My early retirement plan - thoughts?

KeiserSoze

Hi all

I'm making plans for early retirement, done as much research as I can but haven't sought advice from an IFA. Would appreciate any thoughts people have if anything obvious I may have missed (goes without saying that I won't take it as advice!).

I've outlined my situation below as completely as I could think, hopefully this'll be enough to form an opinion;

- I'm 52 and looking to retire at 54. Luckily I'm in that gap where I can draw on pensions at 55 rather than 57
- Single, no children or dependents so not overly concerned with leaving a legacy or any IHT issues 
- Will be entitled to the full State Pension at 67
- Currently self employed part time, earning between £20-£25k pa dependent on how much work I want to do. I'm no longer contributing to any pension and have no plans to do so
- I've been monitoring my spending the last couple of years and have included absolutely everything and I live the life I want on roughly £19500 pa. This is the figure I'll be using for retirement too (as I only work 5/6 hours per week, my lifestyle in full retirement won't differ too much from what it is now)
- Own house, no mortgage, worth around £465k 
- Have two small DB pensions that I can take at 55. Annual payment for both will be around £2k index linked after the actuarial reduction for taking them early 
- DC pot currently £262k, in an equity heavy fund (73%) rated 5/7 for risk appetite (1 being the lowest) 
- Stocks & Shares ISA value £55k 

THE PLAN
- De-risk DC pot to a category 1 fund (mostly cash) now to mitigate any potential market fall 
- I value certainty over growth to some degree now as I nearer full retirement, so as long as I'm hitting my £19500 target I'll be happy 
- 54; use £20k of my ISA to fund my first year
- 55 to 66; Start drawing on the 2 DBs at £2k pa. Take out 25% tax free cash from DC (£65k, appreciate I can do this in stages to potentially increase the TF amount, but as I mention above I prefer the certainty) 
- With the remaining £197k DC pot buy a single life, no guarantee, 3% escalator annuity. At current rates that would get me £8500 pa. Appreciate rates will change over the next couple of years, obviously I'll reevaluate if they do 
- I'll now have a pot of £95k (remaining ISA and TF cash) which I'll put into savings hopefully earnings around 4.5% (I'll convert the ISA to cash)
- I'll draw down that pot at £9k pa (adjusted for inflation) to supplement the £2k DBs and £8500 annuity, giving my my £19500 pa and not paying any income tax 
- If inflation averages 2% and I get 4.5% interest, this pot will run out when I'm 66 
- At 54 I'll also downsize considerably, buy a much smaller place at around £250k. After buying/selling costs are removed, this nets me around £200k. I'll probably invest 75% of that and put the remainder in savings 
- At 67 I take my SP. The SP plus the annuity and DBs will give me an income of over £22k, plus I'll start paying IT, so still netting me my target income in real terms. Obviously I'll be paying tax on interest &/or investments prior to this too on the £200k pot.

So that's it! From 54 onwards I get the income to carry on living the life I want with reduced market risk (but foregoing potential market gains too), and use the £200k as a luxury pot, e.g. overseas holidays, high value house repairs, improvements, that sort of thing. 

Thoughts?

DRS1

- I'll draw down that pot at £9k pa (adjusted for inflation) to supplement the £2k DBs and £8500 annuity, giving my my £19500 pa and not paying any income tax 

I am being a bit thick but how do you not pay any income tax on that income?

KeiserSoze

DRS1 said:

- I'll draw down that pot at £9k pa (adjusted for inflation) to supplement the £2k DBs and £8500 annuity, giving my my £19500 pa and not paying any income tax 

I am being a bit thick but how do you not pay any income tax on that income?

I may be wrong but my thinking is the £2k DBs and £8500 annuity is income and added together is below the £12500  income tax threshold so no IT due. The remaining £9k isn't income (besides, it'll be from the ISA and tax free DC pot) 

TheGreenFrog

KeiserSoze said:

Hi all


- If inflation averages 2% and I get 4.5% interest, this pot will run out when I'm 66 


Thoughts?

Seems very optimistic to assume a 2.5% real return on your cash.  1.5% would be more realistic (currently).

Storcko14

Your plan looks pretty solid though I'd be a bit wary of unexpected costs as your margins are fairly tight.  For example, whilst your projected taxable income of £12.5k (if I've understood your DBs to be 2* £2k) is just inside your personal allowance, given a) allowances are frozen until 2028 and b) could be frozen for even longer, you'll likely end up a taxpayer in retirement before you hit SP age.

Re your downsize plan, it's also worth bearing in mind that SDLT is changing from April and could impact your purchase.

KeiserSoze

Storcko14 said:

Your plan looks pretty solid though I'd be a bit wary of unexpected costs as your margins are fairly tight.  For example, whilst your projected taxable income of £12.5k (if I've understood your DBs to be 2* £2k) is just inside your personal allowance, given a) allowances are frozen until 2028 and b) could be frozen for even longer, you'll likely end up a taxpayer in retirement before you hit SP age.

Re your downsize plan, it's also worth bearing in mind that SDLT is changing from April and could impact your purchase.

The DBs are £2k in total, not £4k, I should've made that clearer. 

phlebas192

It looks fairly reasonable if you were retiring today, but I think the assumptions are rather optimistic for the future. In particular, if inflation should stay around 2% then it is highly unlikely that savings rates will be anything like 4.5% and, possibly more importantly, annuity rates can be expected to be significantly lower.

barnstar2077

Have you looked at what happens if you leave the DB pots longer?

DRS1

KeiserSoze said:

DRS1 said:

- I'll draw down that pot at £9k pa (adjusted for inflation) to supplement the £2k DBs and £8500 annuity, giving my my £19500 pa and not paying any income tax 

I am being a bit thick but how do you not pay any income tax on that income?

I may be wrong but my thinking is the £2k DBs and £8500 annuity is income and added together is below the £12500  income tax threshold so no IT due. The remaining £9k isn't income (besides, it'll be from the ISA and tax free DC pot) 

Ah right.  I got my pots confused..

kempiejon

barnstar2077 said:

Have you looked at what happens if you leave the DB pots longer?

I'd guess at 55 there's a hefty actuarial reduction? what 40%? Might it be worth spending down anything else first. It looks like the DC pot could be a plan taking UFPLS £16750 pa staying under the tax limits and top up to £19500 with the £25k left in the ISA. Then the £2k DBs might be worth £3+k.
The larger index linked pension might be safer as I think with a 30 year retirement inflation would be a big worry.

KeiserSoze

kempiejon said:

barnstar2077 said:

Have you looked at what happens if you leave the DB pots longer?

I'd guess at 55 there's a hefty actuarial reduction? what 40%? Might it be worth spending down anything else first. It looks like the DC pot could be a plan taking UFPLS £16750 pa staying under the tax limits and top up to £19500 with the £25k left in the ISA. Then the £2k DBs might be worth £3+k.
The larger index linked pension might be safer as I think with a 30 year retirement inflation would be a big worry.

Yeah I was quoted an actuarial reduction of 3.9% pa for every year taken early from the contractual retirement date which is 65, so 39% reduction at 55.