The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Helium on December 27, 2016, 02:02:29 PM
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For those of you in the UK who aim to retire significantly before the normal retirement age, say at 35-40 years old, what investment vehicles do you use to save?
Saving in a pension has clear tax advantages but is problematic because you can't get hold of the money until you are 55. So if you want to retire at 35, it's not that helpful.
The obvious alternative would appear to be a stocks and shares ISA, but there you are limited to saving around £15k p/a. I think this is set to increase to about £20k p/a, but that still does not seem much for people who would be saving enough to retire at 35-40 in any case.
Of course there is the option of splitting your savings between an ISA and a pension, knowing you can't access the pension part until you are 55. That would require some careful planning to ensure you have enough to live on during the 20 years from when you retire at 35 (for example) until you reach 55 and can access your pension.
Are there any alternatives I have missed? For reference I am mid-twenties aiming for FIRE around 35-40.
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I'm filling up my ISA, then my pension, then plain old taxable.
In a few years when I get to my target, I'll stop my pension contributions and then it's just ISA and taxable.
I agree it's complicated as you can't get the money early out of a pension, and the age you'll be able to access it may change - I'm modelling based on 58 at the moment. I've got a basic model in a spreadsheet, showing spending each year, trying to work out how to balance pension and non pension funds.
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Helium, you haven't mentioned taxable accounts. You have an annual dividend allowance and a CGT allowance to limit the tax that you pay on these accounts. You are not limited to saving £15/20k outside of an ISA.
Another thing you can look into is remortgaging in your final year at work, an interest-only tracker for the mortgage term would be ideal. You can then pay the mortgage off when you get access to your pension.
There is a balance between pensions and ISA/taxable, as dreams_and_discoveries says. If you are looking at retiring super early (say 30), then pensions may not do much for you because you will need to last 25 years (assuming access at 55 which is not a given), so you will be looking at needing almost 25x your annual spending in your non-pension stache anyway. If you are retiring at 40 then you can get away with less outside of a pension. I haven't found a slam-dunk answer to this.
I put big chunks of my pay that is taxed at 40% into a pension; my plan is to fund this first because I don't think the contribution rules are going to get better for me than they are now, and I'm covering my spending in the years where my inclination to work is lowest.
If I stop working before my non-pension stache is sorted, I'll probably look into renting some houses, the changes in tax treatment due in the next few years might open an opportunity for a non-working type.
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Thanks for your replies, dreams_and_discoveries and Playing with Fire UK.
Yes, it would seem that there is no easy solution to the balance between saving in an ISA/taxable accounts vs a pension, for those in the UK who aim to retire significantly before the normal retirement age.
An ISA/taxable accounts have the advantage of accessibility, whereas a pension cannot be accessed until 55 (a figure which is subject to change). However, an ISA/taxable accounts do not carry the same tax benefits as a pension, especially for higher rate taxpayers.
I would be interested to hear how others have dealt with this issue, as it must crop up a lot for UK Mustachians. As you point out, Playing with Fire UK, the balance may also be affected by the decision to save for property purchase(s), which may steer one more towards accessible forms of saving.
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Check out:
http://www.thefinancezombie.com/2015/11/the-bridge-to-financial-independence.html (http://www.thefinancezombie.com/2015/11/the-bridge-to-financial-independence.html)
http://www.thefinancezombie.com/2015/12/how-stable-does-your-financial-independence-bridge-need-to-be.html (http://www.thefinancezombie.com/2015/12/how-stable-does-your-financial-independence-bridge-need-to-be.html)
http://monevator.com/sipps-vs-isas-best-pension-vehicle/ (http://monevator.com/sipps-vs-isas-best-pension-vehicle/)
http://monevator.com/pensions-versus-isas/ (http://monevator.com/pensions-versus-isas/)
To clarify my mortgage comment. It will work just as well for a new purchase, but I was talking about a cash out (or remortgage) on an existing property to provide a liquidity bump just before starting early retirement that I'd pay off after accessing my pension. NB, I'm finding out that this is a total nightmare to arrange with a paid off house with the current lending requirements. It's easier for me to combine it with a house move!
If you are certain that you will be buying a property in the UK, the LISA could be good for you. As I have a house the LISA is of no use to me (the access at 60 does nothing for me).
What do you think your earning path looks like Helium? You are talking about saving 20k/year as a low level which makes me think you are a fairly high earner? If you are in danger (haha danger!) of broaching the additional tax rate, I'd be pumping 40% pay into a SIPP now.
Finally, make sure you use cfiresim (or alternative) rather than just a flat rate when you are calculating how much you need in your pre-pension funds. I did an initial estimate using a flat, conservative rate of growth over inflation, and then compared to cfiresim, even though the average growth was lower, the lack of volatility gave me a lower estimate on when I could look at stopping work.
Let us know what you decide Helium.