Retirement Income Planning

cash99

Hi

Planning to retire in just over 2 years at 60 and I am putting the final touches to my and my wife's pension funding and retirement income planning. Any feedback on my plans is very welcome.

I think I have a reasonable plan that will ensure our joint income needs are met , c£5k per month after tax until around 75 then 10% less per month after that, and we have minimised any higher rate tax.

I will have about £450k in two DC schemes by retirement and will have a £23k DB pension plus 3x lump sum from 60 as well. Both my wife and I have full state pension and other small DB pots that will generate another £12k per annum from state pension age.

The general plan is to mainly use the DC pension to bridge the gap until state pension and other DB pensions kick in.

On my latest cashflow, I could end up paying a reasonable amount of higher rate tax, while my wife is not using her personal allowance. The first action is to put c£50k over this and the next 3 tax years in a SIPP for her. We cannot invest more due to the level of her income.  This will reduce the higher rate tax significantly for a few years.

The second action is to put c£375k of the DC pension into drawdown and take 25% TFLS and start drawdown immediately. I will vary the drawdown amounts and the amount of TFLS spent to maintain the desired income without paying any higher rate tax.

The third action is to take the remainder of the DC funds after a few years to bridge the final gap between my wife’s SIPP being exhausted and state pensions etc kicking in. In this case I just want to take the TFLS and defer any drawdown for a few years until the drawdown on the first DC pot is exhausted.

Any feedback suggestions on the above very welcome and I also have the following specific queries.

1.  I am assuming there is no issue with taking a TFLS then deferring the drawdown on the second part of my DC pot for a few year?

2. How can I de-risk my wife’s income in the event I die before her. After 67, my wife’s income would drop to c£27 before tax if I died. Should I be looking at life insurance even if only to say age 75?

I appreciate I also need to think about the investment strategy for the DC funds and the TFLS and whether fixed term annuities might be useful but I want to resolve the cash flow / funding plan first.

Thanks in advance for any replies.

Marcon

cash99 said:

On my latest cashflow, I could end up paying a reasonable amount of higher rate tax, while my wife is not using her personal allowance. The first action is to put c£50k over this and the next 3 tax years in a SIPP for her. We cannot invest more due to the level of her income.  This will reduce the higher rate tax significantly for a few years.

Just double checking - if £50,000 is the net contribution, is your wife earning at least £62,500 (more if there are any pension contributions being made by her/her employer in the years in question, which I suspect there are)?

1. Not if your provider supports this, and it sounds as if they do.
2. Her annual income might drop, but what would she inherit overall if you die before her? Do you really need to take the whole 25% tax free cash from your SIPP in one go - couldn't you draw down as you have a need for it, thus keeping it in a tax sheltered environment until it's needed (and she could inherit in due course)? There's only so much you can put in an ISA!

badmemory

I only have one comment which I seem to make regularly.  Why do you think you will need so much less income after 75.  Maybe some less but what if you need help even if only a cleaner.  Then there are taxis if you are no longer allowed to drive.  I speak as someone who struggled to wield a vacuum cleaner for almost 2 years.

LHW99

Could a joint life annuity be a part of your (later) plans? It would ensure additional income for your wife after your passing, if needed (they are better value as you get older).

Equalising funds overall can be useful, so another option is to ensure she would inherit sufficient savings outside of pensions, that could be invested / otherwise used for income.

It would be sensible to run through numbers for each of you, to ensure you have roughly equivalent amounts once you need to survive by yourself.

cash99

Marcon said:

Just double checking - if £50,000 is the net contribution, is your wife earning at least £62,500 (more if there are any pension contributions being made by her/her employer in the years in question, which I suspect there are)?

1. Not if your provider supports this, and it sounds as if they do.
2. Her annual income might drop, but what would she inherit overall if you die before her? Do you really need to take the whole 25% tax free cash from your SIPP in one go - couldn't you draw down as you have a need for it, thus keeping it in a tax sheltered environment until it's needed (and she could inherit in due course)? There's only so much you can put in an ISA!

Thanks for the reply Marcon. 
I am not clear if my provider does support deferring drawdown after taking TFLS but it sounds like this is possible. I am with Fidelity at the moment and I am considering Vanguard. I will find out what they support. 

The £50k is gross, my wife's income after deducting DB pension contributions will only support around £12.5k per tax year of DC contributions. Am I correct in only deducting the amount of her contributions to calculate how much relevant earnings she has and not the value of her DB pension increase as you would for the annual allowance?

I need to take that level of TFLS so that the drawdown pot has enough taxable income to maximise my basic rate band in the early years. I expect some of will also be used for a car and holiday with the rest going into ISAs until needed. Anything that is spent will be "paid back" from savings from our monthly income as we will not spend it all. 

Thinking about it, I may be able to achieve the same result with UFPLS which would keep the TFLS in the pension for longer. 

cash99

badmemory said:

I only have one comment which I seem to make regularly.  Why do you think you will need so much less income after 75.  Maybe some less but what if you need help even if only a cleaner.  Then there are taxis if you are no longer allowed to drive.  I speak as someone who struggled to wield a vacuum cleaner for almost 2 years.

Thanks badmemory. I have looked at the figures again and the rounding in my original post was a little off. I am planning a 10% drop in income at 75 and another 10% 85.  I had assumed we would be less active, travel less etc but had not thought about other costs going up.

From your experience what sort of reduction is reasonable? 

I have edited my orginal post as well. 

crv1963

cash99 said:

badmemory said:

I only have one comment which I seem to make regularly.  Why do you think you will need so much less income after 75.  Maybe some less but what if you need help even if only a cleaner.  Then there are taxis if you are no longer allowed to drive.  I speak as someone who struggled to wield a vacuum cleaner for almost 2 years.

Thanks badmemory. I have looked at the figures again and the rounding in my original post was a little off. I am planning a 10% drop in income at 75 and another 10% 85.  I had assumed we would be less active, travel less etc but had not thought about other costs going up.

From your experience what sort of reduction is reasonable? 

I have edited my orginal post as well. 

In my experience (not lived but observed) as people age spending doesn't really reduce by much but evolves, my mother now has to pay for hedge trimming (£190 this month and usually has this done 3-4 times per year), has to pay for decorators and tradesmen ad hoc to do things my late Dad did or she did.

Others need to use taxi services more frequently, two buses in the freezing weather doesn't appeal when your in your 80s+ to get to hospital appointments, sometimes for bringing shopping home etc.

My wife and I are planning a linear spending plan in retirement, we are also age proofing out home as best we can - building work and new garden layout etc. 

Hope this helps your deliberations!

cash99

LHW99 said:

Could a joint life annuity be a part of your (later) plans? It would ensure additional income for your wife after your passing, if needed (they are better value as you get older).

Equalising funds overall can be useful, so another option is to ensure she would inherit sufficient savings outside of pensions, that could be invested / otherwise used for income.

It would be sensible to run through numbers for each of you, to ensure you have roughly equivalent amounts once you need to survive by yourself.

Thanks LHW99

I have looked at this in more detail and I think my income will be fine at 75% of our joint income if my wife dies first but her income will drop to 40% if I die first.  I will look at a joint life annuity. 

Unfortunately, we have no other savings etc, as all put into pensions and supporting adult children. 

Sarahspangles

cash99 said:

The £50k is gross, my wife's income after deducting DB pension contributions will only support around £12.5k per tax year of DC contributions. Am I correct in only deducting the amount of her contributions to calculate how much relevant earnings she has and not the value of her DB pension increase as you would for the annual allowance?

I need to take that level of TFLS so that the drawdown pot has enough taxable income to maximise my basic rate band in the early years. I expect some of will also be used for a car and holiday with the rest going into ISAs until needed. Anything that is spent will be "paid back" from savings from our monthly income as we will not spend it all. 

Yes, the Pension Input Amount is used in the Annual Allowance Calculation, but contributions (gross of relief) are the figure you need to for the calculation check against the relevant UK earnings limit.

I posted in another thread about the opportunity for one spouse to draw less from their pension for a year or two allowing them to benefit from the additional £5k starter savings band. With lump sums, and possibly inheritance, one or both spouses may be taxed on interest on their savings over £1k, as it’s not possible to shunt all the cash into ISAs straight away. We will be saving £1k tax a year for the next couple of years by holding enough in joint savings accounts to benefit from all of the band. 

Linton

As someone who has reached 75 I would confirm that day to day expences do not decrease as you get older although they change.   One gets used to a particular standard of living over decades and deliberately cutting back could be difficult.  You may take fewer holidays but for those you do take you may wish to go more up-market.  For example we would be likely to go business class for long haul journeys or stay in a more comfortable hotel than we would have previously.

On the other hand if your health precludes travel paying for assistance in your own home to do the things that you are no longer able to do is expensive.  You dont want to be in a position where cash is a severelimitation.

On the plus side, provided you have planned prudently the chances are that by 75 you will be far richer than expected when all the possible disasters that could have occurred in fact didnt. 

Albermarle

I am not clear if my provider does support deferring drawdown after taking TFLS but it sounds like this is possible. I am with Fidelity at the moment and I am considering Vanguard. I will find out what they support. 

I am pretty sure Fidelity are fully flexible for you to take TFLS ( all at once or in stages) and not take any taxable income until you want to.
Probably Vanguard are the same.
As a general comment, posters seem happier dealing with Fidelity customer service, online offering etc than Vanguard.
The latter are cheaper if you only hold OEIC funds, but the former are cheaper if you only hold ETF's etc.