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Many of us spent our days in lockdown dreaming of what we would do and where we would go if it ever lifted – and for some that vision did not include work.
“Realistically about five years ago in lockdown like everyone else, we were picturing working towards early retirement, or taking an extended break which might look like retirement but doesn’t exclude us from returning to something afterwards,” says 45-year-old civil servant James Edwards.
He and his wife, wedding photographer Sarah, 46, have long dreamed of stopping work at 57, and taking to the seas once their teenage children have flown the nest.
“We see ourselves buying a yacht to live on, spending a couple of years cruising around Europe – building our confidence then maybe making the jump across the Atlantic,” says Mr Edwards. “We’d love to explore the eastern seaboard of the United States, Central and South America, and the Panama Canal to complete the whole circuit.”
Mr Edwards estimates spending around £150,000 on the aforementioned yacht, and the couple, both qualified skippers, believe that they will be able to sustain themselves on between £4,000 and £5,000 a month when the time comes for them to set sail.
They plan to sell their £600,000 home in north Wales to downsize, clearing their mortgage (they still owe £230,000 and currently pay £1,350 a month). “It would be good to keep the house if possible, but it’s a large expense and tricky to maintain,” Mr Edwards says.
Mr and Ms Edwards originally met in the army, and as such both have military pensions. Mr Edwards already draws £10,500 a year from his, but it will not be index-linked until he reaches 57. His current job pays him a salary of £57,000. Ms Edwards will not be drawing from hers until she is 57. Her photography business pays her £3,300 a month.
Mr Edwards is also a member of the civil service pension scheme, to which he contributes about 3pc of his salary. Sarah pays £1,000 a month into a private pension with Aviva, she also pays £200 a month into a director’s pension for her business.
In addition they have a rental property that gives them £300 income a month. It has an interest only mortgage with £67,000 outstanding. From this they put £50-100 in their children’s Isas each month. In total they currently have £19,000 in cash savings.
They have about a decade to get the cash together to live their dream – are they being realistic?
Felix Milton, chartered financial planner at Philip J Milton & Company, says:
Mr and Ms Edwards wish to be able to purchase a yacht and have an early retirement with an income of £48,000-£60,000 per year to travel the world whilst they are still able. The old way they will be able to achieve this is by selling some of their property, as the majority of their wealth is held here, with a much lower amount in defined contribution pensions.
In terms of their pension provision, they should look at changing the way they are saving into these to maximise their assets.
Mr Edwards’s military pension will be taxed at his highest rate of income tax and this means they will both start to lose their child benefit as Mr Edwards’s total income will be over the threshold of £60,000 it begins to taper.
As Mr Edwards is a higher rate taxpayer and Sarah is a basic rate taxpayer, pension saving is more valuable to them both in his name as he benefits from 40pc tax relief on his pension contributions whereas Ms Edwards only will benefit from 20pc tax relief.
It would be wise for them to fund Mr Edwards’s existing defined contribution pension with the £1,000 per month they currently put into Ms Edwards’s pension.
They will then be able to claim an additional £250 within the pension, making the monthly contribution £1,250 and also reclaim £250 per month (£3000pa) via Mr Edwards’s tax return in higher rate tax relief.
The lost child benefit would also be reclaimed in full, worth £442 per year to them both.
I would also suggest they consider selling the rental property once the mortgage term ends, using the proceeds to repay a portion of their mortgage on their main home.
This would allow them to increase their monthly pension contribution to Mr Edwards’s pension, securing further higher rate tax relief.
Once they get to 57, they should have largely cleared the mortgage on their main home (assuming they keep their £1,350 monthly mortgage), as well as accumulated at least £135,000 in Mr Edwards’s pension in savings, even before investment growth.
They can then use this fund to supplement their lifestyle while they travel, drawing funds each month to meet their income needs on top of their other pension income.
It is likely at this time they will not have enough to purchase a yacht without selling their home, though they would be mortgage-free for their retirement, something which will significantly reduce their monthly outgoings.
Nicola Crosbie, Director of Moran Wealth Management, says:
One of the first things I would recommend to Mr and Mrs Edwards is breaking down their expenses to understand their outgoings, and identify any additional disposable income they can put towards savings.
They should continue focusing on boosting their pensions through employment and personal contributions.
At the same time, they need to bear in mind that while the upcoming pensions age rise to 57 in 2028 aligns with their plan to sail around the world in their yacht, if there were any subsequent changes to the minimum pension age they may be forced to push their date back if they don’t have other assets that can meet their needs.
I would recommend adding some ISAs and cash savings into their portfolios to build up reserves and tax-free pots to draw upon.
“They must also consider what their children will need between now and them becoming independent.
While I do think their pensions look to be generous, I would recommend a full review to ensure that they are on track to provide the income they hope for.
They need to look at the tax efficiency of owning property and tax they will pay on any profit made from a sale.
Getting a clearer overall picture of their tax income position would help provide better advice on how assets, such as a rental property, should be owned to make sure they are making the most of them.
If their main residence is very costly, it might be more sensible to consider downsizing now if feasible when the kids are at home to be mortgage free if their yacht dream is non-negotiable. This would ensure more income is set aside for that dream.
It is also important to have protection against risks to their health or income so their plans are not derailed if circumstances change.
Finally, they must consider what happens after they finish sailing to ensure they are still comfortable. I would recommend they consider finding a trusted or recommended financial planner to help them build a plan and review annually to remain on track.
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