Pensions Planning: The NUMBER

TheTracker

Yellow, are you expecting investment growth of 4% AFTER inflation or before the 3.5% you expect?

I'd recommend not modelling forward inflation in your calculations. It's just such a wildcard over 35 years. Instead, adjust your figures each year to account for inflation of the previous year.

You're also missing some other assumptions, unless I didn't spot them.

What's your safe withdrawal rate (the max you can withdraw safely per year), fees during drawdown (taken from the SWR). Many people use 4% and .5%. Anything more is ambitious.

I think you are being very conservative estimating SP age of 68 in 40+ years time for someone your age. I'd model 70-72. Many people, myself included, simply disregard state pension even existing throughout retirement. If you come to rely on part of your income being at the mercy of other parties you need to account for the risk.

Have you modelled typical major purchases? House, wedding, children, spousal income, cars, etc.

Triumph13

I'd agree with the tracker. Model everything in present value rather than post inflation - not only is it much simpler, but the answers are much more meaningful.
As you haven't said whether your assumptions 2 and 4 are before or after inflation it's hard to comment on them. I personally use inflation plus 4% pa investment growth as my assumption for a 100% equity portfolio in cheap trackers. Only you know how your career is likely to pan out and thus what earnings growth to budget.
Making any assumptions around the BTL market in 9 years time is a complete lottery. I definitely would NOT assume a better yield than what you use for general investments, particularly with the changes that keep being put through to try to make BTL less attractive.

penjam

I am looking to retire at 55. Currently 53, wife 52. I'm aiming for pre-tax household annual income of £50k.

I'm making some simplistic assumptions but hopefully not too simplistic.

I'm offsetting interest/investment income with inflation so all my projected figures are at todays value.

I'm assuming that any shortfall between pension income and £50k will be made from savings.

I'm categorising my SIPP as savings rather than pension.

I'm assuming £50k until aged 90 with no tapering in later years which hopefully leaves a buffer as our requirements drop.

So using my age rather than my wife's, my figures are;

Age 55 to 61 - All from savings so 6 * 50k = 300k from savings.

At 61 (ie when wife is 60) , one DB pension of 6k kicks in so 61 to 65 savings contribution is £44k * 4 = 176k.

Age 65, couple of other DB pensions kick in taking pension total to £24k pa. Introduces tax requirement of £1.5k. So age 65 to 67 savings contribution is £27.5k p.a * 2 = £55k.

Age 67 state pension kicks in @ 12k pa (hopefully), total tax about £3.2k .So age 67 to 90 savings contribution is £17.2k p.a * 23 = £395k.

So total savings pot required at today's rate is £926,500.

The pot will comprise SIPP (currently mostly in cash) , other fairly liquid savings with quite a high percentage in tax free wrappers, and any equity realised from a future house downsize.

Is this too simplistic or is there any other glaring omission anyone can see?

madeinireland_2

Also with regard to your point 3 - why not bung more into your pension now every year so as to avoid having to pay back your student loan. I believe your penion contribution would effectively reduce your salary meaning the amount you pay back to the student loan would disappear and after 30 years it is written off - meaning you have used the money you would have used to pay off your loan to increase you pension instead.

gadgetmind

penjam wrote: »

Is this too simplistic or is there any other glaring omission anyone can see?

I'm looking to manage roughly the same, but without any DB pensions at any stage. I'm also looking to index link that £50k as after a decade or two inflation could make it look a little feeble.

I'm therefore trying to achieve a pot of around £1.7m at the point of retirement. Your DB pensions may let you manage on less, but you really can't ignore inflation.

penjam

Thank you gatgetmind you are right and one (quite important) point I should have mentioned is that 23k pa of the DB pensions are index linked. The levels I gave for the DB pension are current valuations so may start at very slightly higher level than listed.

Triumph13

The glaring omission appears to be tax on the SIPP withdrawals...

penjam

Thanks Triumph13 - absolutely right. I'd accounted for tax on the DB pensions but not the SIPP withdrawals. I'll factor that in.

gadgetmind

You'll probably find that the best way to treat the SIPP is to take max tax free cash and then consider drawing more heavily on the SIPP before DB/SP kicks in. You can reduce this later to avoid hitting 40% tax.

Triumph13

A few more points to factor in:

• If that SIPP is all in your name and some of the DB pensions are also then you will be way over the £1M LTA on those figures - unless you've locked in a higher allowance and stopped contributing
• You appear to be factoring in 2 lots of old state pension. You have plenty of time to pay voluntary NI contributions post April 2016 to get up to the full single tier pension which would be £8k each
• It's not clear whether the £50k pa you want is before or after tax - you say pre-tax in your first line then do your calculations post tax.

If I were you I would not be treating the SIPP as 'savings' in that way and assuming zero real investment growth. At £50k pa you should be able to weather some income fluctuations fairly easily so leaving part of the pot in equities and either taking dividend income or drawing a fixed percentage would be a route to think about. If you put say £300k into an equity pot then an income of £10k pa would be a very conservative estimate. Add £24k of DB schemes and two £8k state pensions and that gives you £50k pre-tax from 68 (when wife's SP kicks in). As that £10k pa is also being drawn for all the years between 55 and 68 that takes another huge chunk out. You can still use low risk investments for filling in the first £40k up until 68, but by accepting the risk of a bit of fluctuation in the last £10k I'd say you can conservatively drop that SIPP target by a good £200k.