Case study - UK - Bridge to the SIPP

[Playing with Fire UK]

I'm figuring out how many more years I need to work. The limiting factor is having enough ISA to last me until I can crack open my SIPP, which I've been thinking about more following the Monevator series.

Axioms
1. The SIPP will be fine by the time I can access it, I'm not working longer to contribute more.
2. I need to be working at least for next year (2021): my in-laws IO mortgage will end and may need a cash injection.
3. There must be enough ISA so that I don't have to work, at all, ever again (obviously returning to work is a back-up plan, but it doesn't form part of Plan A).
4. I know that I don't know when I can access my SIPP (private pension access age or PPAA).

Numbers
Age now: 36
Total Pensions (mostly SIPP or DC): £300k
ISA, GIA, Cash:                                 £280k
"Mortgage* GIA":                             £120k
Mortgage:                                       -£115k

*I still think of my mortgage general investment account separately as it is new and it is invested more conservatively. This is mostly an academic distinction. It's the money that I got when I did a cash-out mortgage on my previously paid-off house.

Spending now (per month):
Mortgage:            £500
Household bills:   £1200
Solo Travel:         £100
My Spending:      £100
(Commuting, charity, work clothes and drinks £1200)

The commuting etc costs will stop with work, solo travel will probably increase, the rest will stay the same.

[Playing with Fire UK]

So total spending is £1900 per month, £22,800 a year and would need a stash of £570k in the ISA/GIAs to last forever. But I only need it to last until I can access my SIPP, which is 19 years until I'm 55 but 26 years until I'm 62.

I'm saving about £2200 a month now, so every year of work buys another £25k for the ISA. We as a couple (we have mine/your/ours accounts) generate a surplus of around £1000 a month, but sometimes we spend this and sometimes we save it, and it's a joint decision so I'm not counting this as guaranteed extra saving.

We are thinking about moving house in the next few years. We bought on the low side of what we could afford when we moved to the area and there are a couple of extra things we'd like. It'd be a nightmare to move before the in-laws mortgage is sorted (2021) and a nightmare to move after I'm FIREd without losing the mortgage. I don't want to work another decade just to pay for a nicer house though. This needs some thought.

My other half (OH) will probably continue to work. He likes his job and is good at it and the job does good things. I won't rely on him continuing to work in order for me to stop, but it adds another level of security to the numbers (at least for his share of the bills).

In an ideal world, the in-laws will be fine next year, I'll remortgage onto a lovely, long-term tracker interest-only mortgage and then stop working in 2022. Does that seem feasible?

[never give up]

Well done Playing with Fire UK. You've got yourselves into a great position there. I really can't wait for the case studies that the Monevator series is promising. I've previously struggled to see how the ISA and Pension accounts need to work together especially for awkward lengths to bridge I.e. more than about 5 years.

I think the Monevator series was recommending about a 5% WR on the ISA for periods of a similar length to that of which you are looking at. I assume your long term mortgage plan will mean you aren't above that level?

How have you chosen to budget for the rare but expensive home maintenance category? Is a proportion of your £22,800 effectively being 'saved' towards this stuff?

I think you're in a great position but I'm hoping for some more help from Monevator. I couldn't say how many years more you would need to work. Are you using a 4% WR and do you have much scope to cut back in your budget if you needed to?

[daverobev]

From what I've read the SIPP 'should' be available from State Pension age - 10 years, but actually the legislation to enact that was not implemented - so actually it will remain age 55 when SP age increases.

Not sure where the 62 age comes from - not heard of SP age going up to 72?

I would suggest a 6% WR on the 400k you have in ISA + GIA is totally fine, so you can probably stop as soon as everything else makes sense. Obviously you'd want more fixed income stuff in the shorter term accounts.

[Playing with Fire UK]

From what I've read the SIPP 'should' be available from State Pension age - 10 years, but actually the legislation to enact that was not implemented - so actually it will remain age 55 when SP age increases.

Not sure where the 62 age comes from - not heard of SP age going up to 72?

Right, 55 is my best case scenario. It just seems like a really long time to assume that the rules won't change. 62 is my worst case scenario based on the SP age going to 70 and the number of years gap between SIPP and SP dropping to 8 which both feel possible based on the noises around aging populations and longevity. [I've pulled it out of the air.] The plan will probably have already worked or failed by the time I reach 55, but as I'm willing to cannibalise the GIA/ISA I need to think about the pot lasting longer.

I'm planning of an eve of retirement switch into more bonds and cash to protect against poor returns in the first five or so years. I sleep well with my asset allocation now because I still have time to buy low if equities drop.

[Playing with Fire UK]

Well done Playing with Fire UK. You've got yourselves into a great position there. I really can't wait for the case studies that the Monevator series is promising. I've previously struggled to see how the ISA and Pension accounts need to work together especially for awkward lengths to bridge I.e. more than about 5 years.

I think the Monevator series was recommending about a 5% WR on the ISA for periods of a similar length to that of which you are looking at. I assume your long term mortgage plan will mean you aren't above that level?

How have you chosen to budget for the rare but expensive home maintenance category? Is a proportion of your £22,800 effectively being 'saved' towards this stuff?

I think you're in a great position but I'm hoping for some more help from Monevator. I couldn't say how many years more you would need to work. Are you using a 4% WR and do you have much scope to cut back in your budget if you needed to?

All excellent questions @never give up !!

I'm really grateful for the Monevator series, it's come at a perfect time for me and it's such a tricky problem for UK FIRE folk. Yes, 5% is the highest SWR for 20 years, but it drops to 4% for 25 years and 3% for a low interest environment. And I'm not confident enough to pull the FIREing pin which requires the SIPP age to stay at 55 for 19 years.

The long term mortgage plan is a tricky one. Assuming I can stay on a competitive rate, it won't push me above 5%. But I'll pretty much lose my ability to remortgage when I FIRE. The First Direct offset IO mortgage would be ideal, but there aren't a lot of alternatives out there. If I couldn't remortgage and dropped onto an ugly SVR then it could push me above 5%. So I keep the mortgage money in a separate account as I could be forced to pay it off (which is not what I'm aiming for - I'm comfortable carrying the mortgage into FIRE if I can get the right product). [OH isn't on the mortgage and can't be until the in-laws mess is sorted and doesn't own the house or earn enough to get an IO mortgage so that's not an option either.]

Yes, I'm using a 4% WR. I have some scope to cut back, but it'd need OH to be on board, which doesn't seem fair if I've chosen to FIRE so that'd be a back-up plan. The household spending is £1200 is broadly £300 each in regular bills (fixed), supermarket shopping (could reduce, especially if I have more time), holidays (this is a lot, but important to OH, we could easily do a couple of years of cheaper holidays but long term this is what we want to spend) and the joint credit card spending (includes minor household things, fuel, weekend trips, presents, there is definitely some fat in here). My spending and travel costs can be easily cut in the short term.

Home improvements and repairs have come out of the £300 for joint spending so far (some months have been a lot more, but £300 is the average). We can DIY a lot, but a new boiler or roof would be beyond us. If there was a big home repair I'd take the cost from the capital and then plan to cut back later if the stash was looking weedy or let it roll if it was looking healthy. It's weird, but a big one-off cost doesn't bother me as much as the prospect of rising everyday living costs, I used to live in fear of a big home repair but now I know that they are rare enough and manageable enough.

[PhilB]

Numbers to play with!  Fun!

Firstly, the bit you already know - from Pension Access Age you should be laughing - even if you need to use the lump sum to pay off the mortgage.

Now the interesting bit that I really wasn't expecting. 
Scenario 1.
Lump the ISAs and GIA together and you've got £400k.  Add in 2 years of savings and you get to £450k.  You want £22,800 a year and that comes out at a withdrawal rate of 5.07%.  Is that reasonable over a period of say 22 years from 38 to 60?  It's certainly not bomb proof, but probably reasonable if you have back up plans to pick up some part time work or cut spending.

Scenario 2.
Pay off the mortgage first.  Your pot drops from £450k to £335k, but your requirement drops to £16,800.  Your withdrawal rate now DROPS to 5.01%  That's not a fair comparison of course as the mortgage payment doesn't increase with inflation, but it does remove the risk of interest rates rising and pushing your payments up and your spending also becomes more flexible when you take away that big fixed cost each month.  It looks to me as though your odds would probably be better if you paid off the mortgage.

Scenario 3.
Replace the mortgage with an offset mortgage and net it down to zero by putting £115k into the offset deposit accounts.  The numbers are now identical to scenario 2, but if the main ISA / GIA pot runs out you can live off those deposits for about 4 years* then repay the mortgage from the SIPP as in scenario 1.

Please check my numbers, but if I have them right Scenario 3 looks way lower risk to me.

* Edited because I forgot the spending power of the offset amount would be reduced by inflation!

[PhilB]

The more I think about this one, the more interesting it becomes (probably not what you want to hear).  It kept my mind busy whilst up a ladder chopping down trees for quite a while!

The usual arguments about not paying off a mortgage because, most likely, you'll get a better return on the stock markets don't apply here.  You're not interested in the most likely outcomes (or you shouldn't be).  What concerns you are the outlier cases where your SWR would fail before you get to pension access age.  If everything goes well you're already laughing.  What you need to do is protect against things going badly.

Keeping the mortgage leverages your exposure to the stock market and increases the odds of failure following a prolonged market crash in the early years.  Market crashes aren't the only cause of portfolio failure though - high inflation is the other SWR killer and in that case the mortgage acts as a hedge against inflation because your liability and monthly cost both shrink in real terms.  I don't know if cFIREsim allows you to model a fixed cost like that and see what the outcomes are? 

The question you need to ask yourself is what are you more scared of, inflation or a market crash?  Do you feel lucky?

[never give up]

I wish I had your bravery in the home maintenance approach Playing with Fire UK, but I like how you are going about it.

I like how PhilB’s scenarios are framed, and wish you all the best with your plans. I look forward to hearing how you ultimately approach it.

[Playing with Fire UK]

Numbers to play with!  Fun!

Firstly, the bit you already know - from Pension Access Age you should be laughing - even if you need to use the lump sum to pay off the mortgage.

Now the interesting bit that I really wasn't expecting. 
Scenario 1.
Lump the ISAs and GIA together and you've got £400k.  Add in 2 years of savings and you get to £450k.  You want £22,800 a year and that comes out at a withdrawal rate of 5.07%.  Is that reasonable over a period of say 22 years from 38 to 60?  It's certainly not bomb proof, but probably reasonable if you have back up plans to pick up some part time work or cut spending.

The question you need to ask yourself is what are you more scared of, inflation or a market crash?  Do you feel lucky?

Thanks for your thoughts @PhilB - great to get some perspectives.

It's important to recognise that while the withdrawal rate for Scenario 1 starts higher, it falls and continues to fall as inflation erodes the mortgage payment (for a constant interest rate). So the WR will be lower for Scenario 1 after a few years and when I'm approaching the SIPP access age. If I were applying for a remortgage today, I'd expect to get a better rate: my options for the cash-out mortgage were limited because most lenders refuse to lend in that scenario, so it's feasible that in 2021 I can get a lower rate which will push the WR with the mortgage lower. An IO mortgage would be even better as I could push more spending into the post-SIPP timeline.

This pushes me to think about both what I'm scared of and when I'm scared of it and how scared I am.

A market crash the day after FIRE could be mitigated by working as a contractor while my skills are still sharp and everyone remembers my name. This would be a failure of the plan, but a relatively easy recovery. My industry niche cycles differently to the general market and tends to use more contractors for roles like mine during a downturn to reduce the commitment for permanent staff.

Long-term inflation is altogether scarier. It would hit maybe 10/15 years after FIRE when my skills would have atrophied and I'd be forgotten in my industry niche. There will always be other jobs (baring the robot revolution), but it'll be a tougher ask to find them with a 10 year CV gap.

I like that inflation is reducing my mortgage and the extra exposure it gives me to the stock market. High interest rates (specifically a high interest rate on my mortgage) won't hit all of a sudden. I'll have a fixed rate for as long as possible and the ability to respond. In the absence of a market crash I can always sell equities or bonds to reduce the mortgage payments if rates rise. I'd be more inclined to invest the mortgage money more conservatively than having it sit effectively in cash in an offset account.

I like your phrase "not bomb proof". It's helpful to add the context that this doesn't need to be a bomb proof plan. If FIRE goes to shit I'll be fine once I can access my SIPP and no worse (even if I did end up back in work for a while) than if I hadn't aggressively earned, saved and FIREd but planned to be employed forever until I encountered an unfortunate redundancy that left me with a CV gap. This is a ridiculously fortunate position to be in.

[Playing with Fire UK]

I wish I had your bravery in the home maintenance approach Playing with Fire UK, but I like how you are going about it.

Do you mean brave as in "as brave as a hatter"? :-) Having seen headline costs for bathroom and kitchen refurbs and then compared it to what we actually spent DIYing I feel like I can err on the side of being relaxed. Also, having more time to stay on top of maintenance might mean that I have less chance of something failing catastrophically?

[PhilB]

I'd be more inclined to invest the mortgage money more conservatively than having it sit effectively in cash in an offset account.

Can I ask what you mean by 'more conservatively' in this context?  Are we talking defensive stocks, ITs, etc or are we talking something like LS40 with high bond allocations / low equity allocations?  I would struggle to see the sense in the latter in this case as they will include a big chunk of gilts which will almost certainly give a worse return than the interest you'll be paying on the mortgage.  It would be much better to just use equities and offset cash in that case.

[Playing with Fire UK]

Gotcha, I was thinking of investing about half in equities, some bonds (but not junk and not only gilts) and then some cash/offset/premium bonds depending on what was happening at the time with rates. I like that bonds have sometimes been counter-cyclical with equities, but know that this isn't a guarantee and that gilts are especially sluggish at the moment.

It's not a fully formed idea. I was 100% stocks until I got my mortgage money and am starting to think about what my asset allocation should be in FIRE and on the approach to FIRE.

ETA: Having looked at current offset mortgage interest rates I'll have to review in 2021, as they are higher than when I was last looking at them, so it will make more sense to use the offset rather than saving accounts or premium bonds.

[PhilB]

I know what you mean about the counter-cyclical nature of bonds, but personally I find it hard to envisage any further capital gains on bonds given where interest rates are sitting - and plenty of scope for loss if interest rates ever go up again.  I know others still believe in them, that's just my personal view that the risk/reward ratio doesn't appear very encouraging.

Like life generally, it's a bit of a lottery whatever investing approach we choose - except in this lottery the odds should be stacked in your favour!

[never give up]

I wish I had your bravery in the home maintenance approach Playing with Fire UK, but I like how you are going about it.

Do you mean brave as in "as brave as a hatter"? :-) Having seen headline costs for bathroom and kitchen refurbs and then compared it to what we actually spent DIYing I feel like I can err on the side of being relaxed. Also, having more time to stay on top of maintenance might mean that I have less chance of something failing catastrophically?

I definitely didn’t mean to imply “brave as a hatter” I can assure you. The fact that you can do so much DIY yourself is great and I’m sure regular maintenance must help. It’s more things like roofing, windows, external doors, boiler replacement, emergency plumbing that I tend to think can be very costly and are things I can’t do myself. I feel I need to budget for these items somehow but have never settled on how best to cover them.

Mortgage wise I would definitely want to be clear of it but I understand that may not be optimal and again admire your “brave as a lion” approach.

[PhilB]

As an aside - I've just found and started reading your journal.  I don't want to derail this discussion, but I do want to say 'Holy Crap!'

[Playing with Fire UK]

I wish I had your bravery in the home maintenance approach Playing with Fire UK, but I like how you are going about it.

Do you mean brave as in "as brave as a hatter"? :-) Having seen headline costs for bathroom and kitchen refurbs and then compared it to what we actually spent DIYing I feel like I can err on the side of being relaxed. Also, having more time to stay on top of maintenance might mean that I have less chance of something failing catastrophically?

I definitely didn’t mean to imply “brave as a hatter” I can assure you. The fact that you can do so much DIY yourself is great and I’m sure regular maintenance must help. It’s more things like roofing, windows, external doors, boiler replacement, emergency plumbing that I tend to think can be very costly and are things I can’t do myself. I feel I need to budget for these items somehow but have never settled on how best to cover them.

Mortgage wise I would definitely want to be clear of it but I understand that may not be optimal and again admire your “brave as a lion” approach.

Thanks @never give up - you are so kind. For emergency plumbing: if you know where the stopcock is, how to drain down your system and have a roll of self amalgamating tape on hand you will turn a lot of plumbing emergencies into plumbing inconveniences. By looking up at the roof when you get home in the rain you'll pick up on mini roof issues earlier.

[Playing with Fire UK]

As an aside - I've just found and started reading your journal.  I don't want to derail this discussion, but I do want to say 'Holy Crap!'

Ha! I found yours yesterday too!! What are the odds? Links to mine and PhilB's, more UK journals here.

[vand]

Getting the optimal balance of funds between SIPP and ISA can be a tricky exercise on paper.

If there is any doubt I think I would overfund the ISA slightly, then you can just delay withdrawing from the SIPP until the ISA is exhausted, or otherwise draw on both while the ISA still has some funds left in it.. (that's my own plan).

Slightly tilting towrds overfunding the ISA is no disaster in my book, and when its all shaken down the material difference it will make in delaying one's RE date is probably only a matter of a few months either way.

[PhilB]

Not having to worry about ISAs vs Pensions is definitely one of the key advantages of being an old fart by FIRE standards :)

[sea_saw]

I have no input but this is so exciting :)

Also PhilB I hope you're around for when I need to figure these numbers out in like 20 years!

[Playing with Fire UK]

Getting the optimal balance of funds between SIPP and ISA can be a tricky exercise on paper.

If there is any doubt I think I would overfund the ISA slightly, then you can just delay withdrawing from the SIPP until the ISA is exhausted, or otherwise draw on both while the ISA still has some funds left in it.. (that's my own plan).

Slightly tilting towrds overfunding the ISA is no disaster in my book, and when its all shaken down the material difference it will make in delaying one's RE date is probably only a matter of a few months either way.

Yes. If I could go back in time and put less into my SIPP or work pension in the past I'd be all over that. I'm barely contributing to my pension* at the moment and I still think it's overfunded. An IO mortgage would nudge that balance back though.

*I get a 12% of salary in my work pension for a cost of ~1.5% that I can't let myself pass up, even though the 1.5% would help the ISA element that is the risky bit.

[PhilB]

I have no input but this is so exciting :)

Also PhilB I hope you're around for when I need to figure these numbers out in like 20 years!

I'll do my best to still be around (despite all the scary things from my works' medical) but I'm sure by then you'll be a full on financial ninja and won't need any help from me.

[PhilB]

Getting the optimal balance of funds between SIPP and ISA can be a tricky exercise on paper.

If there is any doubt I think I would overfund the ISA slightly, then you can just delay withdrawing from the SIPP until the ISA is exhausted, or otherwise draw on both while the ISA still has some funds left in it.. (that's my own plan).

Slightly tilting towrds overfunding the ISA is no disaster in my book, and when its all shaken down the material difference it will make in delaying one's RE date is probably only a matter of a few months either way.

Yes. If I could go back in time and put less into my SIPP or work pension in the past I'd be all over that. I'm barely contributing to my pension* at the moment and I still think it's overfunded. An IO mortgage would nudge that balance back though.

*I get a 12% of salary in my work pension for a cost of ~1.5% that I can't let myself pass up, even though the 1.5% would help the ISA element that is the risky bit.

Yep.  I get very jealous of all the talk of Backdoor Roth and suchlike that so many US forumites are using to access their pensions early.  Try anything like that in the UK and you end up losing 155% of your money :(

[never give up]

Thanks for the emergency plumbing advice Playing with Fire UK. What a thread. SIPP bridging and emergency plumbing all solved in one place! We only need to cover off cooking tips and this thread becomes the Holy Grail!

Yes. If I could go back in time and put less into my SIPP or work pension in the past I'd be all over that. I'm barely contributing to my pension* at the moment and I still think it's overfunded. An IO mortgage would nudge that balance back though.

*I get a 12% of salary in my work pension for a cost of ~1.5% that I can't let myself pass up, even though the 1.5% would help the ISA element that is the risky bit.

That's interesting. Ignoring the mortgage piece you aren't far off of 50:50 in terms of ISA to SIPP. I would have thought that was a decent ratio. I'm roughly 25:75 so you're making me think I have too much in my pension! Why do you think you are overfunded here? Is that because of the expected growth rate in the time before you can access it will lead you to have "too much" in it?

[PhilB]

You can't just look at raw numbers or ratios.  You have to relate them to what they will be used for and when.

PwF has to plan for a 20+ year gap between pulling the plug and accessing her pension.  That gives the double whammy of more time for the ISA stash to last and more time for the pension stash to grow.  You could argue that, with 2020 hindsight, she'd have put more in the ISA and less in the pension, but that's about as fair as saying with hindsight she'd have bought Apple and Bitcoin (and sold at the right time too.)

Not only is there a big carrot dangled to encourage you to save into a pension, but if, like everyone on here, you're a second marshmallow kind of person it's perfectly natural to want to get your long term future safe before you start narrowing the gap to when you can pull the plug.

You need to run the numbers for your own specific timescales to know what ratio is right for you.

[never give up]

Yes very true. I’ve had a long week and that last comment proved it!

[Playing with Fire UK]

...  You could argue that, with 2020 hindsight, she'd have put more in the ISA and less in the pension, but that's about as fair as saying with hindsight she'd have bought Apple and Bitcoin (and sold at the right time too.)
...

You need to run the numbers for your own specific timescales to know what ratio is right for you.

Agreed. I think @never give up you probably have an ideal ratio for your situation. You also have the ability to course-correct much closer to your SIPP age.

I don't regret the decisions I made at the time I made them with the information I had. From a FIRE perspective I'd have been better putting less in my pension and from a tax perspective I'd have been better stuffing my pension now rather than earlier. But none of that really matters, because I've done enough and other factors are the limit on FIREing rather than the ISA. Also, if I was that psychic I'd have just won the lottery and by-passed this whole work thing.

[never give up]

Hehe yes very true. I see what you mean.

[Playing with Fire UK]

Yep.  I get very jealous of all the talk of Backdoor Roth and suchlike that so many US forumites are using to access their pensions early.  Try anything like that in the UK and you end up losing 155% of your money :(

Yes, I get that feeling too!

[never give up]

How's the latest post in the series Playing with Fire UK? Has it helped in any way? I can imagine your plan being so watertight that there wouldn't have been much for you to learn from it.

[Playing with Fire UK]

How's the latest post in the series Playing with Fire UK? Has it helped in any way? I can imagine your plan being so watertight that there wouldn't have been much for you to learn from it.

Great question @never give up - I started a whiny post about how annoying it was to have so much in my pension rather than the ISA but then cooked some delicious food instead and shook myself out of it. The last Monevator case study was not dissimilar to how I was thinking about my savings in the past. The thing that caught me out was my last job move that massively raised my salary which moves the pension/tax needle and is an amazing problem to have that I am grateful for and won't beat up my previous non-psychic self about.

I've been playing with the excellent Engaging Data chart (highly recommended, this is not financial advice). For my current situation (as in right now), with a shift to 70/30 stocks/bonds, this is what my success chances look like. I've assumed 10% spending flexibility and a PPAA of 55. That tiny red slice, that's the chances of this going wrong. Significantly more chance I'll be dead. (Caveats, US data, past performance, blah blah).

In two years' time, with no spending flexibility, it looks like this. No red slice, would have worked in all the historic cases (caveats, past performance, blah blah).

This is exciting! If the PPAA shifts later, the chance of failure increase pretty quickly, BUT, that is assuming that the PPAA increases immediately the day before I turn 55 and I can't do anything about it. I'm comfortable that any pension changes won't happen immediately, and it doesn't take much spending flexibility to nudge that down.

These charts to show that the vulnerable bit is going to be just before the PPAA, which is what I suspected in my gut, but it's nice to have a chart confirm it. The charts aren't modelling that the mortgage costs won't increase with inflation, which will have the biggest impact just before the PPAA. It also doesn't account that the mortgage will cease entirely at some point - but that doesn't really impact the success chances unless the PPAA gets above 60.

All that does bring me to thinking that if I could get a competitive repayment remortgage on a longer term that could do a similar thing to an IO or offset mortgage that is harder to come by and remortgage. There seems to be talk about a 35-year-term being the new 25-year-term. I'd need to check what kind of awkward questions might be asked about expected retirement age though!

[never give up]

That’s good the case study is in line with your own thinking. That helps provide some reassurance nothing has been missed. I must admit I’ve read it about four times and feel I need to read it another four times. My cogs turn slow. I get a bit lost with the impact of fees piece. I count my fees as an expense so can’t see why that would impact my withdrawal rate.

I hadn’t seen the Engaging Data website before. That certainly adds some context! I like how you always seek creative ways of using a mortgage to help you too. I just wouldn’t have the nerves to cope but I really hope you find a way of progressing that allows you to achieve your goal. You seem to be in great shape.

[Playing with Fire UK]

For fees, there are two elements. The amount that you get charged in your account (that you see as an expense) and the fund fee that is a slight drag on investment return. TBH, with a 3% or 3.3% SWR I'd be ignoring fund fees unless they were outrageous, in which case I'd be switching away and buying some Vanguard. If you are already counting the fees as an expense (and you can forecast what they'll be with a higher balance), you are fine, no more work needed. The work is only needed if you aren't counting your fees as an expense and are using a growth estimate before fees to get to your SWR.

I think the whole series is excellent for people in the accumulation stage who are trying to get to estimate how long it'll take to get to FIRE or FART, while knowing that things will change along the way. The detail they've gone into for the tax situation is the most I've seen for a UK site. I suspect that actually deciding to FIRE or FART is so much more complex (satisfaction with work, plans for post-FIRE, health) that unless the spreadsheet says you are stuffed you'll probably end up making the decision once you are in the realms of possibility or when you can finally break free from the shackles of doubt.

I will give some more thought to what my costs will be in FIRE and how much I'm willing to cut following a downturn. The Engaging Data charts are really good at high-lighting the difference that flexibility can make. That growing grey section really focusses the mind on what matters.

[never give up]

I see, thanks for explaining. Yes I thought I was covering the fees ok the way I was doing it.

It really is a thorough series. I agree. I haven’t seen anything quite as comprehensive either but because my ISA value is so low I think PhilB’s pots of joy approach makes more sense in my situation. I’m looking forward to the next post on liability matching. I thought that was going to be today.

I agree that the psychological elements and flexibility are just as important as what the spreadsheet says.

[helloyou]

I'm the same age and I never invested in pension because I don't want to wait for 20 years until I can get access to the money....

Lot of things could happen and the gov could decide to increase tax and change load of things.

Any idea if there is a way to benefit earlier from it?

[PhilB]

I'm the same age and I never invested in pension because I don't want to wait for 20 years until I can get access to the money....

Lot of things could happen and the gov could decide to increase tax and change load of things.

Any idea if there is a way to benefit earlier from it?

I'm afraid not - unless you have a terminal illness with a life expectancy in months.

Pension access scams frequently do the rounds.  They are all fraudulent and run by crooks who WILL steal your money.  HMRC will then come after you for another 55% on what's been stolen as a tax penalty.

The only real flexibility in the UK is to use a mortgage to finance some spending pre pension access age then pay it off from the PCLS.

[helloyou]

I'm the same age and I never invested in pension because I don't want to wait for 20 years until I can get access to the money....

Lot of things could happen and the gov could decide to increase tax and change load of things.

Any idea if there is a way to benefit earlier from it?

I'm afraid not - unless you have a terminal illness with a life expectancy in months.

Pension access scams frequently do the rounds.  They are all fraudulent and run by crooks who WILL steal your money.  HMRC will then come after you for another 55% on what's been stolen as a tax penalty.

The only real flexibility in the UK is to use a mortgage to finance some spending pre pension access age then pay it off from the PCLS.

Thanks i'm not clear how pension can help paying mortgsgr? And what is PCLS? Is there some explanation somewhere?

I can't get to the idea of having my cash lockdown for 20 years. A lot of things can happen in between and I'd rather pay 25% tax on it (so having a 25% lower pension) than having it locked for so long.

However, if there is a way to get some benefit from it (such as paying / offsetting mortgage) I may consider adding money in there?

Othereise I'd await sbout 10 more years before topping up my pension

[never give up]

Unless you are planning on dying prior to pension access age (I do hope not) it is likely a pension has a role to play in your finances.

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

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

[PhilB]

PCLS is the Pension Commencement Lump Sum - the 25% of the pension you take out tax free.  It's a fairly common practice to use this to pay off a mortgage.

Whilst I would urge any employed person to at least pay enough into a pension to get the full employer contribution and to very strongly consider making use of any 40% relief if a HRT payer or 32% if BRT with salary sacrifice, I have no problem at all with anyone who only gets 20% relief parking the money in an ISA instead with the option of maybe shifting it to a pension further down the track if that makes sense.

[vand]

Unless you are planning on dying prior to pension access age (I do hope not) it is likely a pension has a role to play in your finances.

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

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

Agreed. Pension wrappers are still the most efficient savings vehicle for 99% of people.

We've pointed out before that early retirement age is a full subset of normal retirement age. There's no point rushing to retire at 45 if you haven't planned for when you're 70. You build your retirement from the most distant point and then bring it forward to the earliest point you can get away with.

I'm not against ISAs (far from it) at all but the reality for many ISA holders is that they will not be benefitting that much from the touted tax-shield benefits of the ISA - because to benefit at all you need your ISA'ed investments to grow enough that you start to exceed the CGT/dividend tax threshold on annual realised gains.

Pension contributions by contrast allow you benefit straight away from the tax relief and you might not even have to pay any on the way out.

The average ISA pot size in the UK is 24k. That's 24k that the average ISA holder will have paid full rates of income tax on. The tax liability they'll have saved even if they liquidate it all in one go isn't going to compensate them for they amount of tax they've given up on the way in.

[Playing with Fire UK]

I'm the same age and I never invested in pension because I don't want to wait for 20 years until I can get access to the money....

Lot of things could happen and the gov could decide to increase tax and change load of things.

Any idea if there is a way to benefit earlier from it?

I'm afraid not - unless you have a terminal illness with a life expectancy in months.

Pension access scams frequently do the rounds.  They are all fraudulent and run by crooks who WILL steal your money.  HMRC will then come after you for another 55% on what's been stolen as a tax penalty.

The only real flexibility in the UK is to use a mortgage to finance some spending pre pension access age then pay it off from the PCLS.

Thanks i'm not clear how pension can help paying mortgsgr? And what is PCLS? Is there some explanation somewhere?

I can't get to the idea of having my cash lockdown for 20 years. A lot of things can happen in between and I'd rather pay 25% tax on it (so having a 25% lower pension) than having it locked for so long.

However, if there is a way to get some benefit from it (such as paying / offsetting mortgage) I may consider adding money in there?

Othereise I'd await sbout 10 more years before topping up my pension

Using a pension to pay the mortgage is broadly what I describe above. You take an (ideally) interest-only mortgage with a term that extends after your pension access age. You can spend the mortgage money before the pension access age and then repay it afterwards.

Is your plan to retire early? You mention topping up your pension in 10 years time and you'll be severely restricted if you aren't working then. The fewer years you have between stopping work and your expected pension access age the better deal pensions are.

[helloyou]

Thanks guys that's exactly my problem. I'm planning to retire this year or within the next few years. But very soon.

And I don't want to have monnies locked for 20+ years until I can withdraw it if I need it with a pension even with all its advantages. I reckon with good planning I could have saved 30% more with pension but it's possible I may not even live in the UK anymore or maybe move to a low tax country... there are so many possibilities!!!

If at least it could provide some gradual benefit then I could consider. Otherwise it's a tough call as I may need the cash 10 years down the line and it would be locked. And the cash may not be to survive, it could just be to open a new business or having found a great investment to buy...

Dilemma!

[Playing with Fire UK]

Sure, if you want the money available to invest in a business then pensions won't be for you.

If you are solely looking to draw an income, pensions can still make sense even if you are planning to retire 20 years ahead of the access age. If you think about the guidance of needing between 25x and 33x your spending to retire, you can have some of that in your pension, as you won't be spending it until later.

Portugal has some great options for accessing a UK pension tax free if you are willing to relocate for a while (these could change too of course).

[helloyou]

Sure, if you want the money available to invest in a business then pensions won't be for you.

If you are solely looking to draw an income, pensions can still make sense even if you are planning to retire 20 years ahead of the access age. If you think about the guidance of needing between 25x and 33x your spending to retire, you can have some of that in your pension, as you won't be spending it until later.

Portugal has some great options for accessing a UK pension tax free if you are willing to relocate for a while (these could change too of course).

It may not be a business. It can be because I decided to more to a different country, and why not a tax free country. It's also because once it's stuck into pension it's very likely that the governement will change the rules in 20 years time, and who knows what may happen and what they could do.

It's really about flexibility and ability to get the cash when I want to. If I could get access to it in 10 years time, it would be a no brainer of course. But in 20 years lots can change!

[vand]

Moving around countries adds a huge complexity to things and is certainly beyond the scope of what I feel competent to comment on.

I will say that that financial plans and life plans are not independent of one another. If you have no idea what country you'll be in, say, 5 years from now then how can you begin to make long term financial plans? Good planning relies on having clear goals.

Thus there tends to be a trade off between remaining liquid and how much you can shield away from the Tax Man.

[cerat0n1a]

From what I've read the SIPP 'should' be available from State Pension age - 10 years, but actually the legislation to enact that was not implemented - so actually it will remain age 55 when SP age increases.

(Replying to a 6 month old post, but it seems like useful information to followers of this thread.)

The government confirmed yesterday that it still plans to proceed with legislation to raise the minimum age at which you can access a private pension from the current 55, to 57, in 2028.

https://questions-statements.parliament.uk/written-questions/detail/2020-08-28/81494
https://www.theguardian.com/money/2020/sep/04/minimum-age-uk-personal-pension-rise-covid

[never give up]

Thanks for posting and keeping us updated cerat0n1a.

(Shakes fist in the general direction of Westminster.)

[Playing with Fire UK]

Thanks @cerat0n1a - I'm mentally prepared for 57, but I don't like the idea of it creeping up any further (not that I can do anything about it except shake a fist in the general direction of Westminster).

It's useful to get an idea of the notice that they gave for this change: signposting it in 2014 and confirming in 2020 for 2028 implementation. It does mean that I'll probably be done with work before the window that they consider a reasonable amount of notice, but I don't plan to make changes.

[skip207]

The danger is they might push it on a couple more years... thats my worry.  So 57 now but then faff with the legislation for a few more years then when we get to say 2023 they say ah yeah after consideration we will push it to 59 and boom in 2025 they kick it in.

I will only be confident of whats happening once they new regulations are passed.