My early retirement plan - thoughts?

Sarahspangles

KeiserSoze said:

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. 

Are the actuarial adjustments punitive though, or simply the same amount of jam spread more thinly over time?

For what it’s worth, I’m aiming not to draw DB pensions early mainly because they’re inflation-proofed. I’ll draw from my SIPP first, even if some goes straight into a S&S ISA to make sure that I use up my personal allowance.

kempiejon

Sarahspangles said:

KeiserSoze said:

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. 

Are the actuarial adjustments punitive though, or simply the same amount of jam spread more thinly over time?

For what it’s worth, I’m aiming not to draw DB pensions early mainly because they’re inflation-proofed. I’ll draw from my SIPP first, even if some goes straight into a S&S ISA to make sure that I use up my personal allowance.

This is a handy reminder, as you say the actuarial reduction are generally cost neutral on average. I feels safer to me to use other funding first to let the DB pension starting amount be as high as possible to get that index linking until old age, I guess it's the certainty, even if the cash extraction is equivalent.

OldScientist

KeiserSoze said:

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?

Some thoughts on the 3% escalation annuity. The real value of the income from will be critically dependent on inflation. For example, if inflation over the first 10 years of your retirement is as benign as the 2010s and averages 2%, then by the time you draw your SP, the income will be worth about £9.6k in real terms (which would be great!).

If inflation is closer to the post-war average of about 4.5%, then the income will worth £7k in real terms which means your portfolio will need to work a bit harder to replace the lost income.

If inflation is closer to that of the 1970s, i.e., around 12.5%, then the real value of the annuity income will be about £2.7k and you will need to find an additional roughly £6k from other sources.

Of course, over the course of 30 or more years, inflation is likely have more effect on the income from the annuity (at the 4.5% average, the real income would be £4.8k at 85yo).

Since payout rates are currently not too different (at end of February, 4.3% for a 3% escalation and 3.9% for an RPI annuity taken at 55yo) it might be worth considering the RPI annuity instead. Of course, rates will change between now and retirement.

pterri

OldScientist said:

KeiserSoze said:

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?

Some thoughts on the 3% escalation annuity. The real value of the income from will be critically dependent on inflation. For example, if inflation over the first 10 years of your retirement is as benign as the 2010s and averages 2%, then by the time you draw your SP, the income will be worth about £9.6k in real terms (which would be great!).

If inflation is closer to the post-war average of about 4.5%, then the income will worth £7k in real terms which means your portfolio will need to work a bit harder to replace the lost income.

If inflation is closer to that of the 1970s, i.e., around 12.5%, then the real value of the annuity income will be about £2.7k and you will need to find an additional roughly £6k from other sources.

Of course, over the course of 30 or more years, inflation is likely have more effect on the income from the annuity (at the 4.5% average, the real income would be £4.8k at 85yo).

Since payout rates are currently not too different (at end of February, 4.3% for a 3% escalation and 3.9% for an RPI annuity taken at 55yo) it might be worth considering the RPI annuity instead. Of course, rates will change between now and retirement.

On the RPI thing… my pension is RPI linked (up to 5%) but the gove will stop publishing RPI in 2030. No idea what they will use after that, CPIH possibly but that may not be as high as RPI. RPI is usually around 1% above cpi (and yes, I know the argument that RPI is a poor measure but good for me!) any idea what the annuity providers are saying they will do?

OldScientist

pterri said:

OldScientist said:

KeiserSoze said:

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?

Some thoughts on the 3% escalation annuity. The real value of the income from will be critically dependent on inflation. For example, if inflation over the first 10 years of your retirement is as benign as the 2010s and averages 2%, then by the time you draw your SP, the income will be worth about £9.6k in real terms (which would be great!).

If inflation is closer to the post-war average of about 4.5%, then the income will worth £7k in real terms which means your portfolio will need to work a bit harder to replace the lost income.

If inflation is closer to that of the 1970s, i.e., around 12.5%, then the real value of the annuity income will be about £2.7k and you will need to find an additional roughly £6k from other sources.

Of course, over the course of 30 or more years, inflation is likely have more effect on the income from the annuity (at the 4.5% average, the real income would be £4.8k at 85yo).

Since payout rates are currently not too different (at end of February, 4.3% for a 3% escalation and 3.9% for an RPI annuity taken at 55yo) it might be worth considering the RPI annuity instead. Of course, rates will change between now and retirement.

On the RPI thing… my pension is RPI linked (up to 5%) but the gove will stop publishing RPI in 2030. No idea what they will use after that, CPIH possibly but that may not be as high as RPI. RPI is usually around 1% above cpi (and yes, I know the argument that RPI is a poor measure but good for me!) any idea what the annuity providers are saying they will do?

My understanding (which could be faulty) is that RPI will continue to be published but that the calculation method will be replaced by that of CPIH. In other words, any contractual obligation to use RPI as an indexing measure (such as an annuity or ILGs) will effectively be replaced by CPIH.