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James writes: I am 56 years old and would like to retire at 60. I will receive £9,000 a year income from a local authority pension with a £21,000 lump sum. I also currently have 3 different self-invested personal pensions (Sipps). I also have ISAs which I am gradually taking money from and putting into the Sipps each year to get the tax relief. When I hit 60 I would also like to do an equity release on my house, which is worth about £150,000 with no mortgage. I would like to use the money I release from my home alongside my local authority pension until my state pension kicks in at 67 – is this plausible?
Alina Khan, The i Paper’s money coach reporter, responds… After reading your letter and some back-and-forth emails exchanged, you explained you would like to release equity from your home as you have no children to leave it to and would use that money alongside your local authority pension to travel during your retirement.
You mention you will receive £9,000 a year income from your local authority pension, when you hit 60, this is because it is a defined benefit pension, meaning you will have a guaranteed income for life.
You also said you have £90,000 saved across three Sipps and £63,000 saved in ISAs. You hope the guaranteed income of £9,000 coming from your DB pension will act as a nice bridge between 60 and 67 when the state pension kicks in.
I spoke to Ruairi Dennehy, financial planner at Dennehy Wealth, to have a look at your plans and what things you need to be thinking about.
First thing’s first, Dennehy said as you are approaching retirement it is crucial you are happy with the level of risk you are taking in the investments within your Sipps and ISAs.
You mentioned that as well as holding cash – which is stable and cannot go down, but tends to grow slowly – some of the money in your Sipps is in money market funds as part of a technique known as laddering.
Money market funds are low-risk investment funds invested in short-term debt. These funds aim to create a slightly better return than you would get on cash in the bank, though it can be lower than you get from equities – shares in companies.
Laddering is a technique that helps investors manage risk and cash flow by purchasing investments that mature at different intervals, so you can access them at different points and get regular access to money.
Dennehy said laddering was a common-sense approach to investing in retirement and important for balancing risk. But he said it’s always worth reviewing your investments too.
He said: “I would also encourage you to do the ‘overnight test’, by this I mean pretend you wake up tomorrow and your portfolio is all in cash. Which of your existing holdings would you actually buy back? If there are a few that you would now avoid, ask yourself why you are still holding on to them?”
Should you be moving money from ISAs to Sipps?
You also mention gradually putting money in your Sipp from your ISAs to get the tax relief.
When you contribute to a Sipp, the government effectively tops up your pension contribution. It pays 20 per cent of the total amount you invest in your Sipp if you are a basic-rate taxpayer.
Higher-rate and additional-rate taxpayers receive the same 20 per cent relief as basic rate taxpayers but they can claim back an extra 20 per cent or 25 per cent through their self-assessment tax returns.
When you pull money out of the Sipp, you pay income tax – though you can get a quarter of the pot up to the value of £268,275 tax-free as a lump sum. With ISAs you don’t get tax relief for paying in, but the money you take is tax-free, as are any gains you make.
However, Dennehy said unless you are a higher rate taxpayer, he suggested keeping as much in your ISA as possible. He added: “Yes you get the top up for each Sipp contribution, but this is essentially clawed back by current rules only allowing you take a 25 per cent lump sum tax-free.”
If you want to retire sooner rather than later, Dennehy said you must consider what your monthly expenditure is.
“With the £153,000 in total between your Sipps & ISA, you could look to generate at least £6,120 per year or £510 per month in income via a ‘natural income’ approach,” Dennehy explained.
A ‘natural income’ approach means living off the income paid out by your assets (dividends and interest), without ever selling any.
However, Dennehy warned it was important to know this approach would need careful selection of future investments.
If you were to begin taking money from your ISA and Sipp (known as drawdown) this will reduce its growth prospects too, he warns.
Pension UK’s Retirement Living Standards say for a single person household you would need £31,300 a year for a moderate standard of living or £43,900 a year for a comfortable standard of living.
Dennehy said: “Even with the £9,000 pension income there is still quite a large shortfall to meet the £31,300 per annum guideline for a moderate standard of living.”
How about releasing equity?
You said you would also like to release equity from your £150,000 home. Equity release allows people over 55 to convert a portion of their home’s value into cash without moving, usually through a lifetime mortgage. Funds are taken as a lump sum or drawdown, with the loan and accumulated interest repaid from the sale of the home upon death or moving into care.
Dennehy said given your age and health – you said you were in relatively good health but had high blood pressure – you will likely be able to take between 20-30 per cent via equity release, which equates to £30,000-£45,000.
“If this is definitely the route you want to go down, you will need to think about what you will do with this lump sum.
“An easy-access cash ISA would be suitable for part of it, ensuring that if it is needed for travelling or anything else then the money is accessible. Be cautious of investing the money, if you plan to spend it in the short term,” Dennehy added.
You should also ensure your nomination forms are up to date, these are the documents that outline who you want to receive your pension death benefits if you were to die.
This will give you peace of mind knowing your pensions will pass to who you want them to, as pensions can fall outside of your will.
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