Back of Fag Packet calculations - Is my logic sound?

[Merkinglue]

I've just turned 60 and I'm recovering from my first COVID infection which hit me hard.
Being ill has given me time to re-assess my position. It also scared me into thinking I want to enjoy my retirement whilst I'm fit enough to do so.

I'm divorced, own the property I live in outright, no mortgage.
One son (21 year old at uni).

I've an interest in 2 BTL properties which generate £6k per year after tax. My share of the equity in these is about £150k if they were sold mortgages paid off and CGT paid. (My ROI calculation meaning they generate 4% per annum ignoring capital growth, 6/150)

I have the remains (post divorce land grab) of a final salary pension which kicks in at 65 which is predicted to give £16k per year.

Full state pension entitlement which will kick in at 67.

I have a SIPP which currently has £200k in it and £50k shielded by ISA wrappers.

My finances for the last few years show I can have a very comfortable retirement on £25k to £30k per annum.

If I were to retire now (3 months notice required) I'd need to bridge the gap until 65, so 4.5 years.

My thinking is to withdraw £12.5k per year from the SIPP as a tax free lump, £6.5k a year as income to stay below tax threshold, £6k per year from BTL giving me the £25k per year.

This would leave £100k in the SIPP at 65 (again assuming no capital growth)

The £50k in the ISA would be my emergency fund.

Do these crude calculations look OK?

Am I missing anything obvious in my logic?

[DrFfybes]

A couple of things - The £6k from your BTL is after tax, so that would increase under your original plan. The risk is the mortgage rates going up, tenancy voids, etc.

Can you take your pension early with a reduction? - you'd probably lose 15-20% but you'd have about £13k pa now so be circa £50k+ in 'credit' before age 65 and in your 80s before the breakeven point. Add in your £6k from BTL and you only need to crystalise £24kpa from your SIPP to get another £6kpa tax free taking you to your £25k target income.

Paul

[scrumpyjack]

A couple of things - The £6k from your BTL is after tax, so that would increase under your original plan. The risk is the mortgage rates going up, tenancy voids, etc.

Can you take your pension early with a reduction? - you'd probably lose 15-20% but you'd have about £13k pa now so be circa £50k+ in 'credit' before age 65 and in your 80s before the breakeven point. Add in your £6k from BTL and you only need to crystalise £24kpa from your SIPP to get another £6kpa tax free taking you to your £25k target income.

Paul

Personally I would be very reluctant to give up any of the (presumably) inflation protected pension rather than use up some of the SIPP but that is obviously a matter for personal preference. The certainty of an inflation protected income for as long as you live is a reassurance not to be diluted without very very careful thought.

[tacpot12]

You haven't mentioned inflation, but with the numbers you have mentioned you would be able to draw a bit more out in two to three years time and still have £100K left in the SIPP. (£12.5k tax free plus £6.5k tax = £19k per year x 4.5 years = £85.5k).

You would only have £50K of tax free cash, which would be all used up by the end of year 4, so would be paying tax on another £6k or so in the fifth year, but this would still leave the SIPP at around £100K, even if you drew out a little more.

In the period between 65 and 67, you would have the BTL income + £16K from the pension (which will probably be index linked to some degree), so you would still need £3k pa from your SIPP and this would be taxable.

After the age of 67 all your pension and BTL income will be taxable with just the personal allowance to mitigate against tax, but you won't need to draw anything from your SIPP. You might even continue to invest via an ISA if your state pension, personal pension and BTL income are in excess of what you need to cover your living expenses.

Is your DB pension fully index linked, or is the index linking capped? This could have a inpact over time, but hopefully you would not draw on your SIPP after 67.

I think your plan looks viable. It's not got a lot of slack in it, but I think it has enough to be safe, providing your DB pension is substantially protected against inflation.

[DrFfybes]

Can you take your pension early with a reduction?

Personally I would be very reluctant to give up any of the (presumably) inflation protected pension rather than use up some of the SIPP but that is obviously a matter for personal preference. The certainty of an inflation protected income for as long as you live is a reassurance not to be diluted without very very careful thought.

It does require some thought. Taking mine 10.5 years early and losing about a third the breakeven was age 86, after that I'm worse off, if I last that long. However the swing for me is that at 65 I have another couple of small university schemes that will pay £3-4k, which added to the SP puts me about at the personal allowance. So whilst I'd get (say) £10k by waiting rather than £6.5k now, I'd actually only see £8k of it in my pocket after tax if I waited, whereas at the moment I pay no tax on it. As the OP will get a lot of the rest of their income from taxable sources then this doesn't apply to the same extent.

Also from age 86 on I'm unlikely to want to be spending it on motorcycling weekends away, as I do now

Paul

[TUK020]

I think you have a pretty good grasp of the basics.
A bigger issue is having the flexibility to cope with the uncertainties of life.
What are the unknown unknowns?
- when will you son need help to get started on the property ladder?
- how would you support unplanned imminent arrival of a grandchild?
- what happens if you have major medical issues that require care support?
You at least have the flexibility to liquidate a BTL or two.
The other big one is: What will you do with yourself?

tuk020
(nearly 2 years retired, and well into dabbling with all sorts of other activities)

[Merkinglue]

Thanks folks.

Glad there are no obvious bloopers in there.

As for "What will I do with myself?"

First objective is Camino de Santiago. A wee walk to decompress from working life and start retirement on my best foot. (Pun intended)

Check out The Way with Martin Sheen if you've never heard of it.