October 2015 Update

This month sees an ongoing reduction in our cash reserves (as intended). The markets have been doing what markets do, but the end result is a slight uplift to our investment portfolio from last month.

I am still waiting for the "aye" or "nay" on voluntary redundancy, but in the meantime, a colleague's discussion with the council's senior pension officer has raised an interesting point. He advised her to apply for VR this year rather than wait until next in the hope that by doing so she will beat proposed legislation to cap public sector redundancy payments.

Make no mistake I agree wholeheartedly with the statement that “It’s not right that highly paid public sector workers should receive huge taxpayer-funded payouts when they’re made redundant" (Greg Hands, Chief Secretary to the Treasury). However some interesting effects of this ruling come about because the cap is to be applied to all forms of compensation on redundancy. And yes, this could, in slightly different circumstances, have meant me.

My top line salary is around £33,000 (pro-rata £26,000 as I'm part-time). I have worked in various part-time/full-time roles in local government for a total of 17 yrs 360 days, earning much less than I do now for the bigger portion of that time, before I funded myself through my MSc and got myself promoted. 

My colleague (the one who had the conversation with the pensions officer) is the same grade as me but works full-time. She has worked in local government for over 40 years, also in a variety of roles and, until the last 8 years or so, at much lower rates of pay. I wouldn't consider either of us "highly paid" even now, but we do both have long service and are in our late 50's, and that means that we are now eligible to receive our pensions if we are made redundant. This is where we (or people like us) could fall foul of the £95,000 cap.

If I am made redundant the system works like this:

I am entitled to redundancy pay of £24,000. 

Because I am now also eligible to claim my pension, the entitlement I have built up until the day I leave becomes payable without actuarial reduction. This is funded mainly from the pension fund coffers, but the actuarial reduction that would have been applied if I hadn't been made redundant has to be "made up" from local government funds (i.e. you and me - the tax payer). A quick calculation of my figures for this component works out somewhere around £18,000 in total. The actuarial reduction reduces for every year closer to scheme retirement you get, so in year 1 - from age 57 to 58 - it is 37% - around £3,300, in year 2 from age 58 to 59 - it is 34% - around £3,060 and so on (My total pension will be circa £9,000 by March 2016). In addition my tax free lump sum would also be granted without the actuarial reduction of around £1,000.

I will therefore be costing the tax payer £43,000 in total to let go. So it's not hard to imagine a situation whereby someone who has been in a middle income technical/professional/managerial role in local government for significantly longer than I have and/or has very long service and consistent full time employment, could fall foul of the cap. Someone of my age with built up pension entitlement of £18,000 a year would be very fast approaching the limit. On the other hand if I'm made redundant, the tax payer doesn't have to find my salary for the next 9 years, so saving themselves £234,000. As a "by-product" we have the degradation in the service I help to provide if I am no longer there, which is difficult to assess, but I would guess that it will eventually be significant. I really can't see how the slack could be taken up by the existing infrastructure as we've got way past that point now. "Value for money" for the tax payer is very difficult to assess depending on what that particular tax payer values. :-)

How I feel about this is mixed. On one hand I totally agree that large costs attached to redundancy for public sector workers should be tackled, especially the situation - which I have seen - whereby someone gets made redundant and is then re-employed, often as a "consultant", a couple of months later (mainly because the work still needs doing and in this way the "paper" costs have been reduced and the boxes ticked, but the person who can do the job most efficiently is re-employed to do it). But on the other hand I object to the "spin" that this change in the rules will only apply to "high earning" public sector workers.

I have no objection to being treated with fairness (even if that is via a degradation of the terms on which I embarked my employment) but I want it to be recognised that this is what is happening. Public sector workers, many of whom have professional qualifications doing jobs that do not have comparable roles in the private sector, have been taking a hammering on salary and status for a considerable time now. Maybe things will go OK if we decide that we've had enough and opt out back into the private sector where at least you're treated with "dog eat dog " respect. Maybe not. I suspect that we will all find out before too much longer. Personally I just hope to be allowed to go without having to see the mess I'll be leaving behind, either with redundancy "benefits" or without.

Pushing the Ethical Envelope - Abundance Sipp and Good Money Week

This week is Good Money Week so take a look at what's going on and get involved.

My "actions" towards becoming a more ethical investor/consumer include cancelling my subscription to Money Observer and using my financial magazine "allowance" to subscribe to Ethical Consumer instead. I've also written to my MP asking him to actively support the movement towards transparency and accountability in all areas of finance that is being promoted during the week.

Having control over what is being done with our money makes a big difference to how we feel about the whole process and, for me, being able to be confident that my investments are being used ethically would give me an added "bonus" that is worth far more than an extra % point on the potential profit. However it turns out that taking a hit on profits is no longer necessary because, (as was reported this week) ethical funds are now heading to the top of the leader boards due to the collapse in the prices of oil and other mining stock.

Divestment has actually made good financial sense for some time because, even if you're not worried about what will happen to the planet and the people on it after you're gone, you have to acknowledge that we simply cannot dig up and burn most of the fossil fuel left in the ground if we have any hope at all of keeping global warming down below the target levels agreed by governments. Fossil fuel companies are in very real danger of not being able to realise expected profits. It would be very short sighted indeed not to take this on board (-:  if the cap fits Ms Rudd et al :-))

In recognition of the unease many of us feel about the opaque nature of investing, Abundance, who I've been investing (and earning over 7% interest) with since March, have just announced the first peer-to-peer SIPP. There's a good write up on this on crowdfundinsider.com so I won't go into details here but it's very competitively priced (free to set up and no fee for the first year, 0.3% thereafter) and seems to make excellent sense if you're ethically inclined and worried about putting all your retirement eggs in the volatile equity basket.

I'm not in the market for any additional retirement investing myself as I'll soon be drawing down what I've got, but I'll certainly be talking about the Abundance product with my sons and their friends. My youngest son in particular is extremely "pension poor" as he's been in full time higher education for the last 8 years. This is exactly the kind of product that will appeal to him and his circle of friends who take the issues of corporate financial integrity and responsibility for the planet very seriously, seeing, as they can, where "turning a blind eye" has got us so far.

The introduction of new financial products such as this, ones that allow us to make our money work in ways we want it to, is an exercise in crowd-sourcing in its own right. People really do want to know what is being done with their money, and they want to be able to make informed choices about whose hands they put it in. Abundance have done their research and seem to have got a lot of things right regarding this product. They are honest about the fact that this pension is not for everyone and the risks involved. At the very least they are to be applauded for pushing the market forward and providing a product that supports all the principles of "Good Money" this and every week.

September 2015 Update

This month saw what I would regard as the first "real" reduction in our assets as we withdrew some of our cash to fund my eldest son's university fees. It was a little painful as it felt like the end of "growing" our pot and the beginning of using it up and I hadn't expected to be entering this stage of the process for a couple of years yet. Still, I have everything worked out and I'm fairly confident that we're on track to be able to stick to our plan that I should retire no later than April 2017 (and hopefully a little earlier - more about that later).

In addition to the drop in our cash holdings there's also been enough market turbulence to do this to our investment portfolios and I expect there's more to come:

	GBP Value	Performance
		1m	6m	1y
A's ISA	£36,920.59	0.20%	-8.40%	7.00%
J's ISA	£13,779.96	0.50%	-7.40%	5.40%
SIPP / CIS Pension	£34,771.05	0.00%	-1.80%	5.80%
Total	£85,471.60

Luckily I think we can ride it out as (apart from my SIPP) we don't need these funds any time soon.

Yesterday I sent in my official request to be considered for Voluntary Redundancy in April 2016. My manager needs to cut between 9 and 12 people from the team over the next two years. Chatting with my colleagues suggests that there's not going to be a shortage of applicants. It's not a happy place to work any more, the cuts in services are depressing and demoralising and public sector wage increases are set to be capped at 1% for the next 4 years.

However, I have reason to believe that I may be fairly near the front of the queue as I have a niche job providing a specialist service that could be delivered totally differently (i.e. outsourced) or supported at a much less responsive level. The public who depend on it (who are incidentally some of the most disadvantaged members of society) would no doubt notice the difference, but needs must when the devil drives :-)

As I mentioned in my last post, redundancy would be a financial godsend to me and the figures I have been supplied with regarding the payout I could expect are even better than expected. I would be entitled to £24,000 redundancy payment plus immediate access to my pension unreduced. I'm not counting my chickens yet (although I have of course made contingency plans on what to do with the money :-)) but I am increasing my AVC contributions to the maximum allowed (50% of gross monthly salary) just in case. Pre-2014 LGPS AVCs can be taken completely tax free (this perk has been removed for anyone starting to pay in after March 2014), so boosting this fund is a better option than paying any more into my SIPP as, if I do get immediate access to my LGPS pension, anything I take out of the SIPP, over and above the TFLS, will put me over the tax threshold. The only risk is that if I don't get VR and have to revert to plan A, I won't be able to get hold of the AVCs until I take my main pension. This may make things a little more difficult to manage for a couple of years as I will have run our cash reserve right down and getting flexible access to my CIS FSAVC isn't as straightforward as I thought, but I think it's worth taking the chance.

So now it's just a waiting game to see if I'm one of the "lucky" ones. We should know by the beginning of December as they have to allow for the 3 month notice period. It might be a very jolly Christmas.

(Oh, and we won £25 on our Premium Bonds too - bonus :-))

A Waiting Game

Following a week of "should I or shouldn't I" angst over my pension transfer, complete with much working out of whether I could manage to leave the pension intact (should I decide it's a good idea to do so) and still retire at 58, my manager dropped a quiet bombshell at the end of last week. Apparently "letters" will be issued by the end of the month.

By this we took him to mean that redundancies of some flavour are back on the menu. There has been much speculation and rumour on the subject for the last 18 months or so. (See here , here and here) with the latest "update" a couple of months ago being that there was to be no redundancy offer in our section due to the high number of contractors we still employ. Apparently so long as there are contractors in post, permanent members of staff cannot be made redundant despite the fact that the work done by the contractors is in a specific role for which none of us are trained, and at a lower level than we are currently employed. Apparently management have now found a way round this, maybe by shuffling people around departments as they're deeply immersed in a transformation exercise at the moment. ("Transformation" being the word you use when you want to find a way of getting the same amount of work done by half the number of people :-))

I had put the possibility of voluntary (or compulsory) redundancy and how it could work for me to the back of my mind but as it might now come back to the forefront, I don't feel equipped to make any type of decision on my pension. The "Welcome" pack from Fidelity is sitting, unopened, on the shelf.

If I'm made redundant I would get immediate access to my LGPS pension, unreduced. There would be no pressing need for me to have access to the £20,000 in the FSAVC over the next couple of years (although it may still be desirable).

So, many thanks to all who left very useful comments on my last post but for the moment I'm going to park it and wait to see what the end of the month brings. Fingers crossed I either get my marching orders or can apply to be given them :-)

GARs, Misleading Pension Statements, Transfer Troubles and Other Gripes

After waiting for over 8 weeks I have finally heard back from Fidelity about my request to transfer my CIS FSAVC into my SIPP. It wasn't good news. Because the FSAVC (Free Standing Additional Voluntary Contributions) has a Guaranteed Annuity Rate they require me to take advice before they will accept it (even though the transfer value is less than £30,000).

They do, of course, offer this advice service themselves for the cost of £500. This fee is payable even if the advice turns to be "no, sorry, it's the wrong thing to do and we won't accept it". In which case, I am informed, the fee will have VAT added on top.

So I have a dilemma. I knew that there was a GAR attached to my pension but I didn't think Fidelity would require me to pay for advice before transferring it, and I don't think that the FCA requires them to do so either as suggested by the quotes below from a policy report released earlier this year.

"Historically there has been no need for a PTS to advise on a transfer from a scheme with a GAR and it makes sense that it shouldn't be implemented now.

"Although providers should be able to show the client what benefit they are giving up if they choose to forego these GAR even if the fund is under £30,000, where advice may not be given."

• Should I therefore look for a platform that will take my FSAVC without requiring that I pay for advice? Does one exist?

• But firstly, and importantly, should I think more carefully about the GAR and what I would actually be giving up seeing as Fidelity obviously think that this option requires £500 worth of investigation by a pension transfer expert.

A little background

I started paying into the FSAVC in 1996 because I knew I had gaps in my pension provision due to taking time out to have kids. I was working at the Council at the time but was in a fairly low paid role and wasn't sure how long I would stay, so I didn't really consider supplementing my pension there. Looking back this was possibly the wrong thing to do given that soon after taking up the CIS policy I got promoted into a job that's served me well ever since. Putting more into my LGPS at the time would have made a significant difference to the value of my DB pension now.

It could even be argued that the CIS (Co-Op) representative who sold me the pension was guilty of a mis-selling as he knew that I was in the LGPS and could/should use that to boost my pension rather than buy an independent product. However when the new pension rules were introduced this year and it looked as if there was going to be more flexibility around taking the FSAVC before my LGPS retirement age of 66 (or so I thought until I received the letter from Fidelity), I have been glad that I went the way I did and continued to pay a (very) modest amount into the FSAVC alongside my main LGPS scheme.

But what did I buy back then?

Working out the actual benefit that my FSAVC "with profits" pension carries has been quite difficult, especially for someone who knew nothing at all about pensions before I started thinking about how I could retire as soon as possible a couple of years ago, .

The policy benefit schedule looks like this:

And after doing a little research I took this to mean that it has a GAR of 6%

This was confirmed during a phone call with CIS (now Royal London) yesterday. So for every £1,000 in the fund at the time of retirement I am guaranteed £60 pa pension. As far as I am aware there is no index linking, widowers pension or any other "with profits" benefits. The transfer value in March 2015 was £19,200.

All that sounds fine but it doesn't actually tie in with the annual statement which says under the heading:

 Pension you Might Get at age 60

• Your fund might be £22,200
• which could give you a taxable yearly pension of £604

I queried the discrepancy in the figures (projected fund around £22,000 with a GAR of 6% - surely the projected pension is £1,320 not £604?). The CIS representative responded that the figures quoted in the statement don't include the GAR and she couldn't say what the pension would actually be with the GAR because they didn't know what the end figure would be. This doesn't make any sense. The statement already quotes me a projection and we all understand that a projection isn't a guaranteed figure. Given that, how can it be right to send out statements for pensions with GARs that do not include the projection for the GAR. That's the whole point of it being a guarantee - if my fund is £22,000 at pension retirement age I'm guaranteed 6%. I'm guaranteed £1,320.

The conversation went round in circles with me asking for a statement that included the GAR and her saying they couldn't do it. The only thing I could get her to agree to was to send out written confirmation that the FSAVC has a GAR of 6%, as although I have the scheme schedule, I felt that I wanted something more recent especially as the fact that I have a GAR apparently can't be included in any of the workings on my statement. The only reference to the notion that the figures may simply not apply in your case is in the "General Assumptions" section, one of which is "we have ignored any guaranteed minimum amounts that may apply to your policy". No wonder people complain that they can't understand pensions.

In conclusion I now have some work to do to find out if there would actually be a benefit to keeping the pension as it is and drawing it at the scheme age of 60, when I could also draw a reduced LGPS pension. In which case I need to look at those years between 58 and 60 again and assess if there is a way my existing SIPP/other funds/extra saving could fund them. 

And, if I find there is no benefit to doing this, I then have to decide whether or not I want to pay Fidelity £500 to tell me the same and accept the transfer, or, even worse, pay them £500 plus VAT to tell me it's a terrible thing to do and refuse.

Part 2 (including workings out) to follow, but any comments in the meantime would be much appreciated.

Cashing In

At the beginning of the month I bit the bullet and sold the last of our CIS UK Funds.

With that job done we went away for a week in Babbacombe. We had great weather, consumed far too much good food and drink and made a valiant attempt to mitigate the effects by hiking up and down chunks of the South West Coast Path. We're back home now and the cash (around £10,000) is sitting in our current account. The question is what should I do with it?

The likelihood is that it will be needed late Autumn/Spring in instalments to fund my son's living costs when he returns to full time education. However this is by no means certain as he has still to secure a place on the course. He may even have to delay his plans till next year if he isn't successful this time around, in which case our whole financial situation may have changed if I do get VR/early retirement next April.

The most sensible thing to do would probably be to open another Santander 123 current account. Our joint one is (or will shortly be) maxed out. However it is possible to open individual ones as well so this option is a strong contender and would be the one that would probably produce the highest guaranteed interest. However, I'm already managing 5 current accounts and can't really be bothered with yet another set of direct debits and monthly money shuffles.

None of my existing banks offer interest rates worth having on their instant access accounts so I'm currently tending to favour Premium Bonds. I've done some reading on the subject, Monevator is (as always) an excellent resource with an additional useful link to a recent Guardian article, so I know the odds of winning big are very slim but in the absence of anything better to do with the cash I think I'm going to set up an account and see how things go. The MSE Forum thread makes interesting reading so I've been working my way through that but I'd be interested to hear about any experience/winnings in the comments.

Whilst we're on the subject of cash I have a slightly thornier problem around what to do with a big chunk of it which will be landing in my SIPP when I transfer my old CIS FSAVC in at some point soon. I've been delaying doing this because the pension has been doing OK (8% in 2014 and 5.78% so far this year) but I think the time has now come to make a move.

I'm hopeful that the transfer into my Fidelity SIPP will be straightforward and I have been assured by Fidelity that there shouldn't be a problem, but it is an old "with profits" fund with a Guaranteed Annuity Rate of 6% so I'm wondering if I might be asked to take advice before transferring out. Hopefully not. It forms a big chunk of the money that will see me through before I take my LGPS pension at 60 (if I don't get early retirement before then) and I don't really want to have to fork any of it out in advisor fees before I'm allowed to move it somewhere I can get at it in drawdown. (The transfer value on my last statement as of March 2015 was £19,270.)

In preparation for the move I've been considering the options for it in my SIPP. I could just leave it in cash which is probably the way I'll go as there's a strong chance it will be needed in 1 - 3 years time. I've yet to completely bottom out Fidelity's drawdown but the options look pretty flexible and I'm hopeful of being able to fit them around whichever scenario pans out as far as my retirement goes over the next few years. So, cash would probably do fine for the transfer in and then I'll sell the additional £15,000 worth of funds I have in there - sooner rather than later to try to avoid a big loss.

(Incidentally I did notice that Fidelity have a "Cash Fund" which I'm struggling to see the advantage of. It has total costs inside a SIPP of 0.55% and has made 0.25% max going back to 2011. Can anyone help me out by explaining why someone would use this?)

Having My Hand Forced... Probably a Good Thing?

Virtually as soon as the election result came in the managers in my section issued invitations to 1-1 sessions with all staff above a certain grade and announced the fact that we are to be offered Voluntary Redundancy in the summer to take effect from April 2016.

It has been on the cards for some time . We have been steadily bleeding staff for several years and yet more savings need to be made in order to accommodate the next round of government spending cuts. Given the fact that this government now has an overall majority there is also a strong likelihood of privatisation and/or outsourcing of services.

In order to keep a basic level of service going, front-line staff who deal directly with the public, are being protected as much as possible from the cuts, although there has been a significant drop in numbers here too. This means that those of us who look after the infrastructure are being targeted.

Don't get me wrong, it would probably be a blessing for me personally to be accepted for VR. In the past people over 55 have been given the chance to choose to go as part of "efficiency savings" rather than be made redundant, which means that they have been given access to their pension immediately and without reduction. This would be an absolute godsend to me as I would receive my pension, as accrued up to date (around £8,500 pa) from next April. Happy days :-). However there is some doubt that the same rules will apply this time round as letting people have their pensions early is very expensive when compared to making them redundant.

We are currently waiting to find out what the terms of the offer will be, but in the meantime I am left with a bit of a dilemma. If I am offered the the redundancy pay only and no pension would I accept? My redundancy payment comes in at around £20,000 but taking it would mean that I would not get that final year of work which adds £500 extra to my pension for life. I'm still running the numbers and going back through the calculations I did last Oct, with the added complication that I've now decided to take my LGPS pension early. At the forefront of my mind is the vision of what working in my small section would be like, given that we are due to lose half the senior staff. That level of stress is not attractive at all. I think I'll be able to find the money somehow :-)

Of course I may not get accepted for VR if there are "cheaper" people who would like to go, or if it's considered too much of a risk to lose me. On the other hand I may get sent down the path of compulsory redundancy anyway if not enough people take up the offer. The next few months will tell. I will certainly feel much happier when I know exactly where I stand. The uncertainty doesn't help my financial planning though, specifically around the choice of funding AVC's as against SIPP. Watch this space.

Happiness is a warm "hygge"

In case you haven't come across the word before "hygge" means coziness, friendliness, peace of mind, belonging and social acceptance and it seems to explain, at least partially, why a recent eurostat report found that retired Danish women are the happiest people in Europe.

Eurostat -  Overall Life Satisfaction.

Contributing factors which encourage this state of affairs include the fact that the Danes have the best pension system in the world (as measured by the Melbourne Mercer Global Pension Index) the existence of social support networks, affordable child care facilities, good healthcare and a strong welfare system.

Denmark's pension system comes out with an overall score of 82.4 according to the  Global Pension Index which measures schemes on adequacy, sustainability and integrity according to a points system. The UK is currently in 9th place with a score of 67.2 (2 points up from the previous year due to auto-enrolment and rising contributions.) It will be interesting to see how the new flexibilities introduced this year affect the score. Despite falling out of favour in the UK, annuities are still widely bought in some of the higher ranking countries with 85% of Danes purchasing one, although some countries such as Australia (77.8) also do pretty well on more flexible systems like those being introduced here. In any case, having a secure, regular and guaranteed income must be one of the biggest influences on a general feeling of well-being and go a long way towards explaining the contentment of retired Danes.

In addition to a reliable pension system Danes "may pay some of the highest taxes in the world but they are rewarded with generous public services and a world-renowned welfare state." and "in Denmark grandparents are not faced with a second career as a childminder, unlike in the UK, where 47% of grandparents look after grandchildren and one in four working families rely on grandparents for childcare¹."

Being female is also key to the happiness quotient. The authors of the report think this is probably because women tend to make strong and lasting friendships and are more likely to have social interests and hobbies outside the home when they retire.

Another interesting fact revealed in the report is that the poorest 20% of Danes are happier than the richest 20% of Greeks which adds some weight to the idea that social stability and a well-functioning welfare system are bigger factors influencing happiness than personal wealth.

On a global scale the World Happiness Report "reviews the state of happiness in the world today and shows how the new science of happiness explains personal and national variations in happiness. It reflects a new worldwide demand for more attention to happiness as a criteria for government policy."

The criteria used to measure the happiness of citizens can be summarised in the following way:

"The happiest countries have in common a large GDP per capita, healthy life expectancy at birth and a lack of corruption in leadership. But also essential were three things over which individual citizens have a bit more control over: A sense of social support, freedom to make life choices and a culture of generosity." ²

An extract from the report's summary of Chapter 8 caught my attention with particular reference to the recent election.

"Well-being depends heavily on the pro-social behaviour of members of the society. Pro-sociality involves individuals making decisions for the common good that may conflict with short-run egoistic incentives.... Societies with a high level of social capital – meaning generalized trust, good governance, and mutual support by individuals within the society – are conducive to pro-social behaviour."

If Mr Cameron is looking to increase the overall well-being of the nation and move us up the chart, rather than down, over the next 5 years, (which surely sums up the job of government?) maybe he should download a copy and study it well.

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1 http://www.theguardian.com/world/2015/apr/28/female-over-65-and-danish-the-three-keys-to-happiness.
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2 http://www.huffingtonpost.com/2013/10/22/denmark-happiest-country_n_4070761.html^↩

Fire Fighting after FiRe - How to Manage an Emergency Fund when the Salary Stops.

The standard advice about a emergency fund is that it should contain 3 to 6 months' worth of expenses (or even more - for a heated debate on this take a look at this recent MSE thread). The reason given for needing to keep this amount of cash is "what if you lose your job?" However, by definition, this can't happen in retirement (although there are many flavours to FI, some of which will involve earning an income of some kind). At this point we need to rethink our calculation and reassess our actual requirements. Will we need an "emergency fund" at all when we are drawing a pension or living on savings/investments? If we do need one how should we assess how much we need to keep in it, and, crucially, how do we top it up when it gets depleted.

There is an interesting discussion about this on "Get Rich Slowly" - Is it Possible you don't need an Emergency Fund which started me thinking about our own situation. What kind of emergencies could we encounter?  - fire, flood, pestilence (a plague of pigeons :-))?  but anything catastrophic of this nature would be more than likely be covered by insurance. Medical emergencies figure heavily for Americans - according to Lisa's figures they represent the most common financial emergency, but they shouldn't cause so much concern to UK citizens. (However who knows what the future might bring regarding the NHS. As an aside one of the main reasons we would like to have a fair amount left to pass onto our sons is that they both have an inherited medical condition that could mean they have periods when they can't work in the future, or need drugs that the NHS will no longer supply. This worry and the threat of the possibility of one or both of us needing care home support is why we would like to leave our ISA funds in tact for as long as possible - so maybe this is a form of long-term medical emergency fund in itself.)

Our emergencies are most likely car, white good or kid related. I do not count holidays as an emergency (although taking one sometimes is :-) - probably not so much the case when you retire). Holidays, despite being paid for in chunks of cash, will continue be paid for by credit card when we retire and have been accounted for as part of our day to day expenses. Thinking about what has happened in the past and when we have unexpectedly needed cash it has generally been to make loans to the kids (some paid back, some not) for things like clearing student overdrafts, help with rent deposits and prop-ups so that they could complete their education. We have not (as yet) joined the growing number of parents who have helped their kids with buying a house but several of my friends have. If we do go down this route though it won't be an emergency. So, in the past the kind of figure we would be looking at that we might need at short notice could be up to around £3,000. In certain situations this could happen maybe 3 times a year - major car repair, fridge and telly both pack-up and the dog needs an operation.  This semi-educated guesswork gives me a figure for our own particular emergency fund of £12,000 going forward. I'm happy with that, it can continue to sit in our "high" interest Santander 123 account and hopefully seldom get touched.

But that's not the whole picture. In addition to this I do have to look at the bits of our income post retirement that aren't guaranteed. From when I retire at 58 and until I'm 66 and my state pension kicks in not all our required income will be coming from guaranteed sources. We will be relying on our rental income and dividends from our ISAs to make up between 30% (58 to 60) and 15% (60 to 66) of our £30,000 income. Neither of these sources are sure-fire or inflation linked. They are liable to fluctuate and may not always be available, or we may not always want to take them. In the case of the rental income we may have an extended void period or large repairs that eat into the rent. (I do only ever assess the annual income from the flat on 10 months' worth of rent but I want to be super careful here). In the case of the ISA dividends we might want to take advantage of a market drop to plough them back in and buy when things are cheap, rather than depleting the funds when they are low. In these situations extra cash in the emergency fund might come in handy.

Given that between £4,500 and £9,000 of our income over those 8 years is not entirely secure, it probably makes sense to have at least a years' worth of the average required (£6,750) available in the emergency fund. This should be added to my original £12,000 and can all be fitted into the Santander 123 giving a total emergency fund of £19,000.

So, I have my figure, we need a £19,000 cash emergency fund until I am 66 when it can probably be run down slightly. Getting the cash into the fund is doable - we currently have just under £14,000 as we've just used some cash to change the car. Making up the extra £5,000 won't be a problem over the next few months before my husband retires. The question that bothers me is how to keep it topped up once we have both retired and are maxing out our income. The whole point of the fund is that it will get used - although it would be nice if it didn't - so how do we fill it back up to comfort level when it does?

The only solution I can think of is to make a point of moving any capital gain from the ISA into cash as and when it becomes available? I have been doing a bit of rebalancing recently using a couple of funds that have made over 25% gain, sold some stock and bought more of assets I'm still a little low on. Should the same strategy be used to keep an emergency fund at the required level? It certainly makes sense from a "sell high" point of view and the whole point of the emergency fund is to avoid a situation whereby you are forced to sell when stocks are low. Of course the potential for more growth is lost by moving down into low interest cash but you are at the same time dodging the bullet of real loss if you need to sell at wrong time. I'm proposing the following sequence of events:

• Son needs help with the airfare and living expenses for interview and then relocation in Toronto (this might actually be happening which is very exciting :-) He's just finished his PhD and is applying for a research position there.)

• Remove £5,000 from the emergency fund 

• Check ISA for any funds that are showing signs of good growth (this is independent of any ongoing asset rebalancing that is going on).

• Sell an appropriate amount of any funds that are showing more than a pre-defined amount of growth (15%, 25%?)

• Top up the emergency fund

• If everything in the ISA is showing red do nothing, wait but rebalance ISA annually as usual if necessary. Wait. Wait. Hope emergency fund holds out despite deciding to use cash from it instead of taking dividends out of the ISA during the bad patch. Wait.

• Breathe sigh of relief as markets start to rise again. Wait for strong growth and eventually take some profit and rebuild the emergency fund.

Any other ideas anyone?

Defining the Benefit. When to take a Defined Benefit pension.

Timing risk and when to draw a Defined Contribution pension are well documented. I was fascinated to read RIT's recent post on this in which talks about SWR and links to a video which uses historical data to illustrate that when a pension "pot" is put into drawdown is a major factor in determining whether or not it will last and that no withdrawal rate (whether 4%, or even less) can be regarded as "absolutely" safe but must be assessed in the context of the "value" of the markets at the time the pension is taken.

I was fascinated, but in a detached kind of way, because this kind of deliberation about "when" has never been considered necessary for those of us lucky enough to have index-linked DB pensions. Received wisdom is simple - never take a DB pension before scheme payment age if at all possible, actuarial reduction is to be avoided at all costs. But I've been thinking about this recently and have come to the conclusion that deciding when to take a DB pension is not that simple after all. We may think that it is but that is only because, unlike with a DC pension, it is easy to count the cost of taking the pension early, when what we should actually be doing is making some effort to measure this cost against the benefit.

As an example my own figures come out like this: (I currently have £35,000 in my SIPP and was intending to boost this up to around £50,000, retire at 58 and defer my LGPS till 65).

• Pension if I take it at 65 - £9,300. Tax free lump sum -  £13,000. (When taken this this would be partly subject to 20% tax as I have a small amount of rental income, plus state pension would become payable at 66).

• Pension if I take it at 60 - £7020. Tax free lump sum - £11,500). (This would be taken tax free until 66 as I intend to pay myself just enough out of my SIPP to take me up to the PA).

As I would get the pension for 5 years longer if I take it at 60, I will start to go into a "loss" at age 75 when I will be £2,300 pa worse off. I would therefore be down by around £35,000 if I live to 90 and this loss would increase year on year. Sounds like a bad deal and I should not even be considering it as an option if I can avoid it?

But what this calculation doesn't take into account are the benefits attached to:

• Not having to stretch our finances to allow me to retire at 58 (in other words, the pressure is off as I already have enough in my SIPP. In fact I shouldn't put any more in there as I am already at the limit of what I can use tax efficiently should I decide to access my LGPS at 60)

• Being able to take advantage of a tax free lump sum of £8,500 from my SIPP at 58 which could be re-invested in my ISA, in whole or in part. The rest of my SIPP would adequately fund the two years before I taking my LGPS.

• Being able to access my LGPS tax free lump sum and AVCs at 60 instead of 65 (when my husband would be 71 and we may not be able to put it to such good use). My TFLS/AVC fund currently stands at around £16,000 but could be bumped up to £25,000 by paying what I was going to put into my SIPP for the next two years into my AVC instead. (It is a perk of the LGPS pre-2014 that the whole of the AVC fund can be used to boost the tax free lump sum - subject to certain upper limits that don't apply to me).

• A big part of my income between 60 and 65 would be index-linked and risk free (via the LGPS) rather than managed myself via my SIPP (and therefore subject to market risk or inflation risk if I move it down into cash).

All the above add up to a clear win, for me, to taking my pension early despite the 24% reduction. This win is personal and depends on my lifestyle and situation, what it actually costs in monetary terms is just one of the considerations. After thinking it all through I'm pretty sure which way to go and have revised my targets accordingly. In fact the only one that I haven't yet hit is the one that means I need to add another £1,000 pa to my LGPS pension and that is simple to satisfy  - I just need to keep working for another 2 years.  

On a more general note, if things stay as they are with DB pensions and public sector ones in particular - which is unlikely but does provide food for thought - then it seems probable that some sort of "retirement age" gap could grow up between those with DC pensions, who let the decision on when they want to retire drive their saving and investing plans because no-one can actually tell them in advance what will be the best time to go, and those on DB pensions who just "expect" to have to stay in work until they reach scheme retirement age (which is increasingly being brought in line with State Retirement Age). Of course, there is nothing to stop DB pensioners funding (slightly) early retirement but it does need the foresight to set up an additional personal pension, a fair excess of salary over needs and a willingness to confront the horned beast of actuarial reduction, and assess the benefits of taking a hit on total pension received, in the context of the whole retirement plan, rather than with "just don't do it" blinkers on.

Knowing the financial cost of something is an advantage, but it can be a brake in just the same way as not knowing can (and maybe even more so). When deciding when to take a pension we should all make sure we take due diligence with our cost/benefit analysis and never forget that the only thing we can really be sure of is the value of time.

Pension Fund Fury

I don't intend this post to be a defence or justification of public sector pensions nor an apology for the fact that both my husband and I are lucky enough to have one. I've been reading the MSE forums for long enough to grow a fairly thick skin about the predictable "gold plated public sector pension subsidised by the tax payer" stance taken by some posters on a regular basis (as an example latest rant here) , although I have found myself getting quite defensive at times when a seemingly innocent question about pension scheme rules will raise a hornets' nest of vitriol against the poster for happening to work in the public sector but not realising just how "lucky" they are. Of course there is a very valid point in there alongside all the "politics of envy" that gets displayed. (Please note - My tongue is pretty firmly in my cheek here as that particular phrase is very often used by exactly the same people but in quite a different context :-))

No truly, I do agree, public sector DB pensions are not sustainable and don't suit today's work patterns and life expectancy. However, the changing pension landscape will mean that public sector salaries will have to be raised to recruit and retain. For example my husband will retire from the Civil Service this year after doing 35 years during which he brought in tens of £millions of revenue. His final salary as a Higher Executive Officer was £32,000 and his pension is £12,000. He chose pension, job security and lower levels of stress (he's also had serious health problems in the past which might well have lost him his job in some parts of the private sector) but he did have to sacrifice salary. It was a choice, not luck.

But I digress and am in danger of doing exactly what I said I wasn't going to do so here is the real subject of this post: "A Pensions Patchwork" - BBC Radio 4. I was sent the link by a friend and have been feeling intermittently incensed ever since.

I don't expect anyone who isn't a member of the LGPS to have the staying power to listen to the whole 38 mins of the programme (although actually maybe you should as it turns out that it is your money that's getting wasted). But in case you're short on time here is the introduction:

"In Canada, everything is big - including powerful pension funds such as the Ontario Teachers fund which owns half of Birmingham airport and other large projects around the world. It's all a far cry from the British pension scene, where a hundred local government pension funds each run their own affairs separately and pay costly fees to City firms for investment advice. Many of them still have financial deficits. Taxpayers have been forced to pick up bills to pay off those shortfalls and already hard-pressed local services have been stretched further. Lesley Curwen investigates how these individual funds are run and asks whether we should have larger funds with cheaper costs - like Canada does. And she asks whether more councils should be using pension money to invest in housing and infrastructure as a way to boost their local economies?

And here are the main points I took away from the programme:

• The LGPS is a "fractured, cumbersome" structure which, although it is to all intents and purposes one occupational pension scheme, is divided up into over 100 funds each having its own admin function, infrastructure and fund managers. 

• On average the 89 funds in England and Wales are 21% underfunded which means there is a deficit of around £47 billion which can only get worse due to low interest rates and increasing life expectancy. The deficit has to be made up by the employer (ie the Local Authority and therefore the taxpayer).

• Local Authorities are already struggling with massive cuts to their budgets and this is yet another pressure on those budgets.The example of Birmingham City Council is given. The Council needs to make £101 million cuts due to loss of funding and it also owes the West Midlands pension fund £23 million to make up a deficit. The cuts will impact the flagship new library which is well used by tourists and locals alike. Weekly opening hours will be cut from 70 down to 40. 90 staff will be made redundant.

• The LGPS as a whole pays out a massive amount in fund management costs. A figure of £597 million is quoted for one year's costs and this figure does not include dealing costs which seem to be much higher than they need to be due to over trading by as much as 500%. Although there has been no detailed analysis made of the trading costs they could easily be adding another billion to fund management charges. 

• Councillors are often ill-equipped to made informed investment decisions so they rarely challenge or question fund managers about performance.

• John Clancy, a Birmingham councillor has studied the costs in more detail. He found that costs had gone up 20% in just one year although returns had halved. He discusses the issue further along with Michael Johnson from the Institute of Policy Studies in a blog post here

• Unison officials are also very concerned and agree with financial experts who advise that larger, regional funds should be created which can then employ their own fund managers instead of paying independent managers and "funding the buildings in Canary Wharfe" .

• The last words go to Michael Johnson who calls the LGPS a "national embarrassment" whose structure "acts to the detriment of members and taxpayers". Unfortunately he isn't hopeful of change any time soon because "the vested interests that oppose change... are very considerable....Imagine the screams of pain from the Investment Management Industry and bear in mind how political parties are funded in this country and draw your own conclusions".

This whole mess is made even more tragic given the fact that the majority of the members of the LGPS are fairly low paid workers (although there are some very highly paid managers at the top - in fact obscenely highly paid as ermines's recent post states). A typical pension for a fairly long serving worker is somewhere between £7,000 - £10,000 with a retirement age of 66. (My own will be around £9,000).

Despite public perception to the contrary, the true situation isn't a simple case of the typical local authority worker leeching the tax payer to fund her pension - that job is being done far more effectively (and cynically) by fund managers supplementing their already bloated salaries, aided and abetted by councillors making decisions on things of which they have very little knowledge.

SWR - Who Cares?

Safe Withdrawal Rate (the % of a pot of money that can be taken each year without fear of it running out before the grim reaper strikes) is a topic much discussed on FI boards and blogs. However I only have a passing interest in the subject because I don't really have a pension "pot". I'm one of those lucky people with a (modest) DB pension that will never run out and will keep going as long as I do. It's index linked and 50% of it will pass to my husband if I die before he does. So once I get to 66 I'm sorted.

My problem consists of funding the years between 58 (when I hope to retire) and 65 (when I intend taking my pension). My calculations are not around working out how much I can take, they are based on having enough there in the first place. It doesn't matter to me if it all goes and I do have the luxury of knowing how long it has to last, but it does have to be there. I'm very close to needing the money (two years this month) and still a fair way off from having it. I need the pot to grow but I haven't got a lot of time. If it shrinks dramatically I could be looking at working longer or not sleeping at nights when I do leave, so I need to secure my income for those years as tightly as possible. How to do this?

I have no training in economics and failed A level maths 3 times (this and learning to drive are the two things I've allowed myself to fail at in my life) and the dynamics of the markets is something I've only just started to take an interest in. Financial products and how to manage money (beyond the basics) is an art I'm only just learning but I think these are the two areas I need to work on.

Assess how much I need to live on.

This should be the easy bit. Working on the premise that we will need as much as we are spending now I have calculated that I will need to secure an income of £930 per month for the 20 months before my husband receives his state pension and £505 for the 64 months after until my pension becomes payable. Total = £50,920.

But at this point I am already making two assumptions:

• that our rental property will bring in at least £4,000 pa
• our ISA's will have grown to £70,000, won't lose value dramatically and will pay 3% dividends giving us at least £2,000 pa. 

This process also tells me something quite important: I need a substantially higher amount of income in the first two years than I do for the following 5.

Work out how much I need to produce this income and how to secure it when I've got it.

This is the tricky part. In simple terms I could just plan to save the whole amount in cash, put it in a bank account and draw out what I need each month. The problem with this is that I'm getting very nervous about whether or not I'll actually have the full amount. I have £29,600 at the moment but that could be £25,000 next week, or £32,000 depending on what the markets do. In any case I definitely need to ramp up my saving to reach my target and this will be made very difficult due to the fact that our disposable income will shrink massively in a few months when my husband retires.

According to received wisdom I shouldn't really have any of my pension in equities at all since I will need to draw on it in 2 years time. Thankfully a good chunk of it (around £19,000) is safely stored in my CIS FAVC but I will have to transfer it out in order to draw it so I will need to have worked out what to do with it by then. Maybe I shouldn't actually put this in my SIPP for drawdown but put it into a "high" interest current account instead and use it to fund the first two, most expensive, years of retirement?

It's very difficult to see how things will pan out given that we don't yet know how pension drawdown will work under the new rules so maybe when this becomes clearer I will be able to put together a firmer plan. But my more immediate dilemma is that I need my SIPP to grow but I shouldn't risk the volatility that this requires. According to my calculations I'll have just enough, but only just and only if....

I know the solution of course, spend less, save more. Any kind of withdrawing, safe or otherwise, depends on the funds being there in the first place. Perhaps I need to concentrate more on tactics for saving than worry so much about where to put the money and how to make it grow.

Having more than enough is the only way to be confident that I won't run out and it's time I acknowledged this, bumped up my targets (see below) and got on with it.

Targets	Current
ISAs - £70,000	65,344
Pension - £50,000	29,600
Abundance Gen - £7,500	1,500
Cash - £22,500	22,000
Total - £150,000	118,444
Isa To Go	4,656
Pension To Go	20,400
Cash To Go	500
Abundance To Go	6,000
Total To Go	31,556

(The money in Adundance is an interesting addition because it works in quite a different way from the rest of my investments. A chunk of capital is returned each year and, so long as the project you are invested in doesn't fail (which is a risk), you can be fairly confident of that return. So this level of investment should give me a return of around £650 - £700 pa.)

Setting Targets for the Final Push

November 2015 will see my husband draw his last ever wage before retirement. So the next 12 months are the last opportunity for me to save and invest substantial amounts of money.

From next Dec until the day I retire we will only have about £350 to invest per month - that is around 25% of what we are currently putting away. I intend to continue to pay £50 in to my LGPS AVC (this can't be taken until I take my my pension which I intend to do at 63 but it can all be taken as part of the tax free lump sum so I think it's worth it) and also continue paying £45 into my CIS FSAVC until such time as I transfer it into my SIPP (not sure when this will be yet). The rest will go into my SIPP.

By the time we both have our defined benefit and state pensions in payment, along with our rental income, we will be up to around £37,000 which is more than enough to maintain our current standard of living. So it is only the years between when I retire and when I get my LGPS pension at 63 that I need to worry about. I have estimated that the minimum income I require each year to take the household total up to the £28,500 we need (with £32,000 being a more comfortable target) is £12,500 until 2018 when my husband draws state pension and £6,800 from then till I draw my LGPS. The sooner I have enough to cover this, the sooner I can retire. But, of course, the sooner I retire, the more I need to cover.

The equation's quite tricky but after some deliberation I've come up with the following conclusions/key facts:

• The earliest date I can hope to stop working is March 2016. This may happen if the offer of voluntary redundancy/early retirement materialises next year.

• I could only really take this up if my redundancy pay would be around £20,000 (as expected) and/or my pension would become payable immediately as part of the deal.

• Without the help of redundancy payments I would need around £80,000 saved in my personal pensions to leave at this date. The bottom line is that we do already have this in our combined funds, but our overall plan includes leaving our S&S ISA capital alone in case we need it for care fees etc so I'm avoiding bringing that and our £20,000 cash emergency fund into the equation. (Although I am allowing myself to figure 3% dividends from the ISA as being available to top up our income).

• Currently my personal pension stands at £24,600 and I am paying a total of £845 per month into it (made up to £1,057 by HMRC). By March 2016 this can only be expected to have grown to about £40,000 which won't be enough no matter how I cook the books.

• By March 2017 (the date at which I would realistically like to retire) my personal pension should have increased to around £45,000 (given the reduction in contributions in a year's time). At this point I will need £67,500. So I am short by £22,500 before I figure in ISA dividends. Taking those into account at around £2,000 per year, I am still £10,500 short. (I need £55,500 in total).

• If I reduce my ISA payment from £300 to £100 per month I could increase my monthly payment into my personal pension for the next 12 months to £1,045 (£1,300 after tax credit). In addition to the reduced contributions (£250/£300 per month) for the remaining 16 months to March 2017 I should have £48,000 which still leaves me £7,500 short.

• I need to reduce spending enough to be able to up my pension payments to around £1400 per month for the next 12 months or I need to be prepared to reduce our emergency fund to £10,000, or a combination of both to cover the shortfall.

These facts give me the following targets for the next 12 months

1. Save at least £1045 per month in my SIPP/FSAVC 
2. Save £100 per month in my ISA
3. Look at spending very carefully - try to cut back by at least £100 per month to allocate for boosting pension even further.
4. Cross fingers and hope the markets don't dive :-) 

The final push is on.

The Spectre Returns to the Feast

A few months ago I mentioned that the possibility of redundancy was looming large and that I was making plans for how to keep on track if it did.

However, a few weeks after telling us what their 5 year savings plan meant in monetary terms and that job cuts were part of the plan, management released a further statement saying that there categorically would not be any further offers of voluntary redundancy and that they expected to make the necessary staff savings by natural wastage alone. The more cynical amongst us were very sceptical that this would turn out to be actually the case given the level of savings required, coupled with the fact the workforce that had already been heavily "wasted" (both naturally and unnaturally) by two previous rounds of cuts.

It turns out that we were right to be cynical because we have now been told that there are another 22 posts to be lost in 2015/16 out of a workforce of around 80. In other words another 25% cut. It seems that denying there were going to be any more job losses was just a ploy to force the hand of anyone who was hanging around waiting for VR in the hope that they would go before they needed to be paid to do so. Fair enough I suppose, but it has put the rest of us through a roller coaster ride - "Perhaps my job is OK, perhaps it isn't, yes it is, oh, wait I minute no it definitely isn't".

All this plays merry hell with my financial planning as I think I'm pretty much in management's sights for redundancy.

My task now is to work out the best way of fitting it into my plans rather than letting it ruin them.

On the plus side, I would get to finish work even earlier :-) I reckon sometime after April 2016 when I would be 57.

On the minus side - how can I fund this when we've just decided my husband will fully retire in Nov 2015? We will need to be able to to live on his DB work pension (State pension not due till Nov 2018), the rent from our studio flat, any dividends I can wring out of our ISAs, whatever finance comes my way as part of the redundancy and my personal pensions (SIPP and FSAVC).

I've been hard at work on the spreadsheets and I'm hopeful that even the worst case scenario will be doable. The worst case being where I come out with a redundancy payment alone (I'm due around £20,000) and unable to access my pension until I'm 63. (This is the earliest reasonable date I can take it without the actuarial reduction being too big of a hit to bear). I am heartened by the fact that all my colleagues who have been made redundant up to now have been given access to their pensions as part of the package and this would certainly be a great result from my point of view but I'm not banking on it.

What this all means is that I have to force feed my SIPP as hard as I can for the next year until my husband retires and hope that will be enough to do the job. I've stopped paying my AVCs (except for a token amount) as they're not payable until I take my main pension and I'm going to reduce the payments into our ISAs so that I can divert the cash into my pension. I've decided that if this turns out to be a wrong move and I end up with more in there than I can withdraw in a tax efficient way, then I'll be happy to take the hit as it will mean that I've got my £8,000 a year LGPS pension 6 years early and unreduced. In that situation I'd be happy to put some of my tax relief back into the public coffers.

(A little good news - I was meant to be on strike today but Unison have negotiated a better pay offer that is heavily weighted towards the lower paid - up to 8.5% for those on the very lowest pay (ie those on around £12,000 pa). For me, this is the part of the improved offer that is far more satisfying than the fact that they also upped the 1% offer to 2.2% from Jan 2015 for the likes of me. What the ongoing cuts will do to services is another worry entirely. I really can't see how the services I look after can be maintained at the current levels of funding, but then I don't suppose that will be my problem for very much longer. Except that the problem belongs to us all  - as a citizen I quietly despair).

(picture courtesy of http://jrgee.deviantart.com/art/Ghost-In-The-Room-242691081)