On the Runway

Well, it's chocks away. For the past year I've been taxiing up to the runway. Now, I'm on it, strapped in and accelerating to take-off. My pension provider has sent me details of what to expect in retirement and given me a choice to make regarding the ratio of lump sum to regular payment. More than a quarter century of contributions and AVCs have paid off well for me and set me on what appears to be a favourable trajectory. Without a pension, early retirement would have been difficult in my current circumstances (I have too many family obligations) since I had not, many years ago, given enough thought to how I was going to extricate myself from employment.

Of course, what is possible is relative, and I am very well aware that some people have no choice but to live on greatly reduced incomes. However, for a painless, non-extreme early retirement you need to start planning these things a long time in advance and to have the ability to take stock of your situation and yourself. Many years ago, I stopped owning a car, stopped buying unsubsidised lunches from my employer and gave up big foreign holidays, with the result that I've able to save and invest, but rarely with the singlemindedness of the dedicated early retiree. There is a wealth of thinking on these matters around now and websites such as Monevator or Simple Living in Suffolk, for example, are good portals into its varied aspects.

In my case there was a deal of luck. The deal was a voluntary severance package and the luck was that it came along at a time when, thanks to a job evaluation exercise which downgraded technical expertise in relation to managerial experience, my personal position in the promotion stakes was not looking too rosy. Now, I must confess, Dear Reader, that my pension is a public sector final salary scheme. However, it is market, rather than taxpayer, funded, and thus only "silver-plated" in the technical tabloid jargon and, of course, possibly vulnerable to future political and commercial revisions, not to mention scheme insolvency (PPF notwithstanding). Nevertheless, I am grateful for the opportunity I have been given to retire in my fifties and take the fruits of my contributions. Once I've left employment and am fully airborne, however, I don't have a lot of opportunity for course corrections. It's more like being catapulted in a glider than powered flight and I'll be on the lookout for financial thermals.

Of course, retirement is a big change and there's a lot more to think about than just the finances, but it's the latter I'm going to concentrate on here. Inevitably, there are various credits and debits operating on different timescales. The Grano household, as currently configured, consumes nearly £1800 per month and I need to fund half of that. Savings are possible, but the plan has been predicated on their not being necessary. There's also money that should be to be put towards house maintenance and travel, but these are to some extent discretionary. My personal wants are few and I have no desire to spend large amounts of money on consumer gadgets, eating out and other luxuries, although if we ever moved to a dark(er) sky location I could see myself shelling out substantially to upgrade my fairly basic stargazing kit.

First off, I have a decision to make on how to use my lump sum payment. This is actually in two chunks, a redundancy payment from my employer and a pension component from my provider. My sole remaining debt is the mortgage, so I am considering whether to pay this off. At around £25,000 at 2.5%, the residual now is not large by most people's standards and in the current environment I have felt no particular desire to eliminate it. Moving soon, however, into higher interest rates, lower income and probably no great buying opportunity in the markets, getting rid of the mortgage is tempting, although it will swallow up most of the redundancy money. It's not a decision I need to hurry, though.

More pressing is deciding the balance between pension lump sum to regular payment, "commutation" as it is known. Now, I realise that this is a problem that many people would like to have; nevertheless, it's not an easy one to make. The difference in the income component relative to the lump sum, if the latter were entirely foregone, is equivalent to 4.6% gross per annum of the foregone capital (commutation factor 21.7%, since 4.6 x 21.7 = 100 approx). This seems to suggest that an equivalent return on any capital retained is the minimum that should be aimed for.

So, should I give way to instant gratification and just grab the maximum amount of cash, believing that I am a good enough investor to generate sufficient return year on year? Or should I be "sensible", forego the lump sum entirely, and maximise the income? It's a bit of a heart/head thing. The pension blurb advises me to reflect on my life expectancy. I should ask myself one question, it seems: "Do I feel lucky? Well, do ya, punk scheme-member?

(Unfortunately, this photo of me was taken while I was querying my JE assessment. I'm normally a bit more relaxed.) Now, suppose I were to be struck down by a terminal illness? Perhaps I would like to blow the cash on something lavish. On the other hand, there is the beneficiary case to consider. An oddity of the pension scheme is that the calculation of residual income for a surviving partner is independent of the commutation issue. Therefore, if I die, having maximised the lump sum, Mrs. G would get all that plus an income, whereas if I maximised the income, her residual income would be identical but with no extra cash to inherit.

If I go for the maximum cash it looks like my gross income would be around £15,000 per annum, well below the UK median earned income of £26,000 (in fact, it's near the poverty threshold for a single household), but still around 25% more than the minimum wage, which means that there will be a few million people working hard to earn less than what I shall get for a life of idleness. After deductions, this should give me about £1100 net per month, enough to pay my whack and a little for spending saving. Maximising my lump sum and minimising my income would clearly leave less room for budgetary manouvres, though.

Of course, I do not intend to be idle (well, not completely) nor to rest content with that income alone. I have no particular desire to re-enter the world of paid employment (listen up, IDS), although I suppose that option is one I could consider if times prove hard, although that in itself may be difficult. In such a case, I would certainly want something fairly undemanding and different from my present line of work. Some of my time needs to go into developing Salis Grano Mega Holdings, turning it into a vehicle for long term growth and one that will literally pay dividends. In five years, SGMH has doubled dividend income and I'd like to increase it by 50% in another five, but that is perhaps rather ambitious, since the regular capital inflows of living well below our means will now be much reduced. Even then, it will still be a good deal less than half my pension.

The biggest item on the debit side is the higher education of the Granuli. Whilst I don't think the government proposals are ideal (rowing back on the £21,000 repayment threshold in real terms, for example, would be a blow), I am sticking to my guns on the issue of student loans for fees, so they will have to borrow, but I expect us to cough up for the bulk of the maintenance, courtesy in part of Mrs. G's continued employability. This is factored into the calculations, but it will be capital-depleting, so perhaps I should reserve a good deal of my lump sum for this purpose and to resist the temptation to splurge it all on equities.

A further concern, of course, is inflation which I've talked about before. Small variations in this, particularly the gap between CPI and RPI, can have big consequences further down the line. Like all defined benefit pensions, mine will be linked to CPI and, therefore, will steadily lose value. A smaller pension will, thus, lose less in cash terms and this seems to be an argument for maximising the lump sum. Perhaps there would be an advantage, also, in terms of basic tax allowance and future political perceptions, in being a "poorer" rather than a "richer" pensioner in income terms. However, this is clutching at straws. Essentially, I think I am going to find it hard to resist the atavistic urge to sit on a pile of cash. Anyway, we are going away to Greece for few days for our first foreign holiday in seven years, so I'll have plenty of opportunity to think things over.