Pension Views

Charity_Dalek

I am a 52 year old male, due to retire at 60 with a Money Purchase Pension. The fund has been running for 19 years and has a pot value of £138,000. I have been paying 4% (in 2007 I paid £1773 into the fund) and my employer's contribution was 8% (3636).

I have no idea if this represent a good or bad pension fund and would appreciate your thoughts.

Thanks

Robert

DavidLaGuardia

Hi Robert

It's all relative. Whether the pension is Good or Bad for you is determined what you think your expenditure will be when your retire and if your projected resources by then can provide it. If there is a shortfall there is not enough in the pot!

Take the following steps either yourself or with the help of a pofessional IFA:

1) Consider where your pension is invested and the risks and likely returns given your existing sum and what can be added to it? A projection from your pension company would help first so ask for one
2) What other savings or sources of income are you likely to have?
3) A state pension forecast would also be needed and consideration needs to be given to the fact that this starts from 65 so you might need more from your pension. You can get one of these online or through the post completing a BR19 form. For example, as you have the option of a lump sum from your pension fund this could be used to brdige the shortfall in these years?
4) Would you want to work part time in something rather than giving up completely and how long for 65, 70, while health permits or not at all?
4) Inflation will also have an impact on your pension over the years so it needs to rise (although some people adopt the attitude that they will spend to more in real terms each year in early retirement while their health permits them to enjoy going out more travel etc.)?
5) Have you got a wife/partner - their needs and resources may need to be inlcuded in a joint plan?
5) Is downsizing your home a likely option to release capital in retirement?
6) Lastly budget what you think you need each year (taking care to adjust this with a realistic figure for inflation for each year ahead) and then it is possible to see how you option are.

At the end of the day, you can only put by what you can afford and you have a few years to do this as much as you can whether its in a pension or other investment such as an ISA. An ISA can be accessed in full whereas a pension will give up to 25% in tax free cash but the overall benefits may be higher due to tax relief.

Charity_Dalek

David

Thank you for the sound advice. Are there any "rules of thumb" that can be applied to gauge the actual pension at retirement?

Robert

dunstonh

Are there any "rules of thumb" that can be applied to gauge the actual pension at retirement?

Only one really. Work on the basis of 5% being the income payable.

jamesd

Charity_Dalek wrote: »

I am a 52 year old male, due to retire at 60 with a Money Purchase Pension. The fund has been running for 19 years and has a pot value of £138,000. I have been paying 4% (in 2007 I paid £1773 into the fund) and my employer's contribution was 8% (3636).

Starting with 138k, adding 450 a month and growing at 5% after inflation the value after 96 months (8 years) would be 258k and assuming 5% for income that's 12,900 a year.

At 4% that would be 240k and 12000 per year. At 6% 278k and 13900 per year.

You should also get a state pension forecast and add that to your anticipated income.

If you'd like to increase this income or increase your safety margin, now looks like a good time for regular contributions to a stocks and shares ISA. A pension also but your income appears quite likely to be in the area where reduction of the age allowance starts. It looks as though you're currently contributing enough to the pension to eliminate your higher rate tax liability, if you're not you might want to increase that a bit.

For general investment planning timing, there is a good chance that now and the next 1-3 years is the last big opportunity you'll have to buy investments cheap before retirement. The next down cycle is likely to be somewhere in the 5-10 year range and you should be factoring that downturn into your planning, moving gradually to lower risk investments over the period 4-8 years from now if you're planning to buy an annuity. There's absolutely no guarantee to these timings but they give you something to think about based on the general sort of timing for market swings.

I have a good bit longer to go than you but I'm being very aggressive indeed about investing a lot at the moment.

Just_landed

dunstonh wrote: »

Only one really. Work on the basis of 5% being the income payable.

The answer dunstonh gives trust me when I say this is, spot on.:o

LOST

I would also look at the choice of fund/s that your contributions are paying for - there may be scope to alter the fund choice so that you actual pension fund is not so susceptible to any volatile fluctuations - this is very important when approaching retirement.

Charity_Dalek

jamesd wrote: »

A pension also but your income appears quite likely to be in the area where reduction of the age allowance starts. It looks as though you're currently contributing enough to the pension to eliminate your higher rate tax liability, if you're not you might want to increase that a bit.

Thank you for the reply. Could you expand a little more about what you mean in the above quote?

Thanks

Robert

DavidLaGuardia

Charity_Dalek wrote: »

Thank you for the reply. Could you expand a little more about what you mean in the above quote?

Thanks

Robert

What James is getting at is the additional tax free personal allowance that over 65s get. This tax year the personal allowance is 6,035 whereas over 65s get 9,030 and over 75s get 9,180

HOWEVER, for every one pound of income that you have coming in over 21,800 in this tax year that allowance is deducted by 50p until it is removed completely - hence higher earning pensioners do not get the allowance.

What this mean is that each pound between 21,800 and 27,795 will effectively be taxed at 30% (the normal 20% basic plus the basic on the 50p allowance you lose). That's not good if you only got 20% relief on the contributions relevant to that addtional pension in the first place. Despite the tax free cash of up to 25%, 30% of the remaining 75% (22.5%) more than offsets the tax relief of 20% on the whole

Many pensioners on the borderline aim to avoid this by controlling their income. Obviously what you get from the state and what is paid to you from your private pension cannot be directly avoided, but when invessting for income use tax free investments like ISAs, some National Savings, put money in spouse's name, or take out investments where income drawings are counted as capital returns (for example non-income producing investments which can give up to 9,800 before capital gains tax is charged or by taking to 5% p.a. from Insurance Bonds a return of capital). Another tip, and one that works even if you have not many other investments. If you go into income drawdown and deliberately take more than you need to and put it into a new pension (up to 3,600 where there are no earnings) this can also be set against your income and furthermore this new pot builds up another 25% worth of tax free cash that would exist if it were left in the drawdown fund. This is rather technical for a novice and you would need professional advice