am I on FIRE?

[petronius]

I am an avid reader of this great board and I hope I can get some expert opinions on my imminent FIRE plans.

I am aware that at the moment I am strongly skewed towards property (and that bizarrely all my properties are similar in value). As mentioned below, I will probably sell some in the future to buy shares. Clearly, being a landlord involves a certain amount of work (so strictly speaking my ER will not be of a pure form in the immediate future).

I am 51 and plan to FIRE later this year. My long-term partner intends to keep working. We have no kids. She is on £60k/year and we have separate finances. I don’t want to count on her for my FIRE considerations, in case she dumps me when I no longer have a job and go loopy .

These are my assets:

Property A: My partner and I own a house (equal shares) in UK where we want to live (no mortgage).

Property B: I own 60% of a house in UK (no mortgage) that is let to students. Gross rental is £14k/year, but the estate agent that manages it takes 12%. The house is worth around £220k.

Property C: I own another house (no mortgage) in UK that is let to a professional couple (gross rental £8400/year). This house is worth £230k.

Property D: I own a flat in Europe (no mortgage). Rental is £7k/year after local tax. The value of the flat is around £210k.

Property E: I own another flat in Europe that I currently keep available for friends and family to have holidays (I don't charge them). I may consider letting this flat to tourists for short periods (perhaps with Airbnb). This is worth £225k and I don’t want to sell it. I actually plan to spend a couple of months there every year as it is in a pleasant historical town on the Mediterranean sea.

Final Salary Pension: according to my calculations, if I take this at 55, it will give me around £10.7K/year. If I took it at 65, it would be £16.4k/year. This is (at the moment) RPI-linked (provided RPI<5%). I want to take it at 55, as the actuarial reduction factor for early retirement seems fairish to me.

SIPP: £110k (mainly invested in FTSE All Shares)

ISA: £71k (mainly invested in FTSE 100)

Saving Accounts: £80k (instant access)

In the next couple of years I will consider selling property C and property D and invest in shares. The reason I am not doing this yet is that I believe that the areas where these properties are located are both increasing in value relative to the broader local markets. I also get an irrational sense of security from owning property as opposed to virtual assets, but I am working on it.

My spending habits are not extravagant, I spent £1.5k/month for the last 12 months. On top of this, I tend to buy a £10k car every seven years or so. I would like to keep the same level of expenditure when I retire.

Do you think this is a realistic plan? What would you do different?

[StepOne]

Do you get 60% of the gross rent on property B? Or is £14k your share of the rental?

[petronius]

Hi StepOne,

I get 60% of gross rent on property B.

[petronius]

Thanks ap8889 - I am actually inclined to go along with your suggestions: sell all my properties (bar the one live in and the one I use for holidays), invest in shares and live off dividends/shares sales.

On top of other considerations, there could be tax advantages to this strategy too.

I will have a RPI-linked pension of £10,700/year.

On top of this, I will need, say, £12,000 net a year to live comfortably (not having to pay rent or mortgage).

Assuming 4% dividend yield, and dividend taxation at 7.5% (I would be in the basic tax band with these numbers), I would need just £330,000 invested in UK blue chips achieve this. Sounds very doable.

[StepOne]

Assuming 4% dividend yield, and dividend taxation at 7.5% (I would be in the basic tax band with these numbers), I would need just £330,000 invested in UK blue chips achieve this. Sounds very doable.

Dividend tax is nil if inside ISAs. You and your partner can squirrel away £30,000 a year like this, so it would not take too long to shelter all your dividends.

StepOne

[flyer61]

Petronius,

can we have more details on your DB pension

State/Private sector?
Funding situation?
NORMAL pension age for you within this scheme?

[petronius]

Hi Flyer61,

My DB pension is with a large private sector scheme (USS). Normal pension age is currently 65.

They informed me that the current early retirement reduction factors are as follows (although they may change in the future):

years=== %
1===95
2===90.4
3===86.2
4===82.2
5===78.5
6===75
7===71.7
8===68.7
9===65.8
10==63.1

[flyer61]

Petronius,

if you can see a way not to touch your DB pension scheme for as long as possible it would mean that you will be closer to the annual tax free amount (£12500 by the end of this parliament). Also remember your pension income does not have NI to pay. It would be interesting to look at the commutation factors for taking your lump sum so early. Make sure your expression of wish form is up to date with the scheme administrators. Whilst your scheme is a 'biggie' it is underfunded. Do not be surprised if your RPI link get's tampered with. if you do take your pension at 55 remember you are not actually a 'pensioner' until 65...It would be worth exploring your scheme rules to ensure you fully understand the implications of this. Eg what is the annual uplift pre Normal pension date.

As someone who has been butchered by an early example of what Philip Green did I am very wary of the entire UK pension landscape.

[petronius]

You are scaring me now, flyer61!

My understanding was that taking early retirement with USS at 55 meant one is subject to the same rules (apart from taking a reduced pension according to the actuarial factors). Am I wrong?

I understand that the RPI-linked increases will apply to my pension regardless of when I take it.

I am entitled to a tax-free lump sum that is 3 x my annual pension. I am told that I can convert this lump sum into additional annual pension according to the following conversion factors:

conversion factor for lump sum at 65 is 17.576
conversion factor for lump sum at 55 is 22.296

I plan to convert at 55. My previously mentioned annual pension takes this conversion into account.

[flyer61]

No intention to scare!

Just make sure you have read the small print!

Remember this

How many people do you hear in the press not getting their state pension.....NONE

How many people do you read about who were sold a lemon ie high charging, poor performing pension funds or DB schemes where the owners knew how to rid themselves of their obligations/promises......I know lots! Everyday there is some scandal associated with the UK industry that is pensions.

[tramrider]

I understand that the RPI-linked increases will apply to my pension regardless of when I take it.

Just one warning. Like the State Pension, USS has gone over to CPI increases to save money. The Conservative Price Index is a little lower than the Real Price Index.

Revaluation of accrued benefits, pensions in payment and of the salary threshold will all be in line with increases to of official pensions which are currently linked to the Consumer Prices Index (CPI), and subject to certain caps. USS

I have been receiving a USS pension for 15 years, after being made redundant, and it gives a great sense of security, allowing you to build some more volatile share investments. I would hold off taking the reduced early value at age 55 if possible, and aim for the full amount at 65ish. Try to live off your other income until then. If it proves difficult, you can always fall back onto taking the USS pension.

Tramrider

[petronius]

Hi Tramrider,

I considered delaying USS pension payments until I am 65, but it seems to me that the reduction factors are not so unfair.

The common assumption of pension schemes is that one will live to 85. That is 20 years pension if you go at 65, 30 if you go at 55.

So, a fair reduction factor for going at 65 would be 20/30 = 66.7%. This is not too far from their reduction factor of 63% for 10 year ER.

Considering that "getting an egg today is better than getting a chicken tomorrow", I don't see compelling reasons to delay the pension, but I am open to suggestions as to why that may be the case.

[tramrider]

Hi Tramrider,

I considered delaying USS pension payments until I am 65, but it seems to me that the reduction factors are not so unfair.

The common assumption of pension schemes is that one will live to 85. That is 20 years pension if you go at 65, 30 if you go at 55.

So, a fair reduction factor for going at 65 would be 20/30 = 66.7%. This is not too far from their reduction factor of 63% for 10 year ER.

Considering that "getting an egg today is better than getting a chicken tomorrow", I don't see compelling reasons to delay the pension, but I am open to suggestions as to why that may be the case.

Hi Petronius,
I agree that the USS reduction is fair, but that is not my point. It just seems easier to live on e.g. £10k per year in my dotage than on £6.3k per year, although you have to survive on 'no chicken' for 10 years. It appears to me that you have plenty of capital to cover the 10 years from your properties.

Effectively, you can ignore the inflation indexing once you start the pension as supposedly the pension just rises in step with the cost of living. So you have to live on the equivalent of that £6.3k value from age 55 to 85, with little opportunity to increase it. For myself, I prefer greater security as I get older. I think you are just seeing that the total money you obtain is the same, although spread over 30 instead of 20 years.

Anyway, it appears that you have plenty of flexibility in your choices.

With best wishes for your future,
Tramrider

[petronius]

Tramrider,

I appreciate your argument for waiting until 65. On the other hand, I fear that the USS may at some point find a way to reduce my benefits (for instance by tinkering with the RPI/CPI link as suggested here). Normal pension age may increase as well. By taking it at 55 I may partly reduce my exposure to these adverse changes.

Best wishes,

Petronius

[BusyBumbleBee]

You and your partner can squirrel away £30,000 a year like this, so it would not take too long to shelter all your dividends.StepOne

Changed in the budget to £20K each per year - so now £40 K per year ca be squirrelled away

[ursaminortaur]

Tramrider,

I appreciate your argument for waiting until 65. On the other hand, I fear that the USS may at some point find a way to reduce my benefits (for instance by tinkering with the RPI/CPI link as suggested here). Normal pension age may increase as well. By taking it at 55 I may partly reduce my exposure to these adverse changes.

I thought the change from RPI to CPI has already been made for the USS scheme

https://www.uss.co.uk/~/media/document- ... .pdf?la=en

"
1 Key points
•
Revaluation of accrued benefits, pensions in payment and of the salary threshold will all be in line with increases to official pensions which are currently linked to the Consumer Prices Index (CPI), and subject to certain caps.
•
Such increases are applied in order to provide a continued link with inflation.
•
For benefits earned after 1 October 2011 such increases are capped as described below.
Description
From 1 April 2016 any pension benefits you have already built up in the scheme, whether on a Final Salary basis or a Career Revalued Benefits (CRB) basis will receive annual increases broadly in line with inflation (Pensions Act 1971) in April each year (starting 1 April 2017) until you retire, or until you leave the scheme if that is earlier.
For current CRB members this is a continuation of the current approach to revaluing accrued benefits.
For Final Salary members this replaces the previous link your accrued benefits had to your salary at (or near) retirement.
The inflation measure used for these increases will be based on the increases applied to official pensions, such as those payable from the public sector pension schemes (which are currently linked to increases in CPI).
"

[monabri]

Regarding the decision to take your tax free lump sum. Do you really want to do this? What are you going to do with the money when you get your hands on it? If you have a real urgent need (looking at the numbers you quote in your first post I doubt it!).

You defined benefit pension scheme sounds pretty similar to mine (I FIRED at 51).

I contemplated taking the full 25% Tax Free Lump Sum until I realised that I would have to invest and get 8% AFTER tax to compensate for the reduction of income.

[Kantwebefriends]

I understand that the RPI-linked increases will apply to my pension regardless of when I take it.

Just one warning. Like the State Pension, USS has gone over to CPI increases to save money. The Conservative Price Index is a little lower than the Real Price Index.

It's actually the Gordon Brown price index.

[Kantwebefriends]

For benefits earned after 1 October 2011 such increases are capped as described below.

It sounds as if a fair chunk of your pension inflation-protection won't be subject to the cap. That makes it more valuable.