A start

[AsleepInYorkshire]

Hello

I am not entirely sure where to start. I will be 57 at my next birthday. On the same day, my daughter, an only child, will be 12. I am not married and I mention this as I suspect it will play a part in some of the decisions I will make over the coming months and years.

I work in construction as a Quantity Surveyor/Commercial Manager and my partner is a librarian and she is 52 at her next birthday. We have lived in our current home for 25 years since we were fortunate enough to buy it new.

However, all has not be idyllic in our world. I've not been too well. My symptoms started when I was about 13 and have become progressively worse until I was correctly diagnosed two years ago. With new treatment I am in a different world and I anticipate I will see the latter part of my life out in some security. To say I am rebuilding my life really doesn't convey what I have to get through to sort all my financial problems out. I don't want to linger on my illness. I can't change the past. My undiagnosed and incorrectly treated condition manifest itself around huge rem sleep deprivation. My ability to function rationally at any level was severely compromised. That has not been aided by an inconsistent income stream.

My planning for retirement has suffered and I need to focus upon a remedy.

I have a plan.

I propose to work towards financial independence over the next 15 years and retire at the age of 72. That would coincide with my partners retirement age of 67. We both have pension funds but they are small. Jointly they come to about £100K. The first part of my plan is to take 25% of my pension fund and transfer it to an ISA. I am looking at a low cost stocks and shares ISA where I can pick the fund(s) I buy into. I propose to add about £1K per month to that ISA over the next 15 years. I have not worked out what to do with the balance of my pension fund as I prefer not to take a 40% hit with tax. I'd welcome some pointers on this please. In 3 years when she is 55 we will transfer 25% of my partners pension fund into an ISA. At this time we will be able to lift our monthly commitment to the ISA to somewhere between £1.2K to £1.5K per month. I've argued to myself that the ISA "could" achieve 10% growth per annum but will be open to the vagaries of market fluctuations accordingly. I sort of hope that the amount we are proposing to commit to the ISA will "offset" any downside if I have over egged the anticipated rate of growth.

I'd genuinely welcome any constructive feedback and in particular advice on which platforms to look at for the ISA please and also does anyone have any idea what to do with the two pension pots or should I just leave them there? I am "sort of" reasonably confident that moving 25% tax free out of them into an ISA isn't a huge risk.

Thank you in advance for any thoughts and comments and I hope I haven't laboured too long on how I arrived this late in life with such few savings for my/our retirement.

AiY

[Alaric]

I am "sort of" reasonably confident that moving 25% tax free out of them into an ISA isn't a huge risk.

If you control the investments in the pension fund, is there any point in moving them sideways into an ISA? It's as risky or otherwise as the choice of investments before and after. You have to notionally retire to take money out of a pension fund, which can be restrictive as to how much you can put in later.

[ursaminortaur]

I am "sort of" reasonably confident that moving 25% tax free out of them into an ISA isn't a huge risk.

If you control the investments in the pension fund, is there any point in moving them sideways into an ISA? It's as risky or otherwise as the choice of investments before and after. You have to notionally retire to take money out of a pension fund, which can be restrictive as to how much you can put in later.

If you just take out the 25% tax free lump sum then that doesn't affect your annual allowance as to how much you could continue contributing to a pension. The annual allowance is only reduced from the current limit of £40,000 to the current MPAA limit of £4000 if you take potentially taxable withdrawals either after taking the 25% tax free lump sum or by using UFPLS drawdown (in which each withdrawal is made up of a 25% tax free part and a 75% part taxed at your marginal rate). One thing to watch out for though in that situation are the pension recycling rules - don't for instance increase your pension contributions by a large amount (over 30%) after taking the 25% tax free lump sum.
The pension recycling rules are here

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

[tjh290633]

I've argued to myself that the ISA "could" achieve 10% growth per annum but will be open to the vagaries of market fluctuations accordingly. I sort of hope that the amount we are proposing to commit to the ISA will "offset" any downside if I have over egged the anticipated rate of growth.

I'd genuinely welcome any constructive feedback and in particular advice on which platforms to look at for the ISA please and also does anyone have any idea what to do with the two pension pots or should I just leave them there? I am "sort of" reasonably confident that moving 25% tax free out of them into an ISA isn't a huge risk.

Thank you in advance for any thoughts and comments and I hope I haven't laboured too long on how I arrived this late in life with such few savings for my/our retirement.

AiY

You recognise that your "growth" could be about 10%, but may vary a lot. This ties in with my own experience, looking at a PEP from 1987 then ISA from 1999 and a combined ISA from 2008. My experience over that period has been an IRR of 9.8%, up to 13% at times, and lower at times. My annual IRR over that period has been:

Yr to 05 Apr   Annual IRR
        1987             
        1988       -6.23%
        1989       41.81%
        1990        6.44%
        1991       19.60%
        1992        3.31%
        1993       21.94%
        1994       17.67%
        1995        1.80%
        1996       22.37%
        1997       15.92%
        1998       58.44%
        1999        7.17%
        2000       -0.23%
        2001        3.06%
        2002        6.79%
        2003      -28.67%
        2004       34.80%
        2005       23.60%
        2006       30.46%
        2007       19.51%
        2008      -11.65%
        2009      -40.73%
        2010       67.93%
        2011       17.50%
        2012       10.38%
        2013       23.12%
        2014        7.75%
        2015       15.75%
        2016        0.33%
        2017       16.22%
        2018       -3.20%

You will immediately notice that there are good years and bad years. 1998 and 2010 were good years, but 2003 and 2009 went the other way. You have to take a long term view. I have followed what was essentially the HYP formula since the start, with my own tweeks to the original conception. All of the time it has been 100% invested in individual shares, although I have OEICs alongside now, having invested primarily in UTs in the previous 30 years. I also invest in ITs on behalf of my grandchildren and may move my own investments in that direction in the future as I near my nineties.

If you look at most of the popular ITs over the same period, the odds are that you will find less fluctuation in annual return. This is down to their wider diversification and the ability to hold a revenue reserve, which allows them to smooth out the dividend payments, so that the downturn in 2008-9 affected them less. I have never invested in fixed interest securities myself, although I did do so on behalf of my mother-in-law for a while. That was reasonably successful in the period 1975-1993, when conditions were considerably different from recent times. I am still of the opinion that they should never be bought above their nominal value, which rules most of them out at this time.

I agree with your proposed tactic to move the tax free sums into ISAs, whenever convenient, and to build up the ISAs. Regarding the pension pots, are they DB, DC or what? Are they in SIPPs, or with the original providers? Do you have any control in how they are invested? If they are managed sensibly, probably best to leave them where they are. That is something you have to decide. People on here can only tell you their own experiences, from which you have to decide how to move. I'm 30 years ahead of you, so what I have done may not suit you for the next 30 years.

TJH

[Chrysalis]

A few questions.
I assume you are still working, employed, what is your current workplace pension arrangement? Are you a 40% taxpayer now?
Consider continuing to contribute to your pension at least to maximise employer contributions, and to benefit from 40% tax relief, (can you do salary sacrifice?) then additional savings can go into an ISA.
I’m not sure of the merits of taking the 25% tax free cash at the earliest possible point, if you are simply going to reinvest it in an ISA. It doesn’t sound like you are likely to hit 40% tax rate on withdrawals. Alaric and others have pointed out the very important restrictions on further pension contributions if you fall foul of the MPAA rules.
Have you and your wife both checked your state pension entitlement?

The most basic question to answer is this - what are your income needs in retirement? Without a working figure for this number, you can’t start to plan what you need.

[Alaric]

It doesn’t sound like you are likely to hit 40% tax rate on withdrawals.

I had the idea that the OP was considering whether to withdraw the whole of the pension fund in one go. If so, then they might hit the 40% level.

For tax optimisation it works better to use any unused Personal Allowance to get tax free withdrawals from a SIPP in drawdown. If much of their personal savings for retirement is going to be in ISA form, that may leave unused personal allowance once they've stopped working.

With the change in the rules under "Pension Freedom", a Pension fund in SIPP form is very much like an ISA but with more complex tax rules. If you have an investment in mind for an ISA it can usually be held in a SIPP, so it isn't necessary to take money out of the pension to reinvest.

[Chrysalis]

Yes Alaric I think you may be right about the reason the OP mentioned 40% tax. That would clearly be a bit crazy!
I agree that OP needs to think about his pension as just another type of investment wrapper. Not much point withdrawing it until it is actually needed, imho.

[AsleepInYorkshire]

May I say thank you for all the replies. I haven't got time tonight to respond. There's a lot of useful information and I will come back later this week and leave a much more sincere thank you.

AiY

[forlesen]

AIY

Sorry for a late response, I've been away for a few days, and I found your OP quite interesting.

Congratulations on taking the first steps in replanning your financial future. I know from my own experience how hard it can be to face up to this.

Like the other posters, I would caution against withdrawing money from your pension. As they have noted, this could lead to short term and ongoing complications regarding tax, future pension contributions, etc, and it seems to confer no advantage. If you have your money in the right pension scheme, you can make exactly the same investments in the pension as in an ISA.

So all I would do on that front at this stage is look to see if your pension costs are optimised. With 100K invested, an annual percentage fee of even 0.75% will cost you £750 per annum, so you may be better off looking for a flat fee arrangement. The Monevator website is a good place to start for this, see: https://monevator.com/compare-uk-cheape ... e-brokers/. This could also give you more choice of pension investments.

You mention a retirement date you have in mind, which makes sense as far as your wife is concerned, but leaves you working up to age 72. Have you done any calculations to support this?

Next, do you and your wife have state pension forecasts? If not, I would do that right away, as it will give you a good starting point to calculate how much you need to save on top of this. If you and your wife were both entitled to the full new state pension, that would give you a joint income of around £330 per week, or £17000 per annum. You can check this here: https://www.gov.uk/check-state-pension.

A back of an envelope spreadsheet calculation using your figures suggests that starting with £100K, investing £12K per annum (£15K after 2022), and assuming a 6% annual return, by 2034 you will accumulated savings of around £570K. This is of course just a projection, and as TJH has graphically illustrated, your actual results are likely to vary wildly from year to year. But it gives you a curve that you can track against from month to month, year to year, and make adjustments accordingly.

I'm making no assumption here about which wrapper you use for the savings and investment (ISA or pension). But if you chose to make the savings into your pensions, your contributions would be boosted by at least 20% tax reclaimed by the pension fund (maybe more if either of you is a higher rate taxpayer), which would boost your projected 2034 savings by around £60K. Of course, there will eventually be tax to pay on the pensions, but you and your wife will both have your annual personal allowances to offset against this.

There is much debate on how to determine how much income you can safely draw down from capital, but for a rough back of an envelope calculation, I think the 4% rule is a good starting point. That suggests you could draw down around £22K per annum on top of the state pension. Depending on your state pension forecasts, that should give you a very healthy level of income, particularly as your daughter will by then be 27, and presumably living independently.

From this starting point, you could look at different options of saving levels, investment choices, retirement dates, drawdown methods, annuities, etc, depending on your needs, risk tolerance, etc.

Finally, I don't think you mention whether your house is still mortgaged? With your past health issues and inconsistent income stream, perhaps that has not yet been paid off. Although interest rates are low, I personally would prioritise getting that dealt with. At that point, all the money that was going out to the finance company can instead be redirected to your own futures, a wonderful moment to reach!

All the best with your future planning. It isn't easy, but there is no need to rush into making big changes. The most important thing is to get those monthly savings underway now. You could also start tracking your total wealth month by month or quarter by quarter too. After that you can research changes in wrapper, changes in investment, etc, at your own speed, and execute on them once you feel comfortable.