Retirement at Christmas

Time2Go_25

Trying to figure out the best way of funding the 2 years and 3 months pre state pension should I hang up my boots at Christmas.

Currently spending around £2500 a month, but want to allow for a 3k income, which means a gross income of £42000 per annum. No debt, house paid off. Spouse has her own small pension and state pension that she uses for her own needs, so mine tends to fund the day to day household. One child, working and in there own home.

I have:

£41k in cash isa

£41k in premium bonds

£12k in the bank

£580k in a SIPP

and in April 2028 I will get a full state pension

And a USS pension, which is:

USS Pension £9396, lump sum £28189, IB 42859

or take everything, £9713 + £64754 (tax free)

Just taking the DB, I can go from

£7893 income + £52620  (tax free) to

£10816 income + £0 (tax free)

leaving me with £10715 tax free and £32144 taxable in the DC

or take the £10715 tax free and £32144 taxable from the DC and leave the DC until either

At Age 66

£12675 income and £0 tax free to

£9151 income and £61009 tax free

or age at 67

£14194 income and £0 tax free to

£10160 income and £67732 tax free

Part of me just want to take the whole lot at Christmas so that it's all easy to manage, but I don't think this is the best/most tax efficient route, so what I was thinking was.

Retire at Christmas and do nothing with the USS pension. Live off what's in the bank until the next tax year. Then:

Take the DC from USS, which will give me £10715 tax free + 12570 (annual allowance) tax free from the taxable part + the remainder that has had the tax removed, would should give me about £39k nett for the year 2026/2027

From April 2027 take the DC pot, my inclination again is to take the maximum tax free, clearly after a number of years it will be wrong decision as long as I am still around to worry about it, but I think I'd rather have it. The other option is to take just enough tax free £31000 to get through the year with the pension and that would give a pension of £11044

At state pension age, this would leave me with a withdrawal rate of about 3.5% from my SIPP, without including the ISA and premium bonds which would be rainy day funds.

Thoughts and criticisms welcome

tacpot12

The most efficient option is usually to draw from your SIPP for as long as possible to avoid having to lose any of your DB pension due to actuarial reductions for early retirement. 

I know from my own SIPP, which is in drawdown, that if you went down a dividend route, you could receive an income of around £2050 after tax from your SIPP (4.5% withdrawal rate). This would leave £950 pcm to be provided either drawing on DB pension early or drawing from savings. Drawing from savings is like to the best due to the actuarial reduction.

£950 x 2 years 3 months = £25,650. So you could easily fund this with withdrawals from Premium Bonds alone. You would still have £15,350 left in Premium Bonds. To my mind, Premium Bonds are not such an attractive option for savings as they once were. (I only have about £2,500 in Premium Bonds left from a high of about £7,000).

You could also sell some SIPP investments to avoid selling the Premium Bonds, but as above, I think this would be a poor deal. My total return on my SIPP is just over 6% return vs. 3.6% for Premium Bonds.

Whether or not to take all the Tax Free element from the SIPP first, or spread this over your retirement is not something I'm going to comment on -  you could reduce the amount you have to withdraw from your SIPP before your reach the state retirement age by only withdrawing tax free month from the SIPP, but this means you aren't making good use of the your personal allowance. You could have some taxable money from your SIPP, up to your personal allowance, and then take the rest as tax free cash. This would result in your paying no tax in the short term, but higher tax when you also have the state pension and have exhausted the tax free cash in your SIPP (whih will take a while).  

kimwp

Not from a finance point of view (though I think there are certain times to retire that are advantageous, but from a mood point of view, winter is supposed to not be a great time to retire with the weather being rubbish - spring is supposed to be a better time. On the other hand, you'll be able to get out during the day, so maybe that's a good time from that perspective.

Time2Go_25

tacpot12 said:

The most efficient option is usually to draw from your SIPP for as long as possible to avoid having to lose any of your DB pension due to actuarial reductions for early retirement. 

I know from my own SIPP, which is in drawdown, that if you went down a dividend route, you could receive an income of around £2050 after tax from your SIPP (4.5% withdrawal rate). This would leave £950 pcm to be provided either drawing on DB pension early or drawing from savings. Drawing from savings is like to the best due to the actuarial reduction.

£950 x 2 years 3 months = £25,650. So you could easily fund this with withdrawals from Premium Bonds alone. You would still have £15,350 left in Premium Bonds. To my mind, Premium Bonds are not such an attractive option for savings as they once were. (I only have about £2,500 in Premium Bonds left from a high of about £7,000).

You could also sell some SIPP investments to avoid selling the Premium Bonds, but as above, I think this would be a poor deal. My total return on my SIPP is just over 6% return vs. 3.6% for Premium Bonds.

Whether or not to take all the Tax Free element from the SIPP first, or spread this over your retirement is not something I'm going to comment on -  you could reduce the amount you have to withdraw from your SIPP before your reach the state retirement age by only withdrawing tax free month from the SIPP, but this means you aren't making good use of the your personal allowance. You could have some taxable money from your SIPP, up to your personal allowance, and then take the rest as tax free cash. This would result in your paying no tax in the short term, but higher tax when you also have the state pension and have exhausted the tax free cash in your SIPP (whih will take a while).  

I agree about the poor returns of premium bonds, so yes it does seem the obvious place to draw from first. Sadly there's no tax free left in the SIPP as I took the 25% a number of years ago to pay off the mortgage shortfall from the joys of endowment policies. I probably could have re-mortgaged but wanted to be free of it before thinking of retirement and that left me in a position to save.

It's surprisingly scary trying to finally send in the "I'm leaving" message. 

FIREDreamer

Time2Go_25 said:

tacpot12 said:

The most efficient option is usually to draw from your SIPP for as long as possible to avoid having to lose any of your DB pension due to actuarial reductions for early retirement. 

I know from my own SIPP, which is in drawdown, that if you went down a dividend route, you could receive an income of around £2050 after tax from your SIPP (4.5% withdrawal rate). This would leave £950 pcm to be provided either drawing on DB pension early or drawing from savings. Drawing from savings is like to the best due to the actuarial reduction.

£950 x 2 years 3 months = £25,650. So you could easily fund this with withdrawals from Premium Bonds alone. You would still have £15,350 left in Premium Bonds. To my mind, Premium Bonds are not such an attractive option for savings as they once were. (I only have about £2,500 in Premium Bonds left from a high of about £7,000).

You could also sell some SIPP investments to avoid selling the Premium Bonds, but as above, I think this would be a poor deal. My total return on my SIPP is just over 6% return vs. 3.6% for Premium Bonds.

Whether or not to take all the Tax Free element from the SIPP first, or spread this over your retirement is not something I'm going to comment on -  you could reduce the amount you have to withdraw from your SIPP before your reach the state retirement age by only withdrawing tax free month from the SIPP, but this means you aren't making good use of the your personal allowance. You could have some taxable money from your SIPP, up to your personal allowance, and then take the rest as tax free cash. This would result in your paying no tax in the short term, but higher tax when you also have the state pension and have exhausted the tax free cash in your SIPP (whih will take a while).  

I agree about the poor returns of premium bonds, so yes it does seem the obvious place to draw from first. Sadly there's no tax free left in the SIPP as I took the 25% a number of years ago to pay off the mortgage shortfall from the joys of endowment policies. I probably could have re-mortgaged but wanted to be free of it before thinking of retirement and that left me in a position to save.

It's surprisingly scary trying to finally send in the "I'm leaving" message. 

The £580k crystallised SIPP could buy an index linked pension of nearly £30k at age 65. Might be worth considering. Together with a DB of £10k and state pension soon of £12k gives you a pension income of £50k. Plus your tax free cash from USS of course.