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  • FIRST POST
    • dippenhall1
    • By dippenhall1 15th May 19, 11:40 AM
    • 15Posts
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    dippenhall1
    Early retirement in 5 years time?
    • #1
    • 15th May 19, 11:40 AM
    Early retirement in 5 years time? 15th May 19 at 11:40 AM
    Hi,
    I'm 50 years old and have a fairly decent final salary pension, but I'm thinking about whether I could work up a plan to give me the potential to retire early. If I leave at aged 55 it reduces my pension by 35%, so I'm looking to see the best way within the next 5 years of trying to make some of that back up.

    I already save as much as I can into various regular savers & accounts, and will pay off my mortgage in a couple of months time giving me around £900 extra a month that I could save potentially for the next 5 years.

    My company has the option of AVCs into Fidelity, however I am a massive scaredy-cat when it come to anything stock market! The idea of saving up £50000 and only ending up with £45000 makes me feel ill! Things I've read advise not investing in the stock market for this kind of 5 year time scale, on the other hand because I'd be investing via a pension the tax relief benefits (I'm a higher rate tax payer) could offset this should the worst happen.

    I just thought I'd post to see if anyone had any thoughts, looking at a 5 year timescale or if there were any other options I could consider?

    Thanks in advance

    Dippenhall
Page 1
    • NoMore
    • By NoMore 15th May 19, 11:56 AM
    • 314 Posts
    • 294 Thanks
    NoMore
    • #2
    • 15th May 19, 11:56 AM
    • #2
    • 15th May 19, 11:56 AM
    I have opened a SIPP to take advantage of the tax relief (I'm a higher rate tax payer) with the intention of withdrawing it out over 5 years tax free. I.e. 25% TFLS and then 12500 tax free allowance each year. If you require more than 16.5k a year then you could supplement with other savings. The tax relief alone is worth it doing it this way without any investment risk.


    https://simplelivingsomerset.wordpress.com/2015/05/18/front-running-a-db-or-state-pension-with-a-new-osborne-style-sipp/


    Good explanation here.
    • atush
    • By atush 15th May 19, 12:54 PM
    • 17,622 Posts
    • 11,141 Thanks
    atush
    • #3
    • 15th May 19, 12:54 PM
    • #3
    • 15th May 19, 12:54 PM
    put money into a separate pension/sipp or use the AVC.

    Dont stress too much about being in the market. Sure it goes up and down, but you arent putting 50K in all in one go. You are putting money in monthly. look up "Pound Cost averaging". When prices go down, you get more units for your money. Also you'd be investing in funds holding perhaps hundreds of different shares, not single shares. Or a multi asset fund that also holds other less volatile investments.

    Then tax relief. 100 into your pension is going to cost you just 80 if you pay BRT (60 if you pay HRT). Your pension would have to fall a lot before you lost more than you put in.
    • AnotherJoe
    • By AnotherJoe 15th May 19, 1:05 PM
    • 14,236 Posts
    • 16,940 Thanks
    AnotherJoe
    • #4
    • 15th May 19, 1:05 PM
    • #4
    • 15th May 19, 1:05 PM
    Hi,
    I'm 50 years old and have a fairly decent final salary pension, but I'm thinking about whether I could work up a plan to give me the potential to retire early. If I leave at aged 55 it reduces my pension by 35%, so I'm looking to see the best way within the next 5 years of trying to make some of that back up.

    I already save as much as I can into various regular savers & accounts, and will pay off my mortgage in a couple of months time giving me around £900 extra a month that I could save potentially for the next 5 years.

    My company has the option of AVCs into Fidelity, however I am a massive scaredy-cat when it come to anything stock market! The idea of saving up £50000 and only ending up with £45000 makes me feel ill! Things I've read advise not investing in the stock market for this kind of 5 year time scale, on the other hand because I'd be investing via a pension the tax relief benefits (I'm a higher rate tax payer) could offset this should the worst happen.

    I just thought I'd post to see if anyone had any thoughts, looking at a 5 year timescale or if there were any other options I could consider?

    Thanks in advance

    Dippenhall
    Originally posted by dippenhall1

    The tax benefits of being a high rate tax payer when contributing and at worst a 20% tax payer when withdrawing overwhelm the odds of all but the most extreme stock market crash.


    And note the bit in bold, because you can get a double whammy.
    You contribute now getting a 40% bump. Both company pension and what were mortgage payments and savings. Maximise your 40% tax allowance. Look at the last year or two before you retire, even if you dont invest it and leave it as cash you get £1,000 for every £600. (I would invest some now)

    Then when you retire DO NOT start taking your company pension.
    Instead you burn down the new pension (be it a SIPP or the AVCs) , take the tax free lump sums, maybe spend some of your savings.
    At best that means you are a non tax payer fro a few years. In those years you take the max out of pension without paying tax, so you've got 40% literally for free.
    The double whammy comes now, because you put off taking your company pension for a few years, so there's less of a decrease when you do take it.
    Win Win.
    Last edited by AnotherJoe; 15-05-2019 at 1:07 PM.
    Please dont criticise my spelling. It's excellent. Its my typing that's bad.
    • FatherAbraham
    • By FatherAbraham 15th May 19, 1:08 PM
    • 978 Posts
    • 740 Thanks
    FatherAbraham
    • #5
    • 15th May 19, 1:08 PM
    • #5
    • 15th May 19, 1:08 PM
    Hi,
    I'm 50 years old and have a fairly decent final salary pension, but I'm thinking about whether I could work up a plan to give me the potential to retire early. If I leave at aged 55 it reduces my pension by 35%, so I'm looking to see the best way within the next 5 years of trying to make some of that back up.
    Originally posted by dippenhall1
    I suspect that is not leaving at 55 which reduces the pension level by 35%, but leaving and starting the pension at 55.

    If you can refer taking the DB pension until you are 60, things may look much better. You don't have to take your pension when you leave the employment, do you?

    Then all you have to do is save a big enough pot to tide you over from 55 until the DB pension starts at 60.

    That may not be easy to do, but at least it's easy to calculate.
    Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...
    THE WAY TO WEALTH, Benjamin Franklin, 1758 AD
    • Albermarle
    • By Albermarle 15th May 19, 2:05 PM
    • 726 Posts
    • 414 Thanks
    Albermarle
    • #6
    • 15th May 19, 2:05 PM
    • #6
    • 15th May 19, 2:05 PM
    The idea of saving up £50000 and only ending up with £45000 makes me feel ill!
    Well if instead you keep the £50,000 in cash inside the pension , it will earn virtually nothing .
    So after 5 years will be worth maybe £51,000 but in fact due to inflation it will be worth a lot less in real terms . Probably somewhat less than £45,000. So I guess that will make you feel ill as well !
    • AnotherJoe
    • By AnotherJoe 15th May 19, 7:07 PM
    • 14,236 Posts
    • 16,940 Thanks
    AnotherJoe
    • #7
    • 15th May 19, 7:07 PM
    • #7
    • 15th May 19, 7:07 PM
    My company has the option of AVCs into Fidelity, however I am a massive scaredy-cat when it come to anything stock market! The idea of saving up £50000 and only ending up with £45000 makes me feel ill!
    Originally posted by dippenhall1
    Would it make you feel ill if £the £500k fell back to 450k but that only cost you £300 k due to tax relief and growth?
    Please dont criticise my spelling. It's excellent. Its my typing that's bad.
    • dippenhall1
    • By dippenhall1 15th May 19, 9:50 PM
    • 15 Posts
    • 1 Thanks
    dippenhall1
    • #8
    • 15th May 19, 9:50 PM
    • #8
    • 15th May 19, 9:50 PM

    Then when you retire DO NOT start taking your company pension.
    Instead you burn down the new pension (be it a SIPP or the AVCs) , take the tax free lump sums, maybe spend some of your savings.
    At best that means you are a non tax payer fro a few years. In those years you take the max out of pension without paying tax, so you've got 40% literally for free.
    The double whammy comes now, because you put off taking your company pension for a few years, so there's less of a decrease when you do take it.
    Win Win.
    Originally posted by AnotherJoe
    Thanks for this, some really good info in there. I hadn't thought about deferring my company pension, but this makes a lot of sense
    • dippenhall1
    • By dippenhall1 15th May 19, 9:54 PM
    • 15 Posts
    • 1 Thanks
    dippenhall1
    • #9
    • 15th May 19, 9:54 PM
    • #9
    • 15th May 19, 9:54 PM
    I suspect that is not leaving at 55 which reduces the pension level by 35%, but leaving and starting the pension at 55.

    If you can refer taking the DB pension until you are 60, things may look much better. You don't have to take your pension when you leave the employment, do you?

    Then all you have to do is save a big enough pot to tide you over from 55 until the DB pension starts at 60.

    That may not be easy to do, but at least it's easy to calculate.
    Originally posted by FatherAbraham
    Yes you're right if I defer taking the DB pension until 60 then it only decreases it by around 13%. Thanks for your reply, it's certainly got me thinking of options.
    • AnotherJoe
    • By AnotherJoe 16th May 19, 4:21 PM
    • 14,236 Posts
    • 16,940 Thanks
    AnotherJoe
    Yes you're right if I defer taking the DB pension until 60 then it only decreases it by around 13%. Thanks for your reply, it's certainly got me thinking of options.
    Originally posted by dippenhall1

    A little bit of spreadsheeting and you are sorted
    Please dont criticise my spelling. It's excellent. Its my typing that's bad.
    • k6chris
    • By k6chris 16th May 19, 4:50 PM
    • 430 Posts
    • 782 Thanks
    k6chris
    Yes you're right if I defer taking the DB pension until 60 then it only decreases it by around 13%. Thanks for your reply, it's certainly got me thinking of options.
    Originally posted by dippenhall1

    But you get it for five fewer years..... #spreadsheettime
    "For every complicated problem, there is always a simple, wrong answer"
    • cloud_dog
    • By cloud_dog 16th May 19, 5:30 PM
    • 4,241 Posts
    • 2,608 Thanks
    cloud_dog
    Hi,
    I'm 50 years old and have a fairly decent final salary pension, but I'm thinking about whether I could work up a plan to give me the potential to retire early. If I leave at aged 55 it reduces my pension by 35%, so I'm looking to see the best way within the next 5 years of trying to make some of that back up.

    I already save as much as I can into various regular savers & accounts, and will pay off my mortgage in a couple of months time giving me around £900 extra a month that I could save potentially for the next 5 years.

    My company has the option of AVCs into Fidelity, however I am a massive scaredy-cat when it come to anything stock market! The idea of saving up £50000 and only ending up with £45000 makes me feel ill! Things I've read advise not investing in the stock market for this kind of 5 year time scale, on the other hand because I'd be investing via a pension the tax relief benefits (I'm a higher rate tax payer) could offset this should the worst happen.

    I just thought I'd post to see if anyone had any thoughts, looking at a 5 year timescale or if there were any other options I could consider?

    Thanks in advance

    Dippenhall
    Originally posted by dippenhall1
    OP, I'm in a similar position regarding having a decent DB scheme and needing flexibility to leave early (not 55 though ). I am however very comfortable with investments and their roller-coaster nature.

    I don't have the option of drawing my DB early so need to fund the gap. As I am a HRT payer and my company offer 'salary sacrifice', it is a no brainer for me to utilise the company's AVC scheme as the vehicle to build this pot of money.

    Before starting this you need to ensure that any monies paid in to the AVC account would be treated as a 'pot of money' and do not have any additional DB scheme benefits associated with them. You may also wish to confirm that you are able to transfer the AVC monies seperate to the main DB scheme. The reason for this is to ensure that you will be able to transfer the AVC monies to a more flexible pension/SIPP provider (or account within Fidelity) when the time was right for you to draw down (N.B. Fidelity are one of the providers with lower cost in this area).

    It would be worth you confirming the above with your scheme administrators before going down this route. If everything is confirmed ok, then this is a good way of building your 'gap pot'.
    Personal Responsibility - Sad but True

    Sometimes.... I am like a dog with a bone
  • jamesd
    I am a massive scaredy-cat when it come to anything stock market! The idea of saving up £50000 and only ending up with £45000 makes me feel ill! ... I'm a higher rate tax payer
    Originally posted by dippenhall1
    So choice:

    1. Don't use the pension. 40% income tax on £50,000 leaves you with a certain loss of 20k and only 30k in your pocket.

    2. Use the pension. Get 10k of tax relief in your pocket from HMRC and 40k in the pension. 25% is tax free, 10k, and the other 30k taxed at 20% leaving 24k. 10k + 10k + 24k = 44k in your pocket. Hmm, I like 44k more than 30k. But what happens if it's all in shares and they drop 40% with no growth first and never recover? 40k becomes 24k inside the pension. You get 10k + 24k * 0.25 + 24k * 0.75 * 0.8 = 30.4k. 30.4k is still more than 30k.

    Hmm... so do you really prefer the certainty of 30k or the chance of 30.4k instead of 44k if what worries you happens?

    Of course you don't have to use all shares. You could use 50:50 shares and bonds. Since bonds tend to drop more like 10% that leaves you even more ahead.

    Markets normally recover from 40% drops in a year or so and you're unlikely to have to sell shares while down. You'd sell the bonds first and top them up by selling shares at better times.

    In effect by using the pension you'd be getting the 30k plus a lottery ticket that is likely to pay you an extra 10k or more but might only pay you 400.
    Last edited by jamesd; 16-05-2019 at 11:08 PM.
    • redux
    • By redux 16th May 19, 11:49 PM
    • 19,121 Posts
    • 26,024 Thanks
    redux
    Hi,
    ... however I am a massive scaredy-cat when it come to anything stock market! The idea of saving up £50000 and only ending up with £45000 makes me feel ill! Things I've read advise not investing in the stock market for this kind of 5 year time scale,
    Originally posted by dippenhall1
    Dont stress too much about being in the market. Sure it goes up and down, but you arent putting 50K in all in one go.
    Originally posted by atush
    Also, it doesn't have to be realised all in one go.

    In the old days, when a fund had to be converted to an annuity, there could be some worry as that approached, in case the market dropped just beforehand, but now it's possible to just carry on taking the income and wait for the capital to go up again.

    It doesn't have to be 5 years then a definite switch, could be 15 or 20, something much more gradual.
    Last edited by redux; 16-05-2019 at 11:54 PM.
    • Workerbee999
    • By Workerbee999 18th May 19, 9:21 PM
    • 47 Posts
    • 42 Thanks
    Workerbee999
    We are 48 & currently concentrating on building up a SSIP to fund 8 years from 55 to DB @63 - 12.5k pa grossed up for TFLS so need about £130k. Going in with 40% tax relief and will pay zero tax on the way out as it will be the only income for one of us.

    We have got 7 years to build the pot, for it to then last 8 years. To manage timescale/ risk we are dividing it into buckets, now contributing to the 45k bucket that we won’t touch until 60-63. As this is a bit further away we are splitting it into 1/3 managed (Lindsell Train Global) and 2/3rds multi fund (split equally between VLS 60 and HSBC Global Strategy balanced).

    From 51-53 we will build the next bucket for 57-60 with lower risk funds. Then for the last 2 years from 53-55 we will fund 55-57 probably by just leaving it uninvested as cash. But as we will also have my DC to draw on and some cash backup, if the markets are at a low we can just draw it out and reinvest in the same funds in an ISA so not really realising the loss.

    Having a cash reserve of 1-2 years expenses is one of the great pieces of advice I gained from this forum which makes investment risk more manageable, and certainly outweighed by the tax relief benefit
    • Mr.Generous
    • By Mr.Generous 18th May 19, 9:41 PM
    • 2,435 Posts
    • 3,596 Thanks
    Mr.Generous
    I suspect that is not leaving at 55 which reduces the pension level by 35%, but leaving and starting the pension at 55.

    If you can refer taking the DB pension until you are 60, things may look much better. You don't have to take your pension when you leave the employment, do you?

    Then all you have to do is save a big enough pot to tide you over from 55 until the DB pension starts at 60.

    That may not be easy to do, but at least it's easy to calculate.
    Originally posted by FatherAbraham
    I've looked at this for my circumstances, take it at 55.


    Just some ballpark figures to illustrate.


    Pension at 55 12k

    wait till 60 = 35% more, so £16,200


    £4200 more per year. Sounds tempting.


    But hang on If I took at 50 I'd have had the actual cash for 5 years, so 5 x 12k = £60k


    To catch up with the 60k I'd need to get the £4.2k for … just over 14 years.


    One last consideration, once you are drawing a pension its covered by a government backed scheme should it go bump, when a contributing or deferred member it is not.

    Bird in the hand and all that.

    My pension tax free lump sum will buy a rental property to boost income too, 5 years earlier means 5 years rent probably about 25k
    Last edited by Mr.Generous; 18-05-2019 at 9:58 PM.
  • jamesd
    To catch up with the 60k I'd need to get the £4.2k for … just over 14 years.
    ...
    Bird in the hand and all that.
    Originally posted by Mr.Generous
    Expensive bird. Life expectancy is about twice that.

    One last consideration, once you are drawing a pension its covered by a government backed scheme should it go bump, when a contributing or deferred member it is not.
    Originally posted by Mr.Generous
    Wrong three ways. There's no government scheme, those already getting it aren't fully protected and those not yet getting it are mostly protected.

    The Pension Protection Fund is partly paid for by a levy on defined benefit pensions and partly because it gets the assets of schemes that fail. If necessary it can borrow from the Treasury.

    Those who are already getting their pension mostly will keep getting it but the pension benefits are cut to their legal minimum. This often means reduced inflation protection to CPI for those whose schemes pay more. If I remember correctly this reduction in benefits means that the PPF is at or close to break even.

    Those not yet getting it suffer a 10% reduction as well.
    • DT2001
    • By DT2001 19th May 19, 9:51 AM
    • 103 Posts
    • 108 Thanks
    DT2001
    I think the sums are slightly different. £12k at 55 equals £18460 at NRA. So at 60 it would be £16060 as OP said 13% reduction then. 15 years before better to wait on that basis.
    Is their any GMP element as early drawdown can effect pension at 65 (xylophone provided some excellent help)?
    Would there be any part of the pension tax free if taken early? Spreadsheet time!
    Does the pension increase at same rate in deferment as in payment?
    If the pension scheme is underfunded and the company performing badly would it be better to draw early?
    I took mine early as mostly tax free and I’ve reinvested and got better than rpi returns.

    So not straight forward
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