Can you check this plan please?

[FIbefore45]

Hi All, I am very new on these forums but have read lots of threads in the last few days and have realized that the way we have our money working for us is not totally according to when we want to retire.

Details about us first: We are a couple, both working and will be 40 next year. We want to be FI before we are 45 and then do what we want to rather than what we have to. A major portion of the time will be spent travelling the world. We live in London and don't own a property at the moment (We sold our house in North of England last year and moved to London) but are looking to buy one this year.

I have spent this evening, looking at all of our accounts. Following are our assets in various classes: Most of these are shared between the two of us more or less equally.

Easy Access Cash (Non ISA): £434,000 (Most is in current accounts or upto 1.5% easy access accounts)
Monthly savers: £14,000 (From 3% to 5%)
Cash ISA: £27,000 (All easy access - 1.44%)
S&S ISA: £40,000 (VLS100)
Sharesave though work: £900
Pensions: £589,000 (Half is VLS100, Rest in my work pension where I contribute extra to save on 40% tax through salary sacrifice)
Jewellery: £30,000
Cash in foreign currency: equivalent to £700 (in euros)
Business Account Savings: £121,000 (I am in a permanent job and DH is a Consultant and has his own limited company. £100,000 is fixed for a year at 1.85%)

Total: £1,256,600

Based on the above, I believe we have more in pensions which will not be available to us until 57 or 58 years of age and rest is not enough to sustain us till then. In addition, most of our money is in Cash rather than growing in S&S.

Following is the plan at the moment:

1. Add £40,000 to S&S ISA before March for both of us
2. Add £40,000 in April for both of us and all years after that
3. My employer matches upto 6% employer contribution so I want to keep on adding that to pension but will add more to avoid getting into the 40% bracket.
4. DH adds £40,000 to his pension through his limited company to save on corporation tax and will continue to do so.
5. I anticipate using £250,000 of the cash to use a deposit for the house in London which we then plan to rent out when we go for long term travel. In addition, I also plan to rent out a room in the house to help with the mortgage using the Rent a Room scheme till we finally retire.
6. Move cash ISA to S&S ISA

But apart from that, we are really at a loss of what else we should do so I have the following questions which I am hoping the experts here can help with. Thanks a lot.

1. Does the above look like a reasonable plan?
2. What should I do with the money outside pensions and ISA. I am aware that we have money which is not doing much for us after we take inflation into account.
3. Is S&S without a ISA Wrapper a good idea, assuming I keep on moving them to S&S ISA after we have stopped working.
4. Would you suggest investing into dividend stocks? I am planning to read more about them. DH currently pays himself dividends from his limited company but I am not utilizing the £2000 dividend tax allowance.
5. Should I keep on using regular savers or will you instead keep most of the money in S&S?
6. Should I overpay into pension to save on 40% tax or should I limit adding anything extra to pension at this stage. DH will still be adding £40,000 per year to his pension.
7. Any other pointers/ suggestions

Thanks
FIbefore45

[ExitViaTheCashRamp]

 All those items look fine - but before commenting further, what is your real goal ? FI before 45 sure -- but what does that look like ?

 How much spending per year after you FIRE ?
 Where do you plan to live then ? London or NE ? How much do you need for the final home ?
 How do you plan to draw the business accounts after FIRE ?

 In short - unless you have a clear goal on what you want to have when you are 45, knowing the best thing to do with the money in the meantime is kind of hard. For example, it could be a plan to:

 Move everything into tax protected (ISA/SIPP) index funds as fast as possible that is outside the business accounts. By FIRE, you estimate that will be at ~£250,000 which will fund your expenditure for the next 5 years. You can then withdraw from the ISAs as required from then on until the pensions are accessible.

 It might be your planned expenditure is £100,000 for the first 10 years, then drop to £30,000 per year - in which case less in then SIPP is required.
 
 

[FIbefore45]

Hi,

Thanks ExitViaTheCashRamp

Sorry, I should have mentioned these before

I think our expenditure will not be more than £50,000  before tax for the both of us.
We plan to travel the world but in a more or less frugal style - staying in Guest houses, staying at a location for a month or so, both eating out and cooking our own food.
We plan to spend around £600,000 on the house in zone 5 or 6 in Greater London. The plan is to rent it out while we are away on long term travel but still have a place to come back to if we get tired of travelling. Hopefully by then the house will be paid off using the rental yield.
We plan to work another 5 years so will be paying back the mortgage during this time as well. We paid off our last mortgage in 10 years which I know now was not the best idea but it felt good at that time.
For the business account, we haven't decided yet but we would like to do it in the most tax efficient way. This is still being discussed but we only need to decide after 5 years. DH thinks it may be using the Entrepreneurs’ Relief  but this will need to be discussed with his accountant.

Hope I haven't left out any important detail.

[FIbefore45]

Further to add, we plan to keep our yearly expenditure the same for now for all years as we don't know for how long we want to travel. If we have more money left because our expenditures are less in later years, it's fine as we can just leave that to our nephews and nieces when we die but definitely don't want to end up in a situation where we outlive our money.

[PhilB]

I hope you don't mind me saying so, but everything looks a bit scattergun at the moment.  I think you need to step back, simplify and answer the big questions first before getting caught up in the minutiae of what accounts to use.  The fact that you have so much in cash rather than invested also worries me.
I think you need to get out your spreadsheets and start by being very clear about how much you need by age 45.  Don't worry about where it is just yet, just what it's invested in between the house, a drawdown fund with plenty of equities and cash for any short term items and/or as an emergency fund or buffer.  Work out what income you are comfortable aiming to draw from that fund, how much you'll still be paying on any mortgage and make sure you are happy that the income covers the expenditure.
Step 2 is to check that you can get from your current total to that total over the next 5 years between what you are saving from your incomes and a reasonable estimate of investment growth.
Only once you are really clear on the big picture can you start to refine your model to cover the other 2 big parts of the picture - cashflow (essential) and tax efficiency (desirable).
I appreciate that you have several things that make your situation complicated - renting the house out, the length of time before you can access pension funds, etc, but that's all the more reason that it's essential you see the wood for the trees and have a very clear position of where you need to be at each stage along the way. 
One thing I would say is i don't like your plan of using the rental income from the house to pay off the mortgage.  One of your biggest challenges is the probably 13 or more year gap between retiring and being able to access pension funds.  The mortgage has the potential to be a big help with that as you can use the excess of rental income over mortgage payments to fund part of your spending over that period, and then pay it down when you have access to your pensions.  That lets you put more into the pensions taking advantage of more tax relief.
I hope this helps.

[vand]

By my rough back-of-a-packet-of-fags calculations..

£1.25m + 80k/year for next 5 years takes you to £1.65m
Buying a 600k house will leave you with just over £1m in liquid net assets

That falls short of the 4% rule (which I have a problem with anyway) if you anticipate 50k outgoing, and I would argue that perhaps 3% is probably safer anyway for UK investors

One glaring problem you have is that with so much cash sitting around, you can only stuff 40k of it per year into a tax-efficient ISA

[FIbefore45]

Thanks Vand  and PhilB. Great advice.

We will put everything in a spreadsheet and see what we come up with.

Cheers
FIbefore45

 

[frugledoc]

By my rough back-of-a-packet-of-fags calculations..

£1.25m + 80k/year for next 5 years takes you to £1.65m
Buying a 600k house will leave you with just over £1m in liquid net assets

That falls short of the 4% rule (which I have a problem with anyway) if you anticipate 50k outgoing, and I would argue that perhaps 3% is probably safer anyway for UK investors

One glaring problem you have is that with so much cash sitting around, you can only stuff 40k of it per year into a tax-efficient ISA

Don’t forget rental income from the property which will reduce the amount required from the rest of the portfolio.  Might only be minimal though.

Also is the work pension defined benefit?
Get 80k into stocks and shares isa this tax year and immediately next tax year. 

You have a low allocation to equities and I would consider thinking about increasing it.

[FIbefore45]

Thanks Frugaldoc,

Yes, I would be considering some income from the rental but agree it won't be much after tax and mortgage repayment

I will be adding 80K to S&S this year and will also move the Cash ISAs as well. I will also.  invest £40 K to invest in DH's pension as well. Adding all that up, I have to invest £3200 per week for the next 14 months 😬😬

At the moment everything is going to VLS100 but I am not sure  about it's UK allocation yet. I will research more on this.

[RetirementInvestingToday]

Just watch the Lifetime Allowance (LTA) with the pension/s as well.  You don't say how the £589k is split between you and better half but here's a thought experiment.  Assume it's all in your name, assume age 40 now, assume access age 57, no more pension rule changes and no more contributions.  To exceed the LTA by the time you can get access to it (your first BCE) you 'only' need a real investment return of around 3.4%.  Every extra contribution and that number reduces.

[FIbefore45]

Hi RetirementInvrstingToday,

Thanks for commenting. Yes, LTA is a worry as well. At the moment, the pension is more or less equally divided between us but we are still adding to it. DH saves corporation tax by adding to the pension and I try to remain in the 20% tax bracket. I think I need to do some calculations soon.

[Playing with Fire UK]

I think you are letting tax efficiency drive your strategy too much.

You'd still be ahead if you moved the cash to S&S and paid tax on it. You have a dividend allowance and both of you have a capital gains allowance as well to reduce the tax. You can still invest in VLS100 - you don't need to pick dividend stocks. In your taxable account, you want to choose the income version of the fund to make keeping track of dividends easier (ignore people who say to get the accumulation fund so that you don't pay dividend tax - it doesn't work like that).