'Pre Retirement' - Is this a sensible plan?

Roger175

RockPools said:

ali_bear said:

Seems that you want to pay into your SIPP and withdraw from it at the same time? I can't see the point in this and part-crystallising now could reduce your options in the future. 

Yes, I want to keep paying into the SIPP to take advantage of tax savings on the way in (more so as my contributions are ltd. company contributions) whilst removing tax free cash to build up the balance of my ISA and leave it there as a cash buffer for the early years of retirement when I start properly drawing down from my pension.

The point is the continuing tax savings while contributing to the SIPP.

In my view this is a very sensible plan from a tax optimisation point of view. OK, maybe put the tax free money into a S&S ISA, rather than cash, but otherwise it makes sense to me, given the opportunity you have to get all that tax relief whilst still working.

RockPools

DT2001 said:

What is your budget for retirement? You talk about 3% drawdown depending on the size of your portfolio - are you assuming no growth/downturn?

When you reach SPA what figure will you then be budgeting? I worked back from that point and have an ultra short bonds fund inside our SIPPS to provide an amount roughly equivalent to the SP - my OH is 7 years away from SP (unsure of when she will retire as she enjoys her work) and has 15% in near cash. This can be reduced over time as our budget is quite flexible. My aim is better long term growth at the expense of short term guaranteed income above the SP figure. Can you expand on how you intend to use your cash buffer - when do you dip into it e.g. when markets are down 10% or 25%. My current plan is to take a fixed % of the investment pots and top up from my rainy day fund but not by the full amount e.g. market down 25%, draw 25% less from growth ETFS and take 12.5% equivalent from cash fund. It’s only possible as we are ‘happy’ to adjust our budget.  IMO  it is covering the worst case scenario (any drop beyond 25% in global markets would probably be the result of a worldwide catastrophe which would curtail our overseas travel - a large component).

If you can provide more information we can hopefully help you more 

Thanks DT2001,
I have set 3% as in my tiny mind, it appears to be a safe starting point.  I'm sure I will adjust upwards as I become more comfortable with decumulation.  Currently, I'm looking to stay invested in HSBC/VWRP or similar, so anticipating growth.  These riskier investments are part of the reason for wanting a good cash buffer for major downturns.  I may split the ISA between cash and Shares, but this is fine tuning and I'm thinking at least 75/50% cash/shares once I get to £100k or am fully retired from my job.

I do struggle with bonds and must put more effort into understanding this total minefield!  My tiny mind has a hard time understanding them.  I even blindly put in £10k about a year ago into IGLT which has dropped by about 4%, only realising that I am receiving a half yearly income from this ETF which is more than covering the capital loss.  How embarrassing.

RockPools

Roger175 said:

RockPools said:

ali_bear said:

Seems that you want to pay into your SIPP and withdraw from it at the same time? I can't see the point in this and part-crystallising now could reduce your options in the future. 

Yes, I want to keep paying into the SIPP to take advantage of tax savings on the way in (more so as my contributions are ltd. company contributions) whilst removing tax free cash to build up the balance of my ISA and leave it there as a cash buffer for the early years of retirement when I start properly drawing down from my pension.

The point is the continuing tax savings while contributing to the SIPP.

In my view this is a very sensible plan from a tax optimisation point of view. OK, maybe put the tax free money into a S&S ISA, rather than cash, but otherwise it makes sense to me, given the opportunity you have to get all that tax relief whilst still working.

Thanks Roger,

"The point is the continuing tax savings while contributing to the SIPP." This is exactly what I'm thinking.

I just can't see any downside. 

If I put the money into an S&S ISA, there seems to be no downside at all (although I do lose the safety of the cash buffer that I wanted in point 2 of my original post).

ali_bear

If you leave the money in the pension for now, it can continue to grow in the tax-free wrapper and is protected. Once you withdraw it you have to re-invest it somewhere, and there is a limit to ISA contributions and premium bond holdings, you'll be paying tax on any income or growth on cash outside of those. Interest rates are always below inflation. And there is the 85k limit for the safety guarantee on savings. 

Have you made a plan for how you will start to use your pension and other funds after retiring? 

RockPools

ali_bear said:

If you leave the money in the pension for now, it can continue to grow in the tax-free wrapper and is protected. Once you withdraw it you have to re-invest it somewhere, and there is a limit to ISA contributions and premium bond holdings, you'll be paying tax on any income or growth on cash outside of those. Interest rates are always below inflation. And there is the 85k limit for the safety guarantee on savings. 

Have you made a plan for how you will start to use your pension and other funds after retiring? 

Thanks alibear,

I think I already mentioned that I would contribute £20pa to the ISA, so no issues with limits or interest outside of any tax wrapper-that's the whole point of taking out a maximum £20k pa pre-retirement. Lower growth on tax cash comes with the territory, and is offset with the greater risk accepted within the pension, so I think I'm ok with that too.  I suppose I could split the ISA between cash and S&S and mitigate this, but it goes against my original aims of having a large cash buffer. I could have two ISAs to get around the £85k compensation, but at £100k total, this isn't a particular concern.

"Have you made a plan for how you will start to use your pension and other funds after retiring? " Still working out the details of this, but in principle I am thinking that I will drawdown from the SIPP exclusively (whether FAD or UFPLS, I don't know yet), and draw from the cash buffer for emergencies or in the event of a big downturn so that the SIPP can remain untouched.  

Cobbler_tone

I’d say it was more a case of asking if you have a plan for the significant amount of money you are planning to leave behind? Worse dilemmas to have. I certainly wouldn’t ever travel anything other than 1st/business class in the future.

RockPools

Cobbler_tone said:

I’d say it was more a case of asking if you have a plan for the significant amount of money you are planning to leave behind? Worse dilemmas to have. I certainly wouldn’t ever travel anything other than 1st/business class in the future.

Seems like a lot of money, but not so much over 30 years or so-I don't think our DC pensions puts us anywhere near 1st class!  And if there's ever a need for any level of old age care in the future, then it's probably a bust anyway. 

About five years ago, we were both on course for a SIPP pot of about £140k by 55 (average salary, minimal contributions).  Big changes to our work situation since then have put us in a much better position and I'm grateful for that, but also conscious that there's a potential flipside in fortune - hence the idea of a cash buffer.

Albermarle

RockPools said:

Cobbler_tone said:

I’d say it was more a case of asking if you have a plan for the significant amount of money you are planning to leave behind? Worse dilemmas to have. I certainly wouldn’t ever travel anything other than 1st/business class in the future.

Seems like a lot of money, but not so much over 30 years or so-I don't think our DC pensions puts us anywhere near 1st class!  And if there's ever a need for any level of old age care in the future, then it's probably a bust anyway. 

About five years ago, we were both on course for a SIPP pot of about £140k by 55 (average salary, minimal contributions).  Big changes to our work situation since then have put us in a much better position and I'm grateful for that, but also conscious that there's a potential flipside in fortune - hence the idea of a cash buffer.

I do not see any mention of planned expenditure ?

You see very often on this forum, people with very large war chests built up ( Like you and your wife) wondering whether they can retire, and then saying but we are not actually big spenders and will be happy with £30K a year.

In these cases the most likely scenario is not that they will run out of money, but will their coffin be big enough to fit in all the money left when they die. For example with a 3% drawdown, I would suspect there would be more than a 50% chance of dying with more than you started with, maybe a lot more. 

So the moral of the tale is make sure you have a plan to spend most of it, rather than give it all to HMRC as inheritance tax. Not as easy as it sounds if you are the careful type, as I know very well.............

Cobbler_tone

RockPools said:

Cobbler_tone said:

I’d say it was more a case of asking if you have a plan for the significant amount of money you are planning to leave behind? Worse dilemmas to have. I certainly wouldn’t ever travel anything other than 1st/business class in the future.

Seems like a lot of money, but not so much over 30 years or so-I don't think our DC pensions puts us anywhere near 1st class!  And if there's ever a need for any level of old age care in the future, then it's probably a bust anyway. 

About five years ago, we were both on course for a SIPP pot of about £140k by 55 (average salary, minimal contributions).  Big changes to our work situation since then have put us in a much better position and I'm grateful for that, but also conscious that there's a potential flipside in fortune - hence the idea of a cash buffer.

Depends what your outgoings are and whether your state pensions will add £25k PA.
With your resources you can easily bridge and have a few £15k holidays without any worry. You have to wanna spend it though….or not and have that juicy buffer for your care home…which may/may not happen. Ultimately you have choices.

RockPools

Albermarle said:

I do not see any mention of planned expenditure ?

You see very often on this forum, people with very large war chests built up ( Like you and your wife) wondering whether they can retire, and then saying but we are not actually big spenders and will be happy with £30K a year.

In these cases the most likely scenario is not that they will run out of money, but will their coffin be big enough to fit in all the money left when they die. For example with a 3% drawdown, I would suspect there would be more than a 50% chance of dying with more than you started with, maybe a lot more. 

So the moral of the tale is make sure you have a plan to spend most of it, rather than give it all to HMRC as inheritance tax. Not as easy as it sounds if you are the careful type, as I know very well.............

Thanks Abermarle,

I didn't mention in my OP that I also have a child - it's a minor point that I neglected to include  - who will be 19yo when I retire, so there is incentive to leave something, although we have always seen the house as her inheritance.  We have also saved to an S&S ISA to help her out.

Anyway.

I must admit that I am struggling with planned expenditure beyond what I spend at the moment which is usually under £2k per month and that includes some biggish insurances (which will stop), small mortgage, lots of TV subs (that we don't really need), nice holidays so hardly living frugally. My wife probably spends about £1.5k pm. We both come from modest backgrounds where money was tight, so it's difficult for us to get into the headspace of our current earnings and it's a big reason (on top of obvious tax efficiency) for putting all recent pay increases into our pensions.  I haven't 'seen' a pay rise since 2018   

I think as I get more comfortable with retirement, I'll adjust my withdrawals upwards.