How to build a cash-flow ladder before retiring

In today's Q&A episode, we're answering a bunch of questions from those on the threshold of retirement, getting into the nitty-gritty of age-difference planning, DB scheme reductions and all sorts!

Shownotes: https://meaningfulmoney.tv/QA29

01:04 Question 1

Hi Pete

I am really enjoying listening to the podcast, thank you. They make what can sometimes be a complicated subject much easier to understand.

I have a question which I have asked my SIPP provider but even they don't appear to know the answer so here goes:

If someone has a SIPP valued at say £1.2m and a DB pension valued at say £300k, in order to maximise the favourable annuity provided by the DB pension, is it possible to draw the full LSA (25% tax free cash) from the SIPP? Or is there a requirement to draw the LSA on a pro rata basis from both the SIPP and the DB pension?

Thank you, AJ

07:07 Question 2

Hi Pete and Roger,

Thanks to The Meaningful Money Handbook, The Meaningful Money Retirement Guide and listening to all of your podcasts, I'm now in the fortunate position to retire in three years at the age of 55.

However, I have a couple of questions about building a Cash Flow Ladder:

Q1 - Should I be moving my investments into the various rungs of the ladder now, or just wait until I retire?

Q2 - Most of my investments are in a pension, but I also have an ISA for a bit of flexibility. Would it make sense to use the same ladder structure in both the pension and the ISA?

Thanks for all your good work. Tim

11:17 Question 3

Hi guys

Loving the podcast - helped me through the COVID years and it's been a staple ever since so thank you for that.

My question is around investing in older age.

At what point, if any, is it worth cashing out GIA investments if other sources of income such as state pension and DB pensions are more than enough to live off and I have sufficient other capital (cash isas) for those big things still ahead?

I'm not planning to leave any sort of inheritance (unless I pop my clogs early !) so is there some rule of (age) thumb of when to cash out and spend investments?

I sort of don't see the point of continuing to invest after a certain age and to spend the money. But I guess it's not easy switching from investing to spending.

Thanks, Chris

16:33 Question 4

Hi Pete & Roger,

Great show gents, always interesting and informative. I've been an avid listener for a couple of years now and have been encouraged to write in on the off-chance that my question may have relevance to others with a similar dilemma. I fear you may feel it's too niche but here goes:

I'm 59yrs old and for all intents and purposes retired, in as much as I quit my career in business 18months ago to take on the full-time parental care role of my 6yr old twins which enables my wife (15yrs my junior) to continue in the career she loves. We are fortunate that my wife is an additional higher rate tax payer (as was I before I quit), we live mortgage free in a ~£1.5m family house - all of which means I have no plans to draw a pension until my wife is also ready to retire, which despite her occasional gripe, is not likely to be until our children leave school (by which time we will be ~ 72 and 57 respectively).

I have a small index-linked Public Sector DB pension that kicks in in a few months time when I hit 60 (£7k per year) and expect to get a full State Pension which should provide me with around £20k p.a. at todays values as a base income when I reach state pension age in 7 years time.

I also have a Pension pot currently valued at around £1.2m, made up from £1m SIPP and £200k S&S ISA) and my wife's Pension pot is currently valued at around £520k (£400k SIPP & £120K S&S ISA). I no longer contribute to my SIPP but my wife invests around £30k Gross in to her SIPP annually and we plan on continuing to fill both ISA allowances each year until she retires. We are both 100% invested in equities using low-cost Global trackers to maximise their growth potential.

Here's my question, I was burnt a few years back (before I started listening to podcast like yours to educate myself on how to manage my finances) when I was persuaded to join SJP and combine all my old workplace pensions into a single pot managed with them. I even persuaded my wife to join and I opened Junior SIPPs for my twins when they were born (not their advice, my own) which we continue to pay the full amount into monthly to hopefully secure their future retirement. Long and the short of it, the more I learned about investing, the more I regretted my decision to tie myself into SJP and the more I begrudged paying their relatively high fees (for what turned out to be a lower return than much lower cost tracker options could / would have produced over that same time period).

I eventually sucked up the exit fees and bailed out a few years back, taking my wife and children's accounts with me and whilst I haven't looked back, it has made me reluctant to spend money on financial advisors, given the perceived poor advice I felt I received last time. To that end, I'm currently planning on managing mine and my wife's finances through retirement without recourse to an advisor but have started to have niggling doubts as to the whether I'm being too arrogant in my own abilities.

In simple terms, our aim to build a combined Pension Pot (incorporating a healthy ISA element to aid in tax-efficient drawdown, allow my wife to retire early(er) if she so desires and to cover one-off expenses that may from time to time will come up) that's large enough for us to live off comfortably based on a flexible 3-3.5% drawdown rate annually (index-linked). The plan is also to remain 100% invested in equity throughout retirement with the exception of and maintaining, a 3-5yr cash-like buffer (invested in MM Funds / short term government bonds) from which to take our living expenses.

My wife and I are not extravagant spenders and can easily cut our cloth according to circumstances, so my feeling is, with a small but decent guaranteed income that we will have as a foundation, when combined with what I hope/expect to be a sizeable joint Pension Pot and a relatively low and sustainable withdrawal rate that should see us right even through the harshest of winters (metaphorically speaking) this should provide all the income we'll need for a comfortable retirement with a good chance of leaving a fair amount left in the pot for our children at the end, without over complicating our portfolio or expensive management costs.

The obvious concern I have is around IHT but even there, I feel like that's a concern to address further down the road once we know we are financially secure and when we know more about the needs of our children as they grow-up and can plan what to do with any excess cash we might have using the rules in place at that time.

Sounds simple, but is it too simple? Can you spot any obvious flaws in this plan or reasons why you think seeking professional advice would make sense that may not have considered?

Thank you and keep up the good work!

Regards, Aaron

27:42 Question 5

Hi both

Love the podcast. I listen regularly and enjoy hearing the banter between the two of you, as well as providing answers to thought provoking questions.

As an additional rate taxpayer in Scotland, my marginal income tax rate is an eye watering 48%. So I get significant benefit from tax relief when topping up my pension. It can cost as little as £33,000 to enjoy a full input of £60,000 once I get money back on my tax return.

I have been diligently stuffing my pension as much as I could afford for years now as it was always the prevailing financial advice. I'm now only a couple of years away from retiring at age 55. I am fortunate enough to be now over the old LTA (which is now of no consequence). However the tax free limit is still set at 25% of that old allowance (£268,273?). Given I am now NOT going to benefit from any further tax free money on the way out, I wonder whether continuing to contribute to my pension is a good idea anymore.

My choices are either :

1) Pay into the pension and enjoy tax relief of 48% now, allow the fund to accumulate tax free over the coming years, then pay income tax on the way out at 40%. (I expect to be high rate , not additional or basic rate tax payer in retirement)

2) Take the tax hit now on income, don't contribute to pension, put the nett amount into a GIA, and pay 24% CGT on the gain on the way out.

I did some numbers and while the pension wins out, it's not by much over a 10 year term assuming 5% growth. But tax rates could change, pension rules could change, and inheritance tax changes are pending.

Can you compare the pros and cons of each approach to help me make a decision, or is there a third option to consider?

(I hear Roger sometimes suggest a strategy of taking the tax hit now rather than later e.g better the devil you know)

I hope this makes sense.

Thanks, Martin

33:47 Question 6

I became an avid listener of the podcast during the first lockdown and have learned so much in the past 5 years. I really enjoy it and appreciate all the effort you put into it.

My question is with regard to age gap relationships and planning for retirement. I'm 59 and am currently contributing to the NHS Pension Scheme. Part of my pension can be taken at age 60, without deduction, and I hope to have an income of £16,000 plus a £50,000 lump sum. The rest of my pension I'll be able to take at age 67 and by the age of 63 I hope to have a further pension of £18,000 without a lump sum. In addition to this, from my career before the NHS, I have a SIPP and the current value is £400,000. 63 is the age by which I hope to have stopped working at my current level but it might be sooner.

My wife is ten years younger than me and has not been working for most of her adult life. Currently she is paying into a local authority DB scheme but by the time she is 58 her pension entitlement might only be £5,000 per year, but this would need to be discounted by 40%-50% in order to take that income.

By the time we are eligible I expect both of us to qualify for the full state pension. We have no other cash savings to speak of and our mortgage is due to be paid off next year, when I will be 60.

My question is what advice do you have for couples who face this age gap issue. The plan is that we want to spend our retirement together while I am fit and active (well fit-ish). Once we both have the state pension, with my NHS Pension, we should have an income of £58,000 at todays values, which will be enough for our needs when I am in my late seventies, but might make me a higher rate taxpayer in requirement. Before then, we'd like to spend a bit more and we are planning to use my SIPP and my wife's DB scheme (when she is 58) to fund our pension, until it is replaced by the second NHS Pension and the state pensions.

I never realised this would be so complicated to get my head around.

When the mortgage is paid off, we'll have some money and should we concentrate in paying it into an ISA so that we can get an additional income without me having to pay higher rate tax, or should we set up a SIPP for my wife so that she can build up a pot of money that she can drawdown on from when she is 58. This would be with the aim of her utilising as much of her annual tax free allowance as possible.

I've assumed there is no way that I can transfer part of my SIPP to her before I die.

I very much hope that you can help.

Best wishes, Steve