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Retire early ,optimum route to zero/lowest tax and earliest date.


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I thought it might be useful to start a retire early thread to look at and compare the simple ways to structure ISAs,pensions,cash etc to achieve early retirement.Given the movement from government on pension ages both state and private the interaction will become even more crucial.I also think government will merge NI with income tax at some point,so any pension income above the tax allowance will start to be hit with 12% NI on top of tax (or maybe a lower NI rate above pension age,say 6%).

So for myself im 49 and retired,sort of.I keep taking jobs if i fancy them,and i might do that again,or i might not.I can access my SIPP at 55 (so far) and expecting state pension at 68.

So my main concerns are around pension and ISA.

My plans so far are these.

Between now and 55 live off cash savings,dividends etc with capital sales if needed.Income £10k a year,maybe £12k .So i only need £60k to £72k to cover me from now until 55

At 55 two choices.Take out the full 25% tax free sum and then £12500 from my SIPP,re-invest the 25% over the years into my ISA and add those dividends to the £12500,all tax free.Or take one off lump sums (UFPLS) each year of £16,650 meaning your tax free allowance and your 25% tax free element.At that point stop taking dividends from ISA and let compound again up to 67,(i think i like this route others thoughts welcomed)

At 67 then have to go into full draw down and take out the full 25% tax free.Again re-invest that,or leave as cash whatever.

At 68 state pension of £9110 so then £3390 from your SIPP for the tax allowance,the rest to remain tax free will need to come from the ISA.From then to 75 if extra capital was needed better to draw down from ISA and leave pension capital.

At 75 choices.Tax free inheritance age now gone,so it could make no difference to take out extra pension and pay tax,or maybe not.

In theory with a full state pension at 68 you only need £3390 x 20 to draw down from the pension to last you until 88.

ISA remains tax free at all times so needs to make up any extra anyone wants over £12.5k to keep out of tax.

Im basing this on being mortgage free,and know others will need to look at extra etc,and others might want a bigger income.

I think my main concern is the ratio of assets in SIPP/ISA

 

 

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4 minutes ago, Sasquatch said:

Good topic DB. Very high up my list of things to do/plan for. Will definitely contribute to this thread in due course.

For me the big thing is the interaction with ISAs.I dont want to pay any tax,legal of course.I also would prefer to have an income of that £16650 tax free as its well enough.Give once state pension kicks in there is only £3390 allowance left,then from State pension age i need much less from my SIPP,but the option of more from my ISA.So far i think the best path is take £16650 from 55 to 67 from SIPP all tax free,and at 55 allow all dividends etc in ISAs to compound again until 68.At 67 take the full 25% tax free cash and put the pension into full drawdown but only take that £3390,the rest from ISAs.

Any change in rules though could really slam you.However i think the main risks are around NI being added,and age being pushed back.

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45 minutes ago, Bobthebuilder said:

I am 50. Wound my work down to part time over the last 2 years, self employed.Using a Sipp, ISAS and cash for the moment. I want to put more cash to work really but unsure where to go.

Will follow this thread with interest .

Part time is also something to consider,especially for someone with a lower SIPP,but maybe higher ISA.Its important i think to use that £12.5k tax free allowance fully.

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8 hours ago, DurhamBorn said:

Part time is also something to consider,especially for someone with a lower SIPP,but maybe higher ISA.Its important i think to use that £12.5k tax free allowance fully.

Yes I’ve been on a 3 day week for the last few weeks and I think that makes a huge difference to quality of life - 3 days working 4 days off - and might be a more realistic milestone to aim for by 50 (Or younger!) for a lot of folk. 

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8 minutes ago, JoeDavola said:

Yes I’ve been on a 3 day week for the last few weeks and I think that makes a huge difference to quality of life - 3 days working 4 days off - and might be a more realistic milestone to aim for by 50 (Or younger!) for a lot of folk. 

I agree and can make things much more flexible and a safer way for a lot of people.Even working those 16 hour jobs on minimum wage once mortgage free means its much easier.

Say £150 wages,

£130 income from ISA dividends/slow draw down.

At 55 take the extra from a SIPP up to the tax allowance.

The other option there of course is also to take full time jobs,but only until tax allowance each year.

The different routes need different investment set ups though,hence this thread.

I think you part time work option would likely mean more in an ISA than a SIPP,but its close,and again shows i think that the SIPP/ISA interaction is key.

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It's a difficult area and the rules keep changing and are likely to change again in the next twelve years which is my action point.

Ideally I want my DCs emptied into my SIPP and my SIPP emptied into my ISA prior to taking the DBs at the rate, following the initial 25% freebie, that I can keep within the 20% band and so offset that tax via VCT or whatever product is then available.

This means working back from 65 to see when I have to start this process so that at 65 my SIPP is empty, DBs kick in, and cash sits in ISA or VCTs which I can tip into ISAs at £20k pa.  Balance sitting in PMs or house. Then whole lot into a nice house as and when one comes up at a price which I regard as value. 

That's the plan but I don't think I'll be allowed to empty my SIPP at the desired rate so it will be a long drawn out process of taking the max out each year to run it down; meaning that I will have to trigger my retirement event earlier to have a decent amount out by the time I want to spend it.

Hopefully there will be a sensible revision of the rules between then and now so that if you can demonstrate either a set capital level or income level excluding the SIPP then you can take the whole SIPP out in one go if you wish; bearing in mind that it will be subject to taxation.   

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15 hours ago, DurhamBorn said:

For me the big thing is the interaction with ISAs.I dont want to pay any tax,legal of course.I also would prefer to have an income of that £16650 tax free as its well enough.Give once state pension kicks in there is only £3390 allowance left,then from State pension age i need much less from my SIPP,but the option of more from my ISA.So far i think the best path is take £16650 from 55 to 67 from SIPP all tax free,and at 55 allow all dividends etc in ISAs to compound again until 68.At 67 take the full 25% tax free cash and put the pension into full drawdown but only take that £3390,the rest from ISAs.

Any change in rules though could really slam you.However i think the main risks are around NI being added,and age being pushed back.

Are you sure that £16650 will be enough to cover your council tax? What about money for food etc.?

I could access my SIPP now and shift it into my ISA. While the SIPP is free of inheritance tax until age 75, I'm inclined to leave it there.

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1 hour ago, Democorruptcy said:

Are you sure that £16650 will be enough to cover your council tax? What about money for food etc.?

I could live on that easy,i probably live on less than that at the moment. All the usual stuff of course, home cooked food, less meat, doing my own work to the house etc, etc. It has to be said, It is all much easier if you are mortgage free. I spent the last ten years with that as my priority and got the mortgage paid off asap.

SIPPs still look good to me, even if its just for the tax relief but, i can see the problem with getting it back out tax wise.

If i can i plan to keep doing my work part time for at least another ten years yet (60) and not touch anything until then.

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2 hours ago, Democorruptcy said:

Are you sure that £16650 will be enough to cover your council tax? What about money for food etc.?

I could access my SIPP now and shift it into my ISA. While the SIPP is free of inheritance tax until age 75, I'm inclined to leave it there.

Council tax is a problem food isnt.£35 a week between two at the moment.That interaction between SIPP and ISA and tax allowances are the key for me.

 

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5 hours ago, Frank Hovis said:

It's a difficult area and the rules keep changing and are likely to change again in the next twelve years which is my action point.

Ideally I want my DCs emptied into my SIPP and my SIPP emptied into my ISA prior to taking the DBs at the rate, following the initial 25% freebie, that I can keep within the 20% band and so offset that tax via VCT or whatever product is then available.

This means working back from 65 to see when I have to start this process so that at 65 my SIPP is empty, DBs kick in, and cash sits in ISA or VCTs which I can tip into ISAs at £20k pa.  Balance sitting in PMs or house. Then whole lot into a nice house as and when one comes up at a price which I regard as value. 

That's the plan but I don't think I'll be allowed to empty my SIPP at the desired rate so it will be a long drawn out process of taking the max out each year to run it down; meaning that I will have to trigger my retirement event earlier to have a decent amount out by the time I want to spend it.

Hopefully there will be a sensible revision of the rules between then and now so that if you can demonstrate either a set capital level or income level excluding the SIPP then you can take the whole SIPP out in one go if you wish; bearing in mind that it will be subject to taxation.   

You can take all the SIPP now,the rules where you could only withdraw so much have gone with pension freedoms.

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1 minute ago, DurhamBorn said:

Council tax is a problem food isnt.£35 a week between two at the moment.That interaction between SIPP and ISA and tax allowances are the key for me.

 

I was just exaggerating because I know you don't like council tax. I think it will get more add ons. We already have a Social Care payment which is bound to go up but if they think of some more they can increase the bill in total. I dread to think how much it will be in 10 years. 

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We have an old financial planner on an excel spreadsheet. Not used it much recently but prompted by this topic I've updated it today. Current average monthly outgoing excluding ad hoc holidays is £4,300. Of this £1,500 is mortgage (7 years left) and £800 university support for our children (only a couple more years thank god). Therefore this suggests that we could live comfortably on a nett monthly income after tax of £2,000 or £24,000 yearly once we are mortgage/university free. On top of this would be ad hoc big ticket spends such as a replacement car or a holiday. Bit more than DB's £16,650 but I'm sure we could trim a little if necessary. I probably need to invest in a pizza oven and stop drinking expensive whisky.

Of course, one needs to have a house fully paid for and in good low maintenance order. That's pretty crucial.

Pretty sure that I can make a decent bit of pocket money from dabbling with selling on ebay. Been doing this on and off for 20 years. It's amazing what people will buy! 

I'll work for another 5 years, easing down from full time to part time. Currently 53 so hopefully full retirement by 58. Mrs S is 3 years younger and therefore up on the deal.

Not yet sure about my SIPP in terms of whether I take 25% tax free when 55. I probably won't as I won't need it unless to plug the gap on capital spend on a house purchase (planned in the next 12 months or so). 

No current thoughts regarding our ISAs. I'm pretty much fully invested and waiting for the cycle to play out.

The big unknown is income from our business. Forward income is looking okish but it's really shaky out there and I can see a huge drop in confidence with some of our clients. Are they pausing or cancelling? That's the $64,000 question. If our income drops a lot over the next 5 years it will affect our retirement timescales or mean we need to scale back somewhere. 

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13 minutes ago, DurhamBorn said:

You can take all the SIPP now,the rules where you could only withdraw so much have gone with pension freedoms.

 

'Kinell I missed that change.  When did that happen?

This page from HL does say you can take the whole lot in one go.

And it's saying 25% of each drawing will be tax free.

Well as I intend to take out to the top of the 20% band - £50k - then I can take out £66k each year; £16k doesn't count as income, £12k is personal allowance, leaving £22k at 20% which I can offset by putting £15k in a VCT at 30% tax relief.

That's £35k in cash of which £20k will go into an ISA, £15k in a VCT, and no tax paid. Result.

And as that works nicely I'll also tip my DCs into that as well so that I can control the income and keep it below the 40% band whilst emptying the SIPP. 

 

 

Quote

 

How taking a lump sum works

Taking a lump sum is a flexible way to take money from your pension. It allows you to withdraw your entire pension in one go, or a bit at a time.

Each time you take a lump sum, usually 25% of that withdrawal will be tax free. The rest would be taxed as income. You can decide how to invest anything you don’t take, and you’ll be free to take more lump sums in the future if you want to.

For example, if you had a £100,000 pension and withdrew £20,000, usually £5,000 of your withdrawal would be tax free. The rest (£15,000) would be taxed as income. You’d choose how to invest the remaining £80,000.

 

 

https://www.hl.co.uk/retirement/ufpls

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18 minutes ago, Democorruptcy said:

I was just exaggerating because I know you don't like council tax. I think it will get more add ons. We already have a Social Care payment which is bound to go up but if they think of some more they can increase the bill in total. I dread to think how much it will be in 10 years. 

It is a big problem and at the level now where compounding really hurts.I found a good way to get around it though,my partner is a Nurse working for the council so is building up a final salary pension that goes to me if she goes before me.plus if i go first she will do the caring of me,iv covered as much as i can xD

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@Sasquatch have to add my £16650 is just me,my partner has final salary pension from NHS and Council,a house rented out paid for,another final salary pension shel transfer and draw down from 60 to 68 and ISAs etc.

I actually need £12000 a year,i base £16650 if i wasnt getting anything from her towards the bills.

I think we would be about the same as you together in that £2000 a month would easily be enough.

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5 hours ago, DurhamBorn said:

@Sasquatch have to add my £16650 is just me,my partner has final salary pension from NHS and Council,a house rented out paid for,another final salary pension shel transfer and draw down from 60 to 68 and ISAs etc.

I actually need £12000 a year,i base £16650 if i wasnt getting anything from her towards the bills.

I think we would be about the same as you together in that £2000 a month would easily be enough.

I threw a spreadsheet together to play with changes to drawdown figures, income, inflation, the effect of one-off income (might be 25% lump sum) etc.

The effect of inflation really drives a drawdown figure up and if income trails it, then it's not a pretty sight!

 

Amortisation.jpg

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13 hours ago, Democorruptcy said:

I threw a spreadsheet together to play with changes to drawdown figures, income, inflation, the effect of one-off income (might be 25% lump sum) etc.

The effect of inflation really drives a drawdown figure up and if income trails it, then it's not a pretty sight!

 

Amortisation.jpg

Yes inflation is the killer.For myself my state pension pretty much covers everything i spend and thats inflation protected and will remain so.The rest you need inflation protection as much as you can.I think the 20/80 type portfolios Financial advisors put people into near/at drawdown will prove a disaster,especially when you add in roughly 2% fees a year.

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Great thread. Thanks for starting. I'm nearly 52. My main retirement income will be my DB pension from Exxon. I can take this at 55, albeit with a discount. There is about 650k in this pot. I'm still banging AVCs into this.

Both me and my wife have s/s ISAS which I am trying to develop into reflation portfolios.

My wife has a teacher's pension which will provide some income at 67. She is already effectively retired, and will not go back to teaching when we get back to the UK. 

The best part is that my house is already paid for. 

I will continue to work FT until I am 55, and reassess 

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29 minutes ago, Popuplights said:

Great thread. Thanks for starting. I'm nearly 52. My main retirement income will be my DB pension from Exxon. I can take this at 55, albeit with a discount. There is about 650k in this pot. I'm still banging AVCs into this.

Both me and my wife have s/s ISAS which I am trying to develop into reflation portfolios.

My wife has a teacher's pension which will provide some income at 67. She is already effectively retired, and will not go back to teaching when we get back to the UK. 

The best part is that my house is already paid for. 

I will continue to work FT until I am 55, and reassess 

Is the pension money purchase or final salary?,i agree paid for house is crucial for most people in when to retire planning.

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