Supplement retirement income until state pension age

[Plutus]

Hi,

I’ve been pondering how I’d actuate an early retirement plan and I welcome any opinions, please.

Current age: 50
Planned retirement age: 60

Projected assets/liabilities at age 60:
Defined benefit (LGPS) pension income of £25k per year.
AVC fund value £50k
ISA value £75k
SIPP value £75
Mortgage £50k

If we haven’t downsized I would guess that it makes sense to clear the mortgage using the AVC fund, otherwise I could take a lump sump if it’s needed for anything else. Or to use it as a cash reserve.

My main question though is how to supplement the £25k DB pension until I’m 67, when I’ll receive a state pension.

If I wanted/needed an extra £5k per year for 7 years is it more efficient to withdraw from the SIPP or from the ISA?

I assume that it’s better to use the SIPP as I’d effectively be paying tax on any drawdown/lump sum? If I exhaust the SIPP account by age 67 I could then withdraw from the ISA?

I will obviously seek professional advice when I’m closer to retirement but I’d like to validate my reasoning.

Thank you.

[Alaric]

I assume that it’s better to use the SIPP as I’d effectively be paying tax on any drawdown/lump sum? If I exhaust the SIPP account by age 67 I could then withdraw from the ISA?

That's likely to depend on what the tax rules are in 10 years time. Are your numbers revalued for inflation? I'm thinking that the sum of DB Income, SIPP Income and State Pension could take you into a higher rate of tax. That would support using the SIPP first so as to take money out at a lower rate of tax. IHT rules may also be an issue.

[DrFfybes]

How long have you been in the scheme - pre 2008(?) service has a lump sum component. The later 60ths and the Career Average schemes have no TFLS, however AIUI if you make a SSAVC and take this at the same time you draw benefits, it counts as one pot so you can take 25% of the total notional pot. Currently the pension pot is a notional 20x pension, so you'll have used circa 50% of your LTA, so the AVC should be able to be taken tax free.

Check on this, as the (SS)AVC not only benefits from NI reduction, but might be better than adding to a SIPP due to taking it all tax free.

As for whether to take £5kpa from the ISA or SIPP, that depends on the tax rukes in 10 years, whether SIPPS are still passed IHT free if that concerns you, etc. but with £100k in total between them taking £5k would almost be done just from dividends.

I'm assuming inflation is factored in to your sums.

Paul

[xxd09]

£100000 invested in a 60/40 portfolio of equities/ bonds would generate a safe £3000 pa without reducing capital-probably may even get some growth -as a guidance
So for a withdrawal of £5000 pa need a minimum portfolio of £166000 initially
Taking money from ISAs you pay no tax
Tax will be deducted from Pension fund withdrawals at your normal tax rates as withdrawals are counted as income (could however take 25% of pension fund withdrawals tax free)
Need to do some calculations
Probably need to keep working and save some more cash -preferably in ISAs
You are within reach of your aims but a little more cash needed to be safe
xxd09

[Plutus]

Thank you for responding so quickly.

I joined the LGPS in 1994, I have mainly worked in higher education since with only 3 years of that time outside of the scheme. The projection of an income of £25k is based on another 10 years of service and a reduction for early retirement. I factored in a salary increase of £10k over those 10 years so it’s quite approximate.

I forgot to include a £22k lump sum from the LGPS for the pre-2008 scheme.

The SIPP was opened last year as I transferred out a small pot from a defunct abbey life pension when I worked in the private sector.

Re: xxd09’s suggestion. At present I’m not too focussed on preserving the capital. I would prefer to spend money on experiences and travel while I’m still relatively young.I might yet continue working after the age of 60, but currently there are a lot of other things that I’d rather be doing.

A further factor to consider is my wife (!) - she has a pension and investments of her own and is lucky enough to have parents with assets that are on a different level to my own.

[swill453]

If I wanted/needed an extra £5k per year for 7 years is it more efficient to withdraw from the SIPP or from the ISA?

You've mixed "I" and "we" in the post, so it's not clear whether you have a spouse who'll get the state pension as well.

If you have a spouse, then potentially between you you'll have £20K+ in state pension to add to your £25K DB pension.

So do you really want to live on only £30K per year between 60 and 67? I think I'd want to be spending a bit more than that, personally.

So (IMO) it's more of a priority in the next 10 years to:

1. Make sure you do any necessary topups to get the full state pension.
2. Save like crazy. You never know, you may be able to retire even earlier.

How you finance the years will need to be finessed around the tax regime in place at the time, as others have said.

Scott.

[Plutus]

If I wanted/needed an extra £5k per year for 7 years is it more efficient to withdraw from the SIPP or from the ISA?

You've mixed "I" and "we" in the post, so it's not clear whether you have a spouse who'll get the state pension as well.

If you have a spouse, then potentially between you you'll have £20K+ in state pension to add to your £25K DB pension.

So do you really want to live on only £30K per year between 60 and 67? I think I'd want to be spending a bit more than that, personally.

So (IMO) it's more of a priority in the next 10 years to:

1. Make sure you do any necessary topups to get the full state pension.
2. Save like crazy. You never know, you may be able to retire even earlier.

How you finance the years will need to be finessed around the tax regime in place at the time, as others have said.

Scott.

Hi Scott, my wife is 45, earns a similar amount that I do, but she enjoys her job and doesn’t plan to retire early.

[xxd09]

Just a few more practical points
So if you know taking more than 3% will run your capital out that’s fine-chose your own
withdrawal rate with that in mind
You may prefer to be more 40/60 than 60 /40 as bonds preserve wealth better than equities but with less growth as a result
You pays your money and makes your choice
A global index tracker equities fund and a global bond index tracker fund hedged to the pound should be all the investments you need
Simple cheap easy to understand
xxd09

[DrFfybes]

Just a few more practical points
So if you know taking more than 3% will run your capital out that’s fine-chose your own
withdrawal rate with that in mind
You may prefer to be more 40/60 than 60 /40 as bonds preserve wealth better than equities but with less growth as a result
xxd09

Personally I believe at least one of those statements to be false.

Compare VHYL, with over 3% yield, and 50% capital growth over the last 10 years, with Vanguard's Global Bond Index Fund, with negative real returns in 3 of the last 5 years, yield under 2%, and total growth of 11% over the last 10 years, and capital loss of 15% over the last 3 years.

Maybe bonds will pick up again, but in recent history they have not been great preservers of wealth and longer term have almost always lost out to equities.

Besides, he's taking only income for 7 years, he'll have to be very unlucky to run out of capital even at 7% drawdown.

Paul

[Plutus]

There are some things that I need to consider over the next 10 years, this has been very helpful so I’d like to thank everyone who’s replied.

I’ll have a chat with my wife to check her own pension projections and plans, we tend to keep everything separate apart from the house finances.

Kind regards.

[monabri]

A further factor to consider is my wife (!) - she has a pension and investments of her own and is lucky enough to have parents with assets that are on a different level to my own.

You might be in line for a inheritance windfall at some future date. However, if either of the wife's parents need to go into a care home it can deplete an inheritance sum very rapidly at £1500 per week.

[TUK020]

What is your current tax rate?
You do not want to be paying any HRT. It might be worth cycling some of your ISA funds into your SIPP

[xxd09]

DrFfybes
Cannot disagree with some of your statements
One can always find better performing funds-unfortunately for the average investor it is hard to pick them out so accepting what the total stockmarket gives you is an acceptable compromise for most of us
Re bonds-alternatives to equities are a constant dilemma-historically bonds have always filled this role as other types of investments seem to be opaque and expensive-hard for the amateur investor to understand
I suppose in the middle of a stockmarket downturn and general recession all investors are feeling fragile as their portfolios decline but it is certainly not the time to experiment-tried and true investments are probably a wiser bet for most of us
Good times will come again for certain but when is the conundrum !
xxd09

[Plutus]

You might be in line for a inheritance windfall at some future date. However, if either of the wife's parents need to go into a care home it can deplete an inheritance sum very rapidly at £1500 per week.

Hello, I’ve discounted any inheritance from my own planning, and to be fair my wife lives relatively frugally and hasn’t relied on any financial assistance or placed her bets on an inheritance. We’ve always seen it as a possible/quite certain bonus.

[Plutus]

What is your current tax rate?
You do not want to be paying any HRT. It might be worth cycling some of your ISA funds into your SIPP

Hi, I pay basic rate. My salary is just over £50k per year and the LGPS contribution rate is 8.5%. I pay a further 5% into the additional voluntary contributions.

[Adamski]

@plutus, my preference is withdraw from the sipp the tax free 25%, then drawdown a fixed monthly amount.

You can contribute back into the sipp £2880, and govt tops up £720 tax relief. Assuming not working in early retirement. The rules are complex on this!

Some here need more than £30k pa to live off. Im not one of them. Affordability comes down to lifestyle. And whether you wish to leave much of a legacy. Cheers adam

[Plutus]

…
Some here need more than £30k pa to live off. Im not one of them. Affordability comes down to lifestyle. And whether you wish to leave much of a legacy. Cheers adam

We have a decent joint income at the moment but we still live within our means. We’ll be happy enough to retire closer to the coast in a smaller house.

[Hariseldon58]

If the need is to find £5k a year for 7 years , starting in 10 years time then perhaps equity investing to target a real inflation adjusted £35k lump sum to be deployed over that seven year period would seem reasonable, rather than a lump sum that can provide £5k a year indefinitely. ( although clearly this is more desirable !)

Bonds have performed poorly recently but clearly a better purchase now than a few years back…

Ultimately the aim is to provide a series of ‘real’ cash flows (in inflation adjusted terms) starting in year 10, year 11 etc and a portfolio that is largely equities now and then becomes increasingly short term high grade bonds/cash would be my first thoughts , maybe a Vanguard Target Year fund if the DIY approach is not desired. Given the OH is still working with her own pension provisions it looks a good plan !

[Plutus]

If the need is to find £5k a year for 7 years , starting in 10 years time then perhaps equity investing to target a real inflation adjusted £35k lump sum to be deployed over that seven year period would seem reasonable, rather than a lump sum that can provide £5k a year indefinitely. ( although clearly this is more desirable !)

Bonds have performed poorly recently but clearly a better purchase now than a few years back…

Ultimately the aim is to provide a series of ‘real’ cash flows (in inflation adjusted terms) starting in year 10, year 11 etc and a portfolio that is largely equities now and then becomes increasingly short term high grade bonds/cash would be my first thoughts , maybe a Vanguard Target Year fund if the DIY approach is not desired. Given the OH is still working with her own pension provisions it looks a good plan !

Thanks for this - it’s another idea that I hadn’t really thought about and it seems achievable.

[makemakeolaf]

It's never too early to start thinking about it and you're being smart to do your research. I think that clearing the mortgage with the AVC fund is a great idea, and I think that withdrawing from the SIPP will be the most efficient way to supplement the £25k pension. You're right that you'll effectively be paying tax on any drawdown, but it sounds like you have a solid plan to exhaust the SIPP by age 67 and then withdraw from the ISA.