Retirement sense-check 2026 and bridging the gap

Yorkie1

Time for my annual stocktake; I have a discussion with my financial advisor next week about bridging the 60 - 65 gap after proposed retirement at 60, but if anyone has any comments about where to focus my efforts for that, I'd be grateful for them.

Age 55
Income £61K
Plus £4-5K taxable interest this year (likely to decrease over time as interest rates go down and more gets sheltered tax-free)
Mortgage < £8K remaining (3.99%), to be paid off in 2026 via lump sum overpayment. Not looking to downsize or move
Basic rate taxpayer owing to current pension / AVC contributions
Single, no dependents

Would like £25K - £30K (net) income per year from 60.

At 60, take Civil service pension (Classic) - estimate £15k pa and tax free lump sum £45K
At 65, take Civil service pension (Alpha: EPA -2 / non-EPA reduced for early payment) - current contributions estimate another £15K pa (with future years' contributions to be added as they are accrued)
At 67, take state pension (on track for full pension of just over £12k with 3 more years' contributions, i.e. to be achieved before age 60)

Current available assets:
- S&S ISA valued at about £125K (with MyWealth, moderate risk)
- Civil service AVCs valued at £32K, with monthly contributions at present of £1500
- Excluding money set aside for other projects, cash currently at £80K (PBs, cash ISAs, easy access account, regular savers)

So, I will need to find money for about £10K - £15K per year, after tax, from age 60 - 65.

Cash lump sump from Classic will count for years 1 and year 2. My Classic pension will use all of my 0% income tax band.

What combination might be worth considering for the remaining income? AVCs, S&S ISA, or Cash savings to fill the gap? This is relevant now because I would like to be assured that I am focusing on funding the right assets in the next 5 years (e.g. whether to up AVCs, S&S ISA etc etc).

If the AVCs, which was my original thought process when I set them up, then they are currently invested in the default L&G PMG 2035 - 2040 Target Date Fund 3 at the end of this month. I presume this is the default fund based on my currently recorded retirement age & date of 67 & 2037. Should I be seeking to change my retirement age & date (e.g. to 60), and thus I assume moving into a lower risk fund? Or lea ve them there? Or something else?

I had also considered a 5-year RPI annuity from some of the assets. I really don't understand gilt-ladders, despite repeatedly reading helpful threads, so would probably stay away from them.

Edit to add: I know that taking any taxable cash from an AVC will trigger the MPAA. But I also wonder whether it's worth setting up a couple of small SIPPs, with a view to the "small pots" rule???

OldScientist

RE: Gilt ladders. Another (conceptually similar) approach is, once retired, to use a ladder of fixed rate savings accounts instead. For example, place £15k in an account maturing in 1 year, £15k in an account maturing in two years, £15k in 3 years, etc.. On maturity, the accounts will provided income for the subsequent year.

I note that this approach is only inflation protected up to the interest rate (currently around the 4% mark) although placing 15.75k, 16.5k, and 17.4k, in the 1, 2, and 3 year accounts would add a further 5% inflation protection (i.e., for a total of 8%).

Yorkie1

OldScientist said:

RE: Gilt ladders. Another (conceptually similar) approach is, once retired, to use a ladder of fixed rate savings accounts instead. For example, place £15k in an account maturing in 1 year, £15k in an account maturing in two years, £15k in 3 years, etc.. On maturity, the accounts will provided income for the subsequent year.

I note that this approach is only inflation protected up to the interest rate (currently around the 4% mark) although placing 15.75k, 16.5k, and 17.4k, in the 1, 2, and 3 year accounts would add a further 5% inflation protection (i.e., for a total of 8%).

Interesting idea, had forgotten about that possibility, thanks.

hugheskevi

Yorkie1 said:

Would like £25K - £30K (net) income per year from 60.

At 60, take Civil service pension (Classic) - estimate £15k pa and tax free lump sum £45K
At 65, take Civil service pension (Alpha: EPA -2 / non-EPA reduced for early payment) - current contributions estimate another £15K pa (with future years' contributions to be added as they are accrued)
At 67, take state pension (on track for full pension of just over £12k with 3 more years' contributions, i.e. to be achieved before age 60)

I'd be worried with this plan that I would be pushing myself into higher rate tax once State Pension age comes into payment. I'd be keeping a careful eye on thresholds and forecast pension income, with a view to commencing alpha earlier with actuarial reduction if it looks like higher rate tax is likely.

Unfortunately, the same issue rather disincentivises buying Added Pension, which otherwise may have been quite attractive given you appear to have plenty of cash and SSISA resources for your plans.

Yorkie1 said:

What combination might be worth considering for the remaining income? AVCs, S&S ISA, or Cash savings to fill the gap? This is relevant now because I would like to be assured that I am focusing on funding the right assets in the next 5 years (e.g. whether to up AVCs, S&S ISA etc etc).

Up to age 67 you look like being well within basic rate band. That would point toward AVCs, even though you would only be getting the 6.25% uplift from 25% tax free lump sum. Given you are paying tax on interest now and probably struggling to even keep up inflation on the net interest, ramping up AVC contributions might be attractive, using the cash to augment salary income.

Yorkie1 said:

If the AVCs, which was my original thought process when I set them up, then they are currently invested in the default L&G PMG 2035 - 2040 Target Date Fund 3 at the end of this month. I presume this is the default fund based on my currently recorded retirement age & date of 67 & 2037. Should I be seeking to change my retirement age & date (e.g. to 60), and thus I assume moving into a lower risk fund? Or lea ve them there? Or something else?

It may well depend on when you plan to draw the AVC. Presumably you expect to start drawing it at age 60 and have fully drawn it by State Pension age of 67, so the funds have between 5 to 12 years  remaining to being taken as cash. That might suggest a fairly conservative investment, depending on wider goals and in particular being viewed in conjunction with the SSISA. I'd be looking across all my investments at how much the combined investment into each category is, and whether the Target Date fund matches investment preferences or not.

Yorkie1

hugheskevi said:

Yorkie1 said:

Would like £25K - £30K (net) income per year from 60.

At 60, take Civil service pension (Classic) - estimate £15k pa and tax free lump sum £45K
At 65, take Civil service pension (Alpha: EPA -2 / non-EPA reduced for early payment) - current contributions estimate another £15K pa (with future years' contributions to be added as they are accrued)
At 67, take state pension (on track for full pension of just over £12k with 3 more years' contributions, i.e. to be achieved before age 60)

I'd be worried with this plan that I would be pushing myself into higher rate tax once State Pension age comes into payment. I'd be keeping a careful eye on thresholds and forecast pension income, with a view to commencing alpha earlier with actuarial reduction if it looks like higher rate tax is likely.

Unfortunately, the same issue rather disincentivises buying Added Pension, which otherwise may have been quite attractive given you appear to have plenty of cash and SSISA resources for your plans.

Yorkie1 said:

What combination might be worth considering for the remaining income? AVCs, S&S ISA, or Cash savings to fill the gap? This is relevant now because I would like to be assured that I am focusing on funding the right assets in the next 5 years (e.g. whether to up AVCs, S&S ISA etc etc).

Up to age 67 you look like being well within basic rate band. That would point toward AVCs, even though you would only be getting the 6.25% uplift from 25% tax free lump sum. Given you are paying tax on interest now and probably struggling to even keep up inflation on the net interest, ramping up AVC contributions might be attractive, using the cash to augment salary income.

Yorkie1 said:

If the AVCs, which was my original thought process when I set them up, then they are currently invested in the default L&G PMG 2035 - 2040 Target Date Fund 3 at the end of this month. I presume this is the default fund based on my currently recorded retirement age & date of 67 & 2037. Should I be seeking to change my retirement age & date (e.g. to 60), and thus I assume moving into a lower risk fund? Or lea ve them there? Or something else?

It may well depend on when you plan to draw the AVC. Presumably you expect to start drawing it at age 60 and have fully drawn it by State Pension age of 67, so the funds have between 5 to 12 years  remaining to being taken as cash. That might suggest a fairly conservative investment, depending on wider goals and in particular being viewed in conjunction with the SSISA. I'd be looking across all my investments at how much the combined investment into each category is, and whether the Target Date fund matches investment preferences or not.

Thanks hugheskevi.

Interesting comments re. higher rate tax bands. You've made me have another look at what the figures might be in 5 years' time (the figures I gave were what I anticipate them to be in the ABS to be received in summer this year, for 31 March 2026).

Assuming 2% annual salary increase for Classic, 2% CPI annually for Alpha (plus adding 2.32% of salary each year), and 2.5% state pension annual increase, I think (rough unverified calcs) that at 65 I would have £50K income from Classic and Alpha (taking McCloud in Classic) or about £54K (taking McCloud in Alpha, which is my current line of thought). State pension would add just over £16K at age 67. Definite food for thought. I guess I don't need to make a decision on McCloud until just before taking the Classic part of the CS pension.

Re. the AVC, part of my thought process is whether to draw down on that from age 60, which will involve some taxable income, or focus on the S&S ISA, which of course will not be taxable when obtained. Good point re. not considering the investment approach in isolation - if I focus on taking income from the AVC, and leave the S&S ISA in moderate risk investments, then the derisking of the AVC is OK. Or vice versa if focus on taking income from the S&S ISA.