Achieving £1240 pension income each month - calculating contributions

csa_monitor

To achieve £1240 pension income per month, how much would a person need to contribute into a pension plan if they are:-

• 20 years old
• 30 years old
• 40 years old
• 50 years old

Assumptions

1. Retirement age = 65 years old
2. average yearly growth rate = 3%
3. inflation = 2.5%
4. RPI / Index-linked pension
5. Joint life with spouse pension of 50%
6. Spouse = 5 years older than person
7. Non smoker with no medical issues

Kez100

I'd be interested in hearing this. I've been paying £60 gross a month since my twenties and they predict that pension per annum! So, my guess is 12 x 60 from age 20. £720 a month. Be interested to see how far out I am!

When you buy a pension though it's not that simple. Will you be taking no lump sum? No spouse benefit? No indexed/inflation allowance in the annuity? How many guaranteed years? When I looked at my Dads choices on retirement I was amazed how complicated it was and the choices you make then effect the pension per month you get.

csa_monitor

Kez100, I've edited the assumptions. Like you, I am interested to know the answers too.

JayZed

csamonitor, there are hundreds of pension contribution calculators on the internet and any one of them will be able to tell you this.

e.g: https://wwwx.pruifa.co.uk/Calculators/retIncCalc
http://www.scottishwidows.co.uk/individual_pensions/guides_and_tools/pension_calculator.html
http://money.guardian.co.uk/calculator/form/0,1456,603163,00.html

Of course, they'll all give you different answers depending on their assumptions about growth, inflation, future life expectancy, cost of annuities, etc. Some allow you to set your own assumptions. So all you'll be getting is some approximate indicators, but that's all that anyone can give you.

CLAPTON

I think its much better to work in 'real' current values... otherwise you end up with a nice looking figure that means very little in terms of actual spending power and it makes the calculations easy to understand.

so
assume inflation 0%
growth between 0.5% and 1%
base pension income on current annuity levels so say about 3% for an index linked annuity at 65 years old

then its quite frightening

-if you are 20 years old
-retiring at 65
-annunity rate of 3% index linked
-growth 1%

-to get an income of 1240 per month in todays terms then
-you would need to have saved in todays terms 1240x12 /3% = £496,000
-and if growth is 1% then that means you need to save in todays terms
£715 per month or £8,580 per annum gross

or of course get a good job in the public sector and benefit from a gold plated index linked pension

GillyFlower

My husband and I are both on State Pension. He was 65 last December.

We do have about 90k of savings that we are starting to dip into. ISA's, NS & I Bond, etc.

Seeing some of the programme last night we caught the bit about advising a man to take out an annuity and he needed £58 k.

We have not thought of an annuity so could we be at the age we should not be managing our own savings but thinking along these lines?

Any thoughts?

Thank You

dunstonh

Seeing some of the programme last night we caught the bit about advising a man to take out an annuity and he needed £58 k.

The programme last night was pretty awful to be honest. A few little hints at useful information in there but it was largely a case of dealing with people that didnt plan, didnt pay enough and/or didnt spread the money around.

Annuity is certainly a valid option at the moment. Especially if you go index linked. It usually takes many years for an annuity to pay off but currently they appear good value. Especially if it means you wont be eroding your capital as much or at all.

It is also still possible to contribute to pensions even if you are already retired or not working. an immediate vesting personal pension can bring you nearly 10% income based on net effective contribtuion.

GillyFlower

Thank you Dunstonh.

Can you explain just a little more for me please and maybe give an illustration?

immediate vesting personal pension can bring you nearly 10% income based on net effective contribtuion.

Say we put 'up front' 60k into an index linked pension how would it work?

dunstonh

1 - £3600 into a pension will cost you £2880 (the difference is tax relief).
2 - You take 25% of the £3600 back which is £900. This makes the capital you give up £1980.
3 - the annuity is based on age and terms you decide to purchase it by but say you get 6% annuity rate, that would be £162 a year.

£162 divided by your cost of £1980= 8.18%

So, your effective income return is 8.18%.

There is a guaranteed equity bond just being launched that will pay 8%p.a. for 5 years which may be a better option as you get your capital back at teh end of year 5 if the FTSE hasnt dropped by more than 50% from its current position. That option at least gives you a decent chance of capital retention. Although its for 5 years, unlike the pension which is for life.

Kylie

What is the general advice about putting in % of your income -v- age?

I can't remember...

GillyFlower

Thank you again Dunstonh.

This has given me something to think and learn about and the bond looks attractive.

Is the bond a better product to that we took out with Birmingham Midshires although this was a 3 year Trigger GE ISA (Iss7) Issue Date 14 June 2007 - Maturity date 31 May 2010.

It is linked to the FTSE and states -The Initial Index Level = 6636.6 calculated by taking the daily FTSE 100 index closing date between 14 June 2007 and 13 July 2007.

I can see us only, hopefully, getting our investment back and nothing else.

However, the Bond you say states it does not have to drop by more than 50% from its current position. So forgive me if I am sounding naiive but does that mean that this is quite a good time to think seriously about it?