Pension pot: how much is enough?

RandallFlagg

ToneControl said:

1. my apologies, had no intention to offend
2. I've checked just now and it looks like the rules have changed. A few years ago, you had to make a case for larger yearly drawdown percentages, because the regulators didn't trust us with our own money. AFAIK there is no limit now.
3. My point is, they may be good, but they are probably not going to repeat the last 20 years' performance, I think you should use a much lower percentage in your projections, as everyone else is doing btw
4. Not saying it's a bad fund, I'm saying that most funds don't repeat their past behaviour
5. not sure what you mean. it's very easy to burn all your cash quickly, because of the nature of the maths, play with a pension predictor to try to get the curve right, but I would not assume 16% growth per year, that's way off the end of the opimistic end of the scale for most people.

Agreed, I'm not really expecting 16% but 8-10% average is not unrealistic for high performing funds. The real problem is managing volatility (sequence risk) which you can manage year to year but the real, real killer will be a slow decade. That will hurt everyone though so we'll all be struggling pensioners.

Government policy should be aimed at promoting buoyant equity growth long term. That way they can ramp down the state pension that we've all paid for!

I'm not sure when I will have enough or when I make the jump or whether I will work part time or not. For now I'm happy to keep smashing the mortgage and loading up the ISA and pension for the next couple of years and see where I am then.

ToneControl

RandallFlagg said:

ToneControl said:

1. my apologies, had no intention to offend
2. I've checked just now and it looks like the rules have changed. A few years ago, you had to make a case for larger yearly drawdown percentages, because the regulators didn't trust us with our own money. AFAIK there is no limit now.
3. My point is, they may be good, but they are probably not going to repeat the last 20 years' performance, I think you should use a much lower percentage in your projections, as everyone else is doing btw
4. Not saying it's a bad fund, I'm saying that most funds don't repeat their past behaviour
5. not sure what you mean. it's very easy to burn all your cash quickly, because of the nature of the maths, play with a pension predictor to try to get the curve right, but I would not assume 16% growth per year, that's way off the end of the opimistic end of the scale for most people.

Agreed, I'm not really expecting 16% but 8-10% average is not unrealistic for high performing funds. The real problem is managing volatility (sequence risk) which you can manage year to year but the real, real killer will be a slow decade. That will hurt everyone though so we'll all be struggling pensioners.

Government policy should be aimed at promoting buoyant equity growth long term. That way they can ramp down the state pension that we've all paid for!

I'm not sure when I will have enough or when I make the jump or whether I will work part time or not. For now I'm happy to keep smashing the mortgage and loading up the ISA and pension for the next couple of years and see where I am then.

the big problem then for you and me is when will the growth happen? it is not uniform.
I've been expecting a crash for 3 years, so have not been invested, for example, but what if the crash comes in 10 years, how can I retire soon? I need the bulk of the capital to still be invested when the boom comes, not the bust.

Anyone on higher rate tax should leave the mortgage alone and put everything into the pension (where possible to use backdating) down to the level where you are not a high-rate tax payer.

In any case, be aware that if you have suddenly increased your total annual pension contribution by 10% or more, you can't retire on it for about 3 years without risking a "recycling penalty" of 55% tax on the contributions made. HMRC expect static levels of contribution each year, and have weird rules about this

RandallFlagg

ToneControl said:

RandallFlagg said:

ToneControl said:

1. my apologies, had no intention to offend
2. I've checked just now and it looks like the rules have changed. A few years ago, you had to make a case for larger yearly drawdown percentages, because the regulators didn't trust us with our own money. AFAIK there is no limit now.
3. My point is, they may be good, but they are probably not going to repeat the last 20 years' performance, I think you should use a much lower percentage in your projections, as everyone else is doing btw
4. Not saying it's a bad fund, I'm saying that most funds don't repeat their past behaviour
5. not sure what you mean. it's very easy to burn all your cash quickly, because of the nature of the maths, play with a pension predictor to try to get the curve right, but I would not assume 16% growth per year, that's way off the end of the opimistic end of the scale for most people.

Agreed, I'm not really expecting 16% but 8-10% average is not unrealistic for high performing funds. The real problem is managing volatility (sequence risk) which you can manage year to year but the real, real killer will be a slow decade. That will hurt everyone though so we'll all be struggling pensioners.

Government policy should be aimed at promoting buoyant equity growth long term. That way they can ramp down the state pension that we've all paid for!

I'm not sure when I will have enough or when I make the jump or whether I will work part time or not. For now I'm happy to keep smashing the mortgage and loading up the ISA and pension for the next couple of years and see where I am then.

the big problem then for you and me is when will the growth happen? it is not uniform.
I've been expecting a crash for 3 years, so have not been invested, for example, but what if the crash comes in 10 years, how can I retire soon? I need the bulk of the capital to still be invested when the boom comes, not the bust.

Anyone on higher rate tax should leave the mortgage alone and put everything into the pension (where possible to use backdating) down to the level where you are not a high-rate tax payer.

In any case, be aware that if you have suddenly increased your total annual pension contribution by 10% or more, you can't retire on it for about 3 years without risking a "recycling penalty" of 55% tax on the contributions made. HMRC expect static levels of contribution each year, and have weird rules about this

Yep one of the imponderables. A cautious chap at work in his 30s moved a big chunk of his pension out of equities into cash at the end of 2017. He avoided the stock market slump of 2018 but also missed the significant rebound in 2019. He is being too cautious too early when he should be riding the waves and reaping on the good years with at least 20 years to go.

I absolutely agree about not paying the mortgage down...UNLESS....you face a very real prospect of not sustaining the income level you are on before the mortgage is paid off. That's why I am smashing the mortgage, I am lucky enough to be able to save at the same time.

I wasn't aware of the recycling penalty. Will need to investigate that so I stay the right side of it.

fields5069

Ok great shitting Christ I need to do some reading. 

ToneControl

this recycling law could be a minefield

most sites claim it only matters if you want to put cash into the pension after taking a lump sum out, but that's not true:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133800

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133850

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133830

What is the cumulative basis on which the significant increase of contributions is based?

An individual planning to increase contributions significantly to a registered pension scheme when taking a pension commencement lump sum does not avoid the “significant increase” test by increasing contributions piecemeal or gradually over time. It does so by providing for contributions to be measured over a set period of time in determining whether or not there has been a significant increase in contributions.
The period of time is:

• the tax year in which an individual takes a pension commencement lump sum with the intention of using it to make significantly increased contributions to a registered pension scheme

• the 2 tax years immediately preceding the tax year in which the individual took the lump sum, and

• the 2 tax years immediately following the tax year in which the individual took the lump sum.

so basically, there are various combinations of events that could trigger HMRC to be interested. I doubt if many people will be affected, but it's worth being aware. AFAIK the main worry for normal people is if you remortgaged your house or took a loan in the 2 years before retirement, and then increased pension payments by 10% or more, even if this was down to a pay rise or employer changing pensions policy. 

So: don't do anything with your pension that looks weird to HMRC in the 2 years before wanting to draw tax-free cash from that pension.

ToneControl

I hope you lot all know about the pension lifetime allowance

frankly, it's likely to only affect those with a large final salary pension, and extremely rich people
Basically you get taxed at 55% on pension funds above about £1m

However, if you did save £350k or so before 40, then invest it very well, you could get it grow to £1m+, and be subject to this tax
Hence I would not advise saving up more than £500k until they remove this punitive (tory!!) law

viz

You only get taxed on the incremental not the whole 1M surely

ThePrettyDamned

I really should sort mine out. I am still in the standard annuities fund, risk level 4. I've probably got another 30 years of work, at least...! And that's optimistic... 

I would like to move into ethical or sustainable funds somewhat. Thinking of going for a split of a high risk and medium risk, but not sure how to do it. Perhaps this indicates its time to see a financial advisor... 

ToneControl

ThePrettyDamned said:

I really should sort mine out. I am still in the standard annuities fund, risk level 4. I've probably got another 30 years of work, at least...! And that's optimistic... 

I would like to move into ethical or sustainable funds somewhat. Thinking of going for a split of a high risk and medium risk, but not sure how to do it. Perhaps this indicates its time to see a financial advisor... 

put a load into Africa
I did once, 10 years ago, but it was too soon. The next 20 years should see huge growth there, and you'd be helping to finance it

viz

ToneControl said:

ThePrettyDamned said:

I really should sort mine out. I am still in the standard annuities fund, risk level 4. I've probably got another 30 years of work, at least...! And that's optimistic... 

I would like to move into ethical or sustainable funds somewhat. Thinking of going for a split of a high risk and medium risk, but not sure how to do it. Perhaps this indicates its time to see a financial advisor... 

put a load into Africa
I did once, 10 years ago, but it was too soon. The next 20 years should see huge growth there, and you'd be helping to finance it

Hurry boy, it’s waiting there for you. 

exocet

ToneControl said:

I hope you lot all know about the pension lifetime allowance

frankly, it's likely to only affect those with a large final salary pension, and extremely rich people
Basically you get taxed at 55% on pension funds above about £1m

However, if you did save £350k or so before 40, then invest it very well, you could get it grow to £1m+, and be subject to this tax
Hence I would not advise saving up more than £500k until they remove this punitive (tory!!) law

I pointed this out on here about 2 years ago but I wasn’t very clear on all the facts but you are correct on the massive tax on breaches of the LTA, I know a number of people that I work with who had scary tax bills as a result of breaching the LTA - these all related to Final Salary schemes. I suspect that the same tax laws are behind the recent issues in the NHS where Doctors were refusing to work overtime because of the pension tax liabilities - there is definitely an aspect that relates to variable earnings and the way that HMRC calculates your effective maximum annual contribution - a sudden increase in earnings in a year (promotion or large commission) resulted in some kind of “multiplier” being applied that could then theoretically cause you to breach the annual allowance or even the LTA and then subject you to a punitive 55% tax rate. 

I think that this website gives some illustrations on effective annual (input) allowance treatment for Defined Benefits schemes (Final Salary) - although the rate of closure of such schemes means that the impact is felt by a diminishing number of people. https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance

ToneControl

exocet said:

ToneControl said:

I hope you lot all know about the pension lifetime allowance

frankly, it's likely to only affect those with a large final salary pension, and extremely rich people
Basically you get taxed at 55% on pension funds above about £1m

However, if you did save £350k or so before 40, then invest it very well, you could get it grow to £1m+, and be subject to this tax
Hence I would not advise saving up more than £500k until they remove this punitive (tory!!) law

I pointed this out on here about 2 years ago but I wasn’t very clear on all the facts but you are correct on the massive tax on breaches of the LTA, I know a number of people that I work with who had scary tax bills as a result of breaching the LTA - these all related to Final Salary schemes. I suspect that the same tax laws are behind the recent issues in the NHS where Doctors were refusing to work overtime because of the pension tax liabilities - there is definitely an aspect that relates to variable earnings and the way that HMRC calculates your effective maximum annual contribution - a sudden increase in earnings in a year (promotion or large commission) resulted in some kind of “multiplier” being applied that could then theoretically cause you to breach the annual allowance or even the LTA and then subject you to a punitive 55% tax rate. 

I think that this website gives some illustrations on effective annual (input) allowance treatment for Defined Benefits schemes (Final Salary) - although the rate of closure of such schemes means that the impact is felt by a diminishing number of people. https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance

yes, that's what causes the consultant surgeon problem. The tories came up with a flawed approach to pension tax rebates, and it has backfired. Bozza is supposed to announce an antidote in the next few weeks if he hasn't already

ThePrettyDamned

viz said:

ToneControl said:

ThePrettyDamned said:

I really should sort mine out. I am still in the standard annuities fund, risk level 4. I've probably got another 30 years of work, at least...! And that's optimistic... 

I would like to move into ethical or sustainable funds somewhat. Thinking of going for a split of a high risk and medium risk, but not sure how to do it. Perhaps this indicates its time to see a financial advisor... 

put a load into Africa
I did once, 10 years ago, but it was too soon. The next 20 years should see huge growth there, and you'd be helping to finance it

Hurry boy, it’s waiting there for you. 

Feeling blessed. Like the rains. 

Snap

Also a subject close to my heart.
My advice to anyone on the subject of serious investments (as opposed to faffing) is to hand it over to a professional. 
Always remember that they do this for a living, they have access to analysts that we don't, and the analysts do this for a living.

IMO, the reason people choose not to use an adviser is either due to fees, or believing that they can do better themselves with the benefit of the internet.

Well, as someone who has played around with investments for maybe 20 years I would say both these reasons are bobbins.

You won't do better than a good financial institution. You might get a few wins, but overall the chances are stacked against you. Like anything, if you go to a pro, you should get a better service than doing it yourself. You wouldn't cut your own hair for example (well not if you have any and are bothered what you look like!).

Fees are negligible really - 1-1.5% of your total portfolio value. So, they only need to grow 1-1.5% better than you can achieve yourself. Tiny margin . I'd expect a professional mechanic to do a lot more than a 1% better job on my car than I could. They have access to tools and insights that we just don't. Crucially, they will mitigate market falls too and minimise your loss.

As for long term pension growth - I wouldn't base my projections on 8-10%, I'd be looking at more like a consistent 5%. That IMO is a sensible baseline to work from. You would be doing very well to sustain 8% year on year. Also, as you start to draw on your pension, your attitude to risk will change and you will be moving money into lower returning investments. So, even if you go agreessive in the early years of investing, you will likely slow up soon enough.

Don't even consider an annuity. 

Consider looking at offshore bonds. Depends how big your pot is, but they are very tax efficient. 

In short, get an adviser. From a good company. this is your quality of life, pay for proper management of it. 

Jalapeno

Musicwolf said:

Jalapeno said:

I just read a paper from IG Investments saying the the London Stock Market has average 4.9% pa growth (incl reviesting dividends) over the last 119 years.

I've tracked one of my managed ISAs from April 2009 - April 2019 during which time it achieved a CAGR of 7.13%.  The lowest that it achieved over any three year period within that decade was 3.97%.  Certainly not sufficient difference to say that it is in any way at odds with your number.

It's not 'my' number.

https://www.ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100--190318

Musicwolf

Jalapeno said:

Musicwolf said:

Jalapeno said:

I just read a paper from IG Investments saying the the London Stock Market has average 4.9% pa growth (incl reviesting dividends) over the last 119 years.

I've tracked one of my managed ISAs from April 2009 - April 2019 during which time it achieved a CAGR of 7.13%.  The lowest that it achieved over any three year period within that decade was 3.97%.  Certainly not sufficient difference to say that it is in any way at odds with your number.

It's not 'my' number.

https://www.ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100--190318

Sorry - 'your' link.

The point being, and in line with @Snap above, banking on returns above 5% is folley.

Jalapeno

Musicwolf said:

Jalapeno said:

Musicwolf said:

Jalapeno said:

I just read a paper from IG Investments saying the the London Stock Market has average 4.9% pa growth (incl reviesting dividends) over the last 119 years.

I've tracked one of my managed ISAs from April 2009 - April 2019 during which time it achieved a CAGR of 7.13%.  The lowest that it achieved over any three year period within that decade was 3.97%.  Certainly not sufficient difference to say that it is in any way at odds with your number.

It's not 'my' number.

https://www.ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100--190318

Sorry - 'your' link.

The point being, and in line with @Snap above, banking on returns above 5% is folley.

NP

Snap

Just a thought, another factor is to think about what age you plan on retiring. Sorry if this has already been covered, but cba to read back through everything.


Also factor in the impact of the state pension. In my case, I will be 68 when it comes, and I plan to retire at 55 ish. Even though that;s another 13 years away from then, when I get it, it will be 8500 PA, and my wife will get one too. A not insignificant amount. The state pension is good value compared to contributions so do check on your NI contributions and fill them up if there are gaps.


On retirement age and how to draw down your pension. Say you have a pot of 100k and you forecast 5% growth. That allows you to take 5k a year and not reduce your underlying pot value. So, assuming that continued, when you died, there will still be 100k in your pot. Or you take more out, on the gamble you die before it runs out. That is a more complicated calculation, but it is true to say as you get older, you will spend less. Just another thing to consider.


oh, and one more! There is always equity release if you are a homeowner. Depends on your attitude to leaving an estate, but I think equity release will help a lot of people in our generation really. After all, you can't take it with you, the government will stick their claws into value over 325k, so why not get your hands on it whilst you can still enjoy it? Or, sell your house and rent somewhere til you pop your clogs, spend the rest?

ToneControl

Snap said:

Also a subject close to my heart.
My advice to anyone on the subject of serious investments (as opposed to faffing) is to hand it over to a professional. 
Always remember that they do this for a living, they have access to analysts that we don't, and the analysts do this for a living.

IMO, the reason people choose not to use an adviser is either due to fees, or believing that they can do better themselves with the benefit of the internet.

Well, as someone who has played around with investments for maybe 20 years I would say both these reasons are bobbins.

You won't do better than a good financial institution. You might get a few wins, but overall the chances are stacked against you. Like anything, if you go to a pro, you should get a better service than doing it yourself. You wouldn't cut your own hair for example (well not if you have any and are bothered what you look like!).

Fees are negligible really - 1-1.5% of your total portfolio value. So, they only need to grow 1-1.5% better than you can achieve yourself. Tiny margin . I'd expect a professional mechanic to do a lot more than a 1% better job on my car than I could. They have access to tools and insights that we just don't. Crucially, they will mitigate market falls too and minimise your loss.

As for long term pension growth - I wouldn't base my projections on 8-10%, I'd be looking at more like a consistent 5%. That IMO is a sensible baseline to work from. You would be doing very well to sustain 8% year on year. Also, as you start to draw on your pension, your attitude to risk will change and you will be moving money into lower returning investments. So, even if you go agreessive in the early years of investing, you will likely slow up soon enough.

Don't even consider an annuity. 

Consider looking at offshore bonds. Depends how big your pot is, but they are very tax efficient. 

In short, get an adviser. From a good company. this is your quality of life, pay for proper management of it. 

Fair points here, but most of the "professional financial advisers" I've met have been incompetent
Many just advise going into Index trackers

1% to 1.5% can have a massive effect on your final pension pot, because of compound interest effects
e.g. £300k for 20 years at 5% = £1.34m
take off 1.5% a year and it's £856k

The other point I'd raise is that the big funds can't quickly change their position, so sticking with managed funds and not paying attention can be a bad idea

RandallFlagg

I'm going to revisit my provisional plan reducing drawdown to living expenses and pocket money only and look at potentially using the 25% lump sum for discetionary spend such as holidays/car replacement etc and see how that looks. Also going to revisit using the extra money planned to go on mortgage overpayments as salary sacrifice into the pension and then pay it off at retirement.

Plenty of tweaking and refining to do over the next few years. Also going to get the free PensionWise consultation booked at some point.