My initial plan to retire at 59 hoping for some advice

Twigwidge

I have only just joined MSE and have been reading through the pensions forums for a couple of weeks and got some good tips, so I thought I would post my plan for some comments and suggestions 😊 Apologies for not using too many abbreviations here as I am still wrapping my head around the terminology.

My situation is that I will be leaving work at the end of July aged 59. I currently have a net salary of 2,502 pounds per month and am hoping to maintain this level of income throughout retirement.

Fortunately I will have a defined benefit pension from USS of 1,400 pounds (net) per month on retirement (inclusive of early retirement penalties) plus I will get a Tax-free lump sum 151,000 pounds

My idea is to put this lump into a savings account which should yield 4% interest and to take 1,100 pounds per month from this until I reach state pension age at 67. This means I need to bridge the gap to state pension which will be 7 years and 2 months

Rough calculations of use of lump sump

12x7+2=86 (months)   86x1,100=94,000 pounds which leaves 57,000 of lump at state pension age (probably a little more left due to any interest). I obviously realise that inflation will progressively eat into the value of this lump sum throughout

At 67 I am hoping that my full state pension (assuming it won’t be abolished or means-tested by then) will make up the 1,100 pounds

My DB pension is linked to CPI and hopefully the state pension will stay triple locked so I am hoping my income will maintain most of its value

I am just wondering if this seems a sensible plan or if I should perhaps be doing something different with my lump sum to offset the effects of inflation?

I am mortgage-free and have total regular monthly outgoings (Including utilities, council tax, food, car, insurances) of 990 pounds

I would love some comments as I am on a steep learning curve as early retirement was not on my radar until just before Christmas when I realised it might just work for me (after seeing colleagues of a similar age doing the same thing)

Any comments most appreciated

QrizB

In general, it seems a reasonable plan.

Do you have any other savings right now, before you get your lump sum in July? They might give you more options.

Dazed_and_C0nfused

Did you give up some USS pension to get some (or all) of the lump sum?

There usually any penalty for taking a DB pension early, do you mean the actuarial reduction applied because you have asked for it to be paid for longer than normal?

What tax code have you assumed to arrive at your £1,400 net amount for the USS pension?

Have you factored in the tax payable on the interest you will be getting?

thegentleway

Twigwidge said:

At 67 I am hoping that my full state pension (assuming it won’t be abolished or means-tested by then) will make up the 1,100 pounds

Full state pension is ~£960 per month.

prob worth investing some of the lump sum if you’re not going to spend it for 5+ years

LL_USS

@Twigwidge, I am glad you open the discussion here.

It looks like your plan can cover your minimum needs at retirement already. The SP number you have there is gross though - as you have other pension your SP will be taxed. 

Am also wondering about the tax you need to pay on interest of your saving from TFLS during the years to bridge to SPA. For me I am trying to address this by keeping an ISA that is enough to cover the bridging years. As you still have a bit of leftover money now, I'd put into an ISA every year.

I can see that people tend to use TFLS to pay off any outstanding mortgage. For me I don't have a mortgage to pay off at the start of my retirement, so I plan to use my TFLS plus LISAs and ISAs to perhaps move to a better house in a location that suits my retirement.

With my limited understanding, I think there is little point for someone to take out the MAX of TFLS if they only use that sum to put into some saving accounts outside of their pension. Only take out what they need immediately (like to pay off the mortgage, retirement treats...) and leave the rest continue being invested in the pension scheme to be withdrawn each year as needed. The remaining portion of your 25% total pot should still remain tax free when you take out later. I am not sure though. Would love to hear about this from others who know pension better.

EDIT: I've read further on, the decision depends on the pension scheme. What I wondered above regarding taking out 25% pot tax free multiple times turns out to be not applied to USS DB scheme, as others point out after this post.

EDIT: I asked USS about whether one has to take the whole max TFLS and this is the answer - in line with what others say here:

GrumpyDil

OP is talking about USS pension which is defined benefit so the tax free element is handled differently.

The OP can take a pension commencement lump sum ranging from 0 up to maximum amount they are entitled to. 

It is a one off option and doesn't remain in the fund and OP can't take further sums later.

What it does impact is the regular pension payments which reduce/increase according to the lump sum payment.

Phossy

I too will be taking a lump sum to bridge the gap to State pension over 7 year. I have planned to spend the whole amount over that 7 years, but whether I do or not is another thing (lots of travel plans that may or may not happen). My plan is to max out any ISA allowances (20 K / year, using my wife's allowance too), fixed rate savings accounts over 2 to 3 years and as high an interest easy access savings account (currently Chase) with one year of spend in it.  I may also add a fraction into a separate Personal Pension I also have (which is high in equities and more risky). I would not have more than £85K in any institution though due to FSCS cover  note  National Saving and Investments has coverage beyond £85K)

Linton

Some questions...
 - Do you have any other savings or DC pensions?
 - Have you got a State Pension forecast from  https://www.gov.uk/check-state-pension?  If you have been paying into a DB pension for much of your working life you are likely to find that your SP is rather less than the standard level.
 - Do you have any options for less lump sum for more pension?

You are assuming SP is £1100/month net.  However it is currently £221.2 X 52/12=£958/month gross. Though if you are assuming it is covered by the tax allowance gross is the same as net.
 
My feeling is that if that is all the money you will have, your estimated spare £57K cash at SP age may be a little tight bearing in mind it may have to last 35 or more years steadily losing value to inflation. Could you need more money for major one-off expenses (eg house repair) or for activities to use up the large amount of extra time you will have available (eg holidays)?

I am unclear about the cap on USS pensions but believe it to be generous compared to many.   However any cap is a risk in that if it comes into effect your income is reduced relative to inflation for the rest of your life.

Marcon

There seems to be quite a bit of 'hoping'!  I certainly wouldn't bank on the triple lock being around for much longer.

Have you checked if you will get a full state pension if you retire at 59 and pay no further NI contributions, especially as you've spent many years in a contracted out pension scheme? See https://www.gov.uk/contracted-out/how-contracting-out-affects-your-amount#:~:text=An%20amount%20is%20taken%20off,a%20workplace%20or%20private%20pension

If you have a current net salary of around £2,500 and outgoings of just under £1,000, then presumably you have had scope to save, although whether you've done so is obviously another matter. Could be why your colleagues are able to afford to do what you think you see them doing.

Have you maximised your ISA contribution for this year? Perhaps consider doing that, and also in future years - and a stocks and shares rather than cash ISA to increase the chances of getting some growth.

Why are you taking so much tax free cash when your need appears to be for income, and you have what appears to be a 'vanilla' approach to saving, with little appetite for risk (ie put the lot in a savings account and leave it there)? Lots of people feel that way, and you just need to decide if that's true of you. If so, taking a lower tax free sum and thus getting a higher income every year from when you start to take your USS benefits might suit you far better. 

Any chance you could find the £ sign on your keyboard (you'll have one - google on 'how to find £ on [name of device]') and edit your post? It won't take much effort but it would genuinely make it much easier for the rest of us to spot the numbers eg

Fortunately I will have a defined benefit pension from USS of £1,400 (net) per month on retirement (inclusive of early retirement penalties) plus I will get a Tax-free lump sum £151,000 

smacks you in the eye more readily than:

Fortunately I will have a defined benefit pension from USS of 1,400 pounds (net) per month on retirement (inclusive of early retirement penalties) plus I will get a Tax-free lump sum 151,000 pounds 

...and you might get more replies if you do!

LL_USS

GrumpyDil said:

OP is talking about USS pension which is defined benefit so the tax free element is handled differently.

The OP can take a pension commencement lump sum ranging from 0 up to maximum amount they are entitled to. 

It is a one off option and doesn't remain in the fund and OP can't take further sums later.

What it does impact is the regular pension payments which reduce/increase according to the lump sum payment.

The TFLS is only a one-off option? So it's different from this general rule: https://retirement.fidelity.co.uk/access-your-pension/taking-tax-free-cash/ ??: "Take less than the tax-free allowance – if you don’t need all your tax-free cash, you don’t have to take it all at once. Just withdraw as much as you want and whatever is left can be taken later. If your pension savings rise in value, this could mean you could take a larger total amount tax-free."

I got this answer on MSE forum before: "Just to follow up regarding drawing down pension, yes each individual can have up to 25% of the pension pot as tax free (for e.g. a pot worth 400K, max 25% is 100K). If the person only takes less than the maximum of this 100K allowance as tax free lump sum (TFLS) at retirement, say, taking out 80K TFLS only, then the rest of the allowance (20K) can still be drawn down later with 25% no tax. But if the person has taken maximum 100K as TFLS at the start of the retirement then there's no tax free element left and from then drawing down is subject to the normal tax"

EDIT: I've read further on, the decision depends on the pension scheme. What I wondered above regarding taking out 25% pot tax free multiple times turns out to be not applied to USS DB scheme, as others point out after this post.

EDIT: I asked USS about whether one has to take the whole max TFLS and this is the answer - in line with what others say here:

Albermarle

As above my thoughts are also;

Why take a big lump sum rather than an increased annual pension? There maybe a good reason, but we often see on the forum people taking lump sums  - because they can/pound notes in their eyes, when it is not always the best route.

Otherwise if you take the lump sum, I would look at investing at least some of it, rather than keeping it all as cash savings. Normally it is said on a 5 year time frame, savings are best . On a 10year + timeframe investing has proved to be nearly always better historically. Between 5 and >10 years some mix of the two seems sensible.