Have I got enough to retire - asking for a friend

[Myfyr]

Age 56, target income £30,000 increasing with inflation

SIPP 1 £490,000 (crystallised) invested in Investment Trusts
SIPP 2 £150,000 (uncrystallised and taken as 75% of true value as exceeds LTA, at least in part) invested in global equity funds
Defined benefit 1 = £7,500 currently in payment
Defined benefit 2 = £4,000 payable from age 60

LTA used up from SIPP 1 and DB 1 = 90% exactly (deliberately exact) so 10% LTA remains which will mostly be used up by DB 2

State Pension = £9,000 from age 67 and fully paid up so no more NI needed as currently at maximum

Question is, does he have enough funds to retire now on £30,000?

I have done some spreadsheet analysis with fairly pessimistic assumptions and it seems doable, can anyone give their thoughts please. SIPP 2 wont be crystallised until SIPP 1 is exhausted,

He has share ISAS and a cash reserve which I have been asked to ignore if possible.

Thanks

[Urbandreamer]

I like firecalc*
https://www.firecalc.com/
for these type of calculations.

To me it looks like you should not have an issue, assuming £30k is the correct spending.

*yes I know it's US, uses the US stockmarket and reports in $'s. I'm ok assuming that doesn't make a blind bit of difference.

Ps I take it that someone already retired and that the two SIPP's belong each to a retired person and someone working. I'd also point out that there is more to retirement than simply finances. It might be a good idea to organise a trial retirement or at least avoid taking your pension for a time to find out if you need more time to think about being retired.

[tjh290633]

Age 56, target income £30,000 increasing with inflation

SIPP 1 £490,000 (crystallised) invested in Investment Trusts
SIPP 2 £150,000 (uncrystallised and taken as 75% of true value as exceeds LTA, at least in part) invested in global equity funds
Defined benefit 1 = £7,500 currently in payment
Defined benefit 2 = £4,000 payable from age 60

LTA used up from SIPP 1 and DB 1 = 90% exactly (deliberately exact) so 10% LTA remains which will mostly be used up by DB 2

State Pension = £9,000 from age 67 and fully paid up so no more NI needed as currently at maximum

Question is, does he have enough funds to retire now on £30,000?

I have done some spreadsheet analysis with fairly pessimistic assumptions and it seems doable, can anyone give their thoughts please. SIPP 2 wont be crystallised until SIPP 1 is exhausted,

He has share ISAS and a cash reserve which I have been asked to ignore if possible.

Thanks

Presumably he knows how much income the two SIPPs are currently generating. £640k ought to be able to generate £25k or more in normal circumstances, but these are not normal circumstances. Going forward it is not possible to predict what the ITs will pay out, although they do like to use their income reserves to smooth out short term fluctuations. The global equity funds will also be in for a few traumas in the next year or so, even if there is a V-shaped recovery.

I suspect that a cautious person would wait for a few months to see how the wind is blowing, in case there is a sudden collapse in dividend payments. The selection of ITs and funds will have a bearing on this. Presumably the DB pensions are inflation protected?

TJH

[AJC5001]

Age 56, target income £30,000 increasing with inflation

Is the £30,000 before or after tax?

Adrian

[Myfyr]

Age 56, target income £30,000 increasing with inflation

Is the £30,000 before or after tax?

Adrian

All figures quoted are Gross. So would be £26.5k net of basic tax, increasing with inflation.

[Myfyr]

I like firecalc*
https://www.firecalc.com/
for these type of calculations.

To me it looks like you should not have an issue, assuming £30k is the correct spending.

*yes I know it's US, uses the US stockmarket and reports in $'s. I'm ok assuming that doesn't make a blind bit of difference.

Ps I take it that someone already retired and that the two SIPP's belong each to a retired person and someone working. I'd also point out that there is more to retirement than simply finances. It might be a good idea to organise a trial retirement or at least avoid taking your pension for a time to find out if you need more time to think about being retired.

All quoted pensions are for one individual. The spouse is a stay at home parent age 55 with full new state pension accrued plus a very small defined benefit of £200 per year and a small SIPP which is minuscule in the scheme of things. The spouse pensions will be a bonus when they become available. They are ignored for the £30.000 requirement.

[Myfyr]

Age 56, target income £30,000 increasing with inflation

SIPP 1 £490,000 (crystallised) invested in Investment Trusts
SIPP 2 £150,000 (uncrystallised and taken as 75% of true value as exceeds LTA, at least in part) invested in global equity funds
Defined benefit 1 = £7,500 currently in payment
Defined benefit 2 = £4,000 payable from age 60

LTA used up from SIPP 1 and DB 1 = 90% exactly (deliberately exact) so 10% LTA remains which will mostly be used up by DB 2

State Pension = £9,000 from age 67 and fully paid up so no more NI needed as currently at maximum

Question is, does he have enough funds to retire now on £30,000?

I have done some spreadsheet analysis with fairly pessimistic assumptions and it seems doable, can anyone give their thoughts please. SIPP 2 wont be crystallised until SIPP 1 is exhausted,

He has share ISAS and a cash reserve which I have been asked to ignore if possible.

Thanks

Presumably he knows how much income the two SIPPs are currently generating. £640k ought to be able to generate £25k or more in normal circumstances, but these are not normal circumstances. Going forward it is not possible to predict what the ITs will pay out, although they do like to use their income reserves to smooth out short term fluctuations. The global equity funds will also be in for a few traumas in the next year or so, even if there is a V-shaped recovery.

I suspect that a cautious person would wait for a few months to see how the wind is blowing, in case there is a sudden collapse in dividend payments. The selection of ITs and funds will have a bearing on this. Presumably the DB pensions are inflation protected?

TJH

Thanks. He thinks he was already there pre COVID which has reduced the value of the SIPPs by £150k though the drop was a scary £300k just three months ago. Should have reduced the risk as the "game" was pretty much won, but none of us could have predicted this situation really.

Perhaps carry on working til the end of the year and review again at that point would be sensible, its only an extra six months in the rat race I guess.

[Dod101]

Personally I would be waiting for a year or three. I suspect that the friend could retire on what he has but it might be a bit tight especially with what others have said about Covid19 and the generally accepted 4% from assets. 'A wee bit tight' I'd say, and I am not referring to the Scotsman at Central Station on a Friday night.

Dod

[SalvorHardin]

I've had way too much to drink to do a detailed response (have binge watched the last six episodes of "The Brave" with at least 1 can of Special Brew per episode).

But I am sufficiently compos mentis to pose a key question, because I've done so for so many times over the years it's almost on autopilot!

Has your friend allowed for the reduction in living costs because they are no longer working? Commuting, clothes, food and drink (convenience eating), etc.

It surprises many people as to how expensive it is simply to have a job.

When I retired (in 2003) from work in Central London, I was working with many high rate taxpayers who spent something like 30% to 40% of their after tax income simply to get to work and other work-related costs.

Retirement = end of work-related costs

It's your net income after work-related costs that counts, the gross less so.

And the coronavirus/lockdown is going to screw up investment income for a few years, especially for the classic HYP selections

[xxd09]

£3000 income pa per £100000 of an investment portfolio is a good rough guess
So you could do it but it would be a close run thing
xxd09

[1nvest]

It can be useful/informative to create a table based on the assumption that pensions, spending and investments increase with inflation, so nominal values, but that scale with inflation over time. Something like (£K values) ...

So with 490K+ they've more than enough. If you've won the game then capital preservation of the £325K is appropriate, speculate (stocks) with the rest. Used to cost less - inflation bonds (index linked gilts) used to pay a real reward (above inflation), such you needed even less. Nowadays that's flipped around and securing a safe inflation pacing return is a primary risk. i.e. you can't rely upon bonds alone for the safe component, and instead have to resort to asset allocations such as 20/80 stock/bonds or whatever.

So looking at just the £490K available element alone, perhaps £325K of that in a 20/80 = £65K stock/£260 Gilts, and the rest above £325K into stocks = £230K stock/£260K gilts overall. Spending bonds first, and the bonds would support the income until age 80 and have transitioned from a near 50/50 stock/bond to 100/0 stock/bond over 24 years. Likely the stock would have accumulated at a reasonable rate by then. If for instance a 3% annualised real gain was achieved then the stock value would have doubled in real terms by then ... and they'd still have the same amount in inflation adjusted terms as at the start date. If they get to 80. Even if stock accumulation just paces inflation they'd be fine.

[JohnB]

It sounds enough but I would wait until Christmas to see what tax raids are planned to fund the CV debt. The portfolio has already had its shock, so 3.5% sounds fine, but I'd have it all in equity, plenty of bond like cover in the DBs. 30k income sounds low as children were mentioned, and they may need support.

[Myfyr]

It sounds enough but I would wait until Christmas to see what tax raids are planned to fund the CV debt. The portfolio has already had its shock, so 3.5% sounds fine, but I'd have it all in equity, plenty of bond like cover in the DBs. 30k income sounds low as children were mentioned, and they may need support.

Current salary is £24k gross of tax (part time less salary sacrifice pension) so the retirement income is pretty much the same as take home from salary and pension.

He has about £100k in share ISA and about the same in NSI (premium bonds and index linkers). This is for emergencies only and would appear to cover 8 years at £24k per year if needed. No mortgage. Think this makes the retirement more do-able but not sure I would risk it myself.

[taken2often]

I am no sure about the LAT percentage shown now up to 1,073,100.

Also no mention of PCLS (Pension Commencement Lump Sum) now £268,275 and growing. So UFPLS may be worth considering where 25% of each draw is tax free. Over the years you get more tax free sums than you get taking it at the beginning. You can also just use the natural income rather than sell stock to obtain income.

[Urbandreamer]

I am no sure about the LAT percentage shown now up to 1,073,100.

Also no mention of PCLS (Pension Commencement Lump Sum) now £268,275 and growing. So UFPLS may be worth considering where 25% of each draw is tax free. Over the years you get more tax free sums than you get taking it at the beginning. You can also just use the natural income rather than sell stock to obtain income.

It doesn't effect me and probably won't effect the OP's friend, but I understood the drawdown LTA tax situation to be the reverse. By taking the tax free lump sum early you remove any investment growth of it from the LTA calculation. The lump sum could be gradually invested in ISA's, so have the same growth, but be exempt from LTA tax (though possibly subject to IHT).

As I say, it's not something that I need to consider, just something that I came across.

[ursaminortaur]

I am no sure about the LAT percentage shown now up to 1,073,100.

Also no mention of PCLS (Pension Commencement Lump Sum) now £268,275 and growing. So UFPLS may be worth considering where 25% of each draw is tax free. Over the years you get more tax free sums than you get taking it at the beginning. You can also just use the natural income rather than sell stock to obtain income.

From the OP

SIPP 1 £490,000 (crystallised) invested in Investment Trusts
SIPP 2 £150,000 (uncrystallised and taken as 75% of true value as exceeds LTA, at least in part) invested in global equity funds
Defined benefit 1 = £7,500 currently in payment
Defined benefit 2 = £4,000 payable from age 60

LTA used up from SIPP 1 and DB 1 = 90% exactly (deliberately exact) so 10% LTA remains which will mostly be used up by DB 2

His total pensions already exceed the LTA* so the last thing he needs is to use UFPLS which would capture further growth and increase the LTA excess charges. Much better to use flexi-access and crystallise the SIPPs so that growth after crystallisation can be removed without increasing the LTA excess amount.

* Though adding the figures up

(7500 + 4000) x 20 + 490000 + 4/3*(150000) = 230000 + 490000 + 200000 = 9200000

suggests he does have a little leeway at the moment. However it still suggests it is better not to use UFPLS since it is so close to the LTA that average growth would be expected to take it over by age 75 even with the LTA limit increasing by CPI.

[Myfyr]

I am no sure about the LAT percentage shown now up to 1,073,100.

Also no mention of PCLS (Pension Commencement Lump Sum) now £268,275 and growing. So UFPLS may be worth considering where 25% of each draw is tax free. Over the years you get more tax free sums than you get taking it at the beginning. You can also just use the natural income rather than sell stock to obtain income.

From the OP

SIPP 1 £490,000 (crystallised) invested in Investment Trusts
SIPP 2 £150,000 (uncrystallised and taken as 75% of true value as exceeds LTA, at least in part) invested in global equity funds
Defined benefit 1 = £7,500 currently in payment
Defined benefit 2 = £4,000 payable from age 60

LTA used up from SIPP 1 and DB 1 = 90% exactly (deliberately exact) so 10% LTA remains which will mostly be used up by DB 2

His total pensions already exceed the LTA* so the last thing he needs is to use UFPLS which would capture further growth and increase the LTA excess charges. Much better to use flexi-access and crystallise the SIPPs so that growth after crystallisation can be removed without increasing the LTA excess amount.

* Though adding the figures up

(7500 + 4000) x 20 + 490000 + 4/3*(150000) = 230000 + 490000 + 200000 = 9200000

suggests he does have a little leeway at the moment. However it still suggests it is better not to use UFPLS since it is so close to the LTA that average growth would be expected to take it over by age 75 even with the LTA limit increasing by CPI.

The £490k SIPP has been crystallised and about £185k PCLS was taken and not included in tne figures shown.

Exactly 90% LTA crystallised in the last tax year (90% of £1.055m exactly, deliberately so to make figures easy) with about 30% LTA left so total 120% LTA.

90% LTA crystallised
Remaining is £4,000 pa so 7% LTA approx.
Leaves 3% LTA (as good as nil really) but has an uncrystallised SIPP of about £200k (20% LTA) which is £150k after PCLS or LTA charge.

Probably best to take the £4k DB then then take up to residual LTA from the £200k SIPP. Leave the rest uncrystallised until 75 or LTA abolition if sooner (unlikely).

Note that the DB has a high GMP element revaluing at 7.5% (joined 1989 and deferred in 1993) and if not taken early will exceed remaining LTA quickly due to the revaluation of the GMP and unwind of the early retirement factor (3% pa simple allowing for months). Indeed the early retirement pension at 56 is pretty much the revalued post 1988 GMP at 65 (about £20 pa higher) so only a nominal PCLS is available with a slightly reduced pension (exactly the reavalued GMP).

[ursaminortaur]

I am no sure about the LAT percentage shown now up to 1,073,100.

Also no mention of PCLS (Pension Commencement Lump Sum) now £268,275 and growing. So UFPLS may be worth considering where 25% of each draw is tax free. Over the years you get more tax free sums than you get taking it at the beginning. You can also just use the natural income rather than sell stock to obtain income.

From the OP

SIPP 1 £490,000 (crystallised) invested in Investment Trusts
SIPP 2 £150,000 (uncrystallised and taken as 75% of true value as exceeds LTA, at least in part) invested in global equity funds
Defined benefit 1 = £7,500 currently in payment
Defined benefit 2 = £4,000 payable from age 60

LTA used up from SIPP 1 and DB 1 = 90% exactly (deliberately exact) so 10% LTA remains which will mostly be used up by DB 2

His total pensions already exceed the LTA* so the last thing he needs is to use UFPLS which would capture further growth and increase the LTA excess charges. Much better to use flexi-access and crystallise the SIPPs so that growth after crystallisation can be removed without increasing the LTA excess amount.

* Though adding the figures up

(7500 + 4000) x 20 + 490000 + 4/3*(150000) = 230000 + 490000 + 200000 = 9200000

suggests he does have a little leeway at the moment. However it still suggests it is better not to use UFPLS since it is so close to the LTA that average growth would be expected to take it over by age 75 even with the LTA limit increasing by CPI.

The £490k SIPP has been crystallised and about £185k PCLS was taken and not included in tne figures shown.

Exactly 90% LTA crystallised in the last tax year (90% of £1.055m exactly, deliberately so to make figures easy) with about 30% LTA left so total 120% LTA.

90% LTA crystallised
Remaining is £4,000 pa so 7% LTA approx.
Leaves 3% LTA (as good as nil really) but has an uncrystallised SIPP of about £200k (20% LTA) which is £150k after PCLS or LTA charge.

Probably best to take the £4k DB then then take up to residual LTA from the £200k SIPP. Leave the rest uncrystallised until 75 or LTA abolition if sooner (unlikely).

Note that the DB has a high GMP element revaluing at 7.5% (joined 1989 and deferred in 1993) and if not taken early will exceed remaining LTA quickly due to the revaluation of the GMP and unwind of the early retirement factor (3% pa simple allowing for months). Indeed the early retirement pension at 56 is pretty much the revalued post 1988 GMP at 65 (about £20 pa higher) so only a nominal PCLS is available with a slightly reduced pension (exactly the reavalued GMP).

I'd agree with crystallising the remaining DB first so that taking it doesn't trigger any LTA excess charge since it has such a large revaluation and it is much messier dealing with the excess charge with a DB. However unless the LTA is abolished (or dramatically increased eg back up to £1.8 million) you would still be hit with a large excess charge at age 75 for the uncrystallised remaining pot so it would be better to crystallise that immediately after the DB pot so that the growth can be removed before you reach 75 thus minimising the total LTA excess charge.

[Myfyr]

From the OP

SIPP 1 £490,000 (crystallised) invested in Investment Trusts
SIPP 2 £150,000 (uncrystallised and taken as 75% of true value as exceeds LTA, at least in part) invested in global equity funds
Defined benefit 1 = £7,500 currently in payment
Defined benefit 2 = £4,000 payable from age 60

LTA used up from SIPP 1 and DB 1 = 90% exactly (deliberately exact) so 10% LTA remains which will mostly be used up by DB 2

His total pensions already exceed the LTA* so the last thing he needs is to use UFPLS which would capture further growth and increase the LTA excess charges. Much better to use flexi-access and crystallise the SIPPs so that growth after crystallisation can be removed without increasing the LTA excess amount.

* Though adding the figures up

(7500 + 4000) x 20 + 490000 + 4/3*(150000) = 230000 + 490000 + 200000 = 9200000

suggests he does have a little leeway at the moment. However it still suggests it is better not to use UFPLS since it is so close to the LTA that average growth would be expected to take it over by age 75 even with the LTA limit increasing by CPI.

The £490k SIPP has been crystallised and about £185k PCLS was taken and not included in tne figures shown.

Exactly 90% LTA crystallised in the last tax year (90% of £1.055m exactly, deliberately so to make figures easy) with about 30% LTA left so total 120% LTA.

90% LTA crystallised
Remaining is £4,000 pa so 7% LTA approx.
Leaves 3% LTA (as good as nil really) but has an uncrystallised SIPP of about £200k (20% LTA) which is £150k after PCLS or LTA charge.

Probably best to take the £4k DB then then take up to residual LTA from the £200k SIPP. Leave the rest uncrystallised until 75 or LTA abolition if sooner (unlikely).

Note that the DB has a high GMP element revaluing at 7.5% (joined 1989 and deferred in 1993) and if not taken early will exceed remaining LTA quickly due to the revaluation of the GMP and unwind of the early retirement factor (3% pa simple allowing for months). Indeed the early retirement pension at 56 is pretty much the revalued post 1988 GMP at 65 (about £20 pa higher) so only a nominal PCLS is available with a slightly reduced pension (exactly the reavalued GMP).

I'd agree with crystallising the remaining DB first so that taking it doesn't trigger any LTA excess charge since it has such a large revaluation and it is much messier dealing with the excess charge with a DB. However unless the LTA is abolished (or dramatically increased eg back up to £1.8 million) you would still be hit with a large excess charge at age 75 for the uncrystallised remaining pot so it would be better to crystallise that immediately after the DB pot so that the growth can be removed before you reach 75 thus minimising the total LTA excess charge.

A small pot of £10k uses zero LTA.

He has taken one small pot of exactly £10k and can take two more which will give an extra £5k PCLS and reduces the LTA charge by the same amount. A well known provider, ahem, will create an artificial small pot of exactly £10k to facilitate this.so rhat is just under 1% LTA saved for each small pot taken.

[ursaminortaur]

The £490k SIPP has been crystallised and about £185k PCLS was taken and not included in tne figures shown.

Exactly 90% LTA crystallised in the last tax year (90% of £1.055m exactly, deliberately so to make figures easy) with about 30% LTA left so total 120% LTA.

90% LTA crystallised
Remaining is £4,000 pa so 7% LTA approx.
Leaves 3% LTA (as good as nil really) but has an uncrystallised SIPP of about £200k (20% LTA) which is £150k after PCLS or LTA charge.

Probably best to take the £4k DB then then take up to residual LTA from the £200k SIPP. Leave the rest uncrystallised until 75 or LTA abolition if sooner (unlikely).

Note that the DB has a high GMP element revaluing at 7.5% (joined 1989 and deferred in 1993) and if not taken early will exceed remaining LTA quickly due to the revaluation of the GMP and unwind of the early retirement factor (3% pa simple allowing for months). Indeed the early retirement pension at 56 is pretty much the revalued post 1988 GMP at 65 (about £20 pa higher) so only a nominal PCLS is available with a slightly reduced pension (exactly the reavalued GMP).

I'd agree with crystallising the remaining DB first so that taking it doesn't trigger any LTA excess charge since it has such a large revaluation and it is much messier dealing with the excess charge with a DB. However unless the LTA is abolished (or dramatically increased eg back up to £1.8 million) you would still be hit with a large excess charge at age 75 for the uncrystallised remaining pot so it would be better to crystallise that immediately after the DB pot so that the growth can be removed before you reach 75 thus minimising the total LTA excess charge.

A small pot of £10k uses zero LTA.

He has taken one small pot of exactly £10k and can take two more which will give an extra £5k PCLS and reduces the LTA charge by the same amount. A well known provider, ahem, will create an artificial small pot of exactly £10k to facilitate this.so rhat is just under 1% LTA saved for each small pot taken.

OK that should work since he doesn't have any protections.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/small-pots-defined-benefit-trivial-commutations/#

If a member has funds in excess of the limit in an existing single arrangement, some of which are then moved into arrangements set up to allow a member to take one, two or three small lump sum payments under Regulation 11A, this will entail the setting up of one or more new arrangements. This could potentially have consequences if the member has valid enhanced protection or any of the fixed protections (i.e. the protection would be lost).