Pensions Planning: The NUMBER

LL_USS

hugheskevi said:

A quite reasonable order, setting aside things like retaining an emergency fund and perhaps a separate cash buffer if that is part of a plan to manage investment risk (although that could be held in any vehicle).

However, the preceding question is what is the optimal asset allocation to reach minimum pension age with. ISAs provide access and flexibility whereas pensions provide valuable tax relief but no access.

As minimum pension age approaches, the value of access and flexibility of ISAs declines (although perhaps not to zero, as pensions have the drawback of higher rates of tax should you need to withdraw a particularly large amount), and the drawback of no access to a pension drops away. Therefore why would you want to reach minimum pension age with lots of ISA saving when it could be in a pension instead and have benefited from tax relief. So when planning for funding between minimum pension age and State Pension age, DC pension is the obvious tool, with ISAs for any period prior to minimum pension age.

Note that for these purposes LISAs are more akin to pensions, as they benefit from the government contribution.

hugheskevi. My situation leading to the use of ISAs is a bit particular, plus I am still learning all these to be honest - I have only looked into pension figures recently after thinking I may want to take out an interest only mortgage from my unencumbered main house to lend my kids help them buy a property, and use my LISAs and tax free lump sum at retirement to pay off that debt, or anything remaining after some mortgage overpayments. Until this probable purchase I am accumulating ISAs to add to it (hence not much left for volunteer contribution to DC for now). If I won't buy/ won't be able to buy/ or have another way to buy then I will have these ISAs to use later, meaning perhaps when bridging between retirement and state pension age. Once I know I don't need ISAs this way any more I'll perhaps max contribution to DC. The pot of LISAs only serves as another buffering or safety net, for example to pay a lumpsum to a mortgage in the case above, or in case of very unexpected emergency beyond my reserve, then I'll pay the penalty to take them out to use.

SarahB16

LL_USS said:

I suppose it is a bit easier to estimate if we have a DB defined benefit pension element. I have been able to keep my outgoings as approx 2,500/m (not including mortgage) for the last couple of years, i.e. 30,000/year. Less spending for kids but more spending on myself in retirement so this figure in today's money as net income at retirement would be wonderful (say each month basic food 500, hols and entertainment 500, bill 1k, 500 for other things like giving grand children some pocket money :-). This means a DB of 23k/year, bridging with ISAs till full state pension to get 11.5K/year. After tax it comes down to 2,500/m net. That would be great :-). I just have to work for that target now.

Great reading your posts as I too am thinking along similar lines.  I plan to work until I reach my target retirement income and it will likely be a similar figure to yours of £30k net (in today's money) per annum (including state pension). It's the savings pot that I'm not sure about, i.e. how much do I need to leave simply as savings (so in your case not drawn down from your ISAs).  

The vast majority of my retirement income will come from DB pensions which I know I'm in a fortunate position as it does make forecasting easier however I do wonder, say at the age of 67 how much should I have as savings/ISAs, i.e. imagine I retire at 62 so need to supplement my retirement income from ISAs etc however I wouldn't wish at the age of 67 to not have any savings set aside at all.  

That is what I'm not sure about in terms of how much to set aside.  For example, on the assumption I wish to have a net retirement income of £30k per annum then how much should I also just keep back for emergency repairs, those unforeseen items of expenditure (hip replacement, new knees, goodness knows!) 

Many people say during their working career to always have an emergency fund of 3 to 6 months but 6 months in this example, when retired would be £15k.  However, £15k doesn't seem like much to me so would be interested to hear what people think is a reasonable amount to have as 'savings' as a proportion of what you think you need to live on per annum (net). 

I guess my thoughts are £20k as a minimum is what I'd feel comfortable with and if it falls below that due to an unexpected boiler repair, etc then top it up again by not spending £2,500 a month if that is what I was spending in retirement. 

Peterrr

LL_USS said:

hugheskevi said:

A quite reasonable order, setting aside things like retaining an emergency fund and perhaps a separate cash buffer if that is part of a plan to manage investment risk (although that could be held in any vehicle).

However, the preceding question is what is the optimal asset allocation to reach minimum pension age with. ISAs provide access and flexibility whereas pensions provide valuable tax relief but no access.

As minimum pension age approaches, the value of access and flexibility of ISAs declines (although perhaps not to zero, as pensions have the drawback of higher rates of tax should you need to withdraw a particularly large amount), and the drawback of no access to a pension drops away. Therefore why would you want to reach minimum pension age with lots of ISA saving when it could be in a pension instead and have benefited from tax relief. So when planning for funding between minimum pension age and State Pension age, DC pension is the obvious tool, with ISAs for any period prior to minimum pension age.

Note that for these purposes LISAs are more akin to pensions, as they benefit from the government contribution.

hugheskevi. My situation leading to the use of ISAs is a bit particular, plus I am still learning all these to be honest - I have only looked into pension figures recently after thinking I may want to take out an interest only mortgage from my unencumbered main house to lend my kids help them buy a property, and use my LISAs and tax free lump sum at retirement to pay off that debt, or anything remaining after some mortgage overpayments. Until this probable purchase I am accumulating ISAs to add to it (hence not much left for volunteer contribution to DC for now). If I won't buy/ won't be able to buy/ or have another way to buy then I will have these ISAs to use later, meaning perhaps when bridging between retirement and state pension age. Once I know I don't need ISAs this way any more I'll perhaps max contribution to DC. The pot of LISAs only serves as another buffering or safety net, for example to pay a lumpsum to a mortgage in the case above, or in case of very unexpected emergency beyond my reserve, then I'll pay the penalty to take them out to use.

My bold - indeed you can effectively move your ISA funds into your pension in your 50s by upping your salary pension contributions to such a point where you need to withdraw and use your ISA funds for your living expenses. This is what my wife and I are doing now. Appreciated we don't enjoy growth on the tax gross up element in the earlier years, but we can keep our PAYE really low, and will enjoy the 25% tax free element when we draw the pensions down in retirement.

hugheskevi

Peterrr said:

LL_USS said:

hugheskevi said:

A quite reasonable order, setting aside things like retaining an emergency fund and perhaps a separate cash buffer if that is part of a plan to manage investment risk (although that could be held in any vehicle).

However, the preceding question is what is the optimal asset allocation to reach minimum pension age with. ISAs provide access and flexibility whereas pensions provide valuable tax relief but no access.

As minimum pension age approaches, the value of access and flexibility of ISAs declines (although perhaps not to zero, as pensions have the drawback of higher rates of tax should you need to withdraw a particularly large amount), and the drawback of no access to a pension drops away. Therefore why would you want to reach minimum pension age with lots of ISA saving when it could be in a pension instead and have benefited from tax relief. So when planning for funding between minimum pension age and State Pension age, DC pension is the obvious tool, with ISAs for any period prior to minimum pension age.

Note that for these purposes LISAs are more akin to pensions, as they benefit from the government contribution.

hugheskevi. My situation leading to the use of ISAs is a bit particular, plus I am still learning all these to be honest - I have only looked into pension figures recently after thinking I may want to take out an interest only mortgage from my unencumbered main house to lend my kids help them buy a property, and use my LISAs and tax free lump sum at retirement to pay off that debt, or anything remaining after some mortgage overpayments. Until this probable purchase I am accumulating ISAs to add to it (hence not much left for volunteer contribution to DC for now). If I won't buy/ won't be able to buy/ or have another way to buy then I will have these ISAs to use later, meaning perhaps when bridging between retirement and state pension age. Once I know I don't need ISAs this way any more I'll perhaps max contribution to DC. The pot of LISAs only serves as another buffering or safety net, for example to pay a lumpsum to a mortgage in the case above, or in case of very unexpected emergency beyond my reserve, then I'll pay the penalty to take them out to use.

My bold - indeed you can effectively move your ISA funds into your pension in your 50s by upping your salary pension contributions to such a point where you need to withdraw and use your ISA funds for your living expenses. This is what my wife and I are doing now. Appreciated we don't enjoy growth on the tax gross up element in the earlier years, but we can keep our PAYE really low, and will enjoy the 25% tax free element when we draw the pensions down in retirement.

The tax gross up and growth is neutral, as it is all multiplicative. By putting funds into an ISA first, you get tax relief on the growth. You didn't miss out on anything.

For example, assume investments, growth and charges are the same in an ISA and pension and you pay basic rate tax.

Scenario A - put £10,000 into an ISA, it grows by 50% to £15,000. You then put it into a pension where it is grossed up to £18,750.

Scenario B - put £10,000 into a pension, where it is immediately grossed up to £12,500. It then increases by 50% to £18.750.

Using a SSISA when conditions for pension contributions are not favourable (eg if you are a basic rate taxpayer, don't receive means-tested benefits and don't have access to salary sacrifice) and waiting until at least one of these things apply before moving the funds into a pension can produce significantly better outcomes. It also provides liquidity should it be required.

Sarahspangles

SarahB16 said:

LL_USS said:

I suppose it is a bit easier to estimate if we have a DB defined benefit pension element. I have been able to keep my outgoings as approx 2,500/m (not including mortgage) for the last couple of years, i.e. 30,000/year. Less spending for kids but more spending on myself in retirement so this figure in today's money as net income at retirement would be wonderful (say each month basic food 500, hols and entertainment 500, bill 1k, 500 for other things like giving grand children some pocket money :-). This means a DB of 23k/year, bridging with ISAs till full state pension to get 11.5K/year. After tax it comes down to 2,500/m net. That would be great :-). I just have to work for that target now.

Great reading your posts as I too am thinking along similar lines.  I plan to work until I reach my target retirement income and it will likely be a similar figure to yours of £30k net (in today's money) per annum (including state pension). It's the savings pot that I'm not sure about, i.e. how much do I need to leave simply as savings (so in your case not drawn down from your ISAs).  

The vast majority of my retirement income will come from DB pensions which I know I'm in a fortunate position as it does make forecasting easier however I do wonder, say at the age of 67 how much should I have as savings/ISAs, i.e. imagine I retire at 62 so need to supplement my retirement income from ISAs etc however I wouldn't wish at the age of 67 to not have any savings set aside at all.  

That is what I'm not sure about in terms of how much to set aside.  For example, on the assumption I wish to have a net retirement income of £30k per annum then how much should I also just keep back for emergency repairs, those unforeseen items of expenditure (hip replacement, new knees, goodness knows!) 

Many people say during their working career to always have an emergency fund of 3 to 6 months but 6 months in this example, when retired would be £15k.  However, £15k doesn't seem like much to me so would be interested to hear what people think is a reasonable amount to have as 'savings' as a proportion of what you think you need to live on per annum (net). 

I guess my thoughts are £20k as a minimum is what I'd feel comfortable with and if it falls below that due to an unexpected boiler repair, etc then top it up again by not spending £2,500 a month if that is what I was spending in retirement. 

In retirement I think ideally you have both capital, and an emergency fund. We know that sooner or later we’ll need to replace one of our cars, for example. It’s a near certainty a boiler will need replacing at some point during retirement. The emergency fund is more of a cushion for things like our bank account being frozen after identity theft, or because we need cash for the boiler sooner than expected and we’d rather not take it from fixed-term savings.

We should have enough coming in to continue to top up - or replace - capital in the early years of retirement. I use budget software which shows we’re living well within our retirement income already, if you take off what we were/are saving or contributing to pensions. 

I will be joining OH in retirement soon, and rather than drawing on ISA/savings until my DBs kick in I will be paying myself a pension from my SIPP. This is tax efficient because my SIPP contributions are topped up by the taxman on the way in, they take me out of the Higher Rate Tax band whilst I’m employed, and once I retire I can take £16,760 before I pay any tax, for those ‘bridging’ years. You do need a bit of lead time if you’re planning to move from savings to SIPP, as you can only contribute up to your salary each year and also have to take account of the Annual Allowance limits too (especially if paying into a DB pension).

barnstar2077

SarahB16 said:

LL_USS said:

I suppose it is a bit easier to estimate if we have a DB defined benefit pension element. I have been able to keep my outgoings as approx 2,500/m (not including mortgage) for the last couple of years, i.e. 30,000/year. Less spending for kids but more spending on myself in retirement so this figure in today's money as net income at retirement would be wonderful (say each month basic food 500, hols and entertainment 500, bill 1k, 500 for other things like giving grand children some pocket money :-). This means a DB of 23k/year, bridging with ISAs till full state pension to get 11.5K/year. After tax it comes down to 2,500/m net. That would be great :-). I just have to work for that target now.

Great reading your posts as I too am thinking along similar lines.  I plan to work until I reach my target retirement income and it will likely be a similar figure to yours of £30k net (in today's money) per annum (including state pension). It's the savings pot that I'm not sure about, i.e. how much do I need to leave simply as savings (so in your case not drawn down from your ISAs).  

The vast majority of my retirement income will come from DB pensions which I know I'm in a fortunate position as it does make forecasting easier however I do wonder, say at the age of 67 how much should I have as savings/ISAs, i.e. imagine I retire at 62 so need to supplement my retirement income from ISAs etc however I wouldn't wish at the age of 67 to not have any savings set aside at all.  

That is what I'm not sure about in terms of how much to set aside.  For example, on the assumption I wish to have a net retirement income of £30k per annum then how much should I also just keep back for emergency repairs, those unforeseen items of expenditure (hip replacement, new knees, goodness knows!) 

Many people say during their working career to always have an emergency fund of 3 to 6 months but 6 months in this example, when retired would be £15k.  However, £15k doesn't seem like much to me so would be interested to hear what people think is a reasonable amount to have as 'savings' as a proportion of what you think you need to live on per annum (net). 

I guess my thoughts are £20k as a minimum is what I'd feel comfortable with and if it falls below that due to an unexpected boiler repair, etc then top it up again by not spending £2,500 a month if that is what I was spending in retirement. 

My plan is to keep a £30k house maintenence and white goods replacement fund invested in a globally diverse fund.  That way, assuming I don't need anything doing for a few years, it will be self sustaining and it shouldn't be necessary to top it back up after I fix or replace something.

Even if I end up draining the rest of my funds and am living solely on my state pension by my late eighties (God willing) I will still have peace of mind as I will not have to budget for one off expensive items.

Nebulous2

My position has similarities with what some of you are planning. We're living mainly on my DB pension, topped up with a part-time job. Unfortunately as our pension provision was almost all mine, we cannot make use of my spouse's personal allowance, and that has been a niggling annoyance.

We relocated and freed up some cash to give us a cushion, expecting to draw much of it down in bridging to state pension age. Rather surprisingly our capital has actually increased in the last 2-3 years. 

We front-loaded some expenditure before I stopped work, to try to pre-empt some possible big bills, so new vehicle with a 5 year warranty, new boiler with a 12 year warranty and a roof repair. 

I'm convinced many people's ambitions dwindle on retirement. That bucket list (I don't have one) never gets completed, other things get in the way of travel ambitions, people find enjoyment in the small pleasures rather than spending money. As a result, and from an excess of caution, people over estimate their needs. 

We're running two vehicles, holidaying abroad twice a year, having 6-10 staycations a year, and eating out regularly,  on around £2500 net a month. 

Sarahspangles

Nebulous2 said:

I'm convinced many people's ambitions dwindle on retirement. That bucket list (I don't have one) never gets completed, other things get in the way of travel ambitions, people find enjoyment in the small pleasures rather than spending money. As a result, and from an excess of caution, people over estimate their needs. 

In the run up to retirement, OH was focussed on being able to replace the diesel used for his long commute, with something more ‘fun’

Yeah, he now has four mountain bikes and a railcard.

It wasn’t until he got behind the wheel for our first UK weekend away that he/we realised how stressful long drives are. We’re currently debating going down to one car, and if so what that should be. His diesel is useful for DIY and transport for bikes but there are other solutions. Mine is a bit more fun, but half the time, as I work from home, I’m looking for an excuse to drive it at weekends just to keep the battery healthy.

SavvySaver24

Quick question on getting to 'The Number' as I'm thoroughly inspired after this thread (and a shot day at work). I'm early 30s, keep rigorous expense details but what % should I apply to these expenses for inflation in say 20 years time?

Nebulous2

SavvySaver24 said:

Quick question on getting to 'The Number' as I'm thoroughly inspired after this thread (and a shot day at work). I'm early 30s, keep rigorous expense details but what % should I apply to these expenses for inflation in say 20 years time?

As a quick and dirty way, do everything in today's money. What would you need today to get the lifestyle you would like in retirement?