I'm 46 and want to retire in ten years - how can I build the pension and investments to do it?
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I am 46 and would like to retire early in a decade's time to make the most of the years when I am hopefully still fit and healthy enough to do the things I want.
I plan to continue doing some work after that but only on a contract basis and on my own terms, with most of my time dedicated to things like travelling, walking, sailing, cycling and other things that my wife and I enjoy.
By that time, our two children will be nearing the end of university and our mortgage will be paid off.
I currently have about £250,000 in my work pension and mine and my employer's contributions are 15 per cent of my £110,000 salary. I also have a £150,000 in an investment Isa and about £30,000 in cash savings.
How can I build the best possible pension between now and then – and should I also focus on my Isa as I will not be able to access the pension immediately?
If you harbour ambitions of an active early retirement, how can you get your finances on track?
This is Money replies: An ambition to step off the career treadmill while you are hopefully still fit, healthy and active in your 50s is one that you share with many people.
But as your question shows, modern-day early retirement is often viewed differently to how people perceived retiring in their mid-50s in the past.
It’s not the desire for active and adventurous pursuits rather than afternoons on the golf course that make that the case, although we suspect that for many harbouring ambitions of early retirement tee-times might still feature.
Instead, it is the view that being able to retire early will involve achieving a degree of financial independence, while also perhaps doing some work to supplement your income.
But how much will you need? The Pension and Lifetime Savings Association has created some retirement income benchmark figures and this can give you some pointers on what your lifestyle might cost each year.
Your description of what you want to do puts you in the comfortable retirement bracket, which would require £54,400 annually for a couple at today's prices, according to the PLSA.
You would need to achieve that from a combination of your pension, Isa and savings and your work income - and the more the latter delivers, the less the draw on the savings and investments will need to be.
For example, if you could earn £20,000 per year, or £1,700 per month, this would mean potentially taking just under another £35,000 from investments.
Clearly, you have thought your early retirement dreams through, but are you financially on track to achieve this vision and what can you do to boost your chances?
We asked Tom Kimche, senior client adviser at Netwealth for their guidance on what you can do.
Tom Kimche, of Netwealth, replies: Like most people your situation and needs are quite particular, and while not uncommon, achieving your ideal outcome requires some thoughtful consideration and fine tuning.
With £250,000 in your pension now and with further contributions each year of £16,500, this could amount to around £620,000, if we assume growth in your pension after costs of 5 per cent a year for the next decade.
Similarly, your Isa could grow to almost £250,000 with the same scenario and no further contributions.
Keep your investment costs down
Crucial to how much growth you actually achieve is how much you pay in fees – and this is also true with the funds in your investment Isa.
For example, even paying 1 per cent less in fees (compared to 2 per cent) in a medium risk portfolio could add up to £14,000 extra to every £100,000 pot over 10 years.
With hundreds of thousands of pounds being invested, that amounts to a substantial boost over time – potentially giving you several more years of a comfortable retirement or more money to gift to your two children.
So, one of the first things you should do is identify your pension and Isa charges and see if it is worth changing provider, as it's gnerally a good idea to remain invested when you retire.
As you will be retired for quite some time, perhaps equal to or longer than your working life, making your money last is critical. Your £30,000 in cash savings could also be invested in your Isa or added to your pension to make the most of the tax-free benefits, providing you don't need this immediately accessible for emergencies.
Make sure you have the right investments for you
You should also ensure you are appropriately diversified. Some investment portfolios might be too skewed towards one particular asset or region (UK shares, for example) but to capture wider growth opportunities, and to better protect what you have from localised turbulence, it’s always recommended to invest in mix of global assets.
A diversified portfolio will commonly include Uk companies, but also ensure you hold a blend of (or exposure to) US, European and Asian firms, and government and corporate bonds – a forward thinking wealth manager can bundle all that together for you in one portfolio, at the right price, and with the level of risk that suits you.
I mentioned the £30,000 you have in cash savings, but you should also check that your Isa and/or pension doesn’t hold more cash or defensive assets (such as lower risk bonds) than is appropriate considering your time horizon. You have the time to put your money to work harder.
On the other hand, you may only be comfortable taking less risk, so it’s important to be conscious and mindful of your overall position. Make sure your asset mix is suitable to help you achieve your goals rather than letting cash build up and hindering your progress.
Having diversified assets in tax wrappers (pensions and Isas) and not overpaying to invest will go a long towards maximising your growth potential.
Can you pay more into your pension?
You should also consider whether you can contribute more to your pension.
Currently £16,500 is set aside between you and your employer, but you can put up to £60,000 a year into your pension (and you can carry forward any unused allowance from the previous three years), so it may be worth increasing your contributions if you can afford it.
The key then is the steps you take to make your overall funds (both pension and Isa) last for as long as possible.
It’s great news that your mortgage will be paid off, and you and your wife will also benefit from the state pension when the time comes (between 2026 and 2028 the state pension age is due to rise to 67 for both men and women).
Take your income in a tax-friendly way
While you can now take money from your personal pension at age 55, this rises to age 57 from 6 April 2028, but you may want to consider letting this pot grow further and withdrawing money from your Isa first of all.
How much you want to take from your investments initially will be driven by how much you need to be comfortable – if you are working on a contract basis and not paying housing costs, you might not need to touch your investment pots at all.
Of course, at some point you will likely stop working, and this is when smartly structuring your withdrawals from your pension and Isa will be crucial.
What is the most tax-efficient way of taking money from each, at what levels and in what order?
This is a highly individual situation, depending on your outgoings and preferences. Therefore, it might be best to seek financial advice to ensure you understand all the nuances of your circumstances and can find an approach that is most efficient for you.
The commonsense tips to growing your investment pots, as described above, are also invaluable to ensure your retirement funds are as resilient as possible – and getting an impartial opinion to help you fine-tune your options can help you ensure you stay on track.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions. When investing, your capital is at risk.
