Check our plan - Are we ready to go?

Moodyboffin

Good Afternoon All

Very long time lurker here. My financial education has mainly been gained through this forum over the past 10 years, so a huge debt of gratitude to all posters, past, present and future.

Goal:

After 25y+ careers, OH and I would like to leave our corporate jobs to pursue personal interests. We believe we've achieved financial independence and are ready to press the button and would love to pressure test our thinking, numbers and phasing.

Context:

52M/52F (Born Nov/0ct’72), 2 children aged 14/16. Children’s education support through to University already secured separately, so not a direct consideration here. 

No mortgage, main residence value £900k (potentially would downsize to move to a different part of the country when the kids are gone. May create potential equity release, but not a priority).

6 mth emergency fund in place.

Financial situation:

(Note that for simplification purpose, we are assuming that investment growth offsets inflation, so all expressed in today’s money).

Me:

• Deferred DB #1 - £32k pa from age 60 (2032). Annual revision lower of RPI/5% for Pre 06/04/10 (1/3) and lower of 2.5%/CPI for Post 06/04/10 (2/3). 50% to spouse upon death.
  Protected pension age 50 but not planning on accessing before 60. For completeness, Full pension would be £37k at 65, but ok to take some actuarial reduction to access at 60 (or not?).
• SIPP #1 - £220k, STMM
• ISA #1 - £74k, STMM
• ISA #2 - £150k, 50% STMM (dry powder), 50% Global tracker
• SP #1 - YTD £8.3k, planning to buy missing years to full SP.

OH:

• Deferred DB #2 £7k pa from age 60 (2032). Annual revision RPI-linked. Protected Pension age 55. 50% to spouse upon death.
• DC #1 Work Pension - £366k, 50% Global tracker, 50% Balanced Fund
• SIPP #2 - £220k, 50% STMM, 50% Global tracker
• ISA #3 - £64k, STMM
• ISA #4 - £150k, 50% STMM (dry powder), 50% Global tracker
• SP #2 - YTD 11.3k, planning to buy missing years to full SP.

Shared Assets (legacy investments):

• Corporate Investment Bond - CIB #1 - £42k
• Corporate Investment Bond - CIB #2 - £38k

Current plan:

Both leave employment in 2025. OH finishing 31/03, Me finishing 31/06 (allowing for bonus/shares to be paid in March, AVC contributions into Tax Year 25/26 in April and sufficient NI contribution for 1 extra SP year).

We assumed we conservatively target £5k net a month to cover bills, shopping, insurances, discretionary spend, holidays, house maintenance, capital projects (one-offs, car fund etc…). This number will drop significantly when the kids are gone, however we don’t really know what their circumstances will be in the coming years, so let’s assume we continue to need the £5k until the end of Phase 3 below.

Basic approach is to sequence investment withdrawal based on access constraints and minimise taxation, so start with ISAs/CIBs, then SIPPs, then DBs, then SP.

Phase 1 - 07/25 -> 03/26 - Use ISA #1.

Phase 2 - 04/26 -> 03/28

TY 26/27: Use CIB #1, complement with ISA #1 

TY 27/28: Use CIB #2, complement with ISA #1 (depleted) and ISA #3

End of Phase: ISA #1 depleted, ISA #3 with balance of ca. £50k.

Phase 3 - 04/28 -> 11/32 (both reach 60)

TY 28/29: Use SIPP #1 (£36k taxed, £12k TFLS), Use SIPP #2 (£16,760 no tax).

TY 29/30: Use SIPP #1 (£36k taxed, £12k TFLS), Use SIPP #2 (£16,760 no tax).

TY 30/31: Use SIPP #1 (£36k taxed, £12k TFLS), Use SIPP #2 (£16,760 no tax).

TY31/32: Use SIPP #1 (£36k taxed, £12k TFLS), Use SIPP #2 (£16,760 no tax).

04/32->11/32: (7/12th) Use SIPP #1 (£21k taxed, £7k TFLS), Use SIPP #2 (£9.8k no tax).

Note: Both SIPPs are with Fidelity so we will be able to access at 55y from Nov’27 onwards.  

End of Phase: SIPP #1 depleted, SIPP #2 with balance of ca. £140k.

Phase 4 - 12/32 -> 12/39 (or 11/41 if SPA to 69)

Use DB #1 and DB #2, complement with SIPP #2 balance over the 7 years (+£20k/y), also consider accessing 2.5% of DC #1 (below SWR? - may not be needed).

End of Phase: SIPP #2 depleted.

Phase 5 - 11/39 -> …

Use DB #1 and DB #2,  SP #1 and SP #2, complement with 2.5% pa from DC #1 (below SWR? - may not be needed).

Given the difference in DB values, DC #1 should be ‘preserved’ to support OH along with her DB and SP should I pass away before her.

If this plan works, ISA #2 and #4 would not be needed (£300k in today’s money). This along with potential downsizing and a more modest spending in Phase 4/5 should offer sufficient margin. DC #1 is also possibly an extra margin, but rather not count on it.

Now, the 3 fundamental questions to the Forum:
1) Does this plan allow us to meet our goals?
2) Is there enough safety margin?
3) Is the sequence right in terms of tax optimisation?

I appreciate that the above is all hypothetical as life will throw curve balls and that it will not unfold that way, but wanted to get a view as to whether we are good to go?

Thank you for your consideration.

Edit: corrected the ISA # that were wrong.

Dazed_and_C0nfused

From a tax perspective you both seem to have a lot of Personal Allowance going to waste but I think you are probably too young to do too much about that.

But could you move some (DC) pension income forward a year to 2027-28?

NoMore

But could you move some (DC) pension income forward a year to 2027-28?


52M/52F (Born Nov/0ct’72)

Yes they could access their DC Pensions in Oct/Nov before the increase in access age to 57 in April the following year. I have no idea on the tax position of a Corporate Investment Bond but does this allow them to use up their personal allowance with the SIPPs 2027/28 ? If so its a good idea, without the CIB I would say yes, but as I say I have no idea how tax is treated with those.

Moodyboffin

Hi - thank you both for the prompt answers.

My understanding is that the profit on the CIBs is considered as income in the tax year they are accessed.

Both CIBs are around £40k each consisting of ca. £30k profit and £10k capital (original bond in 2008 was £20k each).
So the profit is divided between me and OH and taxed at 20%. So £15k taxable income each and £5k capital tax free each. We would do this in 26/27 and 27/28 to use our Personal Allowance.

Then when CIBs are out of the way, we move to SIPPs.

@Dazed_and_C0nfused would you mind elaborating on the PA waste please? I though that the approach to CIB was a good way to avoid wasting PA waste re 55y? 
  

Dazed_and_C0nfused

Moodyboffin said:

Hi - thank you both for the prompt answers.

My understanding is that the profit on the CIBs is considered as income in the tax year they are accessed.

Both CIBs are around £40k each consisting of ca. £30k profit and £10k capital (original bond in 2008 was £20k each).
So the profit is divided between me and OH and taxed at 20%. So £15k taxable income each and £5k capital tax free each. We would do this in 26/27 and 27/28 to use our Personal Allowance.

Then when CIBs are out of the way, we move to SIPPs.

@Dazed_and_C0nfused would you mind elaborating on the PA waste please? I though that the approach to CIB was a good way to avoid wasting PA waste re 55y? 
  

Those sort of investments tend to be very complicated/opaque from a tax perspective and it isn't always clear exactly how they will be taxed. 

But if you have done your research and know they will utilise the Personal Allowance then 2025-26 is the only problematic year.  And that can be mitigated by your wife applying for Marriage Allowance so at least only £11,310 is wasted.

NB.  I'm assuming you won't be a higher rate payer in 2025-26

hugheskevi

Few thoughts:

1. You need to keep an eye on higher rate tax threshold. Although £32K DB and £11.5K SP (total £43.5K) is well below the £50,270 higher rate starting point, a few more years of fiscal drag and who knows how many years of Triple Lock might rapidly erode the buffer you have. In that case, taking the DB pension earlier than age 60 might be preferable. With just a 14% reduction to DB pension for taking it at age 60, that seems sensible, and helps with future higher rate exposure.
2. You both should be drawing taxable income from age 55 up to at least Personal Allowance.
3. Can OH work a bit into the next financial year? That would be very advantageous in terms of using Personal Allowance and also getting (presumably) the final qualifying year for State Pension. Although if CIB will use PA then this doesn't matter much.
4. The assumption that returns net of costs equals inflation is good for simplification, but need to remain aware that is a very pessimistic assumption. So that makes future DC resources an underestimate, so you have mitigation by that assumption against adverse markets.
5. Your future income is badly exposed to inflation risk, given the poor inflation protection on your DB pension. You may wish to check OH DB pension to see if any ways to enhance that, eg, drawing later, and maybe considering State Pension deferral to increase inflation-protected pension. Holdings of ISAs and DC pension mitigate this risk, so as those decline the risk increases.
6. Carefully assess positon on death of either person at different points of the retirement journey and ensure you know all the rules that apply, eg, is it 50% of pension in payment, or 50% of pension due to normal pension age if taken early.

Pat38493

How did you decide your investment mix and strategy?  I haven’t crunched your numbers or anything, but at first glance, it looks like you have an awful lot of money in money market funds - pretty cautious risk strategy given that you have significant DB and SP available.  That said, if you don’t need to take any more risk it might be right for you.

Pat38493

Also what about ISA #3?  Maybe I a need to go to specsavers but I cannot see what your plan is for ISA3?

Moodyboffin

I'm absolutely inept with MSE as don't even know how to answer specific posts or correct my original post, so I'll answer individually, apologies.

@Dazed_and_C0nfused and @hugheskevi - My wife wishes to stop by 31/03 to assist my oldest with GCSE revision/readiness, so she won't be working until 30/06 (I will), this will come at a cost as rightly pointed. I didn't think about the Marriage Allowance, great catch. For completeness, I will have earned ca. £35k by 30/06, hence why we thought about pulling from the CIB the following tax year. I think I could gift my portion of the first CIB to my wife in Apr'25 but she would then have an income for 25/26 of £31.5k, so PA could be used for her indeed too. Probably need to model that!

@Pat38493 - Please don't go to Specsaver, I will. It was a typo, every time I wrote ISA #2 I meant ISA #3, apologies as I don't know how to edit.
Re. investment mix, I recognise that I cannot pick shares or active funds, so rely on trackers. Through 2022 I moved some 20/80, 40/60 Equity/Fund funds to STMM so have been benefiting from very decent returns for limited risks.

I feel it is fine to stay in STMM for ISA/SIPPs that will be accessed within the next 3 years, however beyond that I'm compromising future growth as rates will eventually drop. My thought was to move the STMM portion of ISA #2 and  ISA #3 to either a full on Global Equity Tracker (SWLD/HMWO/VWRP) or maybe a more balanced one like HSBC Global Strategy Balanced or equivalent? Maybe the SIPP #2 ratio should be shifted towards more equity too?

Would you have any suggestions?

@hugheskevi - your few points are a gold mine, so I will have to take some time to digest and comment back. Thanks!

Pat38493

Moodyboffin said:

I'm absolutely inept with MSE as don't even know how to answer specific posts or correct my original post, so I'll answer individually, apologies.

@Dazed_and_C0nfused and @hugheskevi - My wife wishes to stop by 31/03 to assist my oldest with GCSE revision/readiness, so she won't be working until 30/06 (I will), this will come at a cost as rightly pointed. I didn't think about the Marriage Allowance, great catch. For completeness, I will have earned ca. £35k by 30/06, hence why we thought about pulling from the CIB the following tax year. I think I could gift my portion of the first CIB to my wife in Apr'25 but she would then have an income for 25/26 of £31.5k, so PA could be used for her indeed too. Probably need to model that!

@Pat38493 - Please don't go to Specsaver, I will. It was a typo, every time I wrote ISA #2 I meant ISA #3, apologies as I don't know how to edit.
Re. investment mix, I recognise that I cannot pick shares or active funds, so rely on trackers. Through 2022 I moved some 20/80, 40/60 Equity/Fund funds to STMM so have been benefiting from very decent returns for limited risks.

I feel it is fine to stay in STMM for ISA/SIPPs that will be accessed within the next 3 years, however beyond that I'm compromising future growth as rates will eventually drop. My thought was to move the STMM portion of ISA #2 and  ISA #3 to either a full on Global Equity Tracker (SWLD/HMWO/VWRP) or maybe a more balanced one like HSBC Global Strategy Balanced or equivalent? Maybe the SIPP #2 ratio should be shifted towards more equity too?

Would you have any suggestions?

@hugheskevi - your few points are a gold mine, so I will have to take some time to digest and comment back. Thanks!

No need to apologise.  I probably should have figured that out by a process of elimination.  Normally there is a button at the top right of your post and if you click on it, you have the option to edit the post.  However on most forums like this, that option will only be open to you once you have made a certain number of posts (in order to avoid spammers from making posts then editing them to an advertisement).  Prior to that I guess you would have to report your own post and then ask the moderators what you want to change, but no big deal.

I don’t think anyone said this yet, but looking at the overall picture, and assuming that your spending estimates of £5K per month are viable long term (or less), it looks like you are in a pretty good position.

Regarding money market funds, at the moment, they are giving an investment return in excess of inflation, but that is rare in historical terms.  “Normally” MMF will not match inflation, and as other posters have pointed out you will need to keep that under review.

Using tracker funds is not an issue as many posters on this forum including myself are doing the same.  Also the concept of having 2-3 years in cash/MMF is considered a good one by many.  However you seem to have a good half of your assets in MMF, which is probably fine given the current market conditions, but probably won’t be a good idea over the long term.

You should be fine, but if I was in your position I would be taking more risk and having less in MMF than what you have today, especially after the first 2 or 3 years have gone by.  A Huheskevi pointed out, your current investment approach is arguably a little bit too cautious and you need to carry a bit more risk in order to a) make sure you beat inflation and b) most likely end up a lot better off than you think you are in a few years from now.  

Are you good with spreadsheets?  If so you may want to look up how to build a cash flow ladder or some other similar approach - your first post is something like that so maybe it came from your sheet.  You can use the cash flow ladder to decide what level of risk you should have - as an example, personally I would roughly use
1-3 years - cash
3-5 years - 70% equity 30% bonds (tweak % based on your risk attitude)
6-10 years - 80% equity 20% bonds
Anything over 10 years - 100% equity.

Funds like HMWO, VBRP are fine - I have holdings in both of those but note that HMWO is an ETF and it pays out the dividends as income in USD - if you don’t want that you would need HMWS. (I found this out the hard way!)

Beyond that, with the amount of assets you have, you would most likely benefit from finding a good IFA to use either for a one off review, or for a few years.  With over a million quid in mixed assets, an IFA will probably make you more money than you save.  Alternatively if you do some more research, you could probably end up a lot better off.  Middle ground is to sign up to a retirement planning course (e.g. meaningful money or the James Shack one) which gives you access to cash flow planning software on the internet.   IFA will also stress test your plan using historical data and Monte Carlo simulations which will give you additional peace of mind.  (I am not an IFA and I don’t use one - just commenting that unless you get pleasure out of planning this stuff, with a pot your size they would probably be useful).

To put it all another way - it looks to me like your plan will probably work, but you are leaving a lot of upside on the table and carrying some inflation risk.

michaels

1) Probably missed it, but is the indexation on the DBs the same before you take them or are they fully rpi protected until then which might indicate taking them later?

2) You could 'bridge' state pension and DB using a 'index linked gilt ladder' which basically lets you remove all market and inflation risk form this part of your provision, the cost aligns with your 'keeps up with inflation' assumption - ie 15 years of index linked 12k (state pension replacement) would cost 15 x 12 = 180k from one of your money pots.  Similar for DB.

2) As mentioned above, you want to make sure you don't leave any personal allowance unused for either of you and maybe think about going higher (and moving unused 'income' to isas) to avoid higher rate tax in future.

4) Next to consider is what happens on first death where the surviving partner loses in your case the deceased's state pension and half of their DB, more of an issue for your DW on the figures - is the remainder sufficient for her?

5) And final consideration is of course estate tax where now as pension wrapped funds are probably less advantageous than unwrapped you might consider drawing out of pension quicker and then gifting/gifting from income - for me this brings up a quandary, do I take DB as early as possible as this money is not heritable (although this differs in the rare case of both dying before DKs are 23) so better to spend this before DC but at the cost of reducing long term DB which is one of the best hedges against longevity risk....

Having said all  that, I suspect if anyone does the maths it will show that 5k net pm with two personal allowances gives an extremely conservative SWR, guessing less than 2% whereas 3.25% is probably about par for an early 50s retirement.