Refining retirement options

Whatsit_Allabout

Hello Experts. I’m new here and looking for thoughts please on retirement options. I hadn’t really been thinking much about retirement, but have started doing so now with some urgency since spouse received a cancer diagnosis earlier this year. Financially I feel we are in a comfortable position. So my question is really not whether I can afford to retire, but what’s the most beneficial route considering tax and pension rules.

 Me: 55, working full time. Two DBs – one crystalised from previous employment plus one current. Crystalised scheme pays in full (~£41k) at 60, or early reduced by around 6.5%/yr. I can retire and take a pension from the current scheme (~£8k) anytime from now. Full SP entitlement at 67. I also have a SIPP that I haven’t touched yet.

Spouse: 57, was self employed but probably won’t go back now. Crystalised DB from previous employment in full (~£9.5k) at 60, or early reduced by around 5%/yr, or possibly now in full due to ill-health (waiting to find out). Full SP at 67, and also has an untouched SIPP.

 For example:

1. Use savings as bridge until DBs pay out in full. We could fund this from general savings outside of ISAs/SIPPs.
2. As 1, but bridge to DBs using SIPP(s). I’m thinking we should protect ISAs as far as possible.
3. Trigger one or more DBs early. Biggest DB plus one other would cover our needs now, potentially leaving other DB to reach normal retirement age. But then what to do with the SIPPs?
4. Also not sure what to do about tax-free lump sums from DBs. We don’t need any lump sum and if taken it would have to go mainly into savings/investments that are not tax-protected as we could fill annual ISA allowances and ongoing £2880 SIPP contributions from existing general savings. Would it make sense to maximise TFLS and take a lower annual pension, or minimize TFLS and take a higher annual pension.

I think any option would work but looking to optimise decisions as much as possible and not sure how to start modelling this. I have tried talking to an IFA but didn't feel we were focusing on the right issues. Thank you in advance.

ali_bear

Sorry to hear about your difficult situation, I hope things work out OK. 

For the pension planning, one of the most important things to do is to work out how much pension income you need in retirement. This starts with making a budget for living, necessities, luxuries ... Once you know this you can start to think about how your pension savings will meet these needs. 

If you have decent SIPP funds there would be no need to start taking any DB pension income early. 

DRS1

People will ask you about commutation rates in connection with your lump sum question.  That is how much pension do you give up for a lump sum.  They may also add in a question about the pension increases applicable to the pension(s).

The thought on here is that a commutation rate of 12:1 is not good (that is £12 of lump sum for £1 of pension given up.

But of course if you have a shortened life expectancy then the rates look a little different.

I don't know about your OH but cancer is not always the awful diagnosis that it used to be.

Albermarle

Not really answering your question directly, but with around £50k to £60K of guaranteed income between you ( depends when you actually retire) and then later another >£20K of state pension . Then you are already in a very good and secure position, before you even look at the untouched SIPPs./ISAs/savings
So of course you want to look at a plan, but even if the plan is not 100% efficient, it will probably have very little impact in reality.
It sounds more like you will be wondering how to spend it all ( a common problem on this forum) 
So I would not spend too much time or emotional energy on the finer points, especially as you have more important things to worry about.

Whatsit_Allabout

Thank you for these points - I really appreciate them. To continue the conversation:

ali_bear: We currently live on around £25k per year, which we consider to be comfortable standard of living. However, this does involve us doing all our own decorating, gardening, DIY, car maintenance etc, so would probably have to rise as age takes its toll. Allowing for an increase in standard of living as well I'd think £40k/yr in today's money, or £50k by exception, would be our realistic max.

DRS1: That was good homework thank you, and something I hadn't thought about. The biggest DB (i) looks like 22:1, and the others are about 15:1 and 12:1, all based on their retirement modelers. Annual increases look like: (i) CPI capped 5% for part and 2.5% for part; (ii) a rate set out in some pension legislation; and (iii) RPI.

Albermarle: Thank you, and yes affordability is one less thing to worry about. But after a (working) lifetime of trying to spend carefully and make good financial decisions I'm struggling with the concept of just picking an option which may be sub-optimal! Ingrained habits I'm afraid.

Triumph13

22:1 is a very attractive rate, especially if you were going to be paying 40% tax on the 1.

How do the numbers stack up if you:

1. Take your DBs from normal retirement rate, taking maximum tax free cash from the big one.  That would leave you just nudging into 40% tax once your SP kicks in. At that point you have >£42k pa post tax so your needs are covered nicely
2. Use your SIPP (and other savings if needed and the TFLS from the big DB) to fill in the gaps until everything else is online.

You want to be emptying those SIPPs as tax efficiently as possible.  That means making sure you use your personal allowances until the DBs start and using your 20% band over the 12 years before SP.

And once again, sorry to hear of your situation and best wishes for a good result from treatment.

Albermarle

Albermarle: Thank you, and yes affordability is one less thing to worry about. But after a (working) lifetime of trying to spend carefully and make good financial decisions I'm struggling with the concept of just picking an option which may be sub-optimal! Ingrained habits I'm afraid.


Spend carefully, plan carefully and end up with more money than you ever likely to spend ( especially as you are a careful spender) You sound like you are made for this forum, join the club !

Being retired a little while, I have come to appreciate the fact that one of the advantages of having 'too much' money, is that I have stopped worrying about it as much as I did when I was younger. Although I do still maintain an interest of course.