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  • FIRST POST
    • Ceme3000
    • By Ceme3000 12th Jun 18, 10:04 PM
    • 13Posts
    • 5Thanks
    Ceme3000
    Redundancy at 52, retire now?
    • #1
    • 12th Jun 18, 10:04 PM
    Redundancy at 52, retire now? 12th Jun 18 at 10:04 PM
    Hi All, So here is my story….
    I am a 52 year old single bloke, no kids, basic rate tax payer, and for a number of years have been saving hard aiming to retire at 55. A couple of weeks ago I found out that I am going to be made redundant in September.

    I am now trying to work out if I can retire now, or at least be in a position to choose to work part-time if I want to, and what is the best way of taking an income. I don’t live an extravagant lifestyle, my monthly expenditure for council tax, utilities, insurance, food and running my 12 year old car is £600 per month. I currently spend an additional 1K per annum on short UK breaks and estimate I would like 15K per annum to live comfortably (but 18K would be nice!).

    In retirement I would like to take more short breaks, and am interested in buying a motorhome at some point in the future.

    My home is mortgage free and I own a second property also mortgage free that I have been letting out. The BTL has just been put on the market. After CGT and sales expenses I expect to have about 260K from the sale.

    I have 170K in a Hargreaves Lansdown ISA all invested in equity funds. My redundancy will be 40K after tax and I have 10K savings in the bank.

    After the redundancy and house sale I will have 480K at my disposal.

    Now for pensions…
    SIPP – 70K invested with HL.
    Defined Benefit 1 – With former employer. Have been advised this would pay £1600pa. I was entitled to take this from age 50 without penalty but chose not to.

    Defined Benefit 2 – Deferred with current employer. Recent quotes obtained say the pension payable at age 65 would be 22K, at 60 it would be 17K, and at 55 it would be 13K. This assumes no tax free lump taken which would otherwise reduce the DB pension.

    Defined Contribution – With current employer and is “linked” to the final salary fund so that I can use all of this for a tax free lump sum subject to 25% limit. Currently contains 31K.

    Here is what I am proposing to do;
    1. Use my unused pension carry-forward allowance, plus this years allowance which should mean I can contribute 90K net into pensions, this would be £112500 gross. I would put 20K net into DC employer pot and the rest into the SIPP. This should take the DC to 56K and the SIPP to £157500.
    2. The remaining 170K from the house sale will be invested with HL. 20K will go into the ISA account each year and the rest invested in a fund account.
    3. Keep 50K (the redundancy and cash savings) in the bank and use this to live off until I reach 55.
    4. This leaves me with £157K in the SIPP, £340K Invested with HL and £50K in cash.
    5. At 55 I would then take an annual pension (DB estimated to 2018 values not age 55) DB1 £1600 + DB2 £11700 + SIPP Drawdown £5000 (increasing with inflation) = Total £18300. I calculate the SIPP would run out in my late70’s assuming a 3% return and a 2.5% annual increase.
    6. At 55 I would also take tax free the DC pot of £56K + £39K from the SIPP = £95000. This would pay for the motorhome, and a newer car, and leave me with the 340K invested with HL.
    7. At 67 state penion would start, taking my pension to 25K until the drawdown runs out.

    So here are my questions;

    1. Does my plan seem to make sense? The numbers appear OK to me, but it feels like I am taking a leap into the unknown.
    2. Would I be better using the SIPP as a “bridging pension” and delay taking the DB pension.
    3. Is it better to take more tax free from the DB fund and accept a lower pension.
    4. Is keeping all 50K in cash to cover me until age 55 excessive? Am I missing an investment opportunity? My logic for keeping it in cash is because if there is a stock market correction then I don’t have to take money from the fund while the markets are depressed. But I could put it into a lower risk bond fund instead.
    5. If I am not earning for 3 years then my personal allowance won’t be used. If I take an income from the HL non ISA fund then can I receive £5000 plus my personal allowance without paying tax.

    Any advice and suggestions appreciated. Sorry for the long post!
    Thanks all.
Page 3
    • kidmugsy
    • By kidmugsy 14th Jun 18, 1:21 AM
    • 10,856 Posts
    • 7,423 Thanks
    kidmugsy
    What strategy would you use to get it all out tax free?
    Originally posted by Ceme3000
    Suppose you have £100k in pensions at age 55. You might hope for more since you'll be adding (won't you?) £2,880 net = £3,600 gross from 19/20 onwards, but maybe there will be stock market losses to cancel that. Anyway, £100k to be withdrawn over 11 years; circa £9,000 per year. 25% of that is tax-free, so the tax-exposed bit is £6,750. In addition you will be adding £2,880 p.a. net, keeping it in cash for a couple of months until the tax relief arrives, and then taking out £900 TFLS plus £2,700 tax-exposed. Your DB1 pays you about £1,600 tax-exposed so there you have a total tax-exposed of about £11,000. Your personal allowance against income tax will be about £12,000 so you will pay no income tax on this lot. (Plus you have tax-free lump sums totalling about £3k.)

    Next you use your hitherto unused £1k of personal allowance and your £2k dividend allowance to pocket £3k of dividends untaxed. Now we've reached a grand total of £11k + £3k + £3k = £17k and still paid no tax. Now you still have at your disposal your £1k of savings interest allowance plus the unused part of your Starting Rate from Savings allowance (£5k - £2k = £3k). At current interest rates (will they still be current in three years time?) you will be hard-pressed to raise that £3k + £1k of interest, but remember that it needn't all be interest on cash: income from bonds and bond unit trusts counts too.

    So that's how you'd get to £18k p.a. or more without paying income tax. You could supplement it with sales of equities within your CGT allowance. Capital Gains of £11k added to your £18k gives you £29k with no tax to pay. Yippee!

    All this would mean that your investments within ISAs could be left alone to fructify. Since you are limited to adding only (!) £20k per annum to your ISAs you obviously don't want to be taking money out at the same time. The ISAs are your insurance in case bad times arrive.

    P.S. Don't forget to subtract from your total wealth the £2,880 you will have added to the SIPP, which will presumably come from the capital liberated when you sell enough equities to make a capital gain of around £11k.
    Last edited by kidmugsy; 14-06-2018 at 1:31 AM.
    Free the dunston one next time too.
    • kidmugsy
    • By kidmugsy 14th Jun 18, 1:48 AM
    • 10,856 Posts
    • 7,423 Thanks
    kidmugsy
    HOLD ON! Dolt that I am I forgot to ask how your house will be looked after with you swanning around the Continent in your Tesla motorhome. Naturally you will have taken in a lodger. That gives you up to £7,500 tax-free, courtesy of the Rent a Room allowance. Where have we got to now?

    £29k + £7.5k = £36.5k.
    Free the dunston one next time too.
  • jamesd
    It's not wise! I know I have taken a gamble so far with equities ... A thought though! The idea of de-risking closer to retirement or "lifestyling"- was that approach not aimed at a time when you had to buy an annuity? Surely at 52 with potentially 30+ years exposure to the stock market through draw down, can you not take a more adventurous approach?
    Originally posted by Ceme3000
    Safe withdrawal rate research in the US has shown that the way Guyton-Klinger handles the mixture is good, with not too far behind being a rising equity glidepath, analysed in Should Equity Exposure Decrease In Retirement, Or Is A Rising Equity Glidepath Actually Better?

    Part of the reason that Guyton-Klinger does so well is that its withdrawing rules effectively create a rising equity glidepath, but with additional techniques included if you live through bad investing times.

    It's also worth looking at Guyton's sequence of return risk taming approach. At current equity cyclically adjusted price/earnings ratios that suggests reduced equity proportions for the moment. It's why I suggest it in the first post of Drawdown: safe withdrawal rates.

    However these splits relate to your whole portfolio and for you that currently includes the BTL so you might already have equities at an appropriate level.

    So far as bonds go, other research showed that in a low interest, low inflation environment using Treasury bills (one year fixed term) beat Treasury notes (usual terms) because the interest rate difference on the notes wasn't high enough to compensate for the capital risk from rising interest rates. To do the same here you'd use cash, money market funds or maybe defensive bond funds with low average maturity.
    Last edited by jamesd; 14-06-2018 at 1:18 PM. Reason: typo
  • jamesd
    It's only worth buying an extra 5 years not 6. Each year is worth 1/35 of the total, so £4.70 a week, and costs about £750 to buy so a fantastic bargain. 5 years gets you so close to the maximum that the sixth year would only get you an extra 34p a week - so that one's not such a good deal!
    Originally posted by Triumph13
    For comparison at current rates deferring for a year would cost 52 * 164.01 (assuming the 34p not bought) = 8530.08 to get a 5.8% increase of 494.74. 494.74 / 8530.08 = that 5.8p/pound spent.

    While 34p / say 750 * 52 weeks = 23.40 pounds a year per pound spent.

    Since you can defer for part of a year that would be the better buy.

    Not perfectly comparable because the 23.40 benefits from the triple lock while the 43.50 from spending the same on deferring doesn't.
  • jamesd
    What strategy would you use to get it all out tax free?
    Originally posted by Ceme3000
    kidmugsy explained the basic approach.

    You have so much to invest outside a tax wrapper already that I'm not sure that you'll ever be able to get it all into ISAs. Even bed and breakfasting into almost identical funds to use your CGT allowance every year you may struggle to avoid accumulating a substantial CGT liability.

    On the other hand, the CGT implies taking a lot of capital for income if you take the capital instead of bed and breakfasting. So you might accumulate lots of potential CGT liability but never have to actually pay any CGT.

    Bed and breakfasting into almost identical funds means say selling one brand of tracker and buying another brand which tracks the same thing. Or swapping from income to accumulation units of the same fund.

    If you want to avoid tax later, with the pensions paying out, look into VCTs.
    • kidmugsy
    • By kidmugsy 14th Jun 18, 8:59 AM
    • 10,856 Posts
    • 7,423 Thanks
    kidmugsy
    Or swapping from income to accumulation units of the same fund.
    Originally posted by jamesd
    Personally I'd avoid that (except inside an ISA or pension) because I'd hate to have to work out the tax implications.

    You have so much to invest outside a tax wrapper already that I'm not sure that you'll ever be able to get it all into ISAs.
    Originally posted by jamesd
    Aha. Let's consider the wall of money arriving from the BTL sale and the tax-free redundancy money. I suggest three destinations. (i) The aforesaid motorhome. (ii) A heap of cash e.g. £50k in Premium Bonds at ns&i, plus the best instant access cash interest rates you can find, plus (say) a 90-day notice account, plus (say) 1, 2, and 3 year term accounts to see you through to 55. (iii) Gold sovereigns. A wonderful diversification with no CGT liability. You'd store them presumably at some conveniently located safety deposit or, if you lack one perhaps at the Royal Mint, who will also obligingly sell them to you. There are other firms that will sell (and store) at keener prices but I admit that I fancy the idea of having my Jimmy O'Gobblins guarded by the SAS or whoever it is.
    Free the dunston one next time too.
    • Triumph13
    • By Triumph13 14th Jun 18, 12:31 PM
    • 1,187 Posts
    • 1,473 Thanks
    Triumph13
    What strategy would you use to get it all out tax free?
    Originally posted by Ceme3000
    Kidmugsy and JamesD have already given you lots of pointers, but it should be pretty easy as everything in your current work DC can just be left to grow until 65 then taken out as TFLS leveraging the DB scheme. That just leaves your SIPP to get out and if that's at say £80k @ 55 then £20k of that is TFLS leaving you £60k to get out over the next 10 years.
    Once the house is sold you should have about £310K outside pensions and ISAs, but filling your ISA allowance each year and taking living expenses from it should have that down below £200k by the time you start drawing pension. If you keep using those unprotected funds for your living expenses and stuffing your ISA allowance then the taxable income from unprotected funds will continue to fall away rapidly allowing you to take increasing amounts from the SIPP each year until it's all gone - at which point you start taking money back out of the ISAs until DB2 kicks in and you get the TFLS on that (from works DC).
  • jamesd
    Personally I'd avoid that (except inside an ISA or pension) because I'd hate to have to work out the tax implications.
    Originally posted by kidmugsy
    Wouldn't make sense in those because there's no increasing CGT liability to manage by trying to use the CGT allowance each year.

    Income units definitely make tax accounting easier if they are going to be outside a pension or ISA.
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