Author Topic: Balancing pensions/SIPPs (etc) and ISAs (etc)  (Read 4208 times)

sea_saw

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Balancing pensions/SIPPs (etc) and ISAs (etc)
« on: July 03, 2018, 06:40:52 AM »
People who have this figured out, please explain :)

I understand if you were going to retire at 30 and live off your stash for decades before any workplace pensions / SIPPs / state pension kicked in, you'd need to have at least 25x times your expenses (or whatever multiplier you're comfortable with) so you could live off the returns indefinitely while the stash continues to grow enough to cover inflation.

On the other hand, if you were going to leave work 1 year before starting to take your pension, you wouldn't worry about that. You'd just keep enough around in savings to cover yourself for that period.

What happens for middling periods, like 5 years, 10 years, 15? Obviously personal circumstances and risk tolerances vary, but are there any generally accepted thresholds or principles?

As an illustration, my very very back-of-the-envelope, for-fun calculations have me reaching FI at 55. But if I keep contributing to my workplace pension until that age, then at 60-65ish I'll start getting a firehose of income which, while I'm sure I could find ways to enjoy, I'd previously classed as unnecessary Ė and sitting on a stash much larger than I now need to support myself. All seems a bit inefficient. Should hypothetical-me have actually quit her job 5 years earlier, with the understanding that it's okay to use some of the stash up instead of growing it?

How do you all calculate this stuff? If it was a fixed interest rate I could see how to model it, but I assume the wobbly returns of the market make you vulnerable to snowballing in the wrong direction and running out.

cerat0n1a

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #1 on: July 03, 2018, 07:05:29 AM »
I haven't done anything other than "back of the envelope" calculations (and my last monthly salary is now imminent) on the basis that I don't think a fixed 4% annual withdrawal accurately reflects my likely spending (some things like house maintenance, new cars etc. are inherently lumpy and have some scope for being delayed) and future stock market returns are equally unpredictable.

Broadly though, I aimed to get net worth excluding home above 25x expected annual spend. Getting there using pension savings is obviously much faster because as a higher rate taxpayer, I can choose to save say £10k in my pension or £6k outside my pension (pension contribution limits notwithstanding) and in fact it's even better than that because of the 12.8% NI uplift due to salary sacrifice.

So then, I simply take the number of years between my ER age and the age I can access my DC pension. That's the minimum amount I need in non-pension savings. So if I stop work at 45 and can access the pension at 55, then I need *at least* 10 years worth of spending money outside the pension within the total stash. If the income level is going to put you into the position of paying income tax on your pension when you start to withdraw, you need to take that into account too. As it turns out, I have more outside than the pension than I probably really needed, so could have got here faster if I'd contributed more aggressively in the past.

I've seen other people take a more nuanced view, using spreadsheets - I need n years of £X in ISAs and taxable accounts to take me from RE age to 55 (or 57 for younger people), then £Y from pension to take me from 55/57 to 67, then £Z from pension from 67+ to take into account state pension etc.

I'd also say that even if you're FI and don't "need" the money, it's still worth having any employer contributions associated with a pension. And, in particular, I think even if you intend to RE in your 30s (for example) and need all of your stash to be outside the pension, I still think you should contribute to the workplace pension and get the employer contribution and tax benefits.
« Last Edit: July 03, 2018, 07:09:12 AM by cerat0n1a »

cerat0n1a

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #2 on: July 03, 2018, 07:07:51 AM »
There was a useful discussion of this here:

https://the7circles.uk/savings-rate-four-pot-solution/

but it now seems to be behind a paywall.

dashuk

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #3 on: July 03, 2018, 09:45:07 AM »
Glad others are wrestling with a similar conundrum.

Probably in that middle ground. Although I think even if you were going to retire at 30 the same questions apply, because someone in a position to do that probably has a pretty good employer pension match available to them, and may also be a higher rate taxpayer as @cerat0n1a points out.

Currently mid-30s. On track to hit our 25x number including pensions at about 43yo. I'm assuming private pension age will probably be 60 by the time we get there, so maybe 17 year gap.  If we waited to have 25x in accessible ISA, it might mean working until about 51yo, then effectively doubling our income nine years later. By ~43, there will be enough in pensions that, left alone for 15 years or so, will probably be enough to completely fund us from 60 onwards.

So yeah, optimum RE point would result in almost running out of money at 59yo (and thus very vulnerable to, say, a market crash at 57/58).

TLDR: Everything above is basically "me too"

My current plan is basically the same as @cerat0n1a - 25x including pensions, excluding house, then think about whether there's enough accessible to get to pension age.

I just keep thinking of the MMM Confidence vs Money post. I think there's quite a few safety factors built in for me:

- Conservative growth projections.

- Assuming no earnings post-FIRE. If nothing else, there's always B&Q. Our expenses are such that one full-time minimum wage job would just about cover them, leaving time for 'stache recovery.

- Will be empty-nested by the time we hit the 'cashflow-critical' few years, so permanent or temporary downsizing is always an option.

- Our inaccessible 'stache includes a couple of years of two person full LISA subscription as well as pensions. I doubt we'll put any more into the LISAs, but that would be accessible in an emergency, and might cover a year or two of expenses even after losing the withdrawal penalty.

We're a long way out, so plenty of time for confidence to ebb and flow.

cerat0n1a

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #4 on: July 03, 2018, 10:16:02 AM »
- Will be empty-nested by the time we hit the 'cashflow-critical' few years, so permanent or temporary downsizing is always an option.

Yes, that's one of our safety factors. We'll be empty nested next year, so downsizing/moving away from HCOL location is always an option. I knew there was a good reason to have children in my twenties rather than later  ;-)

sea_saw

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #5 on: July 03, 2018, 10:18:05 AM »
Thanks cerat0n1a, that's super helpful.

And thanks dashuk, helpful to see another illustration. I had very similar numbers coming to working until 50s to get 25x in my ISA then my income doubling once my pension arrives. I knew it couldnít be right!

I'm only thinking very broadly as well, I don't have a particularly accurate picture of what my life will look like in 20 years (including like, children y/n?), which makes all calculations pretty much nonsense. Luckily no controversy on what I actually need to be doing I don't think - I'm a DB workplace pension, can't increase my contributions there, and am a basic rate taxpayer, so saving what I can into an ISA makes sense to me for now. I'm just trying to get a big-picture feeling for what's sensible to aim for outside the workplace pension.

cerat0n1a, hearing that you'd hold N years' expenses + a buffer to get you through N years is very heartening, and buys hypothetical-me about five fewer years in the workplace. Is it just a question of asset allocation then, depending on whether n = 5 or  10 or 15 years?

I also hadn't fully internalised that I could take my pension from age 55 (by current rules)... from my statements for my current workplace pension, that looks like a fairly bad deal, I'd have to die quite young for it to come out ahead. Which is why I assumed I had to cover myself until age 65 outside of pensions. But of course I might go through other employers over the years.

cerat0n1a

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #6 on: July 03, 2018, 11:52:49 AM »
cerat0n1a, hearing that you'd hold N years' expenses + a buffer to get you through N years is very heartening, and buys hypothetical-me about five fewer years in the workplace. Is it just a question of asset allocation then, depending on whether n = 5 or  10 or 15 years?

Well bear in mind that I am the antithesis of the spreadsheet approach to this, and that I've certainly worked longer than I needed to. So my analysis is essentially that it feels like we have more than we'll need. Partly this is because I don't really know how much our annual spend minus expensive teenagers will be and because of the realistic back-up plans of being able to extract at least 10x annual spend by downsizing our house, if necessary, or to pick up some occasional work. And of course, the emotional effects of spending ISA savings on living costs are yet to be seen.

In my case, there is no DB pension - just a DC pension + ISAs and stuff outside tax shelters. So no need to think about actuarial considerations about taking things early and lifespan. I think the minimum access age for pensions rises to 57 in 2028.  If I did have DB pensions kicking at a certain age, and/or lifetime ISAs, I might want to model it a bit more closely as the various dates approach.

RetirementInvestingToday

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #7 on: July 03, 2018, 12:55:27 PM »
I'm just a few months away from full FIRE having already given my notice.  I'm 45.

Firstly, in my calculations I assume no State Pension.

Secondly, I'm assuming I won't get access to my Private Pension until I'm 60 which is 5 years above my current access age.  Government has a habit of changing the rules and they've shown their hand a couple of times on access age in recent years.

I then check two things:
- Total wealth must enable a 2.5% withdrawal rate + expected annual investment expenses of 0.2%
- Then to determine the amount of wealth required outside of private pension wrappers I use cFIREsim (knowing that it's US based backtesting tool) but use a duration of 15 years to investigate potential worse case sequence of returns.  I want a worst case number > £0.

That means I currently have 56% of wealth outside of pension wrappers and 44% within.

never give up

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #8 on: July 03, 2018, 04:15:29 PM »
Iím assuming I wonít be able to access my work pension until 60. Iím also not counting the State Pension but assume Iíll get something, and so it essentially just acts as a safety net. Iím 41 now. Iím aiming for 25x in my pension.

I havenít a clue how 25x should work for the pre-60 period so Iím aiming to have 10x expenses by 50 plus a bit more to cover house/car expenses I.e. the expensive lumpy stuff cerat0n1a mentioned. Any growth again provides a safety net. I will also have 4-5 years worth outside of stocks as I donít need to beat inflation with this pot,or even to sustain it, just enough to get through to 60.

I also have three budgets. I base my FIRE numbers on the highest one so can cut back in times of expensive house repairs or plummeting markets.

The longer I can remain in my current job and the more I can put up with the corporate world plus reasonable market performance can bring the 50 retirement age earlier.

Playing with Fire UK

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #9 on: July 04, 2018, 01:24:31 AM »
I like the articles by the Finance Zombie on the bridge to early retirement.

I'm on the side of building big spreadsheets and playing around with how much I can cannibalise the pre-pension cash without getting to 54 and being a vagrant with a huge pension pot I can't spend. I also like the idea of remortgaging so I can spend my pension cash before the private pension access age. My focus is stopping work sooner rather than later, and I'm willing to take some risk to save a couple of years' work.

PhilB

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #10 on: July 04, 2018, 06:08:18 AM »
The only real way to do it is by burying yourself in spreadsheets and doing loads of sensitivity analysis.  I have one set of spreadsheets showing the various income streams and expected investment returns that I used to let me calculate how much I needed to accumulate to get the income I needed.  I then used those as the starting point to do cashflow and tax optimisation spreadsheets to know what I had to hold outside pensions (not too much in my case as I'm retiring at 52).   With a complex situation with DC funds becoming available at 55, DBs at 63 and 65 and SPs at 66, maturing investments, etc it really is the only way to go.  I still have the challenge of spreadsheeting how to get money from of DC lump sums and drawdown sheltered into S&S ISAs but that can wait until I've retired!
If you are budgeting for a 10 year gap before pension access then you could say 10 years spending outside the pension, or even be more aggressive and say 9 years and hope that above-inflation investment returns gives you the 10th year, but it's probably not that sensible to be holding very volatile investments in a situation like that!
My safety blanket is a fully offset offset mortgage.  If I suddenly had big unexpected expenses before I could get at the DC pension money then I'd just draw down on the mortgage and pay it off from the TFLS.  If I had the pension allowance left and was retiring earlier I would almost certainly have deliberately planned to live off mortgage money for a few years as HRT pension relief is too good to pass up.  If you run multiple current accounts and shuffle the money around by DD each month your mortgage provider shouldn't ever notice that you don't have a job any more!

dashuk

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #11 on: July 04, 2018, 06:36:54 AM »
I'm a bit wary of being able to predict, from a couple of decades out, what the willingness of banks to give a mortgage to someone who hasn't had a job for a decade might be.

Obviously that's less of an issue if you're within a few years, and a non-issue if you've already got it agreed.

PhilB

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #12 on: July 04, 2018, 09:21:30 AM »
I'm a bit wary of being able to predict, from a couple of decades out, what the willingness of banks to give a mortgage to someone who hasn't had a job for a decade might be.

Obviously that's less of an issue if you're within a few years, and a non-issue if you've already got it agreed.
The idea is that you take the mortgage out well BEFORE you hand in your notice.  That lets you live on borrowed money for some of the period pre-pension access, secure in the knowledge that the tax benefits from the pension more than outweigh the interest you pay.

skip207

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #13 on: July 04, 2018, 11:33:54 AM »
My ideal will be to have roughly the same in my SIPP, ISAs and in property when I FIRE.
I will use the SWR on the ISAs and property will generate an income.  Hopefully that will be enough to tide me over till SIPP age. (15 years between FIRE and SIPP).  The when I am getting closer to SIPP age, maybe early 50s I will start to ramp up the WR from the ISAs as the risk of failure will be much less.  Then once the SIPP kicks in probably look to liquidate the property.

dashuk

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #14 on: July 04, 2018, 12:14:50 PM »
I'm a bit wary of being able to predict, from a couple of decades out, what the willingness of banks to give a mortgage to someone who hasn't had a job for a decade might be.

Obviously that's less of an issue if you're within a few years, and a non-issue if you've already got it agreed.
The idea is that you take the mortgage out well BEFORE you hand in your notice.  That lets you live on borrowed money for some of the period pre-pension access, secure in the knowledge that the tax benefits from the pension more than outweigh the interest you pay.

I can see the benefits of that if you're a higher rate taxpayer say 8-10 years out from pension access age, planning to retire say 4-5 years out and looking to give your pension pot a massive boost with your last few years earnings.

I'm wondering about the risks and opportunity costs of holding one for the best part of 20 years, either planning to draw down throughout, or holding as a contingency to cover the last couple of years if your non-pension investments fall short.

Because unless you do hold one for that length of time then you are in the position of having to try and secure one with very little in the bank and a long time since you were last paid.

PhilB

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #15 on: July 04, 2018, 03:43:24 PM »
That's where an offset mortgage really scores.  If your house is paid off and you're still working, just take out an interest only offset mortgage and put the cash into a bank account with the same provider - zero interest to pay, but the cash is there if money gets tight in the last year's before pension access age.  No risk - other than risk of bank collapsing and even that is covered if the mortgage and associated deposit are less than £85k.  Only cost is the arrangement fee.

highlandterrier

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #16 on: July 05, 2018, 09:53:08 AM »
I like the idea of the offset mortgage, perfect in theory, but does anyone have any experience of this working in practice ? Will the bank let you keep a credit line open with no debt charges for 10 years or more ?

On original point of ISA v pensions it's a tricky one to balance. My plan is to FIRE at 51. Taking into account plausible rule changes the pensions will be accessible at 55-60, another at 60, and one at SPA.  So do you budget ISA's for 4 years expenses, 9 years, or keep some in riskier options and allow say 12 years, there is a lot to consider, and a huge disparity ?

There is no right answer, so I've set a line in the sand for 51, see what the stash is, and see how comfortable I feel. There is a danger of OMY syndrome with this approach, but with cautious projections fingers crossed it will turn into OLY syndrome. It's a good problem to have.


PhilB

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #17 on: July 05, 2018, 11:26:53 AM »
I like the idea of the offset mortgage, perfect in theory, but does anyone have any experience of this working in practice ? Will the bank let you keep a credit line open with no debt charges for 10 years or more ?

On original point of ISA v pensions it's a tricky one to balance. My plan is to FIRE at 51. Taking into account plausible rule changes the pensions will be accessible at 55-60, another at 60, and one at SPA.  So do you budget ISA's for 4 years expenses, 9 years, or keep some in riskier options and allow say 12 years, there is a lot to consider, and a huge disparity ?

There is no right answer, so I've set a line in the sand for 51, see what the stash is, and see how comfortable I feel. There is a danger of OMY syndrome with this approach, but with cautious projections fingers crossed it will turn into OLY syndrome. It's a good problem to have.
I've had basically net zero on my offset for a good 6 years with no complaints.  In reality I end up paying 50p or so interest a month as our current accounts are part of the offset arrangement and rather than keep a large working balance in there (no interest on credit balances), or mess about shifting cash to and from ISAs every day, I let it drift below net zero at times.

MarcherLady

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #18 on: July 05, 2018, 01:38:15 PM »
On original point of ISA v pensions it's a tricky one to balance. My plan is to FIRE at 51. Taking into account plausible rule changes the pensions will be accessible at 55-60, another at 60, and one at SPA.  So do you budget ISA's for 4 years expenses, 9 years, or keep some in riskier options and allow say 12 years, there is a lot to consider, and a huge disparity ?

We have various pension schemes coming on line at different times.  I have modeled it that our ISAs cover 100% of costs for x number of years, then ramps down in percentage as each pension comes in, reducing to 0% when they are all paying out. If I use the last penny in our ISAs on my 67th birthday I have won.

That's easy to calculate if you have DB pensions, trickier if they are DC. Your estimate of inflation on your spending then becomes a risk factor also. I have got around that by being extremely pessimistic in all my modelling. We are probably FI now, but (until my husband got made redundant with a juicy payoff) had intended to work for a couple more years to pad the stash a bit.

elementz_m

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #19 on: July 10, 2018, 05:34:29 AM »
The below is a simple way to demonstrate this. Not necessarily the best way, but it gets the point across. Start with some assumptions:
* Pension preferable to ISA
* At some age, x years after retirement, the goal is to just draw the interest from a pension.
* 3% growth above inflation of invested assets, paid at the end of the year.
* £3 annual spending, taken at the start of the year.
* £103 total money. So each year you spend £3 and the remainder grows back to £103.

The money in your pension needs to grow to £103 by the time you can draw down on it. So if you're one year away, you need £3 in the ISA and £100 in the pension.

For a general sum, given x years until pension, use 103/(1.03^x) for your pension amount, and the rest in ISAs to be drawn down to nothing. 103 is the total pot, 1.03 the growth above inflation.

At 10 years, £76.64 in pension.
At 20 years, £57.03
At 30 years, £42.43

sea_saw

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #20 on: July 10, 2018, 06:49:43 AM »
I see my DB pension is an even rarer beast than I imagined. Interesting, I'll try not to be too jealous ;) Actually I'm not sure DB schemes are that great for early retirees, but I can't be arsed to model it properly and find out. Hopefully nearer the time it'll all fall into place, when I have a better idea of both the amount I'll be getting in benefits and the amount I expect to need.

MarcherLady, that sounds really sensible. Must have been a fun evening with Excel :) The tapering in of multiple pensions must also help with feeling that you have a bit of wiggle room instead of a single hard deadline. 

MarcherLady

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #21 on: July 10, 2018, 07:01:41 AM »
MarcherLady, that sounds really sensible. Must have been a fun evening with Excel :)

We know how to party at Marcher Towers!

PhilB

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #22 on: July 16, 2018, 08:36:55 AM »
I see my DB pension is an even rarer beast than I imagined. Interesting, I'll try not to be too jealous ;) Actually I'm not sure DB schemes are that great for early retirees, but I can't be arsed to model it properly and find out. Hopefully nearer the time it'll all fall into place, when I have a better idea of both the amount I'll be getting in benefits and the amount I expect to need.
That depends how early you are retiring!  Retiring at 30 they wouldn't work that well as the amount needed to bridge the gap would probably last you for ever anyway.  Retiring in your 50s they are wonderful as they take away so much risk.  It's so much easier to plan how the rest of your stash will cover a fixed period of a decade or so than it is to plan for it to cover an unknown period of many decades.

TartanTallulah

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #23 on: July 16, 2018, 08:58:50 AM »
I see my DB pension is an even rarer beast than I imagined. Interesting, I'll try not to be too jealous ;) Actually I'm not sure DB schemes are that great for early retirees, but I can't be arsed to model it properly and find out. Hopefully nearer the time it'll all fall into place, when I have a better idea of both the amount I'll be getting in benefits and the amount I expect to need.
That depends how early you are retiring!  Retiring at 30 they wouldn't work that well as the amount needed to bridge the gap would probably last you for ever anyway.  Retiring in your 50s they are wonderful as they take away so much risk.  It's so much easier to plan how the rest of your stash will cover a fixed period of a decade or so than it is to plan for it to cover an unknown period of many decades.

This is very true. I'm planning to take my DB pension next year when I'm 55, and it's tremendously reassuring to know that whatever else happens, my bare bones expenses will be covered. I'm hoping that my stash will only have to cover the period until I get my state retirement pension at 67, but I won't be counting on that until nearer the time.

Two of my Millennial children are now taking an interest in long term savings. Getting the balance right between SIPPs and ISAs for them will be interesting and I'll probably get to know them a lot better in the process of having the discussions.

sea_saw

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #24 on: July 16, 2018, 09:29:11 AM »
@TartanTallulah, is your pension amount reduced by taking it at 55? If so, interesting that it might be worth it anyway, if the alternative is working longer.

@PhilB I'm sure I'll appreciate the guaranteed income when I get closer to taking it, haha :)

TartanTallulah

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #25 on: July 16, 2018, 10:10:56 AM »
@TartanTallulah, is your pension amount reduced by taking it at 55? If so, interesting that it might be worth it anyway, if the alternative is working longer.


Yes, my DB pension is reduced by 25% if I take it at 55 rather than 60, with the lump sum being reduced by rather less. It was a challenging decision between taking my DB pension early or leaving it till I'm 60 and pulling my SIPP into drawdown at 55, but I'm comfortable with it.

Working longer would be even better because fundamentally I don't have any objection to working, but my job has become untenable.

PhilB

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #26 on: July 16, 2018, 11:09:41 AM »
@TartanTallulah, is your pension amount reduced by taking it at 55? If so, interesting that it might be worth it anyway, if the alternative is working longer.


Yes, my DB pension is reduced by 25% if I take it at 55 rather than 60, with the lump sum being reduced by rather less. It was a challenging decision between taking my DB pension early or leaving it till I'm 60 and pulling my SIPP into drawdown at 55, but I'm comfortable with it.

Working longer would be even better because fundamentally I don't have any objection to working, but my job has become untenable.
It often comes down to the relative size of DB and DC schemes.  For MrsB and I, we need to leave our (relatively small) DBs until normal retirement date for them, plus SP, to be enough to cover our spending long term.  We have much more in DC schemes so it makes sense to draw these down to live off for 11 - 15 years before that.  If the situation were reversed, then we might well be considering taking some of the 'excess' value in the DBs by transferring and/or taking them early in order to preserve some of the DC funds for their flexibility / IHT shielding.

frugledoc

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #27 on: July 16, 2018, 11:34:45 AM »
@TartanTallulah, is your pension amount reduced by taking it at 55? If so, interesting that it might be worth it anyway, if the alternative is working longer.


Yes, my DB pension is reduced by 25% if I take it at 55 rather than 60, with the lump sum being reduced by rather less. It was a challenging decision between taking my DB pension early or leaving it till I'm 60 and pulling my SIPP into drawdown at 55, but I'm comfortable with it.

Working longer would be even better because fundamentally I don't have any objection to working, but my job has become untenable.

Hi TT , Iím sure you know this but the DB pension annual payment is not ďreducedĒ by 25%.

It is an actuarial adjustment to account for more years paid out on retirement.

A lot of my NHS colleagues donít seem to grasp basic NHS Pension facts

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #28 on: July 16, 2018, 03:17:00 PM »
@TartanTallulah, is your pension amount reduced by taking it at 55? If so, interesting that it might be worth it anyway, if the alternative is working longer.


Yes, my DB pension is reduced by 25% if I take it at 55 rather than 60, with the lump sum being reduced by rather less. It was a challenging decision between taking my DB pension early or leaving it till I'm 60 and pulling my SIPP into drawdown at 55, but I'm comfortable with it.

Working longer would be even better because fundamentally I don't have any objection to working, but my job has become untenable.

Hi TT , Iím sure you know this but the DB pension annual payment is not ďreducedĒ by 25%.

It is an actuarial adjustment to account for more years paid out on retirement.

A lot of my NHS colleagues donít seem to grasp basic NHS Pension facts

Yes, I was being obtusely simple but I do know how it works :-)

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #29 on: August 09, 2018, 03:12:09 PM »
Just out of interest, the 4 pot solution mentioned that is now behind a paywall, anyone know what those '4 pots' were? I'd be intrigued as I'd quite like to think about how it relates to my own spreadsheet...

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #30 on: August 11, 2018, 01:31:06 AM »
Just out of interest, the 4 pot solution mentioned that is now behind a paywall, anyone know what those '4 pots' were? I'd be intrigued as I'd quite like to think about how it relates to my own spreadsheet...

ISA, SIPP, DB pension, Government pension

if I remember correctly

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #31 on: August 24, 2018, 08:53:15 AM »
Thought I'd bump this up because I just found the UK tax section and have been thinking about this issue a lot. Great to hear others thought processes on which vehicles to fill first...

Sent from my Moto G (5) using Tapatalk


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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #32 on: August 27, 2018, 02:07:04 AM »
I like the idea of the offset mortgage, perfect in theory, but does anyone have any experience of this working in practice ? Will the bank let you keep a credit line open with no debt charges for 10 years or more ?

Yes they will. We did exactly this with First Direct. Our 10 year deal concluded in May and we decided to just pay off the mortgage in full at that time, but we put everything in there to reduce the interest paid over the first few years and when it was effectively 0 cost we added some more and drew down from that as an when needed. Sometime's we'd take a little bit more out and pay interest on that but as mentioned above, our interest charges were maybe 50p a month. Generally we kept it balanced with a little bit more than needed so we could use the current account. Beyond that everything was put into the ISA (JISA for DD), SIPP and taxable accounts in that order.

With a fully funded Offset mortgage we were saving £800+ a month interest payments that was literally redirected into our investment accounts. I do credit it somewhat to expediting our FIRE plans.

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #33 on: August 29, 2018, 07:46:08 AM »
Mrs PD and me retired in April, at 63 and (nearly) 60 respectively.  We both have DB pensions and investment income from our SIPPs and ISAs.  The third bucket for our retirement income is the state pension.  Weíve examined the state pension estimates from the government and calculated the net-of-tax value of the SP when it arrives for us both in 2020 and 2024 respectively.

What weíve done over the last few years is to save up a separate ďbucketĒ of cash over the last few years to pay ourselves the equivalent of the SP until it arrives.  So in effect we will transfer seamlessly into our SP income at the time.

I guess this is a kind of bucket strategy, which we are comfortable with.

PD

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #34 on: February 01, 2019, 06:27:36 AM »
A related issue I've been struggling with is having a reasonable asset allocation in the ISA pot as you near FIRE.

If you've got to use ISA savings for say 10 years before getting pensions payments, then you are more at risk of sequence of returns than someone planning for a 40 year retirement, so the traditional advice doesn't apply directly. As there would be less time for stock market to recover, and a much larger percentage of your annual expenses would be volatile.

But then if you are ultra cautious with your savings then there is zero chance of having any left which seems a waste!

I've got a plan but wondering what everyone else has planned for ?
« Last Edit: February 01, 2019, 06:53:37 AM by highlandterrier »

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #35 on: February 01, 2019, 10:44:18 AM »
Yes it's not very easy is it. I've probably bored my forum followers rigid pondering the whole ISA versus pension/SIPP conundrum.

In short my ISA is 60:40 stocks to bonds and I have 12 months of expenses churning in cash through regular savings accounts as an emergency fund. At the time I FIRE my ISA will be 42:28:30 stocks to bonds to cash i.e. maintaining 60:40 stocks to bonds but building my cash position significantly. This cautious approach will see my ISA run down but there should be enough left to cover some lumpy home repairs/Mustachian car replacement. These are difficult to factor into annual expenses so I like having a separate bucket for these items.

Hopefully I've got more years left after I can take the pension than I have between now and pension age, so I feel a pension to ISA split of 66:34 is about right. My pension is 90:10 stocks to bonds.

I'm quite cautious and as a result am aspiring to FART rather than FIRE. FART (Financial Accomplishment Reduce Time) was my way of looking at my ISA and pension as a combined figure and essentially is the point where 25X expenses is hit but I only reduce from full time work to part time work. When I hit 25X expenses I probably won't have enough ISA to get me through to pension age so working part time will help rectify this, as well as take me beyond 25X. Every year that passes working part time is one year less for my ISA"s to fund. Once I have enough ISA funds to see me through to pension age I can either FIRE or keep working part time if I enjoy that balance.

If I reach the point of 25X expenses but feel that work is going ok and so I can suppress the urge to FART, then I can keep working full time and go straight to FIRE. I would be looking for 33X expenses though if I did this as I'm quite cautious.

My FIRE or FART approach may not be the most efficient but I have no real desire to spend my last penny on the day I die. There are too many variables at play to cut it so fine, so I am going for cautious and safe. If I end up with far too much then some good causes & charities can benefit.

highlandterrier

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #36 on: February 01, 2019, 11:56:52 AM »
Yes it's not very easy is it. I've probably bored my forum followers rigid pondering the whole ISA versus pension/SIPP conundrum.

In short my ISA is 60:40 stocks to bonds and I have 12 months of expenses churning in cash through regular savings accounts as an emergency fund. At the time I FIRE my ISA will be 42:28:30 stocks to bonds to cash i.e. maintaining 60:40 stocks to bonds but building my cash position significantly. This cautious approach will see my ISA run down but there should be enough left to cover some lumpy home repairs/Mustachian car replacement. These are difficult to factor into annual expenses so I like having a separate bucket for these items.

Hopefully I've got more years left after I can take the pension than I have between now and pension age, so I feel a pension to ISA split of 66:34 is about right. My pension is 90:10 stocks to bonds.

I'm quite cautious and as a result am aspiring to FART rather than FIRE. FART (Financial Accomplishment Reduce Time) was my way of looking at my ISA and pension as a combined figure and essentially is the point where 25X expenses is hit but I only reduce from full time work to part time work. When I hit 25X expenses I probably won't have enough ISA to get me through to pension age so working part time will help rectify this, as well as take me beyond 25X. Every year that passes working part time is one year less for my ISA"s to fund. Once I have enough ISA funds to see me through to pension age I can either FIRE or keep working part time if I enjoy that balance.

If I reach the point of 25X expenses but feel that work is going ok and so I can suppress the urge to FART, then I can keep working full time and go straight to FIRE. I would be looking for 33X expenses though if I did this as I'm quite cautious.

My FIRE or FART approach may not be the most efficient but I have no real desire to spend my last penny on the day I die. There are too many variables at play to cut it so fine, so I am going for cautious and safe. If I end up with far too much then some good causes & charities can benefit.

Doesn't seem too cautious a starting point to me, but then I'm quite risk adverse too, and would not want any chance of returning to work. Are you planning on maintaining the 30% (or maybe flat 3 years) cash allocation throughout the period, or would this ramp down ? I'm presuming your plan is based on 10X current expenses to last 10 years ?

I would love to look at FARTing for the sole purpose of using the acronym, but I've got DB pensions covering most of my post 60 retirement expenses so meaningless :)

I'll have a wee read of your blog too, not sure I'll get through 24 pages !

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #37 on: February 01, 2019, 12:19:25 PM »
To be honest I haven't thought too much about the drawdown phase. It's something I need to learn about in great detail. My efforts have largely been focused on minimising my expenses and having the courage to invest. I have been far too cautious in the past. Without having completed any research I would probably take evenly from the stocks, bonds and cash pots, rebalancing as I go to maintain the ratios. In the event of a downturn I would turn solely to the cash to give the stocks time to recover. This of course depends on the length of time left until the pension kicks in.

Assuming I FART at the earliest point possible I would likely have about 8X expenses to last 13 years I.e. I would need 5 years of part time work covering expenses with the remaining 8 covered. Hopefully I would have more than 8 by that point. This approach is about getting out of full time work ASAP. If the plan is looking like failing I would just keep working part time, but the worst case should be I can fully FIRE at 50.

Great news on the DB pension. I wish you luck with your plan. Are you going to tell us what your plan is?
« Last Edit: February 01, 2019, 01:11:34 PM by never give up »

highlandterrier

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #38 on: February 01, 2019, 01:06:08 PM »
Yeah, I just didn't want to influence replies as I think often the first plan stated sets the tone for the conversation, and I prefer independent, uninfluenced answers.

Current plan is 15x expenses to last 11 years to allow some risk and margin of error, around a 50/35/15 allocation split (so that' about 2.5 years in cash similar to yourself). Theory being if stocks were stagnant then crashed to half their value and didn't recover in time I would only just run out of money. But equally it leaves some money in equity to leave a healthy amount under average conditions.

Not sure on drawdown either, thinking of glidepath strategies which would ramp up stock allocation gradually, but I've not got my head around whether that would be appropriate for this scenario yet.

Best of luck to you too, I'm sure you will do fine.

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #39 on: February 01, 2019, 02:41:57 PM »
I have recently chatted with my husband about this topic. It's good to know that others are thinking about this.

At present, the money in his pension is approximately equal to the money that we have outside the pension. He spoke with someone at work this week and he was informed that he can put 50% of his salary into the pension under salary sacrifice. At present he his putting about 40-something% of his salary into the pension, so we're trying to decide whether to put the maximum-allowed amount in or maximise the amount he brings home (with the exception of the 3% that he would have to contribute to receive the employer contribution of 8%), and save as much as we can in ISAs. It's a difficult decision. I'm also aware that we have children (6 & 10) who may go to university before we reach 57 and can access any pension (we're currently 42 and 43). 

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #40 on: February 01, 2019, 07:00:30 PM »
What ages are you and your husband expecting to FIRE welshcake? As I have flitted between prioritising ISA over pension and vice versa I have come to the conclusion that anything extreme i.e. more than 80:20 in the favour of one of them has to have a really solid reason for the one dominating over the other so much. E.g. If I want to FIRE near to pension age then it make sense to put a lot more in a pension than an ISA. If I'm not sure then anywhere between 66:34 either way means at least I minimise how wrong I can be.

Monevator has a couple of good ISA versus SIPP articles worth reading.

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #41 on: February 02, 2019, 04:19:15 AM »
Thanks for the recommendation for Monevator, Never Give Up; I'll take a look at the articles.

I know it sounds stupid but I really don't know when we will retire. If we aim to be solidly FI, I'd like to think at around 50 years old. Part-time (PT) work at a younger age, where we could just allow the capital to grow, also sounds good.



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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #42 on: February 02, 2019, 05:19:11 AM »
I see yes. Iím no maths whizz and on something like this itís definitely important to do our own research and understand how our own pensions work. I believe with salary sacrifice you donít pay national insurance as well as the income tax so if it were me I would be taking advantage of this as much as possible having ensured your ISA is at a level you are comfortable with. 50 is close enough to retirement age that the pension pot is more important than the ISA in my opinion.

Apologies there are so many articles on Monevator my forum etiquette was very poor and I should have provided links.

https://monevator.com/sipps-vs-isas-best-pension-vehicle/

https://monevator.com/pensions-versus-isas/

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #43 on: February 02, 2019, 05:22:31 AM »
Thanks for the links :)

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #44 on: February 15, 2019, 01:13:16 AM »
Having enjoyed catching up on this thread, I'd like to throw a couple of additional factors into the mix - your savings rate and your view on whether the rules around pension contributions are likely to get more or less generous.  If you have a high savings rate then you can shift the ISA vs Pension balance fairly rapidly. 
If I was a HRT payer now, planning to retire before pension access age, then personally I would be stuffing the pension to the extent of my HRT / AA now and planning to build the ISA stash closer to my retirement date in case pension relief was less generous then.
If I was a basic rate taxpayer without salary sacrifice then I'd be stuffing my ISAs whilst limiting pension contributions to the minimum that gives full employer contribution in the hope of more generous pension relief later.

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #45 on: February 15, 2019, 12:53:37 PM »
Yes although your HRT payer scenario makes the assumption that pensions are more likely to be tinkered with than ISAís. A perfectly reasonable assumption given previous history but I guess itís possible that a government could choose to impact ISAís in some way e.g. reducing the allowance.

I donít earn very much above the 40% tax mark at all. Itís obvious to make sure my pension AVCís exceed the amount above 40%. Beyond that though I have really struggled to know how much to put in my ISA versus my pension. I feel the ISA requires a lower risk asset allocation because itís time frame is shorter. ISAís will need to last me from 47 to probably 58. In doing this maybe my pension wonít be high enough and maybe in my 60ís Iíll think I should have worked to 49 instead. Itís difficult to know how many years expenses to have in my pension with 11 years to run before I need it. That run could easily be 2000-2011.

I guess someone either needs way more years in their ISA than years to when they can access their pension pot so they can maintain a more aggressive asset allocation, or if they are running their ISAís down to almost zero by pension age, they need to be absolutely certain their pension pot will be large enough. This may mean more time spent at work than was necessary.

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #46 on: February 16, 2019, 02:04:11 AM »
Yes although your HRT payer scenario makes the assumption that pensions are more likely to be tinkered with than ISAís. A perfectly reasonable assumption given previous history but I guess itís possible that a government could choose to impact ISAís in some way e.g. reducing the allowance.

I donít earn very much above the 40% tax mark at all. Itís obvious to make sure my pension AVCís exceed the amount above 40%. Beyond that though I have really struggled to know how much to put in my ISA versus my pension. I feel the ISA requires a lower risk asset allocation because itís time frame is shorter. ISAís will need to last me from 47 to probably 58. In doing this maybe my pension wonít be high enough and maybe in my 60ís Iíll think I should have worked to 49 instead. Itís difficult to know how many years expenses to have in my pension with 11 years to run before I need it. That run could easily be 2000-2011.

I guess someone either needs way more years in their ISA than years to when they can access their pension pot so they can maintain a more aggressive asset allocation, or if they are running their ISAís down to almost zero by pension age, they need to be absolutely certain their pension pot will be large enough. This may mean more time spent at work than was necessary.
Once you've used up your HRT band, and assuming you will have enough in your pension to cover your PA in retirement, then the value of basic rate pension relief is probably low enough to let you err on the side of too much in the ISAs, whilst keeping your normal asset allocation across both pots.  You'd only be giving up a 6.25% gain on the extra money you put in the ISA rather than the pension vs the 'optimum' split.  If you have say a 50% savings rate, that would mean that an extra 3 years worth in the ISA rather than the pension would translate to retiring about 10 weeks later which would probably save you more than 10 weeks worth of stress agonising about the split.

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #47 on: February 16, 2019, 02:10:53 AM »
Thanks PhilB. Yes I have recently changed my approach in order to start to prioritise my ISA over my pension. My savings rate is in the 80-85% region so I do have the ability to shift the balance as you alluded to earlier. There does come a point though where if the goal is to retire early then it's worth giving up some of the pension contributions because it will definitely be possible to end up with too much in there.

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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #48 on: April 24, 2019, 03:52:10 AM »
In my view, the pension/SIPP is by far the better option for most people on a relatively "normal" retirement trajectory, and this is probably by design. Somewhat ironically, the typical "Pension vs ISA" financial article typically paints the ISA in the worst possible light.

The practical benefits of the ISA are not guaranteed; it will take considerable amount of a combination of investment, time, and rate of return before you ISA can grow enough for you to benefit from the wrapper's main benefit, the shield from £>11k of capitial gains, compared to the benefits of the pension where the returns of tax relief on the way in are instant and guaranteed.


In my view there are 2 scenarios where an ISA are a very good idea..

The first is what we typically discuss on these boards, and that is to bridge the gap between early retirement and being able to draw on your pension. Typically, the wider this gap the more you need to consider and increasing prioritize the ISA.

The 2nd scenario is one that is perhaps less talked about, but also valid, and that is if you have a goal of building very long term wealth that greatly exceeds the £1m pension lifetime allowance. While this sounds like a pipe dream to most people, the maths is simple and well within reach. £20k every year compounding at 7% (nominal) will give you a £6.1m pot after just 45 years... ;). So if I was going to provide a child with a nestegg, I would choose a J-ISA rather than J-SIPP and encourage them to nurse it to 7 figures and beyond when it is eventually handed over to them (in fact that is what I plan on doing with my 1yr old!).


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Re: Balancing pensions/SIPPs (etc) and ISAs (etc)
« Reply #49 on: April 24, 2019, 04:29:52 AM »
The LTA is indexed so to be fair you would need to use real return rather than nominal in your compounding, but I get your point.

Having said that, if you get 40% relief on the way in, the LTA charge only makes you worse off than an ISA if you are a 40% taxpayer in retirement.  I'm expecting to be over the LTA, but a 20% taxpayer so sal sac benefits meant I was still better off making pension contributions than using an ISA.

The real reason I wouldn't put money into a SIPP for a child is the high likelihood of there being a better way to play the system.  Either by running it through your own pension first, by parking it in an ISA until it can go into a LISA or by parking it until either the child becomes a higher rate tax payer or they introduce a flat rate of relief.  The only reason I can see for using a SIPP for a child is that you don't trust them not to blow it before retirement age.