Money Makeover: ‘Can I retire early and never worry about putting the heating on?’

For some, retirement is a light at the end of a long tunnel but for others it creeps up on you.

Ellie Nichol, from Stratford-upon-Avon, falls firmly in the second camp.

“It took me by surprise when I turned 55 in August,” she said. “The past five years have flown by.”

Ms Nichol, whose name has been changed, began working at age four. She featured in several television adverts as a child, including for Fairy Liquid.

“I’m the one after Leslie Ash but before Patsy Kensit,” she said. 

She now works in insurance and earns £48,000 a year but hopes to retire at the end of 2024 at the age of 57.

There is planning to be done. Ms Nichol has generous pensions but they will not start to pay out for some time. She will receive £15,000 a year from a final salary pension at 65. The state pension, worth around £9,600 in today’s money, will be paid at 67.

In between she will rely on savings – and through saving and simple living she has amassed £230,000 in an employer pension and has a private pension worth £239,000.

She plans to add as much as she can until 2024. Her Isa has £147,000 invested in shares and she has £40,000 in Premium Bonds. Ms Nichol also has a rental property worth between £450,000 and £480,000 which provides roughly £13,000 a year after tax.

She is open to selling but is conscious of capital gains tax as she acquired the property when it was worth £180,000.

Both the rental property and her home are ­mortgage-free. All may seem rosy, but Ms Nichol needs to cover nearly a decade before her pension is paid. Luckily, her income requirements are modest and she will need around £25,000-£30,000 a year to get by.

She would like a new car every five years and wants to spend £35,000 on home improvements for the bungalow she shares with her father.

“I’m a cat lover and a homebody,” she said. “I would love a choice of holidays but nothing fancy. I just never want to worry about turning the heating on.” She wants to know how to manage her savings tax efficiently and wants to know whether she can really afford to retire in two years. She is also unsure whether to sell the property.

Ian Cook, chartered financial planner at Quilter

Ms Nichol is well provisioned. Her income needs are almost entirely met from secure pensions from age 66. Therefore, her savings only need to bridge the gap, with the property providing her with an excess income after state retirement age.

Based on her savings, plus what she saves in the next two years, she will have enough, assuming a life expectancy of 86 and income rising with inflation.

This excludes the need to sell the property but we must be mindful that the income would be lost if she did sell. When she retires at 57 she can be tax efficient by drawing down an amount equal to the personal allowance of £12,570 from her pension, although there will be tax to pay if she keeps the rental property.

Otherwise she could take tax-free money from her Isa or Premium Bonds. She should also hold cash for emergencies and known expenditure such as the bungalow renovations.

Once she reaches 65, she should switch off pension withdrawals in favour of other cash savings, as her personal allowance will be used up by the final salary pension. At this point hopefully she will have decided what she wants to do with any money left in her pension, and any other assets, when she dies.

I don’t think it is worthwhile buying an annuity as she will not receive a meaningful rate at age 57 and by the time her other pensions are paid at 65 and 66 she would be paying much more income tax than she needed to.

An alternative could be a temporary annuity that pays a fixed level of income from age 57 until the secured income begins at 65.

Regarding her existing investments, it’s important to understand someone’s need to take risk. It’s all well and good Ms Nichol saying she is open to investing in risky stocks and shares, but she does not need to.

The cash for immediate needs should be kept in safe assets that preserve their value; this includes a proportion of the employer and personal pensions and a part of the Isa.

The rest should be invested with a “­medium-term” outlook: a blend of different assets including stocks, bonds and “alternatives” such as property. I would choose an actively managed fund because of the size of her savings, perhaps with an adviser to help manage it.

If she does like this option, she should use the Legal & General Multi-Index 7 fund. This uses tracker funds but a manager watches over the asset split. It has a more fluid approach and reacts to market changes more than the popular Vanguard LifeStrategy multi-asset range.

Avinav Nigam, co-founder of Immo

The current gross yield on Ms Nichol’s rental property is about 3pc, which is not the best. However, this is based on a price of £450,000, whereas yield can also be calculated on the basis of the purchase price – and £180,000 gives her a 7pc yield, which is not too bad.

A better way to judge whether it is worth it is to ensure it operates at a gross 4pc to 6pc yield based on the current value. This means Ms Nichol needs to increase the rent to between £18,000 and £27,000 from the £16,250 gross income she earns now.

It could be worth refurbishing, to increase the rent. If she cannot raise the rent significantly from the current level, she should consider selling. There is still a lot to consider. Selling now might not get Ms Nichol the price she wants. It could be worth waiting until June 2023, when interest rate increases may calm down.

At the same time, average house prices have already fallen by 5pc in the past four months and are expected to fall further. In addition, the capital gains tax-free allowance will fall from £12,300 to £6,000 in April. So she must decide whether to sell now at a lower price with a higher allowance, or wait in the hope of a better price but pay more tax.

If she can sell for more than £465,000 (the average of £450,000 to £480,000), she should do so. But it’s worth remembering that many deals are falling through now at the later stages.

If she only receives offers more than £6,300 (the difference between the tax allowances) below her expectations, she would be better off waiting at least until next year to sell (or better still, a couple of years), provided that she can also achieve a higher rent.

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