Basic Pension Advice

StuTheDon

Hi Everyone,

I know very little about pensions I'm afraid but wondered if someone could take a look over the details below?

I am 32 years old, earn a good salary (circa 80k per year) and have a company pension with a value of 20,754GBP at the moment. This is a pension where I contribute and amount and the company match it - my pension is with BGI Aquila Life (60:4) Global Equity Index Fund (Lifestyle). It is made up of 6,268.467 units at a current price of 3.311. The unit price has fallen badly over the last two years, but has risen 5% this year.

In total my contribution, including my company's share, is around 630 per month.

I want to retire at 55-60 ideally and have a monthly income of around 2,000GBP at least in today's terms. I know inflation can play a part.

Am I on the right track here? Some basic advise would be great.

P.S. - I also have an old Standard Life Private Pension (with profits) with 9k in it but I dont contrinute to it.

bendix

I think you probably need to increase it a bit, particularly given your good income. £630 is not a huge amount on your salary, and as you're a high taxpayer, there is obviously some real benefits in increasing the contribution because it will be net of tax.

According to my calculations, if you continue to add just £630 a month (but increasing it 2.5% per annum) then your pension pot will be worth £532k in money terms when you are 55 (assuming 7% return per annum) or just under £300k in today's terms. Depending on how you want to get an income at 55, that would only get you an annuity of around £10-£11k per annum in today's terms (you'd be penalised because you are taking it so young).

Your contributions at the moment are less than 10% of you salary. I'd be looking to double it at least, particularly if your company matches yuor contribution.

A contribution of 20% of your income (with the same assumptions as above) would give you a pension pot of over a million by 55 (in money terms) and an income of £3k a month, or £581k and £1.9k per month in today's terms.

StuTheDon

Bendix - thanks very much indeed. Would you mind sharing the formula you use to come up with the figures?

We overpay our mortgage by double at the moment and hope to have it paid off in 9 years - doubling my pension contribution would mean having to reduce the mortgage overpayment - I'll need to take a look at that.

Would it make a big difference if I were to retire at 60?

Thanks - Stu

dunstonh

doubling my pension contribution would mean having to reduce the mortgage overpayment

Probably a good idea. With higher rate tax relief looking like it is going to be phased out in the next 3 years (rumour and assumption but good chance of it) and investments priced so much lower right now, it could be a case of making hay whilst you still can.

bendix

StuTheDon wrote: »

Bendix - thanks very much indeed. Would you mind sharing the formula you use to come up with the figures?

We overpay our mortgage by double at the moment and hope to have it paid off in 9 years - doubling my pension contribution would mean having to reduce the mortgage overpayment - I'll need to take a look at that.

Would it make a big difference if I were to retire at 60?

Thanks - Stu

Retiring at 60 would make a significant difference in two ways. First you have five years extra contributions and five years extra compounding interest on a larger sum. Similarly, the projected annuity income at 60 would be higher at 60 than at 55 (if you opted for the annuity route).

You can do your own modelling on the calculator I used at the Hargreaves Landsdowne site. It's not bad. www.h-l.co.uk

bendix

One more thing. If you want to retire relatively early, you would be wise to consider saving outside of the pension also because, obviously, your pension money won't be accessible until 55 and even though you are relatively restricted to how you can use it to generate income. And as you have seen, the amount you can generate at 55 will be lower than that you can generate ten years later.

My own strategy is to have a pension pot worth around £300,000 when I'm 55, but to have a cash reserve of around £500,000 when I actually want to retire at 50. That way I have much more flexibility - the cash will generate an income until I need or choose to use the pension pot which I will likely keep invested and untouched hopefully until I'm 65.

DiggerUK

Stu the Don,
I'm shocked that anybody should advise you against getting rid of your mortgage early. The problems of debt are a daily news item. Get rid of the mortgage as quickly as possible is my advice. By your figures you will still have 15/20 years to plan for your retirement after that is done.

Pensions are the worst possible way to plan for retirement, you pay in for 20/40 years and hope it will be OK.
Fancy projections from spivs after their fees, should not be allowed to turn you away from the reality of the situation that anybody retiring now, is finding themselves in. Do you want to be there in 25 years time.

As you are earning a great deal I'm taking it as read that you have a head on your shoulders. Why don't you make your own arrangements for a retirement war chest, equity based products ain't the only show in town.

Best of fortune.

dunstonh

Pensions are the worst possible way to plan for retirement

evidence?

you pay in for 20/40 years and hope it will be OK.

And how does that differ from anything else? Of course, you dont have to close your eyes to it for 20/40 years.

Fancy projections from spivs after their fees, should not be allowed to turn you away from the reality of the situation that anybody retiring now, is finding themselves in.

And what situation is that?

Why don't you make your own arrangements for a retirement war chest, equity based products ain't the only show in town.

The OP is making his own arrangements and is looking at one of the tax wrappers.

You seem to be making the mistake of thinking of a pension as an investment and not as a tax wrapper. You dont have to be invested in equities if you dont want to be. That is a personal preference of the individual.

stephenni1971

Worth mentioning as well that if you have a good level of disposable income it's worthwhile making use of your ISA allowance as well.

Simply put, you can access a large range of funds within either a Pension or ISA wrapper.

With the pension you get tax relief on the money you put in ( within certain limits ) however any income you draw in retirement will be subject to income tax.

With the ISA you have already paid tax on the funds going in, and you will therefore not pay any tax on future withdrawals.

Within each wrapper the funds are able to ( hopefully ) grow and are exempt from Income Tax and Capital Gains Tax.

Its worth looking at what you likely tax position would be in retirement and if you are at risk of putting yourself into the higher rate band then look at moving your focus from pension generated income to ISA generated income.

Digger - how on earth could you criticise the suggestion to swith from overpaying mortgage to pension contribution.

Higher rate tax relief may not last forever.
The earlier funds go in the longer they have to grow
Mortgage can be easily serviced from clients income

You keep mentioning making your own arrangements..what exactly do you suggest - gold bars, tinned food and shotguns, magic beans... go on - do tell!!

Myrmidon_J

DiggerUK wrote:

Pensions are the worst possible way to plan for retirement, you pay in for 20/40 years and hope it will be OK.

Fancy projections from spivs after their fees, should not be allowed to turn you away from the reality of the situation that anybody retiring now, is finding themselves in. Do you want to be there in 25 years time.

I think this "advice" is incredibly dangerous.

Demographic and economic trends in the West - and particularly in the UK - point to dark and difficult times ahead for those currently of working age.

It is more important than ever to plan effectively for retirement, and to ignore the benefits that tax-free growth, tax relief on contributions (etc.) offer is just foolishness.

bendix

As Digger usually comes on here and recommends against pensions (whatever that means, as he confuses the tax wrapper with the underlying investments), I'm wondering what it is he is doing for his own retirement.

Magic beans?

If that's your strategy, you might want to put them in a pension wrapper. Think of the magic bean rebate.