Pension pot: how much is enough?

mark123

hi  @viz and anyone else who can help
took a redundancy last yr 

Im 54 and ive got a 182k pension pot and another  seperate 32k pot
no debt and mortgage paid ,have my dads old house( paid) rented out £500 p.month
no kids

If i dont withdraw the 182k pot i can get 8k a year annuity
do not know what to do with the 32k pot ?

is it best to 
A. put both pots together ,182k+32k= 214k ,and drawdown ?
would i be guarannteed a 4% return in a low risk ?
Or do i take 8k a year inflation proof with 6k a year rent then what do i do with the 32 k pot ? 
i have enough savings not to touch any of these for 3 years
or do i use the 32k and leave the 182k pot and in 4 years see how much my annuity has gone up to,ive been told my anuity is low because i would be taking it at 55 and if i can wait 4/5  yr i should see a good increase in my annuity,is this right?

my heads busted 1 person says drawdown the other says anninuity

my outgoings inc fuel food etc are 800  p /month

crunchman

@mark123 ; whatever you do - annuity or drawdown - you will get a lot more if you do wait a few years.

In your shoes, I'd find a nice low stress job and do that for 5 years.  With the income from the house, you probably wouldn't even need to work full time.

You need something to do with your time anyway.  You can't just sit on the sofa and watch daytime TV all day.

jellyroll

ToneControl said:

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

Agree with the point but I think your maths is a bit off.

fields5069

Is 5% a good assumption? There's a calculator on guiide.co.uk which assumes 3%, and there is a massive difference between the 2. I also had to choose not to take 25%, whereas if I did then my day to day needs would be met by a lower income since luxuries would come out of the 25%. Hmmm.

It's interesting stuff. At 3% the estimate is 16 years of comfy life, at 5% it's 26 years.

And then drawing the 25% and reducing expected yearly income gets me 21 years, at 3% growth.

Of course this is also relying on state pension kicking in after 6 years.

mark123

crunchman said:

@mark123 ; whatever you do - annuity or drawdown - you will get a lot more if you do wait a few years.

In your shoes, I'd find a nice low stress job and do that for 5 years.  With the income from the house, you probably wouldn't even need to work full time.

You need something to do with your time anyway.  You can't just sit on the sofa and watch daytime TV all day.

im falling into that rut !

ToneControl

mark123 said:

hi  @viz and anyone else who can help
took a redundancy last yr 

Im 54 and ive got a 182k pension pot and another  seperate 32k pot
no debt and mortgage paid ,have my dads old house( paid) rented out £500 p.month
no kids

If i dont withdraw the 182k pot i can get 8k a year annuity
do not know what to do with the 32k pot ?

is it best to 
A. put both pots together ,182k+32k= 214k ,and drawdown ?
would i be guarannteed a 4% return in a low risk ?
Or do i take 8k a year inflation proof with 6k a year rent then what do i do with the 32 k pot ? 
i have enough savings not to touch any of these for 3 years
or do i use the 32k and leave the 182k pot and in 4 years see how much my annuity has gone up to,ive been told my anuity is low because i would be taking it at 55 and if i can wait 4/5  yr i should see a good increase in my annuity,is this right?

my heads busted 1 person says drawdown the other says anninuity

my outgoings inc fuel food etc are 800  p /month

annuities are famously bad value at present, which is why people say don't buy them
used to be much higher. No one inherits the pension pot, which may suit you, do you want to leave cash to someone?

make sure you check your pension forecast now on the HMRC site, you need to log in 
you may need more years of NI, but possibly not if you've worked 30 years+

2 options are:
take tax-free lump sum cash now or later + take drawdown of £10k a year
or take a combined lump sum every year, incl some tax-free

If you combine the pension pots, you often get a free gift for moving it, and then possibly reduced fees for one larger pot, depends on their thresholds, annual fees are lower at certain thresholds, could be £250k, not sure
Hargreaves Lansdown and Fidelity via Cavendish online were the best deals I found a while back

beware that sometimes HMRC try to charge NI on rental income, if you have no other job and don't use a letting agent

ToneControl

jellyroll said:

ToneControl said:

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

Agree with the point but I think your maths is a bit off.

that's from the calculator here:
(but for 30 years, sorry for the typo)
https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Snap

ToneControl said:

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

I think you need to check those numbers, I don't get the same calcs, by a long way. 300k growing at 5% pa over 20 years comes to approx 836k pot. E.g. at year one you have 315000, that grows by 5% at year 2 to 330750 etc.

1.5% is high too. For pure investment advice, you need to aim lower. Also, you need to think if your investment manager can get preferential fund charges (which will save you money) or if they do their own funds (which will again result in lower or no fund charges).

But the crucial thing that you are paying for is the ability and increased likelihood of the growth rate being continued.
Could an amateur get a consistent 5% net of charge return over 20 years? Unlikely. Could a good financial manager? Likely. That is the service you pay for: the crucial element is getting a good adviser, and not as you say, one that simply picks the top funds - that's money for old rope.

Another thing to factor into fees is including tax management and estate planning. You can get all that plus investment management for about 1.2%. Depending on your income and size of investment, that will save you much more than it costs. Way more.

ToneControl

Snap said:

ToneControl said:

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

I think you need to check those numbers, I don't get the same calcs, by a long way. 300k growing at 5% pa over 20 years comes to approx 836k pot. E.g. at year one you have 315000, that grows by 5% at year 2 to 330750 etc.

1.5% is high too. For pure investment advice, you need to aim lower. Also, you need to think if your investment manager can get preferential fund charges (which will save you money) or if they do their own funds (which will again result in lower or no fund charges).

But the crucial thing that you are paying for is the ability and increased likelihood of the growth rate being continued.
Could an amateur get a consistent 5% net of charge return over 20 years? Unlikely. Could a good financial manager? Likely. That is the service you pay for: the crucial element is getting a good adviser, and not as you say, one that simply picks the top funds - that's money for old rope.

Another thing to factor into fees is including tax management and estate planning. You can get all that plus investment management for about 1.2%. Depending on your income and size of investment, that will save you much more than it costs. Way more.

sorry, my typo, was for 30 years not 20
point was the long term cost of management fees and % based advice

Last flyer I got from HL said "free 1 hour of advice in Jan and Feb" (normally £500 over phone, £1500 in person), but small print said costs still include 1% to 2% fee on sum advised, so that's up to £8k on a £400k pension pot. What on earth are they doing that justifies that? surely that's one month's wage for a senior manager?

Snap

wow, that's a lot!! 500 for an hour advice is ludicrous. I don't believe they are independent in advice either. 
2% fee is shocking. 


But yeah, incremental impact of even a small percentage fee is significant, but good advice isn't cheap, nor should it be. You are right to point out that not all advisers are worth the time of day. Key is getting the right one, and not just any old bloke or firm.

Koa

Worth pointing out that older pension products from the 80s and 90s May have guaranteed annuity rates(GAR). Can be worth much more, you’d have to check the policy.

RandallFlagg

Just had some good news. I got a letter today, an updated statement and forecast from my preserved final salary pension and the tax free pension commencement lump sum I can take in 2 years from age 55 has increased from £32K to £35K and the annual taxable amount gone up £500 a year.

Feels like I just found £3K on the door mat!

viz

RandallFlagg said:

Just had some good news. I got a letter today, an updated statement and forecast from my preserved final salary pension and the tax free pension commencement lump sum I can take in 2 years from age 55 has increased from £32K to £35K and the annual taxable amount gone up £500 a year.

Feels like I just found £3K on the door mat!

Next month it’ll be 6k down again, don’t worry. 

TTony

RandallFlagg said:

Just had some good news. I got a letter today, an updated statement and forecast from my preserved final salary pension and the tax free pension commencement lump sum I can take in 2 years from age 55 has increased from £32K to £35K 

How does that happen?

I too have a preserved final salary pension, and I know, more or less to the penny, and have always been able to work out (to the penny) exactly what it would pay out because the calculation is based on my salary at the time of leaving (a known, fixed amount), the period of time between leaving and taking the pension (again, fixed assuming that I take it as soon as I can) and the annual increments (again, fixed as it’s defined as the higher of “x”% or RPI inflation, and it will always be the “x”% amount.

Effectively, no variables.  It’s a fixed calculation.

How did the uplift arise @RandallFlagg ?

RandallFlagg

TTony said:

RandallFlagg said:

Just had some good news. I got a letter today, an updated statement and forecast from my preserved final salary pension and the tax free pension commencement lump sum I can take in 2 years from age 55 has increased from £32K to £35K 

How does that happen?

I too have a preserved final salary pension, and I know, more or less to the penny, and have always been able to work out (to the penny) exactly what it would pay out because the calculation is based on my salary at the time of leaving (a known, fixed amount), the period of time between leaving and taking the pension (again, fixed assuming that I take it as soon as I can) and the annual increments (again, fixed as it’s defined as the higher of “x”% or RPI inflation, and it will always be the “x”% amount.

Effectively, no variables.  It’s a fixed calculation.

How did the uplift arise @RandallFlagg ?

@TTony I'm not really sure I understand how this happens, it looks like the preserved sums are index linked and revalued every year. The letter says it can go down as well as up depending on CPI???

I asked for some information with some email questions last year and got this reply (email cut & paste), see if you can make sense of the reply....good luck!

here are the questions I asked:

Hi Derek,

Thank you for sending me the recent transfer valuation for my preserved pension benefits in the Multitone Electronics plc Retirements Benefits Plan. I do not currently intent to transfer the funds but I just wanted a valuation for reference.

I have some questions regarding the plan and hope you can help please, or direct me to the relevant person.

The only information I have regarding the pension plan is the original pension booklet issued to me from Multitone Electronics in July 1997.

The wording in the booklet states:

“When you retire at Normal Pension Date that part of your pension in excess of the GMP…..will increase each April….The increase will be the percentage increase in the retail prices index….or 5% if that is less”

1) So does that mean that the pension benefit will increase by a minimum of 5% if the RPI is lower than 5%? or does it mean that the 5% is a cap and the inflation increase will be RPI capped at 5% maximum? The wording is ambiguous.

2) If I chose to take pension benefits at age 55 with the tax free lump sum option, does the this inflation increase start at age 55 or does it only start at age 65 (as defined as Normal Pension Date in the booklet)?

3) What is the method for calculating the percentage/value of the tax free lump sum?

4) What is the commutation factor for calculating the remaining benefits after a tax free lump sum is taken?

5) What is the reduction factor calculation applied if benefits are taken before Normal pension Date (age 65)

5) Is there a more up to date information booklet on the plan rules?

6) Have the pension freedom rules changes affected or revised the Multitone Pension Plan rules and where can I find details?

7) Can I please request annual statements of benefits with options on early retirements at age 55 and the lump sum options?

RandallFlagg

And here is the reply I got:

"I refer to your emails to Derek dated 2 March 2019 and 23 March 2019.  Please accept our apologies for the delay in replying to you.

Please find below answers to your queries:

1.       When you retire at your Normal Retirement Date (NRD), your pension will be increased as follows:

a.       your GMP (Guarantee Minimum Pension) will be increased in line with the percentage rise in the Consumer Prices Index (CPI) up to a maximum of 3% per annum (ie when the CPI is higher than 3%, your GMP (all Post 88) will be increased by 3% );

b.      your pension in excess of GMP accrued prior to 1 January 1997 will not increase; and

c.       your pension accrued from 1 January 1997 will be increased in line with the percentage rise in Retail Prices Index (RPI) up to a maximum of 5% per annum (ie when the RPI is higher than 5% your post 01.01.1997 pension will be increased by 5%).

 

2.       If you take retirement benefits before your NRD/GMP age of 65, your pension in payment will be increased as follows:

a.       Your pension accrued prior to 1 January 1997 (including your GMP pension) will not increase;

b.      Your pension accrued from 1 January 1997 will be increased in line with the percentage rise in RPI up to a maximum of 5% per annum.

When you reach age 65, your GMP elements will be split from your pre-1997 pension and increase in line with the percentage rise in CPI up to a maximum of 3% per annum.

 

3.       The maximum tax free lump sum cash (PCLS) at retirement (early/normal/late) is calculated as follows:

 

PCLS = (Pension at Retirement x 20)/(3+20/commutation factor)

 

Early retirement factors currently in use by the Plan are:

Years early	10	9	8	7	6	5	4	3	2	1	0
ERF	0.46	0.50	0.53	0.58	0.62	0.67	0.72	0.78	0.85	0.92	1.00

 

Please note that your deferred benefits belong to Barber benefits which can be taken early at age 60 without any early retirement deductions. 

 

 

The commutation factor applied in the calculation is provided by the scheme actuary and is based on your age at retirement.  The commutation factors for male members currently in use by the Plan are as follows:

Age	55	56	57	58	59	60	61	62	63	64	65
Increasing Pension	22.1	21.6	21.1	20.6	20.1	19.6	19.1	18.7	18.2	17.7	17.3
Non-increasing	14.3	14.1	13.9	13.7	13.5	13.3	13.1	12.9	12.7	12.5	12.3

Please note that all the factors are subject to change at any time by the Trustees with advice from the Plan actuary without prior notice to members.

 

4.       The Plan has not updated the member booklet since July 1997.

 

5.       The pension freedom rules changes in 2015 would not have any impact on your benefits under the Plan as you do not have an AVC (Additional Voluntary Contributions) policy under the Plan.

 

6.       We will provide you with an early retirement projection to age 55 by post shortly."

 

RandallFlagg

Here is the PCLS at age 55 sum from a letter I got in April 2019 and below it the sum from the letter I got today:

TTony

Ahhhh, OK, understood now!  You have both variable and non-variable elements, hence the variation.  Thanks for the detail.

Mine works slightly differently in the calculation of the annual increase due to the difference between the guaranteed amount and where RPI inflation has been since I left the scheme - ie there is no variability and shouldn’t be for the foreseeable.

It was a ridiculously generous scheme, the benefits of which I’m looking forward to receiving in a few years time ...

ToneControl

RandallFlagg said:

Just had some good news. I got a letter today, an updated statement and forecast from my preserved final salary pension and the tax free pension commencement lump sum I can take in 2 years from age 55 has increased from £32K to £35K and the annual taxable amount gone up £500 a year.

Feels like I just found £3K on the door mat!

the £500 pa is worth about £10k-£15k

RandallFlagg

ToneControl said:

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.

Been looking into the pension recycling issue a bit more, I was aware of it but not really dug down into the details. This could well impact my plans and require me to take a different tack.

I have been planning to take a tax free lump sum of £35K from my final salary pension at 55 while still working and contributing to my current defined contribution pension. At age 55 we'll be debt free and have a lot more disposable cash and the tax free lump sum is planned to be used to do some house renovations, estimated at £20K and I would put the rest into a stocks and shares ISA.

Purely co-incidentally, as the mortgare is done that year, I then planned to start significantly increasing pension contributions in 2023 by salary sacrifice. 

Although I could prove with receipts and ISA deposit statements that the tax free sum did not get directly recycled and go into the pension, having that money available could be seen as facilitating the increase in subsequent salary sacrifice contributions in 2023 onwards.

I need to rework my planning to either not increase the salary sacrifice contributions and take the salary and put in the iSA (losing the 40% + 13.8% tax benefits) or defer taking the lump sum. Needs to crunch some numbers.

I may have to revert to start the extra pension contributions now instead of paying the mortgage off, gainging the tax & NI benefits and pay the balance of mortgage off with a lump sum from DC pension when I do strat taking it. It means I won't be debt free at 55 and have the mortgage debt hanging as a risk if I lost this job.

It's hard work this financial planning for retirement! But I do enjoy playing with spreadsheets.