Getting to FIRE number (woop!) & practicalities?

[Jade]

My husband has stopped working and I'm planning on doing the same next year, though I might continue working 5 hours a week for a few more years after that.

We have approx £120k, in two stocks and shares ISAs and two SIPPS pensions, which we plan to draw down from to bridge us until we get our state pensions.

We can more than comfortably live on our state pensions plus both have a small works pension. The combination of state plus works pensions will nudge us both near or slightly over the tax threshold.

We intend to drawn down/withdraw from the SIPPS before the stocks and shares ISAs as our thinking is, if we have any money left over in the SIPPS when we receive our state pensions we will tip over the tax freshhold, whereas we won't if any remaining money is in the ISAs.

Is there anything we're missing or need to consider?

Also, is it worth my husband taking his works pension five years early (which he can do) at a reduced amount, or is it better to use the ISA money first?

[former player]

Congratulations.

I'm guessing you'v'e got a statement about your expected State Pensions?  Have you  filled up all the necessary years for a full pension?  You can buy voluntary contributions to add years and it's usually a very good deal for most people.

The works pension will have a standard set of calculations that they use in order to work out how much pension to pay if it is taken early: you might see if they make those available (your trades union could also do this if you are in one) and use them to calculate whether their notional return is better or worse than their ISA.

The only other thing I would suggest is that some employers, particularly the larger ones, have various schemes to benefit impending retirees so it might be worth checking that out - although if they offer financial advice it probably comes from a commercial firm that wants to invest your pension for you, at a cost.

[Jade]

Thanks @former player ! I am feeling very grateful that we found this site, as we reach FIRE.

Yes, we're all good on the NI front thankfully. We'll ask for more info on the work pensions, thank you and yes, we have something like that in terms of advice at my workplace so I'll take that up.

[PhilB]

Congratulations on achieving FI.  It definitely makes sense to withdraw enough from the SIPPS to use up your full Personal Allowance each year.  If you have no other income, that would be a net withdrawal of £13,880 each, being an uncrystallised funds lump sum of £16,760 withdrawn (25% tax free, 75% taxable) with £2,880 net / £3,600 gross paid back in.

My only concern would be are you confident that, when one of you eventually shuffles off this mortal coil, the survivor will be okay financially?

[Jade]

Thanks @PhilB ! So use the SIPPs (when they become available) rather than the ISAs at that point?

Yes,that's a question we're looking at too. This should be fine but the gap between my being 62 and 67 when we'll be mostly relying on Mr Js state pension would be the problem area if anything happened to him, but I think every year I carry on working currently will add more of a cushion overall too. I should earn about 2/3 of what we need each year still so that'll be less savings we need to withdraw.

[PhilB]

I've just been re-looking at some of your other posts to remind myself of your ages and overall position.  Depending on the size of your DB pensions, it looks very tight stopping work entirely at this point.  The five hours a week would give you a lot more wiggle roomy and, speaking as someone still doing seven hours a week, five years after I supposedly retired, a very good work life balance indeed :)

Choosing when to run down the SIPPs involves a few different factors.  I've already mentioned the desirability of getting it out while you have unused PA.  Against that there are the issues of possible impact on benefits and the fact that taking anything other than the tax free 25% reduces your annual allowance to £10k pa.  If the cashflow works out okay, it may make sense to put 100% of your part time earning into a SIPP, getting more tax relief than you have paid tax.  You can even do this whilst drawing money back out of your SIPP if you are still working post 57 - say you earned £8k - which would be tax free - you put £6.4k into the SIPP, government boosts that to £8k and you take it back out for a £1.6k profit and your taxable income is still only £8k!

As regards taking the DB pensions early, I might be tempted to do so when you stop working PT.  DBs are great for longevity insurance, but for you the tightest period is most likely to be the period before your SP starts.  With the age difference between the two of you, unless there are underlying health conditions, the odds are that you will be the eventual survivor.  Have you checked whether any actuarial reduction on his pension would have any impact on the eventual survivor's pension?  It doesn't for many schemes.

[Jade]

Thanks for doing that @PhilB -- we appreciate your help!

Yes, luckily I like my job too and can literally choose my hours so keeping on going on a smaller amount of hours, like you're doing, will create more flexibility.

We'll have a look into the things you mentioned about the allowance reducing to 10k - that was new to us. We're not entitled to any benefits. Very interesting what you are saying about putting all the parts time earning into the SIPP, thanks for the heads up, that could be v useful!

Re the DB pensions, we're getting the sense that ISAs might make sense to use in the period before the DB pensions become available (when I'm working PT) and also whatever's left later in life, as it'll still be tax free and not affect the PAs.

Yes, no underlying conditions but we're preparing for the scenario of me being the survivor / a gap between me getting my SP if anything happened to Mr J. I think as long as I'm happy doing 5 hrs ish a week, that will keep adding to that pot.

[Jade]

Another thought @PhilB ... I'll be earning about £21-22k till this time next year, would it be worth putting all that to a SIPP fir the uplift, as suggested in your last message and withdrawing from the ISAs now?

[PhilB]

Another thought @PhilB ... I'll be earning about £21-22k till this time next year, would it be worth putting all that to a SIPP fir the uplift, as suggested in your last message and withdrawing from the ISAs now?

That all comes down to cashflow.  In a perfect world, you'd get enough into your SIPP to fully use your personal allowance in the years between stopping work and your state pension starting.  The problem is that anything you put into your SIPP will be locked up until you are 57.  You need to make sure you have enough funds to support you until that age (including any unexpected emergencies) in vehicles that you can access when you need them.  It's a difficult balancing act when you don't know how long you'll want to keep working, or when your boiler might blow up.

[Jade]

Thanks again @PhilB ...yes, good point as I'm about ten years away from accessing my SIPP. we do have enough for those ten years in ISAs but probably to be on the safe side we'll definitely keep putting £2880 into Mr Js SIPP as he's only got 4 years till he can access that. I think I'll get a pen and paper out later and try and get a visual on it all.

[Jade]

Would you mind giving a bit more info on these points @PhilB ?

* The fact that taking anything other than the tax free 25% reduces your annual allowance to £10k pa.

* In a perfect world, you'd get enough into your SIPP to fully use your personal allowance in the years between stopping work and your state pension starting

[PhilB]

Would you mind giving a bit more info on these points @PhilB ?

* The fact that taking anything other than the tax free 25% reduces your annual allowance to £10k pa.

There is something called the Money Purchase Annual Allowance (MPAA) which they invented to try and stop people recycling money through pensions.  It isn't triggered by taking a DB pension, nor by taking the 25% tax free from a DC pension or personal pension, but the instant you take any drawdown income your annual allowance is cut from the normal £60k pa to £10k pa.  (It was £4k pa last tax year and I was very annoyed to be clobbered by it!)

* In a perfect world, you'd get enough into your SIPP to fully use your personal allowance in the years between stopping work and your state pension starting

If you are a 20% tax payer (without salary sacrifice) both whilst working and in retirement, then pensions aren't that great a deal.  £80 net contribution gets turned into £100 in the pension.  25% is tax free, but you pay 20% tax on the rest and end up with £85 for a 6.25% net return.  Nice, but not earth shattering.

Where it is a good deal, is if you are retiring early and will have unused personal allowance before your SP starts.  In that case you get to take the whole £100 out tax free (£25 tax free and £75 taxable, but covered by your personal allowance) for a 25% return on your initial £80.

The problem is that, to take full advantage of this, you have to have enough money to park all that money in a pension and live until you reach pension access age.  Yet another case of 'to those that have shall be given more' I'm afraid.

[Jade]

Thanks again (again!) @PhilB .. appreciate your time. I'll do some more research with what you've shared! I think a picture is starting to form of how to do all this. A good problem to have though!!

[never give up]

Congrats jade on reaching your number! Woohoo! I hope your research is going well as you finalise your details.

[Jade]

Congrats jade on reaching your number! Woohoo! I hope your research is going well as you finalise your details.

Thanks NGU! It's a good feeling. We're getting there.