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Considering early retirement

Including Financial Independence and Retiring Early (FIRE)
TUK020
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Re: Considering early retirement

#244947

Postby TUK020 » August 17th, 2019, 8:26 am

Rituximan wrote: That could be because I still have a lot of reading to do on here, but I was wondering if there might be reasons for preferring investment trusts over ETFs or vice versa? I have read most of Lars Kroijer's book now, and that seems quite keen on ETFs.


ITs Diversification/Balance.
One of the tenets of HYP investing is to diversify amongst different sectors by capital weight.
Investing in the FTSE100 using an ETF is easy and low cost. It also comes skewed in terms of capitalisation towards Oil, Miners, etc. So while it may be diversified in terms of the number of stocks, it is somewhat too concentrated by sector.
In the lead up to the GFC, the FTSE100 was very dominated by financials - in retrospect, not a great position to be in.
Generalist Income ITs, such as City Of London Investment Trust CTY do seem to be a little more balanced.

ITs Lower income volatility
ITs have the ability to borrow money, and also to park earnings in reserves. They use this to 'smooth' dividends.
CTY make a big issue of having held or increased dividends every year for >50 years.
Easier to manage if you are living off the income provided

ETFs Lower cost
ETFs tend to run lower costs

Rituximan
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Re: Considering early retirement

#245049

Postby Rituximan » August 17th, 2019, 3:39 pm

TUK020 wrote:ITs Diversification/Balance.
ITs Lower income volatility
ETFs Lower cost


From the perspective of a novice thinking about an investment strategy for retirement, a portfolio that comprises a mix of ITs and ETFs might be appropriate.

TUK020
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Re: Considering early retirement

#245062

Postby TUK020 » August 17th, 2019, 4:58 pm

Rituximan wrote:
From the perspective of a novice thinking about an investment strategy for retirement, a portfolio that comprises a mix of ITs and ETFs might be appropriate.


Very good point,
In my portfolio I have:

ETFs:
L&G Global 100 worldwide stock index of large companies
IS15 short dated 1-5 yr bonds (Cash proxy, as income reserve to reduce sequence of returns risk)
PHAU pysical gold etf (small % of portfolio, as insurance)

ITs
CTY FTSE income
Murray Internation (MYI)
Henderson Far East (HFEL)
HICL Infrasructure
Merchants & Temple Bar general income
Foreign & Commonwealth (FCIT) worldwide, growth

High Yield Portfolio
about 30 individual stocks from FTSE, mostly along Bland Annuity Substitute "HYP" lines, but with enhancements (such as TJH top up/top slicing etc)

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Re: Considering early retirement

#246600

Postby Rituximan » August 23rd, 2019, 5:28 pm

I have had a thought about using my personal pension as a way to keep on topping up my S&S ISA. If I retire next year and transfer my £320k personal pension to a SIPP and take the full amount of the TFLS (£80k) that will leave me with about £240k in the PP and about £320k in my cash pile. If I invested £250K of that cash pile in a basket of investment trusts and maybe one or two ETFs that should hopefully generate around £10k p.a. I would put £20k from the cash pile into my stocks and shares ISA to leave me with a cash buffer of around £50k.
I have checked with my defined benefit pension, and if I retired early – say on my 59th birthday next year, then I would receive nearly £8k p.a. I have now received the forms from them to apply to take the full amount early without penalty, and if successful that would be just over £9k p.a.
In retirement, I reckon that I need £24k to live on and £8k of that would come from the DB pension. I could take another £8k from my personal pension – this would take me over my personal tax free allowance of £12k – but hey ho. There would an income of £10k from the unprotected IT/ETF assets, of which £2k would be free from tax and I would pay tax at 7.5% on the remaining £8k. The next year, I would bed and ISA £20k’s worth of the unprotected IT/ETF assets, and the dividend income would go down, so I would then take a larger chunk of cash from the SIPP to make up the £24k. The year after that, I would do the same again – bed and ISA £20k and take more out of the SIPP to make up the difference. I am not even thinking of or counting on any possible income that might be accumulating within the SIPP. If I did this for eight years, I would have reached the age at which the State Pension kicks in, and could ease off from taking cash out of the SIPP. My calculations are a bit rough and ready, but I reckon that if I did that, I would still have £100k left in the SIPP, about the same left in the unprotected assets and I would have paid the full amount into my S&S ISA for eight years, and probably be in a position to carry on doing so for another 3 or 4 years. The accumulated dividends in the ISA would also have been re-invested which means that the ISA could be up to 80% bigger than it is now, perhaps even bigger with a little luck.
I realise that pensions are tax efficient for inheritance purposes, but I would rather have the money in the here and now, and without any dependents, I don’t really have to think about that kind of tax efficiency.
I am so accustomed to thinking of pensions as sacred objects that must be protected and nurtured that putting the ISA first and running the pension down seems a bit heretical to me. Is there something that I have not thought of here? Some major error in my thinking?

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Re: Considering early retirement

#246608

Postby Alaric » August 23rd, 2019, 5:58 pm

Rituximan wrote:I am so accustomed to thinking of pensions as sacred objects that must be protected and nurtured that putting the ISA first and running the pension down seems a bit heretical to me. Is there something that I have not thought of here? Some major error in my thinking?


Usually tax has to be paid on money taken out of a pension fund. However with the personal allowance set to a high value, that enables money to be taken out tax free that would otherwise be taxed. It's a time limited option, since once the State pension starts, that and the DB Pension will likely send you above the tax threshold. It's also possible to defer the State pension.

EthicsGradient
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Re: Considering early retirement

#246668

Postby EthicsGradient » August 24th, 2019, 12:08 am

Investments inside a personal pension grow free of capital gains tax or income tax on the dividends, so it doesn't seem a good idea to take the TFLS now, only to invest it in ITs outside a tax shelter (at first, at least) where you expect to pay income tax on their dividends, and might in theory end up with capital gains too (or at least have to arrange sales to avoid going over the yearly allowance).

How about just taking the 25% tax free bit each year alongside whatever income you could take from the SIPP that uses up your personal allowance - about £3,000 plus the £1,000 tax free, if I understand what your DB pension will give you (thinking just in terms of this year's allowances).

It might also be worth taking advantage of the £5,000 starting savings rate of 0% for those with incomes at or below the personal allowance - that gives you up to another £6,000 of income, including the standard £1,000, without paying tax. Put some of your cash pile in bond funds, and their dividends are counted as savings income, not investment dividends. How much you buy of those, rather than ETFs or ITs, may depend on your risk tolerance - they may act as a bit of a balance. If you put £125,000 in bond funds and got 4% dividends, that'd be £5,000.

Still put the £20k a year into the ISA, from sales of bond funds/ETFs/ITs.

Then take, from sales of the investments outside the SIPP or ISA, whatever is left that you need for living costs (after a bit of income from the ITs/ETFs). Once those investments are sold is when you look at taking more of the remaining tax free 'lump sum' you still have available from the SIPP, where the growth has meanwhile been sheltered tax free.

TUK020
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Re: Considering early retirement

#246681

Postby TUK020 » August 24th, 2019, 8:05 am

Rituximan wrote:I have had a thought about using my personal pension as a way to keep on topping up my S&S ISA. If I retire next year and transfer my £320k personal pension to a SIPP and take the full amount of the TFLS (£80k) that will leave me with about £240k in the PP and about £320k in my cash pile. If I invested £250K of that cash pile in a basket of investment trusts and maybe one or two ETFs that should hopefully generate around £10k p.a. I would put £20k from the cash pile into my stocks and shares ISA to leave me with a cash buffer of around £50k.


If you think that there is political risk about reducing the limit of TFLS, then it makes sense to hoover it all out now (this might be a Corbyn target?)
If not, then you don't need the cash pile in taxed accounts.

Better to use the tax free portion to reduce your yearly tax bill on what you withdraw from the SIPP.

Whatever you do, keep stuffing max amount into ISA by running down your taxable cash stock pile (or selling ITs/ETFs, and rebuying inside ISA)

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Re: Considering early retirement

#246689

Postby JohnB » August 24th, 2019, 8:56 am

Given dividends and capital gains within a pension are taxed at 15% on withdrawal (allowing for lump sum), but outside dividends are taxed at 7.5% with 2k allowance and capital gains have a 12k allowance, there is merit in having unsheltered savings outside a SIPP. The big boost with a pension is the tax relief going in, it’s not so valuable in drawdown, apart from its Inheritance Tax advantages

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Re: Considering early retirement

#246741

Postby Rituximan » August 24th, 2019, 12:10 pm

There could be well be some risk to the 25% TFLS, and that is a factor in my thinking. I have no idea how likely it is to happen, but it's a possibility and taking all of the TFLS upfront will avoid that. I appreciate that this might not be the most tax efficient strategy, but it does seem to be an option that will allow me to put £20k into the ISA each year for the longest period, at least eight years, probably longer. Also, once I reach the age of 66 years and 10 months, the state pension plus the DB pension will take me over the personal allowance, so I will have to pay tax on whatever comes out of the SIPP.

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Re: Considering early retirement

#246840

Postby runnygum » August 25th, 2019, 3:38 am

After 4 years my ETF's have outperformed my IT's by close to 100% capital return and exceed IT dividends by 10%
So Im about to wipe out all IT's the 50 basis point lower cost basis with ETF's is a high bar and leverage can work both ways.

FCIT were until recently paying 13% on bonds they issued!

Active Management is dead IMO. Long live passive :)

vrdiver
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Re: Considering early retirement

#246844

Postby vrdiver » August 25th, 2019, 7:42 am

runnygum wrote:After 4 years my ETF's have outperformed my IT's by close to 100% capital return and exceed IT dividends by 10%

Interesting, but are you comparing like with like? If your ETFs are invested in different markets / companies versus your ITs then it may be a function of market rather than wrapper...

Would be good to see the specific ITs and ETFs.

VRD

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Re: Considering early retirement

#247222

Postby Shelford » August 27th, 2019, 11:49 am

There are some good answers here.

Completely understand your concerns. Taking the decision to retire, to let go, is a big one.

With regard to the principal topic of these boards, my advice would be:

-research carefully on these boards and others cf. monevator.com
-decide how much of your time you want to spend on personal investment
-decide what your risk profile is (this will shape your portfolio and strategy)
-if you want to spend little time, create a 'basket' of investment trusts, build up a cash surplus/buffer of (say) 2 years worth of projected annual spend, then watch the money role in
-if you are very risk averse, consider allocating some of your money to an enhanced annuity to cover the basics, then spend the income from a smaller IT basket on beer, skittles, etc.

Given you are comfortably off ( you should be able to generate 35-40K per year on the sums you mention, before you dip into your DB scheme, even allowing for inflation), my view is you could do all the above relatively simply, and tell the IFA to take a RUNNING JUMP.

GOOD LUCK.

Shelford


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