Pension vs ISA vs current income

boots_babe

I could do with some help on working out how best to proceed in terms of allocation of saving for pension vs. ISA, and what a realistic retirement could look like. I have played around with Guiide extensively but am still somewhat confused.

We were both aiming to retire in 10 years, which would make us both 55. Clearly that means we'd need some non-pension savings to bridge the gap to retirement age.

No dependants and no requirement to preserve any money to pass on.

We are in our forever home so no plans to upgrade there. We have just finished some redevelopment works which used up ~£150k of our cash savings, no plans for anything further - although obviously general maintenance will crop up over the years.

We don't eat out lots, but like to be able to buy things we want as and when we like, we don't have expensive tastes (no designer labels or anything) but do try to research and buy with a good balance of quality vs value. 

The one thing we do both enjoy is holidays abroad, we like to go exploring on what tend to be more expensive holidays staying in luxury accommodation e.g. Costa Rica, Borneo, NZ. On retirement we definitely want that to continue and potentially increase this. So all things considered, we're operating on the assumption we'd want around the same post-tax income at retirement as we have now.

Husband's monthly take home pay is £5500, mine until last month was £4500. So we'd like around that at retirement (in today's terms). However I have just been made redundant. No plans currently to seek work as I will be looking after my rather ill parents. How long that will be for I don't know, so that 'retire at 55' may end up being effectively 'retire now' for me, worst case. Obviously that reduces current income and also future pension contributions for me.

House worth around £800k, mortgage of £155k remaining. For many years we have been on offset mortgages, with us keeping offset cash to match the mortgage figure hence pay no interest. Whilst I know we could have had better returns with our savings elsewhere, it gave me peace of mind. Having just spent on the house development work we now only have £100k in offset savings. Our current intention is to stop putting anything more into offset savings (or perhaps even put some of the current offset sum in an ISA), then at pension drawdown use some of the allowed lump sum to pay off whatever is left on the mortgage in full.

I currently have £250k in workplace pension and £109k in a SIPP. Assume for now that I will not pay any more in.

Husband has £743k in workplace pension, contributing £2500 monthly via sal sac. He also has £128k in SIPP, paying £200 per month in. Plus an ISA with £80k in, no active contributions currently.

He cannot stop paying into his workplace pension, because if he chooses to opt out of the pension payments, he simply loses that money altogether - it's how his benefits and sal sac work. All my versions of Guiide modelling show him having substantial money left in his pension even at 95 so this is not really an ideal situation, to be forced to keep paying in but there we go. So our current assumption is to at least stop paying into his SIPP as that's within his control.

We know we need to start saving more into ISAs to bridge the gap from 55 onwards. But having suddenly been made redundant I now also have to think about the worst case of no further employment for me, and what impact that has - both pre and post retirement.

As there are so many moving parts I must admit I'm a bit stuck as to which part to logically tackle first, as everything is interconnected. 

Grateful for any and all advice. Thanks.

MeteredOut

I'd recommend stripping out all the (in the nicest way) life waffle from your analysis, and produce a table of retirement fund you expect to have at 55, and what you need to live on.

Very roughly, at todays figures (assumes your hubby's £5500 take home till retirement will be spent 100% on your day-to-day bills since you've been made redundant)

Hubby Pensions: £871000, adding 2500*12 and 200*12 each year for 10 years = £1195000
Your SIPP: £359000
ISAs: £80000
Offset Savings: £100000
Mortgage: £-155000

Total Pot at 55: £1,579,000

(you can adjust this if your husband does stop the £200/month to the SIPP, but its only £24K difference)

What you want from age 55: 10,000 (after tax) each month = £120,000 (so probably nearer £140-150K before tax, even taking into account 25% tax free cash)

Are those figures correct? If so, that just gives no more than 12 years of living todays lifestyle at todays prices.

Given what you've said about Guiide, i must have missed something here, but it depends on what investment increases that model has included.

You should include state pensions in your calculations too. Have you checked whether you're both on track to get the full amount?

You also need to consider the impact of the new Lump Sum Allowance on your husbands pensions - with growth, 25% of what his pot value will be in 10 years will likely be greater than that meaning he won't be able to take the full 25% tax free. If you've not used your full pension annual allowance this year, and/or you have carry forward from previous years, it might be better for that 200/month to go into your SIPP rather than his.

Also review the lump sum death benefit allowance.

If this is overwhelming, given the amounts you're dealing with here, you might want to consider contacting an IFA for one-off retirement planning/forecasting.

Albermarle

As above £1.7M at 55 is a lot, but with your high expenditure you could well have spent the lot by the time you get the state pensions, and then you will just have to live on those. = £2K per month.
Basically £10K a month after tax is very high by most peoples standards.
So you will either have to reduce that significantly,
Or work many years after 55
You go back to work soon.
Or all three.

boots_babe

Thanks for the replies. Sorry if it came across waffly, I was trying to cover all the 'usual' questions I see people getting asked on here e.g. will you upsize your house, will your retirement outgoings go down, etc etc.

I am now somewhat more confused though, as it seems the Guiide figures (which I know are only very indicative) look way out from what's being said on here. I've played around with loads of scenarios, but as an example, for my husband Guiide still shows over £2m left in the pension pot after 35 years when:

- £80k post tax pension taken as income per year
- income increases YoY to account for inflation
- assuming medium 6% growth YoY
- assume full state pension of £20,115 
- assuming he pays no more into SIPP but continues paying into work pension at current rate

Yes both on track for full state pension.

Just looking back, I think a big difference could be the total assumed pension pot at 55. For husband only, Guiide is coming out at £2.3m, with that 6% medium YoY growth. This is versus £1.5m assumed in the post above I think.

To address the comment re lump sum limitations, I'm not anticipating needing any lump sum other than to cover the smallish amount that will be remaining on the mortgage in 10 years, so we'd not be wanting anything near the limit.

ali_bear

I'd recommend you keep working and aim for the minimum pension age of 57 before stopping. 

Look at the income tax you pay, try to minimise this over the long term. 

hara____

As you hint at yourself, there's a clear risk you end up with lots in pension wrappers but not enough in ISAs.

So, yes, I'd prioritise boosting the ISA total one way or another, to give you that flexibility at 55. 

MarlowMallard

boots_babe said:

Thanks for the replies. Sorry if it came across waffly, I was trying to cover all the 'usual' questions I see people getting asked on here e.g. will you upsize your house, will your retirement outgoings go down, etc etc.

I am now somewhat more confused though, as it seems the Guiide figures (which I know are only very indicative) look way out from what's being said on here. I've played around with loads of scenarios, but as an example, for my husband Guiide still shows over £2m left in the pension pot after 35 years when:

- £80k post tax pension taken as income per year
- income increases YoY to account for inflation
- assuming medium 6% growth YoY
- assume full state pension of £20,115 
- assuming he pays no more into SIPP but continues paying into work pension at current rate

Yes both on track for full state pension.

Just looking back, I think a big difference could be the total assumed pension pot at 55. For husband only, Guiide is coming out at £2.3m, with that 6% medium YoY growth. This is versus £1.5m assumed in the post above I think.

To address the comment re lump sum limitations, I'm not anticipating needing any lump sum other than to cover the smallish amount that will be remaining on the mortgage in 10 years, so we'd not be wanting anything near the limit.

I think the growth / inflation factors are the difference here.  At 6% growth your current pot will grow 1.8x in cash terms, plus whatever you put in. 

The snag however is if inflation averages 4% and your "80k" withdrawal starts at 80k in 10 years time,  80k then is only equivalent value to 54k today, so that's under half of your original 120k you mentioned. Big difference.   

HedgehogRulez

You’re nowhere near the pot you’d need with that burn rate.
consider working for 12 more years 

kimwp

Why is your husband contributing to a sipp as well as workplace sacrifice? Aren't they both available at the same time, but the workplace pension is better from a tax point of view?

boots_babe

MarlowMallard said:

boots_babe said:

Thanks for the replies. Sorry if it came across waffly, I was trying to cover all the 'usual' questions I see people getting asked on here e.g. will you upsize your house, will your retirement outgoings go down, etc etc.

I am now somewhat more confused though, as it seems the Guiide figures (which I know are only very indicative) look way out from what's being said on here. I've played around with loads of scenarios, but as an example, for my husband Guiide still shows over £2m left in the pension pot after 35 years when:

- £80k post tax pension taken as income per year
- income increases YoY to account for inflation
- assuming medium 6% growth YoY
- assume full state pension of £20,115 
- assuming he pays no more into SIPP but continues paying into work pension at current rate

Yes both on track for full state pension.

Just looking back, I think a big difference could be the total assumed pension pot at 55. For husband only, Guiide is coming out at £2.3m, with that 6% medium YoY growth. This is versus £1.5m assumed in the post above I think.

To address the comment re lump sum limitations, I'm not anticipating needing any lump sum other than to cover the smallish amount that will be remaining on the mortgage in 10 years, so we'd not be wanting anything near the limit.

I think the growth / inflation factors are the difference here.  At 6% growth your current pot will grow 1.8x in cash terms, plus whatever you put in. 

The snag however is if inflation averages 4% and your "80k" withdrawal starts at 80k in 10 years time,  80k then is only equivalent value to 54k today, so that's under half of your original 120k you mentioned. Big difference.   

Understand that. I should have specified, the £80k IS in terms of today's money. On Guiide that is equating to around £107k withdrawn from pension in year 1, and then increasing yearly to allow for inflation. 

i.e. I've set Guiide to model it based on £80k in today's terms, not at the date of retirement.

boots_babe

kimwp said:

Why is your husband contributing to a sipp as well as workplace sacrifice? Aren't they both available at the same time, but the workplace pension is better from a tax point of view?

Absolutely agree he shouldn't be putting more into his SIPP, however he is not allowed to put any more into his workplace pension via sal sac than what he already is.

He started the SIPP a few years ago, as he wanted more control over what the pension is invested in - he's been getting return of towards 20% per year on average - which of course can/will probably go down at some point in the future. 

This was setup before either of us sat down to work out the retirement situation, at that time we were assuming the more in pensions the better. It is only this last few months that I've started to look at it, and quickly realised that he'll have too much in pension and not enough in ISAs. We were about to get on with sorting everything when I was made redundant and my parents became very ill, so it sort of just carried on as it was with the monthly SIPP contributions.

Aiming to get everything sorted out now though.