Bridge to state pension - ringfence funds in lower risk or just draw from overall pot?

mrklaw

Not sure there is necessarily a ‘right’ way but would like feedback.

target is to retire in 3 years time. I’ll be 58 and a bit, wife will just have turned 59. 8 years for her state pension to kick in, about 8.5 years for mine. Have a DB pension that should pay £15.5k from april 2029. Income needs - 40k net initially, dropping to 32k from 75.

As soon as we both get state pension, those plus the DB covers most of the costs other than 2k -ish depending on allowances etc. And after 75 we’ll be adding to our savings if we’re both still here. So the focus is on that first bridge period.

current estimates have my wife with a DC around 85-90k. intent is to spend that down maximising her personal allowance which will be all tax free with no other income. thats invested in a 2030 TDF as we want stability to spend that down. hopefully gives us around 12500 a year tax free income. My DB would be around 15k so thats 27500 in total leaving my DC to cover 12500 net / £14700 gross at 15% tax. A pot of 120k at the start should cover that, and a pot of £106k now should get to 120k in three years time.

I have £150k currently in DC pots. I plan to continue to save for the next three years while my wife is building her pot up. if all goes well should have around 300-320k by the time we retire. hoping to be able to use some of the excess to support kids and family.

so - for the bridge portion; do I

• keep the entire 300k pot 100% equities as its relatively self-insured and even a 50% drop can support the bridge? (probably not - why play risky when you have enough is my thought here)
• move the entire pot to 60/40 or 70/30 in the 4% rule ballpark to reduce volatitility with some growth and just draw down whats needed.
• move 110-120k now-ish to a more defensive posture with the specific job of funding that bridge period, and letting the rest of my portfolio grow in more aggressive equities? (possiby even transferring out to a dedicated SIPP)

Secondary consideration - not sure if its tax efficient to use some tax free cash or redirect some of my contributions to help my wife be able to use more of her personal allowance. I’m currently sacrificiing down to high rate tax threshold and any basic rate capacity is diverted to my wife. We are both 55 so able to access the pensions eg to transfer tax free cash without impacting contributions.

I’m probably overthinking but would appreciate your thoughts

LHW99

Just a few thoughts (non-expert):

If your wife has no income, using her PA by taking UFPLS from her DC pension means she could remove ~£16,700pa. If the extra isn't needed it could be added to an ISA.

Generally it is thought money needed in less than 5 years should be in close-to-cash form - ie STMMF's, gilts / bonds or actual cash.

Since you won't be needing all your DC funds within the next 10 years (presumably), IMO it adds a risk if they were all transferred out of equities.

QrizB

so - for the bridge portion; do I …

It's the Dirty Harry question - do you feel lucky?

On average, keeping it in equities will leave you better off than converting it to gilts / bonds / STMMF etc. But among the range of possible outcomes, there are some that could leave you a lot worse off than doing the conversion would.

why play risky when you have enough

Exactly this.

I can't tell you what to do, but what I've done is build a collapsing gilt ladder (nominal gilts for the early years, IL gilts for the later ones) to take me from my intended retirement age through to state pension age, and allowing for my old DB pension coming into payment along the way.

Yes, I'd probably be financially better off if I left it all in equities. But there's a non-trivial risk I wouldn't be, and that's a risk I don't want to take.

Veloflyer

I've gone 50/50. 50% in equities - global trackers mainly to be left alone and hopefully grow, 50% ILG gilt ladder to bridge until SP kicks in, then to consider an annuity with the remainder of that 50%. I have managed to ensure the latter 50% covers all basic retirement costs - food/bills/council tax etc, the equity 50% is bunce for holidays/new cars/classic bikes etc…..

Albermarle

Another way is to stay invested at a medium risk level , say 60/40, and have two to three years in cash ( or similar) either in the pension or in cash savings.

Withdraw from the invested part when times are good, and from the cash if the market slumps, to avoid withdrawing from investments when markets are down and locking in losses.

SVaz

I have 5 years in short term money markets to take me to 67 and a small 5 year Gilt ladder after that but if we see huge gains in equities then I would slice off some of the growth to use, probably anything over a 10% gain in a year, assuming no negative years preceeding them that need making up for.

ali_bear

My thoughts on your situation are that you are planning on a fairly early retirement. Are you sure you will have earned enough by then to reach your target 40k p.a. net?

Triumph13

Hard to answer without knowing your risk tolerance / attitude to upside and downside. Is the survivor going to have enough to live on after the first of you passes? Especially if you go first?

I personally would lean towards an ILG ladder to cover at least core spending over the period to SP age. I think it's much better to face up to the fact that you are going to burn through a lot of capital in that period, than to stay invested in the hope of great returns - which really magnifies your sequence of returns risk if you hit a rough patch in the period with the unsustainable withdrawals.

I would also be looking to put everything possible into your wife's pension over the remaining working years. She is currently looking at plenty of unused personal allowance, whereas you will be paying tax on your DC funds whatever happens. One option would be for you to take your TFLS to live on, allowing her to up her contributions.

kempiejon

I used to think I would be bold and use a spending buffer of 3/5 year basic spending then higher risk equities with the majority. When I was a couple of years away from potential ER I increased my cash and fixed interest to about 30% made up of premium bonds, conventional and IL gilts and a few corporate bonds. It gave me peace of mind that I could ride out a stocks downturn of several years.

Covid halved my income and capital that was a shock, I kept buying. I might be deluding myself but I'm confident my allocation could survive a similar or greater shock to my investments.

It is worth reviewing ones strategy and asset allocation every now and again. I certainly felt better when I sold down some equity to fixed interest with clearly known outcomes and dates for part of my spending predicted for the next few years.

tigerspill

I am 60 and have been retired a few year.

Both my wife and I have reasonable DB pensions and will have full state pensions once we buy a couple of tears to top up to the max.

We fully understand our expenditure having tracked it for 10 years (every penny).

I have 5 years top up in cash. This is has been a lot until we started taking out pensions. It will reduce as we head for SP age and then reduce a lot more when that kicks in.

Years 10 to 15 top up money I have in ILGs maturing in each of those 10 years.

The rest is in global equities and a few bonds.

I will add an additional year if ILG each year.

So a spread of investment risk in different "buckets"

I moved a lot of equities into ILGs in November/December as equities were very high and as I planned for the future. And I have been concerned that stocks maybe start to suffer due to these high values - especially in the US.

I am now totally comfortable with my plan.

Storcko14

C) Ringfence

When I first set out I assumed we'd have about 75% in equities at the point of retirement since we'd have relatively trivial DBs and, hopefully, a long horizon. However, with the last several years of strong equity growth and also having got lucky with a now paid off sub 1% tracker mortgage from 2010-21, I came to realise that knowing when you have enough and securing a substantial chunk of that is better for us than the FOMO of possible continued equity growth.

So, one year on from retirement there's about 55% in cash and FI, the rest in equities. Along with the DBs, that FI & STMM component at a draw rate of a bit over 3% provides for about 60% of the budget and when the SPs arrive in 7 years, over 100%. That's a lot more conservative than I ever imagined but given how markets have performed since the GFC and current geopolitics it feels about right.