthwhile amount on separate life insurance premiums. That saving can then be invested while you are active members. 

Balancing sipp and ISA savings towards the partner with the lowest NHS pension provision is a good idea.

Emmia

Off topic, but as you're both 40, and if you both want kids, then time is evaporating for that to happen.

kinger101

I would prioritize pension over LISA to avoid higher rate tax.

I agree it's good to save whether having kids or not as it gives you greater options.

But nursery fees can exceed £1000 PCM even with 30 hours funded in some parts of the country.  And some of the wraparound childcare costs will continue when they're at school.

Then there's a potential contribution to living costs if they go to Uni.