Unplanned early retirement and haven't de-risked SIPP

TimeToEatCake

Firstly, thank you so much for all the detailed replies - so much useful info to digest.   I wasn’t able to reply yesterday as I was enjoying my new retirement by spending the day accompanying my daughter on a school trip as a parent volunteer. Such a treat after years of not being able to do this while I preserved annual leave days for holiday 😊

@OldScientist, yes, it's useful to think about this in stages.   My main concern is the period until 67, and until 65 to a slightly lesser extent as I will be accessing my DB pension by then.  After 67, I will have the DB pension and state pension, I will very likely have downsized my house (saving money from having to maintain a 4-bed Victorian terrace and having released equity) and my daughter will (hopefully) be working so I expect to be living on a lower income and I may not need to draw from my SIPPs then at all.

So I have 13 years to make sure I have adequate funds in the event of a market crash and trying to not make big life changes so my daughter has stability.  Thanks for the discussion around DB pensions.  Of course, it now makes sense that I could be better off starting this earlier and this doesn't mean a loss of value. It is CPI-linked and I do like the idea of this being a cash-equivalent from 65 from a risk perspective so my plan will be to access then but I accept accessing this earlier could be a lever to pull if the value of SIPPs/ISAs fall significantly before 65. It would reduce by 4.5% if I take a year early and by 9% if I take at 63.

I had originally thought that I would use my cash/ISAs before accessing SIPPs but now realise that doesn't really make sense from a tax perspective and I should be thinking of accessing pension from 55.  The only reason not to would be to not trigger MPAA but I am almost certain that I won't be in a position to make pension contributions of >£10k if I do work again. 

Thanks @Albermarle for your comments on the bond market - very helpful in understanding the performance stats and @tacpot12 for your experience from your own portfolio (also nice to read about others successfully taking retirement in early 50s!)

Need to re-read above and convert into a plan!  Thinking of keeping S&S ISAs fully in equities but changing from accumulation to income; switching a % of SIPPs to bonds (30%?) over the next couple of months (assuming equity prices stay high and over a longer period if they become more volatile).  

@El_Torro, keeping four years expenses in cash feels right to me. Given that cash is currently earning >4%, the balance I currently have is above this.  I think I need to work out how to best maintain this in terms of drawing income from S&S ISAs, drawing from SIPPs etc 

Still have a little way to go with planning but feeling a lot more educated today than yesterday before I posted!

Marcon

GunJack said:

Marcon said:

You don't normally 'lose value' by taking a DB pension early. The reduction factors used to reduce the starting level of the pension are usually intended to be cost neutral, so that by the time you die, the overall amount you will have received is the same whatever

With respect, but the "overall amount" you get out of a DB really isn't the point, it's the level of income p.a. you get. You shouldn't compare apples (DB) with pears (DC) especially in this way. Too many posters on this forum try and persuade people that it's ok to take a DB early with actuarial reduction even when it's highly unlikely it's in their best interest.....you can't extol the virtues of having a guaranteed income on one hand then suggest that it's fine to (possibly drastically) reduce that income by taking it early....

Ok, rant over...

With equal respect, the point I was making is that what people so often see as a 'loss' or 'penalty' is no such thing. It might feel that way, but it needs to be seen in context. OP has referred to 'losing value', which is not correct. 

You have carefully quoted only part of what I said (presumably to support your view), but if quoted in full you will see I have merely corrected a common misconception - and flagged that it isn't necessarily a good idea: 

You don't normally 'lose value' by taking a DB pension early. The reduction factors used to reduce the starting level of the pension are usually intended to be cost neutral, so that by the time you die, the overall amount you will have received is the same whatever age you start the pension (in practice that is never the case, but then people don't obediently die in line with actuarial tables!). Whether it's a good idea to take it early is, of course, a wholly different argument, especially if you have cash available from other sources.

DT2001

GunJack said:

@NoMore I would dispute the feeling of penalty for taking (especially) a deferred DB as you're taking an actuarially reduced income at the current value, compounded with giving up the revaluation to NRD, and then further compounding going past that. 

Actuarially neutral maybe, and people on here make a thing about the break-even points when they ignore the often far lower income on offer. DB is all about income, not total amount you "get out" of the scheme...

Are you suggesting the priority is to maximise guaranteed income at NRD or SPA?

I took an actuarially reduced DB at 51 (without the benefit of the wisdom on this forum). My reasoning at the time was it would allow me to be p/t self employed whilst my children finished primary school, the scheme was under funded, most/all would be tax free and at my SPA our expected ‘necessary’ expenditure (£18k in today’s cost) would be covered by SP and the reduced DB. As it happened OH earnt more than expected and the DB money was invested. On a spreadsheet it was the wrong decision especially as the crossover point was about 10 years less than life expectancy (and this was compounded by the change of rules for GMP accrued in my early years of employment so there is no inflationary increase) however I think it was the right decision at the time. 

af1963

Yes, but it's also about getting income at the time when you need it, and for a lot of people asking questions here, the gap they need to fill is earlier ( often pre-state-pension-age) rather than later. 

Plus, if it's a scheme with restricted inflation protection, you can guarantee that the purchasing power of the future payments will decline as time passes. So a few (actuarially reduced, but not eroded by inflation) early payments can be a good deal if it suits your circumstances. Always worth being aware of the option.

Hoenir

TimeToEatCake said:

S&S ISAs invested in global equity index trackers: £135k
SIPPs invested in global equity index trackers: £645k

Not only are you invested 100% equities. That's a highly concentrated portfolio. Equities are always exposed to volatility. Risk comes in many other other forms besides this. 

Albermarle

After 67, I will have the DB pension and state pension, I will very likely have downsized my house (saving money from having to maintain a 4-bed Victorian terrace and having released equity) 

OP - Just be aware that is usually not wise to rely too much on released equity from downsizing. 
It is not that easy house hunting for smaller properties when you have a had a nice big home, as they will often seem too small. Or you will be tempted to move to a more expensive location, with a sea view maybe. 

MeteredOut

Albermarle said:

After 67, I will have the DB pension and state pension, I will very likely have downsized my house (saving money from having to maintain a 4-bed Victorian terrace and having released equity) 

OP - Just be aware that is usually not wise to rely too much on released equity from downsizing. 
It is not that easy house hunting for smaller properties when you have a had a nice big home, as they will often seem too small. Or you will be tempted to move to a more expensive location, with a sea view maybe. 

I'd agree with this. My retirement model has not included any equity from a house sale, even though we do plan to downsize. If it happens, its a bonus, but sometimes downsizing can mean moving to a different location where a smaller house costs the same.

TimeToEatCake

Thanks @Albermarle and @MeteredOut.   Yes, I take your point.  I don't think I'll be relying on it as I think I'll have enough from my DB and state pensions (since both inflation-linked) once my daughter has left home but I do like the idea of it as a back up.  We currently live in London and I certainly wouldn't move here but am interested in moving back to my home area in the Midlands where I still have my brother and cousins I'm close to.  But yes, it might not happen.

TimeToEatCake

Hoenir said:

TimeToEatCake said:

S&S ISAs invested in global equity index trackers: £135k
SIPPs invested in global equity index trackers: £645k

Not only are you invested 100% equities. That's a highly concentrated portfolio. Equities are always exposed to volatility. Risk comes in many other other forms besides this. 

Yes, agreed.  Am quite worried about this.  Unfortunately LifeSight, the provider of my largest SIPP, has a very limited range of funds for diversification.  This didn't bother me on growth phase, but I think is going to be a problem now. 

Bostonerimus1

TimeToEateCake,
I'm in a similar situation to you having taken early retirement 10 years ago and I'm now living off my DB pension (and some rental income) with SP to come. I have a portfolio of 90% equities with 2 years of cash saving earning good interest and I like to keep about a year's cash in the bank for convenience and cash flow, but 6 months would probably be just fine. If you are retiring at age 50 you could have another 50 years to fund so staying in growth oriented investments like equities seems sensible to me. You can count your DB and SP income as the low risk part of your portfolio and as you are mortgage free that's another store of capital you can use in a pinch. For income you could change from accumulation to income variants of your funds and take the dividends, but I see no reason to change your asset allocation radically. With your cash buffer you can probably ride out most stock market falls so you don't have to sell at a big loss, but if you are really worried about the time between your retiring and SP starting you might look into a fixed term annuity or your early DB options.

You should do a budget to get you comfortable with your new retirement cash flow and investigate the various drawdown strategies like constant percentage of portfolio, index linked SWR, Guyton Klinger etc