Please check my logic

[Merkinglue]

I'd like to use your collective experience and knowledge to check my logic.

What I'm not looking for is advice on the wisdom of this, that is a whole minefield.

I'm currently contracting but likely to fall foul of the new IR35 regime, this will tip the balance for me. The money earned isn't worth the BS, I'd rather be gardening.

What I'm considering is drawing on savings then a SIPP to bridge the time between now and full pension(State and Occupational).

Current thinking seems to be that a single person in retirement needs about £26k a year for a comfortable lifestyle.
I'm 57, single, one son who will hopefully not be draining the rations for much longer.
Assumptions used in my modelling
SIPP and ISA dividends return 5%, capital growth of shares 4%

Assets
Own house outright Value circa £350k

Two BTL properties, equity if sold and paying off BTL mortgages £150k

ISA £50k

SIPP £120k

If I stop work my only source of income would be the BTLs. Assuming 80% occupancy (both have been 100% for last 5 years) will generate £7k per year.

If I draw down my ISA to zero it would last about 2 years

I could then take 25% from the SIPP giving me another 18 months or so.

I'd then live off the SIPP and BTL until SIPP is completely empty giving me about 7 years.

This would put me in a position at age 67 of access to state pension and full company pension from my salaried days.
Both SIPP and ISA being zero at this point.

Does this logic work?
Safety net is twofold, either sell one or both BTL or downsize current home.

[Alaric]

This would put me in a position at age 67 of access to state pension and full company pension from my salaried days.
Both SIPP and ISA being zero at this point.

Does this logic work?

You might want to consider some additional points.

Is the combination of state and company pension enough for your income from age 67 onwards?
If you take the company pension early at a reduced rate, is it still enough?

Will you be missing out on utilising your personal allowance?

[EthicsGradient]

Since your only taxable income, before your state/occupational pension, would be the BTL profit and what you take as income from SIPP, it seems to make sense to start using the rest of your personal allowance each year (once you've stopped working) for income from the SIPP - option 3 here: https://www.ii.co.uk/ii-accounts/sipp/income-drawdown

you can take an uncrystallised fund pension lump sum (UFPLS), 25% of which is tax-free and 75% subject to income tax (e.g. of £10,000, £2,500 will be tax-free).

So if you get £7K from BTL, you can take £5.5k from the SIPP before hitting this year's personal allowance. You also get a third of that again as your tax-free lump sum, which is £7,333 in total. Use the ISA to top up your income as needed above that, and you won't be paying tax. If you only used the ISA at first, there'd be a year or two when you aren't using all your personal allowance - and then more - the time spending the SIPP lump sum if you took it all in one go.

[Chrysalis]

I’m not sure how a quarter of the SIPP lasts 18 months but the rest of it can last for 7 years? Especially if some of it is taxed.
I agree with the other posters that your suggested sequencing of withdrawals from your various sources is not optimal with respect to tax - you need to use your personal allowance each year. UFPLS or phased drawdown may help with this, so that you can arrange your SIPP withdrawals such that you fill your tax allowance and take tax free money only after that (ISA or tax free cash from pension).

I personally don’t think you have a lot of wiggle room (although this view might change depending on the size of your DB and your current spending habits). Since you would seem to NEED all the assets in your ISA and SIPP within the next 10 years, I would look closely at your risk capacity and consider putting your investments at low risk (obviously I have no idea what risk level they are at present, but 9% nominal growth seems quite optimistic and suggests plenty of downside risk). Your plan could be derailed if you experience a 20, 30 or 40% reduction in investments, when you have no choice but to sell them to pay bills.

The other posters’ questions about the adequacy of the guaranteed income at SP age are also pertinent, and the potential to take the DB pension early (I probably wouldn’t do that, but it would depend on its value and the actuarial reduction. There are pros and cons, clearly). Have you checked that you have full state pension entitlement (ie from your personal forecast)

And, how much are you actually spending? Is £25k adequate for you, how does it compare with what you currently spend and what you might spend once you no longer have work filling your time? How old is your son and is it realistic to stop supporting him?

From your information you’ve got £170k in liquid assets to last for 10 years at a withdrawal rate of £18k per year (ignoring inflation). It looks tight.

[Gilgongo]

Current thinking seems to be that a single person in retirement needs about £26k a year for a comfortable lifestyle.

If you've not done it already, I'd recommend checking that against your actual historic expenditure, just to be sure.

[Merkinglue]

Thanks all. Excellent help as always.

Answering a few questions

Yes my corporate plus state pension will give me in excess of £30k per year

I hadn't considered the tax benefits from maxing out my personal allowance, great pointer.

Yes £26k a year would keep me at the lifestyle I'm accustomed to.

Finally, there is also a third option if the excrement hit the whirly thing. I could always pick up more work. There is plenty out there I'm just less tolerant of corporate BS these days. Maybe an age thing, or maybe I'm just growing up a bit.

[Chrysalis]

Ok, that level of secured income from 67 does help things a great deal. It’s worth thinking about drawing a reduced DB early, this will give your invested assets more opportunity to grow. I personally like the model of a secured ‘floor’ of income, with investments used flexibly for discretionary spending.

If you do go back to work you may find yourself wanting to add more to pensions in the future. You should be aware of the money purchase annual allowance. This restricts the maximum pension contribution you can make and receive tax relief to £4K per year. It is triggered by withdrawing taxable money from a DC pension (ie using UFPLS or taking from the taxable drawdown account).

[fca2019]

My two cents. Your Sipp is not large enough to stop work IMO. I'd consider doing a hobby job for a couple of years to delay drawing on the Sipp.

[JohnB]

If you are contracting, do you have complete control of your income through an umbrella company or personal company. If so consider putting all your pay into your SIPP to avoid paying NI (you will need to pay yourself minimum wage, but can subsidise from your ISA). You can draw on unused allowances for the previous 3 years to break the £40k limit. Then withdraw from your SIPP taking advantage of the lump sum and the spare £6k of personal allowance. £200k SIPP lasting 10 years at £20k drawdown is tight though if you just use that. But as your 67+ situation sounds balmy, I think you should plan to sell one BTL in 5 years, and they will give you headroom for the unexpected. Will you want the hassle of tenants much beyond that?

[TUK020]

Do you have to view the stopping work as an all or nothing choice?
This is not a particularly great time of year for gardening. Could you do stints of 6 months over winter, picking different contract each time, so you sidestep IR35?
Alternatively could you move to part time?

I've just gone to 4 days a week, and it has made a big difference in giving me extra time (effectively 50% increase in days off per week) and the delta in my take home is hardly noticeable (OK, I have stopped all pension contributions)

[Pheidippides]

£26k from £150k is a pretty poor return in empirical terms, plus all the hassle that goes with it.

Unless there is any significant chance of any capital gain, wouldn't you be better releasing your equity and living off that?

£150k, even in cash would buy your ~6 years breathing space

Regards

Pheid

[NeckPain]

There's a series of posts about this on Monevator:

monevator.com/tag/ISA-pension-split-series/

I can't posts links yet but hopefully you can find it.