Pension pot: how much is enough?

Nitefly

@WiresDreamDisasters also some useful stuff here:

https://www.gov.uk/browse/working

Although if you're 39 now, State Pension may not be a thing by the time you hit your 60's...

WiresDreamDisasters

@Nitefly I'm 35 and want to start being a bit more money conscious - as in, care about making more of it so I can take care of my family.

Jalapeno

LoFi said:

I've also seen the 4% figure used as a benchmark for a safe drawdown rate (including some suggesting it's too aggressive, and 3.5% is safer). I'm not an IFA (or anything like that), but I'd assume there's a reason that figure is the consensus - you're proposing just under 10%.

4% is also pretty much the cost of an annuity vs pension savings, I'd prefer to let the pros do it for me

I'm naturally very cautious financially, and don't want to put a dampener on your plans, but personally, there's no way I would bet my security in old-age on averaging 16% returns (and low/no inflation) for the rest of my life.

Ditto

RandallFlagg

Jalapeno said:

LoFi said:

I've also seen the 4% figure used as a benchmark for a safe drawdown rate (including some suggesting it's too aggressive, and 3.5% is safer). I'm not an IFA (or anything like that), but I'd assume there's a reason that figure is the consensus - you're proposing just under 10%.

4% is also pretty much the cost of an annuity vs pension savings, I'd prefer to let the pros do it for me

I'm naturally very cautious financially, and don't want to put a dampener on your plans, but personally, there's no way I would bet my security in old-age on averaging 16% returns (and low/no inflation) for the rest of my life.

Ditto

Do you know where the 4% safe drawdown return comes from? Research it. It’s from US research in the 90s and It makes assumptions about moving a funds into cash and bonds in retirement. That’s one approach but it won’t give you the growth of equities.

I’m not cautious, I am happy with higher risk

Nitefly

WiresDreamDisasters said:

@Nitefly I'm 35 and want to start being a bit more money conscious - as in, care about making more of it so I can take care of my family.

Ah, sorry, I misunderstood your earlier post.

RandallFlagg

RandallFlagg said:

Jalapeno said:

LoFi said:

I've also seen the 4% figure used as a benchmark for a safe drawdown rate (including some suggesting it's too aggressive, and 3.5% is safer). I'm not an IFA (or anything like that), but I'd assume there's a reason that figure is the consensus - you're proposing just under 10%.

4% is also pretty much the cost of an annuity vs pension savings, I'd prefer to let the pros do it for me

I'm naturally very cautious financially, and don't want to put a dampener on your plans, but personally, there's no way I would bet my security in old-age on averaging 16% returns (and low/no inflation) for the rest of my life.

Ditto

Do you know where the 4% safe drawdown return comes from? Research it. It’s from US research in the 90s and It makes assumptions about moving a funds into cash and bonds in retirement. That’s one approach but it won’t give you the growth of equities.

I’m not cautious, I am happy with higher risk

Ac couple of articles of the mythical 4% rule:

https://www.retirement-planner.co.uk/232025/stop-talking-3-4-drawdown-rules-finalytiqs-okusanya

https://www.ftadviser.com/retirement-income/2017/02/13/four-per-cent-drawdown-rule-obsolete-aegon/

tone1

I’ll just go on a bank robbing spree in retirement and if I get caught I’ll let HMP Services  cook my meals and do the laundry 

EricTheWeary

tone1 said:

I’ll just go on a bank robbing spree in retirement and if I get caught I’ll let HMP Services  cook my meals and do the laundry 

When I used to visit people in prison I had one chap with a history of violent offences who told me, seriously as far as I could work out, that his retirement plan was to murder someone. 

RandallFlagg

For anyone who is really interested in drawdown rates vs equity gains in retirement and the often touted 4% safe drawdown "rule". Note this article on the Small Cap market. My chosen fund operates in the UK SmallCap index of companies and this article highlights the historical benefits of SmallCap equity returns allowing a higher withdrawal amount.

https://www.fa-mag.com/news/small-cap-withdrawal-magic-28553.html?section=47

here's the crux:

"In most cases, they are dramatically higher. In some years, the all-in allocation’s safe withdrawal rate reaches 25%,  while the conventional safe withdrawal rate never gets much above 10%. The average annual safe withdrawal rate using the all-in allocation is about 11.7%; with the conventional asset allocation, it is about 7.75%. Thus, on average, the all-in allocation’s annual safe withdrawal rate is about 50% higher than the rate from the conventional asset allocation."

It is pretty astonishing to me, having dealt with recommended withdrawal rates in the 4% to 4.5% range for many years, to observe that certain lucky retirees could have withdrawn 25% from their portfolios for 30 years by taking extreme measures with their asset allocation.
Even withdrawal rates in the teens amaze me. But the data evinces that about one-third of all retirees could have safely withdrawn 13% or better over their lifetimes. And another one-half of all retirees could have safely withdrawn between 8% and 12%.

One source of this plenty is, of course, the strong long-term returns of small-cap stocks, which have exceeded the returns of large-cap stocks by 2 full percentage points over the last 90 years. And, of course, the elimination of bonds, a low-return asset, also dramatically elevates portfolio returns and, consequently, withdrawal rates."

RandallFlagg

crunchman said:

I wouldn't take the defined benefits pension at 55 unless you are ready to stop working straight away at that point.  I don't know exactly what your salary is, but from what you have said above, you will end up paying higher rate tax on the pension income.  If you hold off until you actually stop working, you will get a bigger gross income, as you won't have the penalties for taking the pension early, and you also will pay less tax on the income.

Even if you retire early, I would actually be tempted to get some kind of part time low stress work for a bit and avoid taking one of the pensions.  If you can hold off on taking one of the two pensions for a few years, you will get more money when you do take it.  I'm on a final salary scheme, but when I get there it will grow by 8% per year + RPI for every year I don't take it.  Not sure how it will work with yours, but an extra year or two before taking it might make a significant difference to your income.

You don't know what the economy will do, and if you plan to have just enough, you might find it is not enough.  I'd plan to have 25% more than I think I need.  If all goes well, you will be able to afford some nice exotic holidays, or expensive guitars.  If it doesn't go well, then at least you have that bit extra.

I just want to answer this point.

I have calculated the difference in taking the final salary pension at 55 vs leaving it to age 65. I will draw £83K benefits from that pension between 55 and 65. If I leave it and only draw at age 65, even though the amount that pays out annually is higher, and even with the index linking, it will take 21 years for it to pay out that £83K taken early and start to be the better option.

Even though I will pay tax on it, its a no brainer.

ThePrettyDamned

WiresDreamDisasters said:

Is there a n00bs guide to this sort of stuff? AKA "Ensuring your future for dummies who thought they were going to die by the age of 16... and then 20... and then 25... and then 39.... but who cling onto this mortal coil and are only just now learning that the future is a real thing: vol 1"

???

Like literally.... the dumbest of the dumb. What is capital.... how can you use capital.... etc... etc....

To be honest, after speaking to a financial adviser I learnt:

- pay off high interest debt first. Before even a rainy day fund. They cost money. 

- contribute to your pension pot, and your employer will pay in too. Max out what your employer puts in - I have a very good employer who contribute 12 percent salary regardless of my own input, and I can put in as much as I like. My girlfriend gets 3 percent from employer, +1 percent for each percent she contributes to a max employer contribution of 9 percent. She puts 6 percent in, totally 15 percent. 

- get a rainy day fund together while paying into pension. At an early stage, it's not terribly worthwhile obsessing over what fund the pension goes to - it's more important to be saving 

- my ifa suggested that, as I have a pretty good pension right now, once I have a rainy day fund together (he suggested 3-6 months of survival with no job, which will take me... A while...!) it would then be better to have a stocks and shares isa, rather than increasing my pension pot further. This means I can diversify. At this point he suggested really looking at where my pension money is, but I know nothing of stocks and shares... Luckily, aviva make this easy to check. 

There is one other side effect to contributing to your pension - you have, at your disposal, an instant pay rise available. It's not perfect (it gets taxed, whereas you get relief on pension contributions) but if I need a slightly higher monthly income, I can cut my pension contribution to nothing, effectively getting a take home raise of about 8 percent. My employer will still contribute. 

Musicwolf

I'm now just 5 weeks into retirement (aged 56), so this is all research / theory.  Check back with me in another 20 years time to see how I'm actually doing.

You need to maximise your savings whilst at work and a pension fund is a great way to do that.  Your earnings are taxed at 0% up to your annual tax free allowance, 20% thereafter up to £50k and 40% above £50k.  You pension contributions are taken before tax so, if you are a higher rate tax payer, that’s saving you 40% straight off.  You can grow your pension pot by, I think, £40k pa as long as you don’t exceed your lifetime allowance.  When you retire you can take out 25% of your pension pot tax free, the rest you will be taxed on but assuming that you are no longer a higher rate tax payer in retirement then that’s going to be at 20%.

Example.  You’re a higher rate tax payer and you pay £80k into your pension over time out of your gross salary.   Upon retirement you withdraw 25% (£20k) tax free.  The remainder you draw out over time at 20% tax (£48k).  You get a total of £68k out of your £80k gross earnings.

If you had tried to save this same £68k out of your net pay (assuming tax at 40%) this would be equivalent to £113k gross.  You’ve saved yourself £33k of tax (you’ll have to wrestle with your conscience about what this means to the NHS).

I hear people say things like “I can’t afford to pay into a pension, I can barely make do as it is”.  Bollocks!  If ‘making do’ includes an annual holiday, a bigger house, going out for a drink etc then yes you can and you must.  Saving for your retirement needs to be the first thing that you do from your pay check.

TheMarlin

Mg brother in law has £1.25 million in his pension pot. Retiring at 55. B@sta@rd!

He’s quite lovely actually. Good for him!

Roland

Musicwolf said:

I'm now just 5 weeks into retirement (aged 56)

Congratulations

Ossyrocks

RandallFlagg said:

I just want to answer this point.

I have calculated the difference in taking the final salary pension at 55 vs leaving it to age 65. I will draw £83K benefits from that pension between 55 and 65. If I leave it and only draw at age 65, even though the amount that pays out annually is higher, and even with the index linking, it will take 21 years for it to pay out that £83K taken early and start to be the better option.

Even though I will pay tax on it, its a no brainer.

I am doing exactly this in June this year when I turn 55. Based on my lump sum and monthly income it will take 22 years before the amount I have received is affected. I'll be 77 !

I'm taking it now, buying a nicer house by the seaside and going down to 2 days a week part time work. 

It is indeed a no-brainer for me.

Rob.

fields5069

thomasross20 said:

"What do I want to do with my life" is a brilliant question. So many work hard to achieve some sort of goal, e.g. some sort of financial independence but what after that? Are you really going to be ok playing guitar 8 hours a day or watching Netflix all the time? I didn't take part (I'm 35!) but we had a retirement class recently and it was largely focused on these issues and less on the money side of things.

It depends of who you are I guess. My dad, the lucky bastard, got a very nice redundancy package from BT in the early 90s, aged 50, and hasn't worked since. I mean he has done loads - pottered around our houses doing all sorts of jobs etc., his day is usually pretty full. He pondered starting up a tiling business, but the ins and outs of self employment didn't seem worth the hassle so he didn't.

In contrast, I'll be lucky to finish work at 70.

ESBlonde

fields5069 said:

thomasross20 said:

"What do I want to do with my life" is a brilliant question. So many work hard to achieve some sort of goal, e.g. some sort of financial independence but what after that? Are you really going to be ok playing guitar 8 hours a day or watching Netflix all the time? I didn't take part (I'm 35!) but we had a retirement class recently and it was largely focused on these issues and less on the money side of things.

It depends of who you are I guess. My dad, the lucky bastard, got a very nice redundancy package from BT in the early 90s, aged 50, and hasn't worked since. I mean he has done loads - pottered around our houses doing all sorts of jobs etc., his day is usually pretty full. He pondered starting up a tiling business, but the ins and outs of self employment didn't seem worth the hassle so he didn't.

In contrast, I'll be lucky to finish work at 70.

Back in the good old days of final salary pensions etc. a number of people did indeed get great opportunities. My Ex FiL retired from BT at 55 with a bunch of shares and generous final salary pension. After a month he returned to his old job as a contractor earning £75ph 4 days a week.  He did that for a couple of years then retired again. This time he took a part time job as an odd job/maint guy for an old peoples home just to have something to do.

Around the same time my sisters husband also left BT on a final salary pension at 55. He's now 72 and she retired at 55 too. they both work part time in a friends retro shop for entertainment and pocket money. John looks set to draw his pension for a good bit longer yet.

The recent sad news about our dear friend BJ (Tributes section) hammers home for me the need to ensure we have enough time to spend and enjoy our retirement.

fields5069

Well, that's one way to look at it, sure. It places understandable stress on those of us less financially fortunate and/or savvy - the feeling that we are being told that we should be enjoying life more, and look this is how to enjoy it. I think the most imortant thing for me at the moment is to integrate work and life such that I'm good at both and enjoy both, and to be honest I'm not far off. I don't have a bucket list particularly, I've never personally understood them.

 I think at this stage I'd be lucky to achieve a 500-600k pension pot. Probably more towards the lower end.

RandallFlagg

I'm currently debating/researching UFPLS (uncrystallised fund pension lump sum) vs Flexible Drawdown. I won't need or want to take the 25% lump sum in one go from my DC pension, I want to leave as much invested as possible for gains and take the 25% of each drawdown amount tax free.

I've read that using UFPLS for regular drawdowns can be a bit admin heavy for some reason, I can't really find anything that goes into details as to why or what's involved.

I don't want to crystallize the full 25% of my DC pension pot, I want to leave it invested and maximise the 25% tax free by stretching it over the duration of years of variable drawdown.

viz

fields5069 said:

Well, that's one way to look at it, sure. It places understandable stress on those of us less financially fortunate and/or savvy - the feeling that we are being told that we should be enjoying life more, and look this is how to enjoy it. I think the most imortant thing for me at the moment is to integrate work and life such that I'm good at both and enjoy both, and to be honest I'm not far off. I don't have a bucket list particularly, I've never personally understood them.

 I think at this stage I'd be lucky to achieve a 500-600k pension pot. Probably more towards the lower end.

500k is quite a lot.