Now where did I leave my flip-flops? Preparing for a sabbatical/work-break

Our financial planning expert takes a look at how to prepare for an extended career break if you are lucky enough to do so.

Poppy’s Planning — Financial Planning

Photo by Mauro Fantini via Unsplash

I guess many of us have a dream about walking away from all the stresses of working life — the routines, the commuting, being controlled etc. Becoming like a student again. In fact for many of us facing a return to the old life after working from home for 18 months, the dream is probably more in focus than ever before.

Increasing numbers of people are opting to take a sabbatical or career break. In fact some employment contracts specifically provide for it…but unfortunately on a non paid basis!

So how do you fund it?

The answer is it depends on what stage of your life you are, what responsibilities you have and how much financial independence you have created and of course what you expect to spend while you are “living the dream.”

You may have a mortgage; in which case you can always let your house or apartment out for a year or as long as you need and use the rent to pay the mortgage (providing your mortgagor allows this.)

Remember though that rental income is taxable in the UK, whether you are UK tax resident or resident on a beach in Bali. Mortgage interest can now only be offset against rental income at the basic rate of taxation even if the rental income is taxable at higher rates.

If you have significant equity in your property you could consider a remortgage and release some of that locked up value while interest rates are relatively very low. This will of course need to be combined with a sensible repayment strategy but this can be from a variety of sources including a repayment mortgage, future pension fund withdrawals, an anticipated inheritance or even downsizing…all strategies are of course not without risk and should be discussed with your financial advisor before proceeding.

You may have been able to save in ISAs over a few years at up to £20,000 p.a All the interest, dividends and capital growth is free of tax and so this may have given your savings a turbo boost.

In fact if you had started saving 5 years ago in UK tax year 2016/17 when the ISA allowance was £15,240 and you put aside £20,000 each year including this current tax year’s contribution, then by now you would have an invested total of £115,240.

Assuming a growth rate of 7% p.a. (not guaranteed and actual returns may be far lower than this) your capital would be worth almost £136,500 — the magic of compound growth. If so, you could withdraw some or all of the capital from your ISAs, transfer it to your bank account and off you go.

If you are over 55 and looking to take a sabbatical, then your pension fund may be very helpful to you. Indeed it is possible to isolate and withdraw some or all of your pension commencement lump sum also known as your tax free cash of up to 25% of your pension value (assuming you have not exceeded the lifetime allowance) leaving the rest of the pension fund untouched to continue growing free of tax while you work your way across Australia to the Great Barrier Reef.

Life is for living so why not at least do the calculations to see what is possible. If we can help in any way, let us know…

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