Investment - extraction level

[dave123456]

Hi,

I reach 50 next year and would like to look at retiring.

My role is pretty well paid and carries a level of equity that I’d be walking away from but my current mindset is that I’d be spending valuable time earning more money than I really need.

Has anyone come up with a good plan for deciding the level of investment extraction they can make when they are happy to end up with not a lot. I know it’s a difficult question to answer but my current thinking is:

I have a pit of investments and 4-5 rental properties.

I intend to rent 4 properties, this roughly covers my bills in my house, utilities, council tax and food.
The 5th property I’ll use to run a hobby business, the idea being this makes my pocket money and keeps me from having too much time to waste too much money.
This leaves a reasonably large pot to draw on for other purposes, I have no children so my intention was to draw 5% per annum and see how I get on.

Based on the above I should get a level of income which is similar to my current salary, which, after tax, sees about 50% currently saved.. so I don’t currently spend huge amounts.

The basic question is; is 5% a reasonable amount if I’m not seeking to protect my assets? I think a 35 year time frame is reasonable and I’d still be left with c£2m of property if worse came to worse…

TIA

[Soloman Dodd]

I think that's reasonable.
I took 4% out of some bonds I inherited and they more than held their own over the last 20 years.

Of course in real terms inflation would be a factor, but it doesn't sound like it will affect you.

[xeny]

dave123456 said:

The basic question is; is 5% a reasonable amount if I m not seeking to protect my assets? I think a 35 year time frame is reasonable and I d still be left with c£2m of property if worse came to worse

I'd consider it slightly on the high side of reasonable, especially given equity prices are currently pretty elevated on a CAPE basis, so would keep in mind worse might well come to worse in the early part of your retirement.




from https://earlyretirementnow.com/2016/12/07/the-ulti... suggests it is a bit optimistic.

[okgo]

Though with flex in spending if needed, which obviously you’ll have given the funds and your current spending habits vs pot I think you’d probably be fine. And spending same at 80-85 as 50-60 is unlikely too so more fat in the plan there also.

[Panamax]

Why do you want "income"? Income is heavily taxed.

On what basis are you in BTL? Directly held or through a company?

Depending on the answers you might consider dumping some BTL and investing elsewhere. Or do you feel trapped in BTL because of potential CGT? Either way up, don't let the tail (tax) wag the dog.

[dave123456]

xeny said:

dave123456 said:

The basic question is; is 5% a reasonable amount if I m not seeking to protect my assets? I think a 35 year time frame is reasonable and I d still be left with c£2m of property if worse came to worse

I'd consider it slightly on the high side of reasonable, especially given equity prices are currently pretty elevated on a CAPE basis, so would keep in mind worse might well come to worse in the early part of your retirement.




from https://earlyretirementnow.com/2016/12/07/the-ulti... suggests it is a bit optimistic.

But 5% with no growth whatsoever would see me through to 70? I don’t want to die rich.

[dave123456]

Panamax said:

Why do you want "income"? Income is heavily taxed.

On what basis are you in BTL? Directly held or through a company?

Depending on the answers you might consider dumping some BTL and investing elsewhere. Or do you feel trapped in BTL because of potential CGT? Either way up, don't let the tail (tax) wag the dog.

To live off. Roughly half my cash pot is in offshore bonds which are pretty tax efficient.

Hold the freehold personally looking to set up leases in a limited company.

BTL spreads my assets a bit, they are not not attractive currently but that could change.

[supersport]

dave123456 said:

xeny said:

dave123456 said:

The basic question is; is 5% a reasonable amount if I m not seeking to protect my assets? I think a 35 year time frame is reasonable and I d still be left with c£2m of property if worse came to worse

I'd consider it slightly on the high side of reasonable, especially given equity prices are currently pretty elevated on a CAPE basis, so would keep in mind worse might well come to worse in the early part of your retirement.




from https://earlyretirementnow.com/2016/12/07/the-ulti... suggests it is a bit optimistic.

But 5% with no growth whatsoever would see me through to 70? I don t want to die rich.

The early retirement now site is a really good resource and has an excellent calculator.

The general consensus would be that 5% is a little high, but it assumes that that is the only income.

If you take into account extra incomes over a retirement, such as state pension, lump sums from selling properties etc and plug that into the calculator then you can easily get a higher safe withdrawal rate and 5% should easily be achievable. Especially since you appear to have a bunch of properties.

[macron]

dave123456 said:

To live off. Roughly half my cash pot is in offshore bonds which are pretty tax efficient.

Hold the freehold personally looking to set up leases in a limited company.

BTL spreads my assets a bit, they are not not attractive currently but that could change.

Can you share some detail on the bonds? Often talked about in the round, not often explained!

[PhilboSE]

macron said:

Can you share some detail on the bonds? Often talked about in the round, not often explained!

It depends on exactly what is meant by the term, but the standard products allows you to invest in the usual OEICs, ETFs, shares etc. All gains are gross, there is no tax along the way on gains or dividends, so over the longer term the growth is better than investments in a GIA.

The downside is that ultimately all gains are treated as income when you eventually “onshore” the funds, so you need to have a plan to do this is a tax efficient way (means sticking within the basic rate of tax on total income, really). A trick is that, with suitable planning, it’s possible to assign “segments” to other people over 18. The prime example is if you have children and can utilise their personal allowance while they’re low income earners eg at University. Then you can effectively onshore gains 100% tax-free, within limits. You are also allowed to onshore 5% of your original capital tax-free every year.

These products are exclusively available through IFAs and need to be fully understood before jumping in. Typically you would only use them if you fully invested in ISAs every year and put as much as you wanted to in a pension, and still had spare cash to invest.

[PhilboSE]

To answer the OP, I would say with his level of investments, sources of income and controlled spending, then his plan is viable if he accepts he will likely be eating into his pot, particularly if investments enter a bear market in the early years of his retirement.


Also the OP should check how many qualifying years he has for the state pension as at 50 it’s unlikely he’s got the full 35 years to qualify for the max, unless he started working at 15.

[dave123456]

PhilboSE said:

macron said:

Can you share some detail on the bonds? Often talked about in the round, not often explained!

It depends on exactly what is meant by the term, but the standard products allows you to invest in the usual OEICs, ETFs, shares etc. All gains are gross, there is no tax along the way on gains or dividends, so over the longer term the growth is better than investments in a GIA.

The downside is that ultimately all gains are treated as income when you eventually onshore the funds, so you need to have a plan to do this is a tax efficient way (means sticking within the basic rate of tax on total income, really). A trick is that, with suitable planning, it s possible to assign segments to other people over 18. The prime example is if you have children and can utilise their personal allowance while they re low income earners eg at University. Then you can effectively onshore gains 100% tax-free, within limits. You are also allowed to onshore 5% of your original capital tax-free every year.

These products are exclusively available through IFAs and need to be fully understood before jumping in. Typically you would only use them if you fully invested in ISAs every year and put as much as you wanted to in a pension, and still had spare cash to invest.

You are allowed a 5% withdrawal per annum for 20 years also.

[dave123456]

PhilboSE said:

To answer the OP, I would say with his level of investments, sources of income and controlled spending, then his plan is viable if he accepts he will likely be eating into his pot, particularly if investments enter a bear market in the early years of his retirement.


Also the OP should check how many qualifying years he has for the state pension as at 50 it s unlikely he s got the full 35 years to qualify for the max, unless he started working at 15.

I want to eat into my pot. For various reasons I don t wish to divulge precise quantums here.

5% would give me the same level of income i currently enjoy, gross. From the net of that income I currently save roughly 50% of my net income each month.

I also put 29% of my salary into pension on top of that 50%. My overall living costs are fairly low.

As a childless couple (my partner has a DB pension due in c8 years) why would we not eat into our asset? I m working on running out at 85, but would still have rental income ongoing. And the property I intend to employ in my hobby business would add to that.

I have an IFA and have run through this with them, I was just wondering if anyone else is in the same position and has an approach to try and land on zero at a reasonable age.

[Derek Chevalier]

dave123456 said:

I have an IFA and have run through this with them, I was just wondering if anyone else is in the same position and has an approach to try and land on zero at a reasonable age.

What were the Timeline success rates for the scenarios your IFA ran for you?

Given the many (personal) variables that determine outcomes, I'm not sure asking for other inputs will help much.

[PhilboSE]

dave123456 said:

PhilboSE said:

macron said:

Can you share some detail on the bonds? Often talked about in the round, not often explained!

It depends on exactly what is meant by the term, but the standard products allows you to invest in the usual OEICs, ETFs, shares etc. All gains are gross, there is no tax along the way on gains or dividends, so over the longer term the growth is better than investments in a GIA.

The downside is that ultimately all gains are treated as income when you eventually onshore the funds, so you need to have a plan to do this is a tax efficient way (means sticking within the basic rate of tax on total income, really). A trick is that, with suitable planning, it s possible to assign segments to other people over 18. The prime example is if you have children and can utilise their personal allowance while they re low income earners eg at University. Then you can effectively onshore gains 100% tax-free, within limits. You are also allowed to onshore 5% of your original capital tax-free every year.

These products are exclusively available through IFAs and need to be fully understood before jumping in. Typically you would only use them if you fully invested in ISAs every year and put as much as you wanted to in a pension, and still had spare cash to invest.

You are allowed a 5% withdrawal per annum for 20 years also.

Not quite. What I wrote in my previous post is correct:

PhilboSE said:

You are also allowed to onshore 5% of your original capital tax-free every year.

It's 5% of the original capital/investment you can take, NOT the total amount. Obviously if you do this 20 times (doesn't have to be in consecutive years) then the original capital is exhausted.

[alscar]

PhilboSE said:

It depends on exactly what is meant by the term, but the standard products allows you to invest in the usual OEICs, ETFs, shares etc. All gains are gross, there is no tax along the way on gains or dividends, so over the longer term the growth is better than investments in a GIA.

The downside is that ultimately all gains are treated as income when you eventually onshore the funds, so you need to have a plan to do this is a tax efficient way (means sticking within the basic rate of tax on total income, really). A trick is that, with suitable planning, it s possible to assign segments to other people over 18. The prime example is if you have children and can utilise their personal allowance while they re low income earners eg at University. Then you can effectively onshore gains 100% tax-free, within limits. You are also allowed to onshore 5% of your original capital tax-free every year.

These products are exclusively available through IFAs and need to be fully understood before jumping in. Typically you would only use them if you fully invested in ISAs every year and put as much as you wanted to in a pension, and still had spare cash to invest.

Iirc "some " types of offshore are nearer to 4% pa allowed in withdrawal if they were issued after 2012 but the exact calculation seems a bit more complex than a simple percentage !
However from the first date "allowed " if no such withdrawal taken ( which can only be of the original investment quantum in order to maintain the tax free element ( its really just a return of your capital investment anyway ) the annual percentage also rolls up so you could take take a lump sum of it as it were.

[xeny]

dave123456 said:

I have an IFA and have run through this with them, I was just wondering if anyone else is in the same position and has an approach to try and land on zero at a reasonable age.

You essentially need to adjust the rate as you go along, moving to steadily less volatile assets as you get older, so you can have a glide path that reaches zero as you expire.

Really small adjustments to the initial conditions make an outsize difference at the end that picking an appropriate initial rate is near impossible. I concluded I was more comfortable going with about 3.2%, aiming to not eat into the pot and spending some time finding some charities I wanted to leave a decent sum to.

[PhilboSE]

dave123456 said:

PhilboSE said:

To answer the OP, I would say with his level of investments, sources of income and controlled spending, then his plan is viable if he accepts he will likely be eating into his pot, particularly if investments enter a bear market in the early years of his retirement.


Also the OP should check how many qualifying years he has for the state pension as at 50 it s unlikely he s got the full 35 years to qualify for the max, unless he started working at 15.

I want to eat into my pot. For various reasons I don t wish to divulge precise quantums here.

5% would give me the same level of income i currently enjoy, gross. From the net of that income I currently save roughly 50% of my net income each month.

I also put 29% of my salary into pension on top of that 50%. My overall living costs are fairly low.

As a childless couple (my partner has a DB pension due in c8 years) why would we not eat into our asset? I m working on running out at 85, but would still have rental income ongoing. And the property I intend to employ in my hobby business would add to that.

I have an IFA and have run through this with them, I was just wondering if anyone else is in the same position and has an approach to try and land on zero at a reasonable age.

4-5% of withdrawals from a pot that is invested is usually regarded as reasonable and in a "typical" investment return year, the gains might equate to the withdrawals, leaving the capital relatively stable. So I don't see a 5% withdrawal with an intent to run down the pot as a bad thing, particularly as you have other assets to support income and capital needs in the future.

You still might want to consider when/how to access your pension. Usual advice is to access that first before investments, due to the higher potential tax implications on death, particularly after the age of 75 and if you are unmarried.

Also, the state pension question I raised earlier is still worth considering. If you have only (say) 30 qualifying years then that's one seventh of the State pension you'll miss out on, that'll be somewhere in the region of £3000 pa of "free" money you'll be missing out on when you qualify for it. That may, or may not, be significant.

Really your IFA should be doing some modelling for you, the advice we can give is limited without quantum. But from the information given I think it's do-able if you're prepared to flex if situations change in 20, 30 year's time.

(FWIW I stopped work aged 52, relying upon savings & investments etc since).

[PhilboSE]

alscar said:

However from the first date "allowed " if no such withdrawal taken ( which can only be of the original investment quantum in order to maintain the tax free element ( its really just a return of your capital investment anyway ) the annual percentage also rolls up so you could take take a lump sum of it as it were.

Indeed - that's what I'm doing this year. My bond has served its purpose (allowing us to onshore gains tax free through child Personal Allowances to pay for their University costs) and due to favourable investments there are still a lot of gains to be taken. Two of my children are going to put 100% of their salaries into a SIPP this year, and then they'll be getting £50k each in gains from the bond. They'll have to pay Basic Rate tax on ~£32,000 of those gains but there's no way we're getting the funds out of the bond now in any reasonable timeframe without someone paying at least Basic Rate tax.

We've had it for 19 years and will be taking the 95% of the original capital out as a lump and reinvesting in onshore funds. Part of the reason is we want to simplify our affairs - these offshore bonds are a bit of a paper-driven ballache to administer (particularly with our provider) and also to cut ourselves free from the IFA costs, which he still gladly takes whilst doing sweet FA from year to year.

Next tax year we'll repeat the exercise and close the whole thing down. It's been very good to us but it's time has come.

[alscar]

PhilboSE said:

Indeed - that's what I'm doing this year. My bond has served its purpose (allowing us to onshore gains tax free through child Personal Allowances to pay for their University costs) and due to favourable investments there are still a lot of gains to be taken. Two of my children are going to put 100% of their salaries into a SIPP this year, and then they'll be getting £50k each in gains from the bond. They'll have to pay Basic Rate tax on ~£32,000 of those gains but there's no way we're getting the funds out of the bond now in any reasonable timeframe without someone paying at least Basic Rate tax.

We've had it for 19 years and will be taking the 95% of the original capital out as a lump and reinvesting in onshore funds. Part of the reason is we want to simplify our affairs - these offshore bonds are a bit of a paper-driven ballache to administer (particularly with our provider) and also to cut ourselves free from the IFA costs, which he still gladly takes whilst doing sweet FA from year to year.

Next tax year we'll repeat the exercise and close the whole thing down. It's been very good to us but it's time has come.

We are "only " coming up for a decade and have yet to take anything - I looked this year at taking some to supplementing our income instead of drawing down from the main pension pot but given that pots growth we are only taking less than 2% from that anyway.
I did use 100% of the TFLS to give as early inheritances to our 3 children towards their house purchase's funds plus did a DOV of an inheritance which has meant 2 now have at least 50% equity and the third is still looking.
As ever its a balance between wanting / needing to help them whilst still maintaining their drive and ambition.