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How to maximise your ISAs and SIPPs to reach financial independence

How to maximise your ISAs and SIPPs to reach financial independence post image

Let’s explore how you can combine your UK tax shelters to reach financial independence (FI) as quickly as possible and as safely as you deem necessary. I’ll explain my thinking as we go, so you can decide if my safe is safe enough for you.1

First we need to re-state the problem with the standard FI approach.

Legend has it that you are financially independent once you’ve saved 25 times your annual expenses.

Say your annual expenses equal £25,000:

£25,000 x 25 = £625,000 = living the dream!

Except no. That’s not realistic – and I’m not even slagging off the notorious 4% rule.

It’s not realistic because most of us will have our wealth locked up in ISAs and pensions.

And this inconvenient truth changes the game.

Got 99 problems and a 4% SWR ain’t one

Let’s say you want to retire early. Continuing our example above, we’ll assume you’ve got £300,000 in your ISA by age 40 and £325,000 in your SIPP.

You’re at the magic £625,000 mark. Theoretically you can draw an income of £25,000 at a sustainable withdrawal rate (SWR) of 4%.2

But wait! You can’t access your SIPP until age 55 at best. Perhaps not until age 57, or higher still if politicians keep moving the goalposts.

That means you’ll be withdrawing £25,000 from your £300,000 ISA account for at least 15 years – an 8.3% SWR.

Such a rapid rate of withdrawal means your ISA risks running out of money too fast in more than 25% of scenarios, according to work by one of the top researchers in the field, Professor Wade Pfau.

Frankly, that’s an unacceptable failure rate.

I don’t want to entertain a one-in-four chance of having to go back to work before I can tap into my pensions.

  • Save the entire £625,000 into an ISA and the problem disappears. Trouble is, it’s far harder to retire early without using the powerful tax reliefs available with pensions.
  • Save everything into a pension and retire after the minimum pension age and the problem disappears. But many Monevator readers hope to retire earlier.

The average FIRE-ee will spread their wealth across tax shelters – and the different access times, rules, and quirks can defeat simplistic withdrawal rate tactics.

However, we can crack the code so you can maximise your tax advantages, and hit FI with a realistic plan that minimises the odds of having your dream derailed by a casual cuff of chance.

Ground rules

This is going to be a series of around six posts.

Yes, it’s going to be a bit hardcore. But by the end you’ll have a guide to the key steps, tools, research, calculations, and assumptions that’ll enable you to customise your own plan.

Financial Independence means being able to live off your investments without going back to work. Yes, you can make up shortfalls in savings by picking up work but then you’re not independent. Our plan needs to be robust enough to avoid that scenario if possible.

Of course other income streams can make all the difference if you can engineer them.

Here are my working assumptions:

  • Before minimum pension age, we’ll fund our retirement with ISAs and – if your pre-FI income is high enough – General Investment Accounts (GIAs), which are the non-ISA, non-SIPP broker accounts that are taxed at standard rates for capital gains, dividends, and interest.
  • For money you’ll access beyond minimum pension age, a personal pension wins hands down as your primary savings vehicle. Some people will hit the lifetime allowance, but that’s a nice problem to have, and nothing to be afraid of. To keep things simple, I’ll assume a SIPP is our account of choice from minimum pension age on.
  • I’ll use conservative SWRs as the benchmark for the sustainability of our plan. The SWR metric strikes a good balance between achievability, and relative safety. Our income will be tithed from the total return via capital sales and any income generated by our assets. (Some Monevator readers3 aim to increase their level of security by living off investment income only. I salute them – but it’s a higher bar, takes longer to reach, and still entails risk.)
  • I’ve used UK tax rates in all case studies for the sake of sanity. Scottish and Welsh income taxpayers may have to adjust slightly where relevant.
  • We’ll adjust for the fact that much of the historic research relies on benign US investment returns.
  • Obviously we don’t know what tax regimes will look like in decades to come. Ditto for investment returns, life expectancies, and the price of fish. All we can do is make use of the best information we have and adapt along the way. So err on the side of caution, have a back-up plan (we’ll discuss those), and let’s not be paralysed by the unknowns.

In part two of the series, I show why personal pensions are much more tax efficient than ISAs and shouldn’t be ignored, even by early retirees.

Take it steady,

The Accumulator

  1. Acknowledging that there is no absolute safety in this world. []
  2. £625,000 x 0.04 = £25,000. []
  3. And my co-blogger, The Investor! []
{ 84 comments… add one }
  • 1 Neverland January 14, 2020, 10:55 am

    While I applaud the idea this isn’t going to give anybody looking at FIRE below say 50 any real comfort, just an illusion

    Its just because of sequence of returns risk vs. ‘average’ outcomes

    This especially true after one of the longest bull markets for equities and bonds on record

    You only get one set of returns which can diverge hugely from the ‘average’ when you retire

    If you don’t believe me have a play with the coin flips or dice rolls here: https://www.random.org/

    “That’s ally our life amounts to in the end: the aggregate of all the good luck and the bad luck you experience. Everything is explained by that simple formula.”
    ― William Boyd, Any Human Heart

  • 2 John B January 14, 2020, 10:55 am

    I think you have to be careful with the SWR term. As while its definition “how can you withdraw safely within your time window” is fine, you don’t want to compare the numbers for a ISA bridging a 5 year funding gap with a 40 year pension. The 4% (in reality 3.5%) rule was using the latter period almost as meaning in perpetuity, viewing the withdrawal rate as pretty much the natural yield. For a short term, its the return of capital that provides the cash.

    Getting £300k to last 15 years at £25k a year (inflation proofed), the number you need to know is the total return allowing for inflation. The answer for 2% inflation is roughly 4.8%, with the big caveat that market vagaries could do for you.

    The thing to do is write a simple spreadsheet with your dates to see how your scenario plays out.

  • 3 Vanguardfan January 14, 2020, 11:15 am

    I agree that for known durations and known liabilities, the SWR model isn’t the right one.
    Just for fun I looked up the cost of a 15 year fixed term £25000 annuity – £342,000. (Lots of caveats – that’s a pension annuity not a purchased annuity, it’s level not escalating/index linked, and its start age is 55. Couldn’t get the tool to do better than that (https://www.moneyadviceservice.org.uk/en/guaranteed-income-for-fixed-period/your-options)
    But I do think that there are some quite low risk ways to bridge a gap of known and limited duration. (Of course you could view your whole post working life as a series of such gaps, but you need to have enough risk assets to have some potential for growth…)

  • 4 Playing with Fire January 14, 2020, 12:01 pm

    I’m really looking forward to this series and the timing is perfect for me as I’m hoping to pull the firing pin in 2022 but 55 or 57 seems a long way away. Thanks Team Monevator!

  • 5 thecurioushebridean January 14, 2020, 1:34 pm

    I am also looking forward to this series. I am in the process of trying to work out the best mix of ISA and SIPP in view of the annual allowances and withdrawal. I am quite close to 55 now though and a deferred member of a final salary/career averaged scheme and currently paying in to a Local government scheme and a SIPP. I was wondering about the balance between my various pensions and ISA’s with a view to withdrawal and potential future working/earning patterns so I will follow with interest.
    Fortunately my brother is a fisherman so the price of fish will largely be irrelevant going forward

  • 6 C January 14, 2020, 1:57 pm

    I’d be interested (without going all MoneySavingExpert) in seeing how lifecycling in spending as well as saving/investing could interact with this? We know people tend to spend less after about about 75, how might that impact on withdrawal/pot to be saved?

    I wonder also how you could bridge the gap to 55 or 57 without having to raise the full £25K/year? One thing I focussed on was the compounding effects of bill minimisation. A few interventions can help close the gap. For us, they looked like solar panels (with FIT) and wood burning stove (fuelled by free wood) means my energy bills are effectively less than net zero and actually partly covering other utility bills. A successful challenge on my council tax band, resulted in another reduction in ongoing costs. Stopping work once FI potentially also reduces your costs eg transport, clothes etc. Potentially, there’s hobbies to lifecycle as well. I’m doing my more physically intensive (and less expensive) ones like running and cycling now.

    Lastly, I’m phasing home improvements. The next major house overhaul will be funded by some of the tax free sum from my pension. For now, it is minimal maintenance through DIY.

  • 7 Playing with Fire January 14, 2020, 3:29 pm

    Savings after age 75 aren’t likely to help you – at that stage you’ll have either been successful from a SWR view or will have failed decades ago.

    Is your thought with the wood stove that you keep heating costs in your budget on the basis that you might not be sourcing free wood into your older age? Otherwise you’d just reduce your budget.

  • 8 John B January 14, 2020, 3:36 pm

    If you are one year out with your calculations, and are pension rich and cash poor, you could always take out a loan or use a 0% interest credit card. Home improvements are not the way to go if it will be tight, as those solar panels may not pay back until after pension age. Delaying your new car could make all the difference.

  • 9 SavingNinja January 14, 2020, 3:42 pm

    Ah, I’m worried this series will blow all of my plans out of whack. I had no idea that you’d have a 25% chance of failure if you could only access half of your stash! That doesn’t bode well for my tiny bridge strategy :sob:

    I’ve generally been applying a standard average growth to my calculations, completely disregarding the sequential risk.

    But better to be in the know! I can’t wait to learn more 🙂

  • 10 PaulT January 14, 2020, 4:27 pm

    Its great to see a real world UK scenario here, looking forward to it..!

    Im fairly new to the FIRE movement, although have been doing it most of my life to some degree (approaching 50 now), just never realised it was a formal thing (my wife just thought I was tight)..

    Just to add something else to the mix for consideration on this theme, Im roughly split 20% cash savings, 25% Shares ISA, and 55% penson..

    I always thought saving cash was a good idea, but the low interest rates in recent times have killed that, and I now rue missing maxing (or at least attempting too) my ISA allowance for the last 10 years. With the formal guidlines of FIRE (as oppossed to just saving for a rainy day and deferred gratification as I was doing), this now looks like a schoolboy error.

  • 11 C January 14, 2020, 4:30 pm

    @Playing with Fire. While we’re fit enough to gather free wood, we’ll keep doing it. By the time we can no longer do it, electric heating will hopefully be greener, less costly etc.

    @John B. When we installed them, solar panels were projected to pay off in roughly 7 years – and will then keep generating income for additional 13 years (enhanced via FIT) and potentially another 10-20 years on top of that (in reduced energy bills). It’s also tax free income. Obviously sums would be different now. In short, the solar panels are part of the strategy to get us to 55/57 but have less of a part to play after that.

  • 12 Brod January 14, 2020, 4:32 pm

    @Neverland – not sure what you’re getting at here. The Trinity 4% rule implicitly includes sequence of return risks. That’s why some cohorts fail and some are successful. And I don’t think the objective is to provide comfort, more information and analysis.

    @JohnB – but cash is fungible. It’s just in different pots with different ways off drawing it down – capital, dividends or a mixture – with different tax treatments. Or am I having a bad day?

  • 13 Mr Optimistic January 14, 2020, 5:00 pm

    @TA. Very timely, look forward to it.

  • 14 FIRE'd before I was fired January 14, 2020, 6:25 pm

    Long time reader, first time commenter here.

    Firstly : a belated thanks for all the amazing posts over the years; they’ve
    been a huge help to me.

    This series is on a topic I’ve grappled with a lot, having retired (very) early a couple of years ago, but with a large proportion of my wealth locked in a SIPP. How to allocate stocks and bonds between my SIPP, ISA and regular trading accounts, and whether/how to change this allocation over time is something I’m not convinced I’ve solved optimally, and so I’m looking forward to learning a few useful things from you, yet again. Although I’m really hoping that I don’t learn that I have made a big mistake and have to return to working for The Man, if he’ll even have me back, that is :).


  • 15 never give up January 14, 2020, 7:24 pm

    Crumbs I’m not sure I could ask for a better series to be written. I may have to take the week off of work, get loads of popcorn in, open up my spreadsheets and keep refreshing Monevator!

    Since finding the concept of FIRE I’ve constantly struggled with the balancing act between my ISA’s and DC company pension. When I first found FIRE I was 50:50 as I felt that minimised any potential mistake I could make. More recently I’m 75:25 in favour of the pension as I may rely on part time work to solve the gap issue to some extent, so the tax relief makes sense. Or does it? I guess I’ll have to read this series to find out!

    I look forward to this series immensely. Thank you for the efforts in putting it together. I also like fish.

  • 16 Dan H January 14, 2020, 9:42 pm

    Same as others, looking forward to this series. Thanks for pulling it together :).

    I have naturally fallen into a 70:30 (ISA:SIPP) ratio through employer contributions + bonus which gets paid in as get an employer NI top-up. I plan to FIRE not long after 40, and have been considering maxing my pension in any year I work beyond 40. Have used FIREcalc to get a general idea on a max ratio based on a 3% SWR, but not given it much thought to date. It will be really helpful to see your hypothetical scenario worked through to helping with planning in this regard.

  • 17 Fatbritabroad January 15, 2020, 4:01 am

    This will be really useful to me. Majority of my wealth currently in my house (220k) and pension (similar) at 39. I belatedly realised liquidity is its on reward so have built up 100k isas but now a bit cash poor . Getting the balance is very tricky

  • 18 BeardyBillionaireBloke January 15, 2020, 4:54 am

    I resigned on Jan 2nd. Last week I told the boss 3 levels up that the job is a waste of time and I only go to the office for the free air conditioning. Last day at work is probably end of March.
    ISA ~ 300k, DC pension ~ 850k, DB pension is tiny, State pension is nearly full. Age = 52.
    I have an idea how that works (1% returns after inflation, after costs, should last to age 100) but it will be good to see the description here.

  • 19 Gentleman's Family Finances January 15, 2020, 9:24 am

    Looking forward to this as it’s something that’s on my mind.
    Our family finances are probably FI already – although the cost of work is significant but then again so is the pay.
    About half of our wealth is trapped in Pensions and we’d need a 20 year bridge without any sign of a life raft (inheritances) to help. Plus we’d have to pay off the mortgage in that time – which would suck out a lot of cash to do.
    The funny thing is that even in this position, the temptation to put money into Pensions (or LISA) is compelling – if the risk of running out of money is (say) 25% then bunging money into the LISA might still make sense – and all that is based on cold-turkey early retirement.
    It’s a complex problem that deserves the 6-parts to it because rightly or wrongly the UK has generous tax rules in place and these need navigating with a view to long term financial optimisation (tax minimisation but more that just that).

  • 20 The Investor January 15, 2020, 9:54 am

    Glad everyone is up for this series, @TA has put a lot of thought into it.

    There’s bound to be some disagreements with him and other commentators, as there are no certainties here — it’s all about different ways of navigating the challenges, and what risk you want to swap for what. (E.g. Swapping market risk for the risk of foregoing returns (or of having to retire later) by keeping all your ISA bridge money in cash versus having some in a more traditional asset allocation, even with lower time horizons).

    Hopefully the talking points should be as useful as the takeaways.

    For now I’ll just chip in and say (again!) that planning to do a bit of ongoing work after ‘technical’ Financial Independence (i.e. hitting your number, on paper) but before you can access pension savings might make this far easier for many, and even doable for some.

    @TA is looking at a situation where work is genuinely optional, declaring that to be true FI, and of course that is perfectly logical so I won’t flog this horse more here, except to say if you run the numbers on trying to bridge tax shelter gaps then, say, a £10K a year ex-investment income is even more compelling.

  • 21 Darren January 15, 2020, 10:06 am

    Really excited for this one. I think when you have come to terms with the typical FI strategy of long term passive global investing, the next big thing to focus on from a UK perspective is ISA vs SIPP based on your retirement goals. I’m in exactly the same position as Dan H above, roughly 70:30 ISA to SIPP based on using maximum employer contributions and putting my bonus straight into the SIPP each year. Just entered my 30s so a great time to tweak this allocation.

    Keep up the great work!

  • 22 Simon T January 15, 2020, 11:07 am

    Please don’t forget the state pension from your next post.
    I currently have no SIPPs but from this November (aged 55) will have in my DC £678,000 and £250,000 house equity. Both full state pensions kicking in at 67 and 68 – wife has £40,000 in her DC.
    Because we are moving abroad and renting in various locations in the Med for the next 15 years in 2022, I was planning to take some of me my 25% TFLS and put into this years ISA maxed for us both and next years ISA as well, a few k recycled into both pensions (2880 x 2 for two years). The house proceeds in a GIA. Using the natural income from the GIA to pay for the property rental (assuming £8,000) a year. Then taking £37,500 or so from the Pension (and less when the State Pensions kick in). Main reasons is that CGT and Dividends in some of the countries we are going are lower than the marginal income tax higher thresholds. Would be nice to see some ideas of people based in Spain, France, Cyprus etc how they would also do this.

  • 23 Simon T January 15, 2020, 11:09 am

    Damn not being allowed to edit posts – I meant to say..
    I currently have no ISAs (I have have company DC pensions which will be amalgamated into a Personal pension)

  • 24 Mr Optimistic January 15, 2020, 11:28 am

    @Gentlemans Family Finances. Yes, the temptation to keep investing is strange but compelling. I have been trying to invest cash already sitting in shares ISAs as the levels were getting disconcerting even to me. Doing this while at the same time thinking about how I can withdraw cash and slowly run them down in the future makes my head hurt. The tyranny of accumulated totals. Psychology is everything. Then there are the IHT issues ( which I don’t expect TA to dwell on: one problem at a time !).

  • 25 N January 15, 2020, 1:33 pm

    On the topic of planning towards FI drawdown, Vanguard Lifestyle funds offer an easy way to hold a constant allocation of both equities and bonds in one fund.

    However I would suggest it may be better to hold one global equities fund and one global bond fund and rebalance annually.

    Although a single combined fund will rebalance itself, if you are in drawdown and selling units, only by holding bonds and equities separately can you choose

  • 26 FitandFunemployed January 15, 2020, 1:43 pm

    Thanks @TA, this sounds like a fantastic series and a timely reality check for some of the more flimsy and overly optimistic FIRE proponents (admittedly mostly US-based, but still…).

    Not sure if you’re factoring it in, but I’d be very interested in how the strategy might vary for those of us lucky to still be paying into DB pensions, and the tradeoffs of taking those early. For example, I’m planning on drawing mine as close to 57 as I’m allowed to (no doubt it’ll be pushed back a fair bit further in 20 years time), but as far as I can establish that will mean reducing it by ~50% compared to drawing it at 67).

  • 27 The Investor January 15, 2020, 2:36 pm

    I appreciate the lack of an edit function is frustrating but from previous experience it causes a lot of problems that won’t be apparent if you’re just trying to correct a typo. Also I suspect the lack of such a function encourages people to post more carefully, especially as I sometimes delete two sentence blah comments, which I’m sure improves the conversational quality here.

    @N — All new commenters’ first comments are held in moderation, hence the delay. 🙂 Unless you start swearing, racism-Ing, or embedding links you should be fine now.

  • 28 Factor January 15, 2020, 3:11 pm

    @TI #27

    Remain “no edit” or Leave?

    For me Remain is the better way; it certainly motivates me to double-check before hitting the Submit “button”, and I pick up occasional errors of commission or omission by doing it. Initially I think my brain reads what it meant to say, not what my untrustworthy fingers actually typed!

  • 29 N January 15, 2020, 3:39 pm

    @TI, the earlier post is missing the end which is key to the point I was making. So I will state it here:

    Although a single combined fund will rebalance itself, if you are in drawdown and selling units, only by holding bonds and equities separately can you choose to sell bonds and maintain your equities during an equity market slump.

  • 30 Haphazard January 15, 2020, 7:13 pm

    One advantage of pensions: If you move abroad to find work, you aren’t likely to have to worry about tax (during the contribution phase). Whereas the foreign tax authorities won’t care about your ISA (or LISA) wrapper. I imagine it wouldn’t be much fun trying to work out the dividends etc., with no tax certificate, and how to declare them.
    On the other hand, if you get a serious or long-term illness, you have to burn through your ISAs (and LISA) before you are eligible for benefits. Whereas as I understand it, pensions don’t count.
    It’s not possible to cater for all eventualities. But I think there are different scenarios: (1) Long, healthy retirement. (2) Long, unhealthy retirement – care costs. (3) Ill-health preventing earning for a significant period prior to retirement, but not killing you off. (4) Terminal illness before retirement. This is how cheerful I am!

  • 31 Bastiat January 15, 2020, 8:02 pm

    @Neverland, your link is actually showing the opposite since with dice rolls you have the markovian property.

  • 32 miner 2049er January 15, 2020, 10:39 pm

    lurker, coming out the lurk for this series, perfect timing thankyou

  • 33 Richard January 16, 2020, 8:38 am

    Looking forward to this as it is something I ponder on a bit. I always assumed it was best to fill the pension up first if you are a higher tax payer and esp if you can save ~60% tax due to things like PA or child benefit claw back. But this raises a big issue, when do you stop and contribute to the ISA (assuming you have a finite amount below pension allowance to contribute each year all at higher tax rates). By definition of RE you have to stop/reduce pension contributions long before you can access the pension but how do you know you have enough in the pension 20 years before you draw it? This is likely to lead to an over contribution to the pension meaning a longer wait to RE. When does the tax tail stop wagging the dog?

  • 34 Ben January 16, 2020, 8:58 am

    “That means you’ll be withdrawing £25,000 from your £300,000 ISA account for at least 15 years – an 8.3% SWR.”

    It’s the overall withdrawal rate that matters, not the percentage of one part of it. It doesn’t matter if the ISA is run down quickly as the pension remains untouched and growing in the meantime. There isn’t really a problem to fix.

    A equivalent situation would be withdrawing from a war chest that’s 100% invested in ISAs, with a mix of trackers, but taking cash from on particular tracker fund for the first few years. That fund would be run down quickly, but growth in the others would compensate. The overall SWR is what matters.

  • 35 Scott January 16, 2020, 9:41 am

    @Ben – not sure if I’m missing your point, or if you’ve missed the point of that part of the article, but if you withdraw too much from the ISA in the early years, the risk is that it runs out before you are old enough to be able to access the pension.

  • 36 The Investor January 16, 2020, 9:42 am

    It’s the overall withdrawal rate that matters, not the percentage of one part of it. It doesn’t matter if the ISA is run down quickly as the pension remains untouched and growing in the meantime. There isn’t really a problem to fix.

    @Ben — It matters if you retire at 45, for example, you can’t access your pension until, say, age 57, and your ISA runs out of money at age 54.

  • 37 MonsAltusLad January 16, 2020, 10:41 am

    The risk of running out of ISA/cash/general investment account resources prior to being able to access pension investments (due to, for example, poor sequence of returns on non-pension assets, unexpected costs arising after RE, changes to pension legislation in the period after RE but prior to being able to access pensions pushing back the date at which pension assets can be accessed) can often be hedged by individuals with a paid-off property setting up an offset mortgage facility. This is best set up whilst still working pre-RE, and should run as far after the date at which pension assets currently become accessible as the offset mortgage provider will allow (thus hedging risk of major changes to legislation in the date at which pension assets are accessible). Ideally the facility would sit there fully offset and never utilised, but the flexibility to access funds in the run-up to getting at pension savings is valuable and probably worth the fees of setting up the offset mortgage in the first place. Once the date is reached that your pension assets are accessed the offset facility can be closed.

  • 38 Ben Morgan January 16, 2020, 11:26 am

    @ The Investor & Scott – ah got it. I’m 51 so the 4 year wait looks trivial to me and me ISA would cover it. In practice, I still don’t think it’s a significant issue as (a) only a tiny number of people retire as early as 40 and (b) if your ISAs ran out, you’d just go back to work for a year or so, before reverting to FIRE at 55. So you’re not really risking your retirement fund by drawing on the ISA, you’re just risking having to return to work for a short period, which I don’t think many people would worry about.

  • 39 Far_wide January 16, 2020, 12:16 pm

    Well, I was intending to post a semi-smug retort that I think I have this nut cracked. However, having run my numbers again, well…hmm…I do have a teensy veensy bit of a problem here, not with tax, just short term v long term.
    So I shall join the hoarding masses eagerly awaiting this series!

  • 40 Xailter January 16, 2020, 12:17 pm

    I’m really looking forward to this series, as this sounds like the exact issue I’m going to run into if I want to hit my FI goals. If I FI at ~40, I’ll probably have to bridge 20 years to age 60 before I can access my SIPPs… but that’s such a long period that I’d pretty much have to be FI on ISA accounts anyway and the pension stuff is just ‘nice to have’.

    Interesting to see what TA has to say about this 🙂

  • 41 Far_wide January 16, 2020, 12:19 pm

    I should add that I currently run at a 2.6% withdrawal rate and have two thirds of my wealth in non-pension funds. However, even with those fairly conservative sounding parameters, portfolio charts indicate I’m running at risk with my current layout of running out of funds prior to 60. Back to the drawing board.

  • 42 Rosario January 16, 2020, 1:55 pm

    I’m looking forwards to this one. I have my own idea’s and have studied this in a fair amount of detail so I’d like to know if your thoughts echo my own. Very briefly my strategy is to fill the pension until I forecast it’ll grow to my FI number with moderate returns until forecast pension access age, and then backfill the ISA to bridge the gap.

    It’ll be interesting if you touch on a few more controversial methods, such as re-mortgaging to free up capital with the intention of redeeming with a pension TFLS.

  • 43 JC2858 January 16, 2020, 3:38 pm

    ”if your pre-FI income is high enough – General Investment Accounts (GIAs), which are the non-ISA, non-SIPP broker accounts that are taxed at standard rates for capital gains, dividends, and interest.”
    I’m particularly interested in this section, how much can one have invested in a GIA account without worrying too much about CGT etc 100K? 200K?

  • 44 Brod January 16, 2020, 4:26 pm

    I forgot to say earlier, I too am really looking forward to this series though for me it’s a bit academic as I’ll be 55 next January… 🙁

    One thing I hope that will be highlighted is the design of your asset allocation. Maxing out 100% on equities is great in the accumulation phase (if you can avoid bottling it in a 2000/2007 scenario) but playing with Portfolio Charts it looks like you can still get good growth and very superior withdrawal rates with low drawdowns with a good slug of bonds and gold – about 15-20% of each – and using some racy equities like Small Caps.

    As my future earnings potential has fallen and my parole date gets nearer (next year?), I’ve become more interested in protecting what I’ve got to provide for my wife rather than being a rich corpse in the cemetery.

  • 45 L January 16, 2020, 4:33 pm

    Been thinking about allocation between SIPPs, ISAs and LISAs a lot recently.

    Being mid 30s means I’ll likely be able to withdraw from pensions around age 60 if the current momentum of government policy continues. Regardless, I’ll need to factor in voluntary national insurance contributions if I plan on living long enough to make the most of state pension. Voluntary contributions to maximise state pension look like the best annuity money can buy, if you’re expecting to have a reasonable lifespan?

    On top of that, I’ll need to assess if it’s worth having an extra £4K a year up to the age of 50 set aside for LISA contributions (hopefully they won’t mess about with the age you can withdraw from those!). Having extra tax free funds will surely dampen the impact of income tax on a pension.

    If I have too much on the “non pension side” I can make a token £2880 a year contribution to a SIPP… Not sure if you can backdate and exploit the previous 3 years if you’re not an earner, but either way grabbing a bit back from the taxman can’t be bad?

    Looks like it makes little sense to have anything other than 100% equities in pension funds while bridging a 20ish year gap. If I go with a 40% bond tent for the overall portfolio, that bond allocation can all sit in an ISA/investment account to help bridge the gap.

    Hopefully the upcoming posts will clarify a lot of the ins and outs. Having a loosely defined state pension date makes things even more complicated!

  • 46 Vanguardfan January 16, 2020, 5:43 pm

    @JC – Taxable accounts are a bit of a pain imo.
    If you think that you can pretty frequently have years where you gain 10+%, and 20% isn’t that unusual, then £100k will regularly see you exceeding CGT. In any case, it’s advisable to manage any CGT gain each year by selling enough to crystallise gains up to the allowance, and lock in a higher base price. Your nice simple one or two fund portfolio quickly starts gathering new funds as a result. There’s also dividend tax to pay after the first £2k so that is likely to be an issue at around £100k.
    Still, better to have the funds invested than not, so it’s a first world problem.
    But never ever invest in taxable while you have room in an ISA!

  • 47 Al Cam January 16, 2020, 7:09 pm

    Whilst in principle, I agree with you re “never invest in taxable while you have room in an ISA!” there are various other options available, see e.g.

  • 48 ZXSpectrum48k January 16, 2020, 7:17 pm

    This issue is one reason why I use an offshore portfolio (life) bond. On the negative side this wrapper costs fees and gains are taxed as income, rather than CGT. On the positive side the wrapper allows investments to roll up gross, top-slicing relief means you shouldn’t pay more than 20% tax if you crystallize gains sensibly and you can transfer units to your spouse or children (assuming they are named in the policy) with no chargeable event. Most relevant to this issue you can take out 5% of the original principal each year (or more if you didn’t use your allocation in prior years) without triggering a chargeable event. Perfect to bridge a 20 year gap.

    Clearly not for everyone and not a recommendation but I’ve found it useful to provide additional flexibility when added to the usual ISAs and pensions. Plus it means less in GIAs, which means less hassle on my self assessment. That means a lot to me since I’ve never used an accountant.

  • 49 Vanguardfan January 16, 2020, 7:27 pm

    Yes, more than one adviser has suggested offshore bonds. I’ve never bitten, as I’m wary of trying to predict my situation, or indeed the tax regime, too far into the future, and they seem expensive and potentially restrictive compared with my DIY investing. I think I do just about understand them, but they make my brain ache (even more than managing CGT!) and that makes me feel like I should avoid.
    Anyway my current method of tax minimisation is to have a very low income, so most income tax breaks are irrelevant to me now, apart from transferring into the ISA every year.

  • 50 AVB January 16, 2020, 7:41 pm

    I’m fairly certain this can be solved deterministically within a mathematical optimisation equation. The constraint would be to minimise the isa contributions (while in work) such that it is depleted at the point the pension can be accessed, AND minimise the pension contributions (while in work) such that it accumulates to a size consistent with your SWR at the point you can access it (which is the point the isa runs out). The allocation between the isa and pension would be the one that satisfies those constraints AND minimises the number of years in work.

    While I say ‘deplete isa’ this would be under a scenario consistent with your own risk tolerance. I.e. no one gets told off for still having some savings in their isa at the point they can access their pension, it’s just means retrospectively you could have stopped working earlier so have swapped efficiency for safety (not always a bad thing)

  • 51 jc2858 January 17, 2020, 11:05 am

    @Vanguardfan, thank you for your reply. I’m vaguely aware of the pitfalls of the GIA, and it is the account of last resort for me after filling ISA, LISA, and pension contributions.I want keep everything simple, so my current thoughts are just buy single global tracker acc units ( to avoid calculating dividend tax) and keep it below 50k for myself and my partner.

  • 52 NervingMyselfUpToPressTheButton January 17, 2020, 12:49 pm

    I’m very excited to hear about the series – February is always the time I consider long term financial planning once the dreaded self assessment deadline is passed – and our recent instinct has been to max out pension contributions (and the max is almost impossible to calculate now), mainly driven by short term tax considerations, but perhaps that is not optimal long term. It will be great to have a UK centric take on this.

    But can I chuck in another requirement before you get started – any chance you could include property/lettings/long term rentals as a potential asset pot and income stream in the thinking? It has slightly different tax and convertibility options to either an ISA or a Pension.

  • 53 Vanguardfan January 17, 2020, 1:20 pm


    @jc, please read the above. If you’re investing in a taxable account, income units are easier to manage the tax implications than accumulation units. Buying accumulation units does not exempt you from taxation on distributions, it simply means the distributions are not paid out. You have to account for and pay tax on distributions just as if they were paid out, and then you have to subtract that from the unit price to calculate the capital gain. It’s much simpler to manage this for income units where the distributions are paid out. (I learned that the hard way).

  • 54 ZXSpectrum48k January 17, 2020, 2:59 pm

    @vanguardfan. Until your pension and ISA are filled there is no reason to touch anything else. Once filled, however, then the choice is between GIAs and wrappers like life bonds, PICs and trusts. I opened my offshore bond because I could make no further payments to my pension (having taken fixed protection). Moreover, having implicitly transferred a large sum from my pension to ISAs using a bit of cunning financial engineering, I felt that my ISAs could be vulnerable to an LTA. So I wanted to focus some of my asset growth outside ISAs to obtain some regulatory diversification.

    Fees are a clear problem. I’ve heard some people are charged over 1% to hold such an offshore bond wrapper; clearly not worthwhile. I’m being charged around 40bp, similar to holding assets on a broker like HL, but still enough to make me think twice. In recent years that cost has been easy to justify since the NAV drag from fees is more than offset by the uplift from gross roll-up. That scenario may not be sustained.

  • 55 miner 2049er January 17, 2020, 7:04 pm

    its the working out of being tax efficiency of the ISA v SIPP im interested in, ive got a feeling of me trying to get one over the taxman by using my ISA means im actually going to be less well off than actually stumping up some income tax come pension time.

  • 56 Metro January 17, 2020, 7:39 pm

    Is it possible and tax efficient to have a final-salary pension from an employer and a SIPP at the same time. What are the pros and cons of this.
    Or is better to keep the company final-salary pension and invest in ISAs. I’m age 56 years.

    Thanks for your advice and comments.

  • 57 TimePasses January 17, 2020, 9:24 pm

    I am a regular ready and posting for the first time.
    This series is very timely for me as my retirement is planned in June 2022 when I turn 66 and my state pension kicks in.
    I am a solo company director and hold a SIPP and an ISA. My company contributes into my SIPP (up to the 40k limit) on my behalf and I also top up my ISA every year up to the limit from my PAYE and company dividends.

    My current plan is to sell particular fund(s) in the SIPP to enable a draw down of the amount I would need each month. My wife is retired and gets the state pension but no other income. I have just paid off my mortgage and I am now totally debt free!!

    My retirement needs to be tax efficient so my current plan is to draw down enough to keep me below the 20% tax threshold (currently £12.5k) but this amount would have to be topped up by drawing down cash from my ISA.

    I need to get my act together and this series will hopefully help me. My SIPP is currently £300k (50/50 split between equities & bonds) and my ISA is £100k at two platforms and is 95% in equities which I will need to de-risk to a 30/70 split between income shares and a global tracker fund (HSBC balanced or Vanguard LifeStrategy).

    Financially, I am frugal (its in my DNA) and don’t need much to live. Over the years since Brexit, I have become a passive investor but still cannot resist trading shares, and very often, I lose! I need to get a grip and learn from my mistakes and some rational thinking is needed. The problem is my philosophy of life is centered round time and eternity. We live as humans in a finite and constantly changing world from which we cannot escape. We are here forever in eternity, cannot loose ourselves and ready to return to the basic elements of earth. So I fear nothing, including death which gets closer each day and this attitude is preventing me from being risk averse when it comes to investing!

    I look forward to the next post in this series.

  • 58 Marco January 17, 2020, 9:50 pm

    Dividends in accumulating funds/ETFs are still taxable in GIA. This is the reason why most recommend income units in GIA, it’s much easier for tax calculations

  • 59 Marco January 17, 2020, 9:54 pm

    Also, even if you are below the 2k dividend tax free allowance you still need to declare it on your tax return, and it does count towards threshold and adjusted income so could trigger an annual pension allowance taper for higher earners (which can be a disaster!)

  • 60 Marco January 17, 2020, 10:08 pm

    Unfortunately 75 is not a cut off for failure/success. A lot of high spenders will not have ran out of money yet, but will have to severely restrict their high spending lifestyles

  • 61 Matthew January 17, 2020, 10:15 pm

    As far as you can fill a lisa and then at 60 transfer it into a sipp, using a lisa means its technically accessable

    Also you could think in cash terms for the time gap between retirement age and pension access age

  • 62 AVB January 18, 2020, 12:08 am
  • 63 Kid Cocoa January 18, 2020, 10:02 am

    When’s the next post in this mini-series?!!!
    Last time i was this impatient was watching Tony Soprano and co rampaging through New Jersey.

  • 64 Merlotman January 18, 2020, 10:05 am

    Congratulations- love the rationale for going to work
    You probably have already but if not I suggest you run your numbers on the lifetime allowance including your small DC which isn’t so small when you apply the x20 rule.
    I’m 56 and recently realised I needed to start drawing on my SIPP asap to reduce the size of my IT bill at 75

    Do you really think there could be a lifetime cap on the size of an ISA pot? I would of thought this might be possible but not without similar protections given to pensions. Also imo LTA on pension partly designed to prevent loss of IHT revenue for HMRC as SIPPs I suspect feature in a lot of IHT plans. Obviously this does not apply to most ISAs (AIM excepted)

  • 65 The Investor January 18, 2020, 10:07 am

    @Kid Cocoa — Hah. One a week, probably. Glad everyone is so up for this; I think there’s going to be lots of talking points/disagreement thrown up, but hopefully all healthy and illuminating. 🙂

  • 66 bob January 18, 2020, 2:35 pm

    Perhaps it’s pure nosiness but I do like to read people’s actual figures when they are considering this leap. Here’s mine:
    Age 40.
    Isas: £205k
    SIPPs: £301k
    DB pension: £156k transfer value
    Residence: £190k
    Cash: £300k (i know)
    Expenses £30k

    I don’t hate my job, just mildly detest it but I ‘m lucky I guess in that I only work for six months of the year. The earliest I will pull the trigger (unless the upcoming IR35 rules force my hand) is January 2021 which should put another £150k gross into the pot before FU-day.
    Very interested in the series.

  • 67 Krage January 18, 2020, 4:47 pm

    I can share what I do to maximaze tax free gains:

    – max isa 20k, for my and my spouse
    – all others are joined accounts with my spouse to max allowance
    – income funds allocation to target £4k tax free. aprox 100k
    – about 200k into growth funds with not income payout. Selling every year to realize capital gains. Even if it grows, still can sell every year to get full capital gains allowance.
    – max SIPP (need to calculate in march due to comlexity of high income)

    so the target is 4k dividends and 24k capital gains allows, 28k tax free income… even if you have more, let it grow with only realizing allowance every year…

  • Mogul
    68 The Accumulator January 18, 2020, 7:18 pm

    Thank you for all the comments. I really wasn’t expecting this level of response. Hopefully the series will answer a lot of questions, but already this thread is giving me lots of ideas for follow-up posts. There are so many different individual circumstances out there. I’m hoping to provide a framework that’ll allow most people to test their plans, then I can explore some of the more unusual niches later.

    @ MonsAltusLad – re: offset mortgage. That’s a very interesting point. I have a question though. How does your plan account for the possibility of offset funds actually being used? Say you had to burn-up some of your offset funds and you went into your pension phase with a mortgage balance that’s down £30K to £50K. Are you ‘overpaying’ into your SIPP to account for that?

  • 69 Badger101 January 18, 2020, 8:50 pm

    “I’ve used UK tax rates in all case studies for the sake of sanity. Scottish and Welsh income taxpayers may have to adjust slightly where relevant.”

    Do you mean English tax rates then or England and NI?

  • Mogul
    70 The Accumulator January 18, 2020, 10:41 pm

    Not as far as I can tell. The gov.uk sites refer to Scottish Income Tax and Welsh Income Tax. The rates that apply in the rest of the country are left as plain ol’ Income Tax. Other rates of tax e.g. dividend and capital gains seem to be described as UK tax rates, and these apply in Scotland and Wales too. To stop the post getting bogged down, I referred to UK tax rates as a short-hand for everything that didn’t include Scottish and Welsh Income Tax. Welsh Income Tax currently being the same as the rest of the UK except Scotland, but the Welsh Assembly has the power to change it. I’m Scottish btw.

  • 71 AVB January 19, 2020, 1:06 am

    Started looking at this in Excel and my initial take is that if the objective is to stop working as quickly as possible, and providing it is attainable before minimum pension drawdown age, then probably max out the isa if you’re 40 like me. The reason being you can’t withdraw the pension early (without a big penalty), and providing your not too old your pension contributions will be invested longer than those of your isa and combined with the upfront tax benefit it kind of takes care of itself in terms of getting to the SWR amount. The isa on the other hand is much harder to build up as quickly, as it’s funded out of post tax income and limited to £20k a year. If you are relying on the isa to take care of expenses before you can draw the pension then in most scenarios you have little choice but to max it out – otherwise you will end up pension-rich but isa poor so forget about quitting the job early. In testing the optimal combination for myself it became clear the £20k isa limit was a real hindrance – even maxing out the isa each year i’d reach my pension goal quickly but have to work more years maxing out the isa before i’d have enough to see me through. As such I think a third consideration is funding non tax sheltered investment accounts as well – at least in my case. Note my objective in the above scenario testing was to be able to stop working ASAP, which is not the same as maximising wealth – in fact I end up quite a bit poorer on paper by diverting money away from the pension. I’m 40, I don’t think the same strategy would necessarily be right for a younger person who has more time on their side.

  • 72 Vanguardfan January 19, 2020, 9:40 am

    @AVB, pensions can’t be accessed at all before 55 (and rising), it’s not a case of applying a penalty. The only exceptions I’m aware of are if an older policy or scheme has a protected earlier retirement age, or in cases of ill health (definition depends on scheme rules) or terminal illness.
    The LISA can be accessed early subject to penalty.

  • 73 AVB January 19, 2020, 10:16 am

    Are you sure? I thought you could get it earlier but HMRC will charge you a big tax bill for it (40-55%). This is what happens to people who are scammed into accessing their pension early. I don’t recommend taking a pension early because of this tax penalty, but would argue it’s not impossible just a really stupid/naive thing to do (unless in very ill health in which case hmrc may allow you to take it without a penalty – you would need to get them to agree first though). I would certainly not contemplate it ever!

  • 74 AVB January 19, 2020, 10:21 am


    Taking money out of your pension saving early can result in tax charges of more than half the value of the money you take out.

  • 75 Vanguardfan January 19, 2020, 10:56 am

    @avb, yes, I am sure. From the same article you linked, a scam may ‘claim they can help you access a pension before the age of 55..Only in very rare cases, such as very poor health, is this possible’.
    This is a scam, no regulated or legitimate pension provider will allow access routinely below the age of 55, tax charge or no. It’s against the rules. I assume the punitive tax rates are about paying back the tax relief if you have been scammed into doing this.

  • 76 AVB January 19, 2020, 11:16 am

    Thanks for clearing that up, I was under the impression that the rules were enforced by the high tax charge (such that no rightly informed person would do it), but looks like your pension provider would most likely stop it from occurring in most instances. Does make me wonder though how the scammers manage it as sure I have read stories of people who have accessed it early via a scammer and were (a) surprised by the tax charge (b) subsequently lost what was left in the high risk scheme it was transferred into (or stolen).
    Looks like both the person need to be scammed and the pension provider as well (either that or they just fail in their basic duty of care)


  • 77 Vanguardfan January 19, 2020, 11:20 am

    The scam involves tricking you into transferring out of your pension provider into the scammers’ scheme. I agree that protections and action against scammers are woefully inadequate.

  • 78 AVB January 19, 2020, 11:27 am

    Think the scam involves transferring between from a UK pension scheme into one outside of UK jurisdiction; then withdrawing from that new scheme (into the scammers account) which doesn’t have the same controls in place. Then you still get hit by the tax bill. So lose/lose scenario. Well I’ve learnt something today! I will now stop posting so may off topic comments!

  • 79 Naeclue January 19, 2020, 8:47 pm

    @zxspectrum48k, I would be very interested to hear how you “implicitly transferred a large sum from my pension to ISAs using a bit of cunning financial engineering”. I looked into this several years ago and could find no legal way of doing it.

    Also, who is your offshore bond with? 40bp is remarkably cheap.

  • 80 MonsAltusLad January 20, 2020, 11:22 am

    @The Accumulator “How does your plan account for the possibility of offset funds actually being used? Say you had to burn-up some of your offset funds and you went into your pension phase with a mortgage balance that’s down £30K to £50K. Are you ‘overpaying’ into your SIPP to account for that?”

    I am not ‘overpaying’ into the pension to account for needing to find a sum to repay a utilised offset facility as I am not planning on utilising the offset facility – it is purely a hedge to a risk, adding flexibility should it be required. The most likely scenario in which I would utilise the offset is if there is a significant and late change to the age at which pension funds can be accessed, when I may have already significantly depleted ISA/GIA pots. In this instance during the period I was withdrawing from the offset I would not be withdrawing from the pension (for the years that the pension access date shifted back), thus there would be more in the pension at the time I finally access it then I had modeled, so at the point of access I’d be withdrawing from a bigger pot and would likely clear the outstanding offset balance with a lump sum (thus hopefully leaving me in approximately the same position I would have been had there been no legislative change and need to draw on the offset). If I found myself drawing on the offset I would regularly review asset allocation as dipping into the offset whilst leaving pension funds invested as in my basecase asset allocation would effectively introduce leverage in my overall position, which may be suboptimal, thus a pension asset allocation that reduced risk levels may be prudent as I would know I would be needing to make a fixed withdrawal at a certain future date to clear the offset at the point pension assets finally become accessible.

    Important thing is to get this set up ahead of any RE as getting a bank to agree to give you an offset mortgage will be a lot harder/impossible after you have given up the salary.

  • 81 Hare January 20, 2020, 11:01 pm

    I would like to thank TA for this series and for acknowledging that some of us can’t/don’t have the ‘luxury’ of adding paid work into the mix when/if desired.

    There was a commenter on another post who, like myself, retired early without choice and isn’t employable, I don’t think a person can assume work is available after a certain age as many industries have age bias (my partner is in this category), and many people find themselves out of marketable skills/specialised/things change so paid work isn’t an option.

    Some people have more options than others in this regard, including the folks who at this point assume they can get work when they want it to fill in a shortfall. It’s a risk that needs allowing for and part of the numbers before going FI.

    Assuming paid work can be obtained when wanted/needed to top up or address a shortfall (very different to choosing to access a paid opportunity) is like assuming a bull run will go on forever.

    It won’t and people can’t assume access to paid work will always be there either. It’s incredible how often this risk is not included like the others more talked about.

    I’m reminded of the excellent post ermine wrote on the subject.

  • 82 Vanguardfan January 21, 2020, 8:48 am

    @hare, I couldn’t agree more. All of us are likely to get to the point where we can’t work due to ill health/incapacity, and long before that our high flying careers will have become closed to us.
    I wish SHMD had written that blog post he promised about finding work in his 50s. I see many people being forced to take much lower paid work at that stage in life, because their industries have changed or disappeared. And it’s much harder to earn that £10k a year as a Walmart greeter on minimum wage zero hour contract.
    I personally think that the quest for meaningful activity is not something you FIRE for, it’s something you try to incorporate as far as possible into your working life. Your FIRE fund is there so that when the road runs out on meaningful paid work, as it surely will, whether due to redundancy, age, or ill health, you aren’t completely stuffed…

  • 83 Vanguardfan January 21, 2020, 8:53 am

    And coincidentally ‘companies face trouble from older staff’ in the FT

  • Mogul
    84 The Accumulator January 25, 2020, 12:52 pm

    @ MonsAltusLad – thank you for your comprehensive and thoughtful reply. If it’s OK, I’m gonna quote you when it comes to listing out Plan B options. I have a natural offset mortgage (low interest only mortgage from before Great Recession versus cash ISAs and ridiculously elaborate system of bank accounts) but I haven’t thought through this side of things as deeply as you.

    @ Hare and Vanguardfan – I completely agree. I think it’s vital to plan for not being able to return to the workforce whether due to ill-health (yours or a dependent’s) or role obsolescence or whatever. My industry has been severely disrupted over the last decade and I see a lot of down-on-their-luck veterans who can’t get back in or struggle to earn what they earned 20 years ago.

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