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Pension pot: how much is enough?

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RandallFlaggRandallFlagg Frets: 13929
edited February 2020 in Off Topic

I have been spending the last year reviewing and developing some retirement plans. After much thought and wrangling with spreadsheets and talking to as many people either retired or also preparing for retirement, I am trying to refine my plans as far as I can without paying for financial advice. It appears to me that there are 2 principle unknowns that make pension planning difficult - how long will I live, and how much do I need in my pot when I retire to last the unknown length of time I will live in retirement, ie how will the stock market perform in the future?

There are some very knowledgeable chaps on here with some financial nouse so I hope that someone can help me fault find and refine my plans with some free advice! 

I'm 53 this year and want to retire as soon after 55 as I can. I plan to be debt free at 55 and my current pension arrangements are 2 pensions:

1) 14 years of defined benefits pension from a previous job. This can be drawn from age 55 with a tax free lump sum of £32K and an index linked £5K a year until death then 50% goes to my wife.

2) A defined contribution pension with my current employer with £185K in it now.

After waking up to pension planning far too late in life, and after some research, I have switched my defined contribution pot, managed by Standard Life, into a different, higher performing fund, it's now 100% in the ASI UK Smaller Companies Pension Fund managed by Harry Nimmo of Aberdeen Standard Investments. I have researched the fund and Harry's profile and this fund has been the best performing fund that I have access to via Standard Life for the last 10 years. My pot grew over £42K last year with £31K of that investment growth, so it was a good year. Below is the funds 20 years performance, so in an attempt to try and answer the question "how much do I need in my pot to retire?" I am trying to build a forecast.

My plan is to take the defined benefits pension at 55 and take the tax free lump sum. At some point after that I plan to take the defined benefit pension as a flexible drawdown with no tax free lump sum.

Target for annual pension income is as follows:

  • £12-15K - household everyday expenses, council tax, gas. leccy, food shopping, car fuel & servicing, Sky TV, mobile phones, broadband etc.
  • £10K - £100 a week each for me & wife - pocket money
  • £10K - Discretionary capital expenditure. Holidays, leisure, save for new car etc.

So, £35K a year.

I hope to try and have savings of £60K at the point of retirement with another £30K available when my wife takes her pension at 55 ( (she only has a pot of £32K so we plan to take it as a lump sum and put it in the savings)

50% of my savings will be in a stocks and share ISA, in a different but equally high performing fund to my pension, and be the rainy day emergency fund and 50% will be in a regular ISA that can be accessed immediately if and when required.

I have used the ASI pension fund 20 year annual history to try and calculate the starting pot value that would be resilient enough to survive the market swings and downturns. In the history below you will see that the fund took a big hit in 2001/2 post 911 and again in 2008 with the banking financial crisis. I have added the fund fees (I assume they take 1.5% of your pot each year? or do they take 1.5% of what they make?) and also Standard Life's annual drawdown fees and it suggests a pot of £316K would have survived with the drawdown of £35K which after tax when added to my £5K DB pension would give us the £35K, escalated 2% a year, and then dropping down the withdrawal amount when we start receiving state pension from age 67 each.

I have a healthy appetite for risk and want to keep the pension pot invested in this fund through retirement to maximise the growth potential. Obviously historical performance is no indication of future performance but 20 years history does hopefully give a flavour of how the fund may peform going forward.

If we hit trouble, I have the savings to fall back on, or we may have to have a couple of lean years while it recovers, or absolute last gasp crisis plan would be us both trying to go back to work part time and maybe using equity release some of the house value - but that would not be desirable. 

So, is £316K enough? Is my plan pie in the sky or is it sound? All advice online suggests I need a much bigger pot and that 4% drawdown a year only can be taken for your pot to survive. Is that too cautious?

Some info:

ASI UK Smaller Comanies Pension Fund & Harry Nimmo (fund manager) details:

https://citywire.co.uk/funds-insider/fund/asi-uk-smaller-companies-retail-acc-gbp/c7751?periodMonths=12

My crude forecast:

ASI UK Smaller Companies Pension Fund - historical performance:


Average performance:

This is not particulary useful, as it in no way reflects real works gains/losses. 

 


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Comments

  • "My pot grew over £42K last year with £31K of that investment growth, so it was a good year" I NEED to re-evaluate my pension ASAP :o 
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  • RandallFlaggRandallFlagg Frets: 13929
    edited January 2020
    "My pot grew over £42K last year with £31K of that investment growth, so it was a good year" I NEED to re-evaluate my pension ASAP o 


    Indeed! I wish I had switched years ago. I switched fund part way throught the year, coincidentally after a Q3 dip with a strong Q4 performance. Bear in mind that some years can be double digit percentage losses though, you just need to tough it out and let it recover.

    The ASI UK Smaller Companies Pension Fund yeilded 44% returns last year


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  • boogiemanboogieman Frets: 12314
    edited January 2020
    One thing to be aware of : in my case, although I could take my pension from 55 onwards, there was a penalty for doing it. Mine worked out at a 5% reduction for each year before 60. Check your policy T&C’s thoroughly. 
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  • RandallFlaggRandallFlagg Frets: 13929
    edited January 2020
    boogieman said:
    One thing to be aware of : in my case, although I could take my pension from 55 onwards, there was a penalty for doing it. Mine worked out at a 5% reduction for each year before 60. Check your policy T&C’s thoroughly. 

    Checked it, there is a reduction factor on my final salary pension for taking it early but as it's so old the "normal retirement date" in the scheme is 65...I ain't waiting until then, I might not live that long! The reduction factor is calculated to a formula but is accceptable to me. I request an annual statement of benefits inckluding taking it early. Plus, the scheme is under funded so I'm keen to start taking it as soon as possible in case it folds!

    There is no penalty on my DC pension for taking it early


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  • MusicwolfMusicwolf Frets: 3627
    Think about how that £35k pa stacks up against what you are living off today.

    I retired 1st Jan this year age 56, so too soon to tell you if my calculations are correct, but I'm looking at a figure of £44k pa until our son is off our hands dropping to £40k pa (in today's money) after that..

    A lot depends upon how you define what goes in which pot but, looking at your figures, your 'pocket money' number is higher than mine but your every day and discretionary spend numbers are quite a bit lower (I'm running two cars).

    Last year was fantastic for investments.  Across a number of ISA's I achieved a return of almost 18% after fees for the calendar year but that compares with a loss of more that 8% in 2018.  Over a 10 year period I have seen positive growth of around 8%.

    Have you factored in State Pension from the age of 67 onward? 


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  • RandallFlaggRandallFlagg Frets: 13929
    Musicwolf said:
    Think about how that £35k pa stacks up against what you are living off today.

    I retired 1st Jan this year age 56, so too soon to tell you if my calculations are correct, but I'm looking at a figure of £44k pa until our son is off our hands dropping to £40k pa (in today's money) after that..

    A lot depends upon how you define what goes in which pot but, looking at your figures, your 'pocket money' number is higher than mine but your every day and discretionary spend numbers are quite a bit lower (I'm running two cars).

    Last year was fantastic for investments.  Across a number of ISA's I achieved a return of almost 18% after fees for the calendar year but that compares with a loss of more that 8% in 2018.  Over a 10 year period I have seen positive growth of around 8%.

    Have you factored in State Pension from the age of 67 onward? 


    Understood. £35K is a lot less than I earn after tax but a lot of my income is going into paying of mortgage/debts, so in fact we would be better off with the £35K in real terms.

    The £12-15K is based on a 2% escalation of current costs but only running 1 car. There is a couplf of thousand fat in there for things like Xmas etc.

    Yes state pension is factored in so the amount of drawdown reduces in the table from the £35K about mid way through, and then again when my wife gets her state pension.


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  • RolandRoland Frets: 8590
    It’s easy to focus on detailed forecasts. I don’t mean to belittle them. They were one of the building blocks of my career. However they tend to focus on “Doing it right” rather than “Doing the right thing”. Consequently they are often based on “more of the same”. 

    There is another question that you need to ask yourself: “What do I want to do with the rest of my life?”. Which leads to “How can I do that?”. My bass player wanted to have more control of his work life whilst still having money to buy equipment. He took early retirement, and immediately went back on contract doing the same type of work 3 days a week.  A former colleague retired and, last time I heard, was delivering rental cars across Scotland. It’s a nice way to see the countryside.
    Tree recycler, and guitarist with  https://www.undercoversband.com/.
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  • "My pot grew over £42K last year with £31K of that investment growth, so it was a good year" I NEED to re-evaluate my pension ASAP o 


    Indeed! I wish I had switched years ago. I switched fund part way throught the year, coincidentally after a Q3 dip with a strong Q4 performance. Bear in mind that some years can be double digit percentage losses though, you just need to tough it out and let it recover.

    The ASI UK Smaller Companies Pension Fund yeilded 44% returns last year

    This the one? 

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  • RandallFlaggRandallFlagg Frets: 13929
    edited January 2020
    Roland said:
    It’s easy to focus on detailed forecasts. I don’t mean to belittle them. They were one of the building blocks of my career. However they tend to focus on “Doing it right” rather than “Doing the right thing”. Consequently they are often based on “more of the same”. 

    There is another question that you need to ask yourself: “What do I want to do with the rest of my life?”. Which leads to “How can I do that?”. My bass player wanted to have more control of his work life whilst still having money to buy equipment. He took early retirement, and immediately went back on contract doing the same type of work 3 days a week.  A former colleague retired and, last time I heard, was delivering rental cars across Scotland. It’s a nice way to see the countryside.

    In the absence of a forecast what would you recommend I use to try and predict the unknown future?, we have to use something to give a level of confidence. The above scenario uses real historical data from the last 20 years against my planned withdrawal rate. Everyone has a decision to make on when they retire based on something. I would rather it be based on some data and my own rationale than the advice of an IFA who wants me to move my pension into a fund he "manages" for a fee.

    With regards what I will do in retirement. I want out of this job asap. It pays well but the 2 hours a day driving commute grates after 16 years. I'm weary of it. I am building a list of things to do in retirement which will include maybe being a magistrate or some volunteering or get involved in local commitees/council etc. as well as many many personal things I want to achieve and do.

    I've had 2 people around me die in the last year, one at 56 and one at 66. I'm getting out of the rate race as soon as I can.


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  • RandallFlaggRandallFlagg Frets: 13929
    edited January 2020
    "My pot grew over £42K last year with £31K of that investment growth, so it was a good year" I NEED to re-evaluate my pension ASAP o 


    Indeed! I wish I had switched years ago. I switched fund part way throught the year, coincidentally after a Q3 dip with a strong Q4 performance. Bear in mind that some years can be double digit percentage losses though, you just need to tough it out and let it recover.

    The ASI UK Smaller Companies Pension Fund yeilded 44% returns last year

    This the one? 


    Yep that's the one. managed my Harry Nimmo, he's a bit of a stalwart in his sector.


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  • DefaultMDefaultM Frets: 7271
    I'm 30 and should probably start thinking about this a bit more.
    I got a stocks and shares ISA that's been making 9%, but I've only got £8k in there. Then I think I've got under £5k in my employer pension even though I've been putting in the max they'll match (5%) for what seems like 6 years.

    The main bulk of my money is my betting bank, which I'd challenged myself to grow enough to pay off the mortgage. That now seems like a silly idea, because then all my money is suddenly gone and not invested in something which will make it grow.
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  • HerrMetalHerrMetal Frets: 533
    I'm the same age as you and stopped working over a year ago. Had the chance of a severence package and my motivation was dwindling. I'm looking at around 30 to 35k of private pension in 10 years time. Main thing for me is I've been mortgage free for years (paid off in chunks when it became clear endowments were underperforming) and have a fair amount of savings to live off for now. Medium term plan is to sell up and move somewhere nicer and also cheaper.
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  • vizviz Frets: 10647
    You’d need a fund of 850k to give you a lump of 25% plus 25k pa if you retire at 55 with a single dc pension and don’t have any other income source or state pension. I think. 

    If you delay retirement to 65, you’d only need 600k for that income. 
    Roland said: Scales are primarily a tool for categorising knowledge, not a rule for what can or cannot be played.
    Supportact said: [my style is] probably more an accumulation of limitations and bad habits than a 'style'.
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  • RandallFlaggRandallFlagg Frets: 13929
    edited January 2020
    viz said:
    You’d need a fund of 850k to give you a lump of 25% plus 25k pa if you retire at 55 with a single dc pension and don’t have any other income source or state pension. I think. 

    If you delay retirement to 65, you’d only need 600k for that income. 

    What logic are those numbers based on? What level of investment return etc?

    I'm not planning to take 25% lump sum and wife & I will have full state pensions, I have escalated todays' state pension rates accordingly assuming the triple lock increase stays in place.


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  • FretwiredFretwired Frets: 24601
    Answer to your question: take professional advice from a qualified IFA.

    Remember, it's easier to criticise than create!
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  • thomasross20thomasross20 Frets: 4423
    edited January 2020
    £1m is the limit, right..  aim for that. £40 k per annum max contribution. If you've paid mortgage off (assuming you don't live in London as per other threads) and are on higher tax, max it out to get max relief. And I agree keep doing 2-3 days in retirement is a decent plan to fight off boredom, if anything. 
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  • RandallFlaggRandallFlagg Frets: 13929
    edited January 2020
    Fretwired said:
    Answer to your question: take professional advice from a qualified IFA.

    I'll take the 1 hour free PensionWise consultation first. I dont trust IFAs and begrudge paying for advice that I may question anyway.


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  • RandallFlaggRandallFlagg Frets: 13929
    edited January 2020
    £1m is the limit, right..  aim and for that. £40 k per annum max contribution. If you've paid mortgage off (assuming you don't live in London as per other threads) and are on higher tax, max it out to get max relief. And I agree keep doing 2-3 days in retirement is a decent plan to fight off boredom, if anything. 
    £1M is the current lifetime limit on contributions, I assume that excludes investment growth?


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  • Yeah if growth takes it over that amount you get stung.
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  • JalapenoJalapeno Frets: 6378
    I think he means NO.  Investment growth counts too (of the Pension pot), various Chancellors have got their fingers in our pots - starting with Gordon Brown.  The Con/Lib government cut the lifetime allowance from £1.5M to £1M.  I think you would be doing really well for £1M pot to yield a £40k/yr pension.
    Imagine something sharp and witty here ......

    Feedback
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