Bridge at 60 alongside Alpha DB Pension: SIPP vs ISA vs Mortgage?

PlanningAh4ad

Hi all,

I'm looking for a sanity check on my long-term retirement plan before pulling the trigger.

My wife and I are both late 30s/early 40s, with a young teenager. We're both full-time public sector workers with Alpha pensions (Defined Benefit) which we've paid into for more than 15 years.

We earn around £97k gross per year between us, equating to approx £6k net monthly. I'm in the higher tax bracket while my wife isn't.

We have fixed outgoings of £1k per month across mortgages and cars etc. Cars are a choice we'd like to keep and the mortgage has 29 years left to run, something I'm conscious of.

In terms of other outgoings, nothing unusual but we currently spend a bit too freely. As an example we're on course to spend £15k on travel this year.

We only have £15k in steady savings (market-leading rates) as we keep choosing to spend money on travel!

Anyway, back to the purpose of this post. We'd like to start being a tad more sensible as to our long term financial planning. Specifically, we'd like to retire when I'm 60 and we're considering the best way to potentially bridge the gap until we can draw down our work pensions.

To get the ball rolling, I'm looking at opening a SIPP in my name with AJ Bell, starting with a regular monthly contribution of £80 net (£100 gross after basic rate tax relief is added, plus claiming the extra 20% higher-rate relief).

I'm planning to invest 100% into the HSBC FTSE All-World Index fund via regular monthly investing. I feel fairly comfortable with this, given the timeframes involved.

Just a few questions:

Given our goal to retire at 60 and the fact I'm a higher-rate taxpayer, does putting this extra money into a SIPP make the most sense, or should we be prioritizing a Stocks & Shares ISA / overpaying the mortgage instead?

If so, does opening a SIPP with AJ Bell and using the HSBC FTSE All-World fund make sense as a starting point, or is there a better platform/fund alternative for this?

Are there any obvious omissions and/ or mistakes in this initial approach that we should consider before setting it up?

Thanks in advance for any help!

hugheskevi

Specifically, we'd like to retire when I'm 60 and we're considering the best way to potentially bridge the gap until we can draw down our work pensions.

You can commence your work pensions whenever you wish after age 55, with actuarial reduction. You should not be psychologically attached to Normal Pension age (68) and instead be planning for whatever works best for you in terms of tax and income.

To get the ball rolling, I'm looking at opening a SIPP in my name with AJ Bell, starting with a regular monthly contribution of £80 net (£100 gross after basic rate tax relief is added, plus claiming the extra 20% higher-rate relief).

It is likely to be preferable to put all income subject to higher rate tax into the pension if at all possible, the tax uplift is considerable. A small number of contributions may be easier administratively too, with a contribution close to tax year end to optimise tax position, but that is personal preference.

From what you say of spending and your desire to save, optimising saving before spending may be helpful.

Given our goal to retire at 60 and the fact I'm a higher-rate taxpayer, does putting this extra money into a SIPP make the most sense, or should we be prioritizing a Stocks & Shares ISA / overpaying the mortgage instead?

Yes, SIPP makes sense. You could also consider the Civil Service AVC arrangement with Legal and General, it is a very modern option unlike most of the public service pension scheme AVC schemes.

Stocks and Shares ISA would be appropriate if you were saving amounts beyond that required to avoid higher rate tax. Although you also say "We only have £15k in steady savings (market-leading rates)" - that appears quite low in terms of liquidity, and stocks and shares ISAs help with that side of things. It depends what level of precautionary savings you are happy with, you probably both have quite secure jobs that also have very good redundancy and ill-health protection, so there may well be little need for a big financial cushion.

Overpaying mortgage is lowest expected return, done for security and peace of mind rather than investment.

You may also consider opening investment LISAs for whichever of you is under 40, particularly for your wife given she is not a higher rate taxpayer.

does opening a SIPP with AJ Bell and using the HSBC FTSE All-World fund make sense as a starting point, or is there a better platform/fund alternative for this?

Nothing glaringly wrong, but it is 33% tech and 60% USA-based (biggest holdings unsurprisingly being Nvidea, Apple, Alphabet, Microsoft and Amazon), which you may or may not think suits your investment preferences.

But at low investment levels it is not going to make much difference, so perhaps something to consider further down the line. For example, you might in future think more exposure to emerging markets or smaller cap companies is desirable.

As an example we're on course to spend £15k on travel this year.

Nothing wrong with that, as long as it gave good value. My wife and I spent £57K on a big travel trip a few years before retirement, well worth it in terms of the experiences gained. I also did some long trips in my 20s, all of which were amazing and something I do not regret at all even though they delayed retirement a little.

I always optimised saving, work, and travel so as to maximise the net income and minimise tax. It is a long journey to retirement, and playing along with tax games is lucrative.

poseidon1

£80 per month contribution is a start, but realistically if kept at that level through out the term you are only looking at £35k to £40k pot at around 5% average growth.

Allowing for inflation over the period this is unlikely to give you much of a 'bridge' until your public sector DB schemes kick in a few years later.

Not sure you can build a realistic sipp or ISA cash bridge, without comprising on aspects of your current and future discretionary spending.

El_Torro

While making the most of your 40% tax relief is a good idea (especially if you will be a 20% tax payer in retirement) there's also a lot to be said for not focusing too much on one person's pension. 2 balanced pensions can be more valuable than one small pension and one large one.

hugheskevi has said it already but it's worth repeating: If your wife is happy to keep some money locked up until she's 60 then a LISA is a great idea, especially since she's a 20% tax payer.

And yeah, £100 extra going into your pension every month isn't going to make much of a difference to your retirement pots. It's a start though.

DRS1

@hugheskevi mentions you could start your CSPS at 55. Do bear in mind that if you start a SIPP now you will not be able to touch that until 57 (maybe 58?)

If you put money into an ISA (not a LISA) you can extract tht whenever you want. Of course you may think that is not a good idea if you have a problem not spending the money.

People do say you should keep an emergency stash of cash (3 or 6 months spending) - is £15k going to do that job? Is it enough? Yes putting money into a pension (or a LISA) is tax efficient but sometimes you are going to need money you can get hold of.

barnstar2077

Any extra money for retirement is great, but £80 a month when you have so much disposable income feels limiting to me.

Could you commit to doubling that for a while, and reassess in six months? You may be surprised how easily you adjust your spending habits, and future you will be grateful that you did. You never know what kind of ailments (or boss) you will have later in life, and more money could mean more options.

LHW99

Have you worked from the other end (in todays money as it's easier)?

With a current £97k gross income, which you appear to be fairly fully living to, given you have only £15k in savings, can you work out a rough amount you spend each year less mortgage, pension contributions and work expenses?

Then multiply that by the number of years you need to bridge (3-4 years?). That will give an idea of how large your additional pot would need to be (savings / SIPP / LISA). IMO you could be looking at needing £150k - £200k, which would take more than an £80per month contribution.

Albermarle

starting with a regular monthly contribution of £80 net (£100 gross after basic rate tax relief is added, plus claiming the extra 20% higher-rate relief).

There is regular speculation that higher rate tax relief will be removed or reduced. It is very expensive for the Treasury and it benefits the better paid only. Nobody really knows if anything will ever happen but it might. So another good reason to up this £80 a month contribution to a higher level.

If so, does opening a SIPP with AJ Bell and using the HSBC FTSE All-World fund make sense as a starting point, or is there a better platform/fund alternative for this?

There are alternative platforms with different changing structures. However in the early days, charges will be insignificant whilst the Pot is small. AJ Bell is for sure an established well respected provider.

There are also alternative global index funds, although in the great scheme of things they are all doing a similar job. The main thing to be aware of is that these funds can be very volatile, and in a big stock market crash they could drop 40%. Not everybody can cope with that emotionally even if their head tells them it will recover again.

QrizB

There are alternative platforms with different changing structures. However in the early days, charges will be insignificant whilst the Pot is small. AJ Bell is for sure an established well respected provider.

My low-value pension pot is with Dodl, AJ Bell's app-only budget platform. HSBC FTSE All-World (this one) is one of the investments available with Dodl, and their charges are relatively low at 0.15% per year (min £1 per month). It might be worth considering while your pension pot is small?

kpk2000

In similar position (age/income/couple but no kids) but in Teachers Pension Scheme. I have had a SIPP with Vanguard for 5 years now adding £100 per month (plus £25 tax relief) to bridge 57/58 (whatever my SPA minus 10 ends up being!)

Due to pay rises, I tipped into 40% income tax last year for the first time. I have gone through the tax refund process and found it to be very confusing! To overcome this issue I have started a AVC (through Prudential sadly - I will do this for a number of years to build up the pot and then transfer somewhere else that are more admin friendly in retirement). The main reason for starting the AVC is to get automatic tax relief through payroll. I add £100 per month to the AVC and avoid paying 40% tax as it is as Net Pay arrangement done automatically through payroll.

I should have been adding more than £100 to the SIPP anyway and this way I pay more (£200 total per month) and avoid 40% tax. As future pay rises increase my 40% tax (pessimistically I think the tax thresholds will not change for a long time), I will add more to the AVC to avoid 40% tax.

For reference I also have a £300 per month S&S ISA which is to enable me to retire at 55 if I choose to. The ISA will cover 55-58 and then the SIPP/AVC will cover 58-60 before I take the TPS at 60 (the average salary part reduced from NPA 68). This gives me most flexibility. I can stop working at some point between 55-60 if I want to and I also retain the right to take my TPS from 55 if I want to in addition to the ISA/SIPP/AVC. Plans change so having flexibility is most important to me currently.

Albermarle

For reference I also have a £300 per month S&S ISA which is to enable me to retire at 55 if I choose to. The ISA will cover 55-58 and then the SIPP/AVC will cover 58-60 

Obviously we do not know your planned expenditure or how many years you will be adding £300 per month. However many people underestimate how much they need to maintain their current lifestyle, even just for 3 years.