Bridging funds the quickest way to FIRE?

[Affable Bear]

I have a question relating to bridging funds and if this method offers the most optimal way to reach early retirement, I have seen it a lot and I understand the logic, but is it actually the most optimal/fastest way to get to early retirement?

We are based in the UK but I know the US has similar tax advantaged pension accounts that you can't access until a certain age too so the general theory should apply to most people (I am assuming other countries also do this!)

We are about 25-30 years away from being able to access our private pensions (currently 57), does anybody have any examples, studies or experience with this approach and is it potentially better/quicker? Our biggest concern is that pension access can be changed in the future by the Government meaning there is a risk of the goalposts moving and stopping us from retiring when we want to and can afford too but thats where the bridging fund would come in and cover this until we can access the pension. 

It would probably work out as an extra 30-40% using the tax relief going into pensions but we would be subject to tax on any gains when we pull it out although we would be investing a lot more each month.

Any thoughts on this would be interesting, we currently only put in enough for our employer match in pensions with everything else going into our ISA as we can access it tax free when we want to (25kpa per person allowance, no tax on any gains in ISA), as we are young-ish we should have enough time to hit our goals this way but if there is a way we can shave a year or two off it would be interesting!

[Jade]

We (couple) were recommended elsewhere on mmm about using SIPPs too because of the government uplift of 25%. (We live on less than £11k so should be ok on not getting taxed at the other end). We've got a mix of SIPPs and ISAs and toggle between our contributions to them, keeping an eye on balance of distribution and the chance of a possible government goal post move.. however we're also late forties / early fifties. I'm also wondering in your case, about LISAs?

[Affable Bear]

Hi Jade

Thanks for the feedback and I am sorry for the long post!! I have looked at LISA's a long time ago and its something I need to do more research on, we both used a help to buy ISA when we bought our first home but its changed a lot since then.

Im 34 and wife is 28, when we started our journey about 4 years ago it was very much employee match pension only and throw everything else into ISA, the main reasoning at the time (and now to an extent) being that there is no restriction on the money, no tax to worry about no penalties for early withdrawl etc...

I have been thinking about this approach for a while and I think it stems from a fear of Government changing/increasing pension access age or some other restriction gets placed on accessing funds. Its difficult because a lot of media is so focussed on negatives, such as Government wanting people to work longer as the population ages, that there will be no state pension or it will be heavily reduced etc.. Whilst I think there are genuine concerns there I now have my doubts as to whether this is biting nose to spite face kind of thinking.

Currently we are probably on course to FI in around 16 years but a lot will likely change by then and we may have children or other responsibilities in the coming years. This is also solely based of our current ISA contributions with no account for private pension or state pension, I am now thinking that we are missing a trick in reducing the amount of time to FIRE by not factoring pensions in at all or not willing to lock money behind age restrictions.

Quick synopsis (I havent done any proper analysis)

Current expenses excl mortgage & investments is approx £2100-2300pm (subject to big one offs), our current FI number is £750k (£2500pm) not incl house, this could potentially be lower but will know closer to the time, for now this is a rough target.

I have a DB pension that goes live at 65 that (not accounting for inflation) will provide an income of around £8500pa if I leave work at 50. Assuming no changes to SP I will get that at 67 providing £11500pa, and 6 years later my wife will also recieve SP meaning at that point the income should exceed our target of £2500pm using both SP and my DB pension alone. This all assumes that everything lines up with inflation by then and theres no changes to the state pension.

Using the bridging method I would need to have enough in ISA to provide £30kpa for 15 years, then 22kpa for a further 2 years and then £11kpa for another 6 years, I have no idea how to calculate what I would need at 50 to have a good chance of doing this and I would probably drain the ISA in doing it this way but on the flipside I might not need as much invested meaning I could potentially get there quicker...

[Jade]

No problem @Affable Bear ! Happy to help.

I met my husband when I was 29 and he was 34 so similar ages to you both now (he was good with money so i credit the 19 years we've been together as my journey from zero to FIRE). We just hit our FIRE number this year so I can wave from the other end and say a) it's definitely worth it and b) you've already been at it for four years so you're in a great  place!

You're asking a lot of the questions we had too (and similar fears about the government changing goalposts etc). Like you, we wanted maximum freedom and flexibility but after doing some research found in our case, adding to SIPPs too was still worth doing so it's always worth keeping an eye on things. I think we had to get over the feeling, to some degree, that we were locking money away till certain ages but realised there are sometimes enough benefits to doing that at times.

I dug around in the helpful advice I got earlier on our own journey from the folk on the UK board and found this link to a series of articles on the tricky ISA & Pension balancing act that addresses what you're pondering...

https://monevator.com/tag/ISA-pension-split-series/

Re LISAs it looks like you can still have a lifetime ISA even though you've had a help to buy...

https://www.ajbell.co.uk/faq/can-i-have-both-help-buy-isa-and-lifetime-isa

A couple of other thoughts...

Mortgage? We paid off our mortgage in 8 years. We then redirected the overpayments to FI lump sum. Not for everyone but worked well for us. Worth crunching the numbers vs other investments.

A small but useful benefit we found was the couples tax allowance and spreading tax (might be useful if you decide to have kids and one of you earns less than £11,500 at that time -- for e.g.).

Sometimes there's different options and tax benefits in how you can invest in your workplace pension, contribute more etc so that could be worth investigating as well as SIPPs. Your workplace can usually inform you of options.

The benefits of nipping any lifestyle creep (without feeling poor) and the power of compound interest.

We're still tinkering with things ourselves. Even though we're closer to private pension age than you guys, we're still wary of having too much in SIPPs vs ISAs and potential government shenanigans! I'm getting more confident in my financial knowledge , lol.. but do recommend picking the UK boards collective brain too! they're great and often will know more of the ins and outs .. that's where we've learnt what we've needed so far.

[Jade]

Also, this case study on the UK board may have enough useful similarities to help you...

https://forum.mrmoneymustache.com/uk-tax-discussion/case-study-uk-bridge-to-the-sipp/

[Affable Bear]

No problem @Affable Bear ! Happy to help.

I met my husband when I was 29 and he was 34 so similar ages to you both now (he was good with money so i credit the 19 years we've been together as my journey from zero to FIRE). We just hit our FIRE number this year so I can wave from the other end and say a) it's definitely worth it and b) you've already been at it for four years so you're in a great  place!

Hi Jade, these words are strong motivation to keep us plugging away, massive congratulations on hitting your number this year too!

You're asking a lot of the questions we had too (and similar fears about the government changing goalposts etc). Like you, we wanted maximum freedom and flexibility but after doing some research found in our case, adding to SIPPs too was still worth doing so it's always worth keeping an eye on things. I think we had to get over the feeling, to some degree, that we were locking money away till certain ages but realised there are sometimes enough benefits to doing that at times.

I dug around in the helpful advice I got earlier on our own journey from the folk on the UK board and found this link to a series of articles on the tricky ISA & Pension balancing act that addresses what you're pondering...

https://monevator.com/tag/ISA-pension-split-series/

Re LISAs it looks like you can still have a lifetime ISA even though you've had a help to buy...

https://www.ajbell.co.uk/faq/can-i-have-both-help-buy-isa-and-lifetime-isa

A couple of other thoughts...

Mortgage? We paid off our mortgage in 8 years. We then redirected the overpayments to FI lump sum. Not for everyone but worked well for us. Worth crunching the numbers vs other investments.

A small but useful benefit we found was the couples tax allowance and spreading tax (might be useful if you decide to have kids and one of you earns less than £11,500 at that time -- for e.g.).

Sometimes there's different options and tax benefits in how you can invest in your workplace pension, contribute more etc so that could be worth investigating as well as SIPPs. Your workplace can usually inform you of options.

We're still tinkering with things ourselves. Even though we're closer to private pension age than you guys, we're still wary of having too much in SIPPs vs ISAs and potential government shenanigans!

I'm getting more confident in my financial knowledge , lol.. but do recommend picking the UK boards collective brain too! they're great and often will know more of the ins and outs .. that's where I've learnt what I have needed.

Massive thanks for the links, hopefully I will be able to figure out how to best balance everything out. We are 4 years in and have nailed a lot of things down in terms of budgeting, having no debt, general index investing etc.. But this is the next thing on our list we need to look at and improve on.

We did move home last year but we are overpaying the mortgage to make sure its cleared by 50, (a personal goal of mine to not to have to work past that age!)

[Jade]

Pleasure @Affable Bear (love your name btw). You sound like you've got yourselves into a very good position. I think one of the things I have learnt is that time does a lot of the heavy lifting with getting you to where you want to go, once you set things up well -- as you've done.

Overpaying the mortgage and having a clear goal is great -- it all helps with motivation as you move forward. Feel free to pick my brain again if needed and I'll help if I can.