Early Retirement, School Fees and a House Deposit
Priya, 54, is an NHS manager earning £82,000 with a defined-benefit pension. Her husband Daniel, 51, is a self-employed consultant earning £46,000 and has a SIPP worth £190,000. They have two children, aged 16 and 13. Their £145,000 repayment mortgage has 14 years left at 4.9% fixed until 2027. They hold £22,000 in cash and £95,000 in stocks-and-shares ISAs. School fees for the younger child are £18,000 a year for four years. Priya wants to retire at 58, when her DB pension would be reduced by 12%; unreduced retirement age is 60. Daniel wants to cut to three days a week next year, reducing income by £12,000. They also promised their daughter £30,000 towards a house deposit at 25. Daniel has no income protection. Their stated priority is to 'retire early without losing the house', but they are equally committed to the deposit. The mortgage fix ends before Priya's planned retirement.
1. Identify the three most material tensions in this plan and recommend which goal should be prioritised. Support your answer with calculations.
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Tensions
Protection before reduced hours. Daniel is self-employed with no income protection. Cutting his income by £12,000 gross (about £780 a month net) reduces resilience just as the mortgage fix ends. The £22,000 cash reserve is roughly three months of household net income, not the six months normally appropriate before a deliberate income cut.
Short-term goals compete with retirement. School fees are £18,000 a year for four years (£72,000, or £1,500 a month). The deposit is £30,000, probably 9–12 years away depending on which child is the daughter; at 3% growth that is roughly £200–£250 a month, not £900. Priya's DB reduction is permanent: if her age-60 pension is £30,000, retiring at 58 gives £26,400, a £3,600 annual loss.
Mortgage refinancing risk. The £145,000 mortgage at 4.9% costs about £1,176 a month over 14 years. A higher remortgage rate before 58 would raise the income needed.
Priority. Protect the mortgage and Daniel's earning capacity first, fund the deposit second, and treat retirement at 58 as conditional on a full cash-flow model. Without Priya's actual DB statement and a remortgage quote, the early-retirement date cannot be confirmed.
2. Daniel proposes stopping his £900 monthly SIPP contribution to free cash for the house deposit. Evaluate this proposal, including tax and liquidity implications.
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Daniel's £900 contribution costs £720 net if he receives basic-rate relief; at £46,000 profit he is not automatically a higher-rate taxpayer, so the headline 40% saving should not be assumed. Stopping entirely saves £900 gross a month but gives up tax relief, tax-free growth and pension death benefits. Over 10 years at 5%, £900 a month could grow to roughly £140,000, so the opportunity cost is material.
The liquidity argument is weaker than it looks. Daniel is 51, so pension access is age 57; the deposit is likely 9–12 years away. A pension is not the right vehicle for the deposit because of the access age and investment risk, but stopping all contributions is an overreaction. A better judgement is to reduce the SIPP contribution to, say, £450 a month, redirect £450 to a cash ISA or fixed-term savings for the deposit, and preserve the pension habit. The couple should also use the £95,000 ISA portfolio only after the emergency fund and protection are addressed. If Daniel cuts hours, the £450 saving should be treated as part of the income-cut plan, not a separate deposit decision.
3. What protection action should be taken before Daniel reduces his hours?
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Before reducing hours, Daniel should apply for own-occupation income protection. A 26-week deferred period aligns with a rebuilt six-month emergency fund and keeps the premium lower; a 13-week deferred period would be safer but more expensive. The benefit should replace 60–70% of his income, run to planned retirement age, include waiver of premium and be written in trust. He should also consider standalone critical illness cover, because a heart attack or cancer would affect his ability to consult.
The existing life cover should be reviewed: the mortgage is £145,000 and the family has two dependent children. A decreasing term policy may be adequate for the mortgage but not for family support. Daniel's SIPP death benefits should be checked and an expression of wish completed. The £22,000 cash reserve should be increased to at least six months of essential outgoings before the £12,000 income cut. The advice should be sequenced: protection in force, emergency fund rebuilt, then reduce hours. Otherwise the family is self-insuring against the most likely risk at the worst time.