Considering early retirement

[Rituximan]

I am thinking about retiring, but struggling with such a big step. I am 58, have a personal pension of about £320,000, a stocks and shares ISA of about £400,000 (which yields approximately £16,000 p.a. in dividends which I reinvest) and about £250,000 in cash, which includes the maximum holding in premium bonds. I also have a small final salary pension which would give just over £7,000 p.a. if I retired now without taking any lump sum from it. No mortgage, no kids, no dependents, and my partner has more money than me. I reckon that I need £1600 per month to live on; but for comfort would prefer a bit more, say £2,000 per month. Until recently I quite enjoyed my work, but I am starting to lose interest and it has been getting a bit stressful. After a bit of serious stress at work a couple of weeks ago, I panicked and rushed out to consult an IFA about whether I am in a position to retire. After some initial fact gathering, the answer looks like a yes, but some of the strategies outlined to me involve a fair amount of money in fees.

The pension options seem to boil down basically to choosing between whether I want the security of an annuity or to go for the flexibility of a draw-down pension – and this is something that I need to think about carefully. It was put to me that I should think about tax efficiency and using the personal £12,000 p.a. tax free allowance to think about my pension, i.e. I don’t want the pension to pay out more than that and the rest of my income should come from the stocks & shares ISA. Thus, if I went for the draw down option with my personal pension, then I would only need it to generate £5,000 p.a. and that level of draw down would not erode the capital and would even end up accumulating cash.

This all sounded fairly optimistic, but I have been thinking about the charges that the IFA mentioned. To arrange an annuity for me, they would charge 2% - which I can probably live with as I have no idea about how to arrange such a thing, but for all I know, there might be cheaper ways of doing this. Actually, the charge might be higher since I have a slow-growing form of cancer and might qualify for an enhanced annuity, which comes with a higher charge. If I decided to go for a draw-down pension, then the initial fee would again be 2% with a 0.5% p.a. management fee. I was shown examples of portfolios for other clients (all based on unit trust/OEICS) that yield approximately 3.5%. They also suggested that I might want to consider switching my stocks and shares ISA to them and they would probably charge a bit less – 1.75% up front, with 0.5% annual management fee, and again likely to have a similar yield of 3.5%.
These fees may well be absolutely standard and in line with the charges made by other companies, but it does feels like a large-ish pill to swallow at the moment, but it may well be something that I need to do as I am keenly aware that I am only a novice and may well need to reduce my level of risk. My stocks and shares ISA is completely UK focused and I had been thinking that I might use this year’s ISA allowance to branch out into something like low-cost tracker ETFs that focus on other parts of the world and perhaps other assets like corporate bonds.
I have been putting money into the ISA for years, and generally viewed it as a bit of an experiment that I could afford to indulge in as I had a secure job to fall back on and no mortgage. Now that I want to give up my job, the ISA becomes more important and I find myself wondering if it needs to be more diverse and less risky, and if the answer to that is yes, then perhaps those fees and the lower return are completely reasonable after all.
There is no great hurry at the moment. I have to give three months’ notice and I think that the earliest I am likely to hand in my notice will probably be next January.
Actually, just sitting here writing this out, it has occurred to me that one option might be to take the IFA’s suggestion of tailoring the two pensions so that they pay out no more than £12,000 p.a. in total. But, instead of switching my ISA to the IFA, I could keep control of it and continue to invest £20,000 p.a. into it plus the usual strategy of reinvesting accumulated dividends and set myself a target of living on the pension plus £12,000 taken from the cash in the bank (I am reasonably confident that I could live on £2,000 per month). Then, after five years the amount in my ISA should have grown a fair bit and I could switch from running down my savings to living off the ISA income, and still have a bit of cash left in the bank.

[Alaric]

I also have a small final salary pension which would give just over £7,000 p.a. if I retired now without taking any lump sum from it.

One point you might want to consider is that you could defer taking the final salary pension until normal pension age and using your cash, ISA wealth and personal pension to tide you over until then. You should get a much higher annual amount unless they've already enhanced it for poor health.

Most if the ideas outlined by the IFA with the possible exception of buying an annuity can be done on a DIY basis. Running a SIPP can be done alongside running an ISA and personal dealing account.

Another way of looking at it is that you have nearly a million in assets excluding the final salary pension. If you can earn 4% on that, you get £ 40,000 a year before tax. That's not guaranteed so some flexibility on spending or holding back cash might be needed.

You perhaps could also consider that 1% of a million is £ 10,000, so that's a nice little earner for the adviser if they can persuade you to let them manage it for you at that sort of ongoing price. But many have more important things to do with their life than manage investments.

[Dod101]

I will not give you chapter and verse at the moment (well my chapter and verse anyway) but I think given the numbers you have quoted you could well produce enough income to more than meet your requirement. I would not be inclined to pay too much by way of fees for the moment, but think things through carefully first. I expect that simply writing out your post will have helped in that respect because you have to get some order to things in your head. I would certainly get some of your cash working in the markets before too long, and I am not keen on annuities but, given your so called 'impaired life' you might want to get some quotes and see what income that would produce. I am not clear why an enhanced annuity should cost more because 2% is a fairly chunky fee anyway I would have thought. Annuity v doing it yourself? Well you could I think reasonably count on getting at least 4% from a lump sum, probably more and you retain the cash. An annuity of course means giving up the cash in return for a guaranteed income, hopefully protected against inflation, but, like investment income it will be subject to tax.

If I were you I would keep say at least two years of income in cash or equivalent and regard the rest of your assets as available for investment, one way or another. As for the ISA I see no reason why you need to give that to an IFA to look after for you. There are lots of investment ideas on this and other Boards and I would suggest that you look and read both HYP Boards to give you some ideas for income producing investments.

You have time on your side so I would not rush into anything. Good luck.

Dod

[xxd09]

I think you have made the initial move to retire in your mind
You have various pots of money/ income which makes early retirement a possibility
Now you have to pull it all together.
An IFA will do for a cost probably wiping out your chances of portfolio growth
Why not continue as you are doing-learning- it’s a steep learning curve!-keep working sustained by the thought you can probably leave any time
Once you have reasonable plan put together-run it past an IFA-if there are serious holes he will tell you- if no holes he also has to tell you !
First consultation is usually free(wants your business!). This process can be repeated
No one will look your money with as much care as you will
Try your Plans on this board when you have done some more work on them
Monevator.com is also a good place for info
Good luck
xxd09

[JohnB]

It sounds like you have enough money for you needs with a wide margin, especially if your partner has matching funds. So there is little need to be cautious or get a clever plan from an IFA, at a cost.

I think you can afford to retire now, and use some of the extra free time to research the subject, once you are more expert, and have a clearer idea how much you need to live the good life you can approach an IFA with more confidence, and possibly do without their services.

Do a spreadsheet running forward your finances. I think you'd struggle to find a scenario where you run out of money.

[Alaric]

II think you'd struggle to find a scenario where you run out of money.

An unscrupulous advisor could assist there. Lend the lot to a dodgy company.

[AsleepInYorkshire]

I am thinking about retiring, but struggling with such a big step. I am 58, have a personal pension of about £320,000, a stocks and shares ISA of about £400,000 (which yields approximately £16,000 p.a. in dividends which I reinvest) and about £250,000 in cash, which includes the maximum holding in premium bonds. I also have a small final salary pension which would give just over £7,000 p.a. if I retired now without taking any lump sum from it. No mortgage, no kids, no dependents, and my partner has more money than me. I reckon that I need £1600 per month to live on; but for comfort would prefer a bit more, say £2,000 per month. Until recently I quite enjoyed my work, but I am starting to lose interest and it has been getting a bit stressful. After a bit of serious stress at work a couple of weeks ago, I panicked and rushed out to consult an IFA about whether I am in a position to retire. After some initial fact gathering, the answer looks like a yes, but some of the strategies outlined to me involve a fair amount of money in fees.

The pension options seem to boil down basically to choosing between whether I want the security of an annuity or to go for the flexibility of a draw-down pension – and this is something that I need to think about carefully. It was put to me that I should think about tax efficiency and using the personal £12,000 p.a. tax free allowance to think about my pension, i.e. I don’t want the pension to pay out more than that and the rest of my income should come from the stocks & shares ISA. Thus, if I went for the draw down option with my personal pension, then I would only need it to generate £5,000 p.a. and that level of draw down would not erode the capital and would even end up accumulating cash.

This all sounded fairly optimistic, but I have been thinking about the charges that the IFA mentioned. To arrange an annuity for me, they would charge 2% - which I can probably live with as I have no idea about how to arrange such a thing, but for all I know, there might be cheaper ways of doing this. Actually, the charge might be higher since I have a slow-growing form of cancer and might qualify for an enhanced annuity, which comes with a higher charge. If I decided to go for a draw-down pension, then the initial fee would again be 2% with a 0.5% p.a. management fee. I was shown examples of portfolios for other clients (all based on unit trust/OEICS) that yield approximately 3.5%. They also suggested that I might want to consider switching my stocks and shares ISA to them and they would probably charge a bit less – 1.75% up front, with 0.5% annual management fee, and again likely to have a similar yield of 3.5%.
These fees may well be absolutely standard and in line with the charges made by other companies, but it does feels like a large-ish pill to swallow at the moment, but it may well be something that I need to do as I am keenly aware that I am only a novice and may well need to reduce my level of risk. My stocks and shares ISA is completely UK focused and I had been thinking that I might use this year’s ISA allowance to branch out into something like low-cost tracker ETFs that focus on other parts of the world and perhaps other assets like corporate bonds.
I have been putting money into the ISA for years, and generally viewed it as a bit of an experiment that I could afford to indulge in as I had a secure job to fall back on and no mortgage. Now that I want to give up my job, the ISA becomes more important and I find myself wondering if it needs to be more diverse and less risky, and if the answer to that is yes, then perhaps those fees and the lower return are completely reasonable after all.
There is no great hurry at the moment. I have to give three months’ notice and I think that the earliest I am likely to hand in my notice will probably be next January.
Actually, just sitting here writing this out, it has occurred to me that one option might be to take the IFA’s suggestion of tailoring the two pensions so that they pay out no more than £12,000 p.a. in total. But, instead of switching my ISA to the IFA, I could keep control of it and continue to invest £20,000 p.a. into it plus the usual strategy of reinvesting accumulated dividends and set myself a target of living on the pension plus £12,000 taken from the cash in the bank (I am reasonably confident that I could live on £2,000 per month). Then, after five years the amount in my ISA should have grown a fair bit and I could switch from running down my savings to living off the ISA income, and still have a bit of cash left in the bank.

Are you Warren Buffett? . Sorry my bad.

I am thinking about retiring

.
You're a little older than I am. A year I'd like to challenge you if I may please. Hopefully in a pleasant way. In a way that may help. Are you sure you've really thought about this? Or is it a knee jerk response to events currently on your mind. If it is then you're not thinking about retiring just yet are you? You're trying to defuse issues, and rightly so, that are troubling you. I often think the same way. I look for safety in an "exit strategy". I ensure that when I feel threatened I can take control of those feelings and keep order in my world. And I wonder if you have a similar coping mechanism?

I have a slow-growing form of cancer and might qualify for an enhanced annuity, which comes with a higher charge.

I am genuinely sorry to hear about your health. You haven't mentioned too much about this and it would be wrong of me to assume anything given this lack of information. May I pick up on a little something please? It may be just drivel and if it is please blink and pass it by. I don't have savings that come anywhere near to matching yours. Not, I hasten to add, that it is a race. I've had a bit of a struggle with my own health and that has impacted on my ability to save for my retirement. I started my own personal pension when I was 24. I got that bit correct. I just didn't know I was going to be ill for so long. Decades. I'm correctly diagnosed now and fighting back. Oh yes My point is that you have been able to do what I couldn't, but may now be facing your own encounter with ill health. And if anyone should get that, it should be me. And I do. And in a way that's why I feel I have to say this to ... and it comes from my heart ... if you're going to retire will you please do a bloody good job of it .

You haven't mentioned what you want to do in retirement. But if it's sitting at home counting out how to spend £2K a month to live then I'm not sure you have quite thought about yourself in all of this. And you should. About two months ago I posted on Beerpig's Snug about my Uncle Harry. He worked on Drax power station and was invited back for a visit as part of their 50 years celebration. He's 83. Two weeks ago I took my Mum to visit him in York Hospital. He's since returned home and is on palliative care with access to a Macmillan Nurse.

I don't know if you've ever been sea fishing? You may prefer lawn bowls or a game of badminton? I'm not sure if you've ever been on a cruise or climbed Everest? You may be a keen horticulturist or keep your own Koi Carp?

Yes you're right. If an IFA wants 2% of your savings to advise you then in that same (really quite enviable position) I'd look seriously at that kind of cost. You've worked damned hard and handing over that kind of money isn't easy. As others have said you have time on your hands and that will allow you to reflect upon the route you want to take with this particular decision.

I'd suggest, quite humbly of course, that you may have not quite got your sums right. If you're going to retire and if you're going to do a "bloody good job of it" then you need to lift your annual budget. You don't have to go mad. I'm not suggesting you set up an F1 team. But you do need to occupy yourself and I don't mean sitting at home watching England getting beat on penalties by Germany

I think you have the funds to do this. If you're not sure then let me have a go for you . How you manage those funds is up to you. You will make all the right decisions. The general rule of thumb when in draw down is not to remove more than 4% per annum from the fund. This acts to protect in the long term. Clearly you have to think long and hard about the IFA fees and whether it's the route for you. In your shoes I'd struggle with the thoughts of parting with that kind of cash only to find the advice wasn't intrinsically of any added value to me.

I hope you come to terms with all your thoughts. If you retire I hope it's to your liking and you plan a retirement fit to meet your needs. It's a lovely problem to have really and a problem that you have been the sole architect of. Well done. I hope I can come here in 10-15 years time and discuss how I have arrived at aa similar problem.

I genuinely wish you the very best with your health and am sure you will find a way to consolidate your plans and ultimately put them into action in a way that is perfect for you.

AiY

[TUK020]

IFAs tend to offer two things and always want to bundle them.
- Tax and legislation advice
- Money management.
The former can be done on a once off fee, and if they know their stuff, can be good value.
On the latter, they would probably not do any better than you could achieve on your own, but then they would get their feeding tubes into your money pile.

No dependants, so no IHT to worry about complications.

If I were in your position, I would opt for a self managed pension pot, and flexibly drawdown income from the pension to manage your tax rate. In rough terms this would be:
Target aftertax income of £2000/month = £24,000pa, growing at RPI.
Keep 2 years of aftertax income in cash reserve say £50k
Take 7k DB pension. Drawdown additional SIPP income to get to stay under 12k tax rate. Run down the cash pile by taking another 12k for income, and 20k for ISA top up each year. The remainder of the cash pile will last another 6-7 years, by which time the SIPP can take up the slack, and serve the 20+k for a couple of years before state pesnion kicks in, and reduces again.

This would get you to state pension age, while increasing your ISA pot (divis reinvested, + 20k capital each year for the next 6-7 years) and increasing your SIPP (at the same rates of return from your ISA, you would be drawing less than your return for the next 9 years).

You could probably fine tune this, and target a higher initial aftertax income, but you get the drift. The 2 years income cash reserve is critical, as this protects you against sequence of returns risk.

[TUK020]

One other thing I would like to add.

I am in much the same age & position as you, and going through the same thought process, hastened by recent bad health.

I would have stopped already but for:
- I have a bevy of uni age youngsters who have yet to fledge off
- commitments made to business partner.
- want to target a higher retired income to allow for skiing holidays etc.

One of the things I am seriously thinking about is whether I can move to part time - if moving to 2 days a week, or project bursts helps with the stress/enjoyment balance, it also helps considerably in building your retirement margin.

[JoyofBrex8889]

http://engaging-data.com/will-money-last-retire-early/

This may be helpful.

[gbjbaanb]

I am thinking about retiring, but struggling with such a big step.

Do it. At some point we stop working and start retiring - the problem is we're all so used to working we can't even think of the day when we stop doing it.

Until we do, and then we never want to go back to work

With a million quid spare, frankly you're sorted. You can take the easy option and put it all into a basket of investment trusts, and simply live off the income from them and ignore the capital value completely (at a meagre 4%, that's £40k a year). And you haved a £7k a year pension on top of that too.

To get an idea of income, and investment trusts (there's other boards for this topic), you can use the AICs toolto see how much you you'd get if you had all your money invested in some.

So to be totally frank, I'd say you need to read this site a lot - ITs, HYP, all the other boards, take your time getting used to the idea, and then retire with income from your SIPPs and ISAs. Forget the annuity - all they do is invest in these same things and give you part of the income back, after taking a hefty fee for doing so.

Your biggest problem right now should be wondering what to do all day.

[Chrysalis]

Do it, do it, do it. You money looks good for just one person. It took me about 3-4 years after truly believing I had enough money to transition out of my career to a new life - I, like most people, was worried about cutting the umbilical cord with my hard won career and identity, but I had a hunch that filling my time would not be a problem. I always preferred my not-work life to my work life. I think you’ll know if you want to go or not.
And don’t pay an IFA to do it for you. I agree with all the comments above that you can do this yourself.
How long before you can take your DB pension unreduced? How much certainty do you need that your basics are covered?
For tax efficiency, you should probably start with drawing the max from your DC pension to fill your personal allowance (if you use UFPLS that will be about £16k - if you don’t know what that means yet then you have a bit of reading to do), topping up with your cash/unsheltered money. And transferring that into ISAs at £20k per year as you suggest.
Then your DB will kick in and you can reduce the SIPP withdrawal. Then SP will come along and you will be a taxpayer again for sure.
With a full state pension (you should check your forecast) and at last £7k in DB pension, you’ll have about £15k in guaranteed lifetime income and probably don’t need to consider annuitising to obtain more, at least until you are much older and want to just simplify everything.
Good luck. Keep learning, I 100% agree that no one can make better decisions about your money than you.

[monabri]

Yes, check out your state pension as well - you didn't mention it. You can then consider if you want to add to it via Class 3 voluntary NI contributions.

Oh, and be wary of "independent" financial advisors.

No one on TLF knows who you (!) are so it you are thinking of acting on what the IFA is saying, it might be worth posting on one of the boards before pulling the trigger.

[Rituximan]

Thank you to everyone who has replied.
Quite some food for thought here. The cash pile is fairly recent - my mother died at the end last year and a large part of the pile came from the inheritance. I already work part-time, having gone down to four days a week just over a year ago. If they switch me onto a less stressful project then I might be less inclined to leave, but the company is not being well run and it feels like it is in a slow downward spiral, it might pick up but I cannot say that I have a lot of faith in the management. I think that at the very least I need to have plans in place so that I am in a position to be able to leave if things suddenly take a turn for the worse.
The prospect of managing my own pension pot is a little daunting, but the IFA's fees are also pretty daunting, enough to motivate me to put some effort into learning about self-invested pensions so that I can judge whether I can do it for myself.
One of the first things I shall do is contact the final salary scheme people to find out the age at which I can take it unreduced. They sent me a rather confusing list of different retirement ages that members can retire at, which is based upon the period in which contributions were made. I think for me it might be 65, but it might be lower than that. I will ask about this and ask for an estimate of what kind of pension I might get if I were to wait until the retirement age - then I’ll have an idea of how much I might miss out on if I decided to take it early. I can also ask them about my lymphoma and whether that would qualify me for an enhanced pension.
It looks like I have quite a bit of homework to do, starting with these boards.

[Alaric]

The prospect of managing my own pension pot is a little daunting

It shouldn't really be that different from running a Stocks & Shares ISA. the main complication being that you cannot take money out without it possibly being taxable. Your existing ISA provider(s) may offer a SIPP as well, you would have a familiar interface were you to take one out.

[Chrysalis]

Monevator.com is a good place to learn about index investing

[gbjbaanb]

The prospect of managing my own pension pot is a little daunting

I'm sure it does, but that's not unusual for any new venture or situation. Fortunately, you have TLF to help, educate and generally assist you in getting to the point where you feel very comfortable doing exactly this.

The simplest thing is to read these forums, the investment trusts one is one I'd pay particular interest in as managing your retirement portfolio can be as complex or as simple as you like. We have user luniversal who has spent years educating us about his "basket of ITs" (which is simply a fancy name for "buying 7 or 8 investments") but in trust form (which are nothing more complex than companies whose business is managing investment portfolios) so you can have a spread over many, many areas (in case one goes tits up, like banks 10 years ago).

If you want simple: you can do the same, "buy" 10 or so trusts and sit back, let them send you dividends (ie interest) every month... and erm... yes, that's it.

[TUK020]

If you want simple: you can do the same, "buy" 10 or so trusts and sit back, let them send you dividends (ie interest) every month... and erm... yes, that's it.

Well, most of them pay quarterly, but yes, that's the basic idea

[OhNoNotimAgain]

Look for advisers who charge by the hour, not percentage of assets.

[BrummieDave]

If you want simple: you can do the same, "buy" 10 or so trusts and sit back, let them send you dividends (ie interest) every month... and erm... yes, that's it.

Well, most of them pay quarterly, but yes, that's the basic idea

True, but if you buy 10 or so ITs as TUK says, you are likely to get dividends paid out every month, three on average, even though each one only pays out quarterly.

I think that's what TUK meant and actually said.