Saturday, 16 August 2014

Is this how Financial Independence arrives - not with a bang but a whimper ?

My recent post about the company's finances made me think very seriously about the state of our personal finances, and what may be possible in '...retirement...' or at least for long periods without a regular earned income.

Using some of the 'float' we've established in the company, in the last few days I've set up a large monthly contribution from the company into my personal SIPP.   Making contributions to an employee's pension plan is also an allowable expense against corporation tax, so it's a tax-efficient way to withdraw money from the company.

Assuming the unlikely prospect of doing no further work at all in the period, these contributions would reduce the three years future 'earnings' we've banked to around two-and-a-half before the company runs out of reserves.  

Anyway, I've been beavering away at various spreadsheets for the last couple of days.  

Based on the new expected value of the SIPP at August 2016, assuming these company SIPP contributions will cease at that time, and using an annual net growth figure of 3% going forward for both SIPP and savings pots, I've calculated the following retirement scenarios, both based on a State Pension age of 66 and receiving £8k a year in today's money (the proposed £155 per week) from that :-

  • Retire at 60 with an income of £20,000 p.a. and with no further additions required to either the SIPP or savings pots
  • Retire TODAY with our usual annual income guaranteed for the next 30 months and thereafter with a tax-free income of £17,500 p.a.

In the calculations, I've assumed that I wouldn't begin to drawdown against my SIPP pot too early in retirement even though I will be allowed to access these funds in just a few years time.

Under either of the above scenarios, until I get to the pensionable retirement age I would drawdown mainly against the savings pot, all of which would be 'tax-free' of course (since the tax has already been paid on the money before it was saved), and after retirement age the balance remaining in the pot would then provide me with a regular top-up to the SIPP and State Pensions.    

In the 'Retire at 60' scenario I would hope, although of course this is not guaranteed, that only a very small fraction, if any, of the pension drawdown monies would be taxable by the time I get to 66, due to expected increases in the annual personal allowance, but in any event the top-up portion drawn from my own resources will definitely be free of tax.  In the 'Retire Today' scenario, I think this ongoing tax-free status is almost guaranteed.

Believe it or not, this is the very first time I've ever carried out such a full calculation that includes the £8k State Pension in the mix and also a small deferred defined benefits pension I accrued in the early days of my working life, which should be worth £3k per year from age 65 (based on a valuation I received in 2012).  These have a profound effect in eking out one's own funds into the distant future, and consequently my relatively small pension and savings pots can already achieve a reasonable income when such future assistance is included.  

Remember, from this earlier post in March, over the next nine years I was planning on increasing the value of the savings pot almost fourfold from its value as at March 2013, and also doubling the SIPP pot in that timescale ....

And apart from the company's contribution to the pension pot for the next couple of years, the above scenarios both assume no further personal contributions to either the SIPP or savings pots, i.e. they're based only on what we have accumulated at the present time.

So, to my surprise, and given that we can live off less than £16k per year, it seems that some sort of Financial Independence has crept up on us, albeit at present to a much lower income level than I'd really feel comfortable with.  Before I could really believe it, I had to check my figures several times.

I've currently no plans to actually stop working, and therefore a proportion of any future money I earn will still go into at least filling the ISA to the limit, to increase the income levels available to us in the future.   But reaching FI when still working does take the pressure off having to squirrel away every spare penny, and should allow us to take more holidays over the coming pre-retirement years when we're still young enough to enjoy them.

So, it's nice to know that the financial situation is already much better than I'd thought.  A glass of wine is in order, I think...


  1. I'm sure you don't mind FI creeping up on you like this - what a nice surprise! In my own calculations, I've erred on the side of caution and over-estimated how much I think I can live on in the future. Harder to aim for but nice to have extra if I get there.
    Hope you enjoyed that glass of wine! Heck, I hope you had the whole bottle to celebrate!

  2. Hi again. I don't really expect this knowledge is going to change the lifestyle very much. I'm certainly not going to suddenly start buying more stuff that I've absolutely no use for !

    And for as long as I'm enjoying the work and the clients still want me to do it, then I'll be earning and adding more to the investments. It's not as if I'm trapped in some evil faceless corporate environment, in the world of early morning alarm clocks & commuting and hating every minute of it, as many of the poor sods in the FI blogosphere seem to be...

    And as you say, it'll be nice to have extra 'cover' for when I'll eventually enter the world of drawing down the cash instead of stashing it away.