Basic Query

SaverT

Hi,
Sorry if this is covered elsewhere, I have been looking I can't find any straighforward answers. Also my apologies if this is long, rambling and not very straight forward!

Simple query is, I would like to recieve £2k per month after tax once I retire, am I curently on track? (based on todays terms and assuming standard growth on personal pension)

I recieved some info from an IFA when setting up my money purchase pension around 2yrs ago but to be honest, I am sure it was incorrect.

I am currently 29 and have been paying towards a money purchase scheme for roughly 18mths at approx £430 per mth (inc employer contribution). I would like to retire at 60 and believe from 60-68 I could only recieve personal pension (no state or S2P) so would need to provide the equivalent of state pension for these 8years from savings.

So...

Basic state pension: I have been working full time since 21 and intend to do so until 60 so will easily reach 30yrs and therefore get full Basic state pension, in todays money £97.65pw so £5078 per year.

S2P. This is where it gets hazy for me... Again, i will easily have 30yrs, I have always been contracted in and don't plan to change this, I am currently (and hopefully will continue to be) in 40% tax bracket.
The maximum seems to be an additional £157.74pw so £8202 per year. Would I get this? Have I mis-understood?

Then my personal (Money purchase) pension. I used the calculator on 'moneymadeclear.org.uk'. Based on a fund of £10k when I'm 30 (roughly accurate), retiring at 60, providing a pension for my partner after death and taking no lump sum, along with £215contributions per month from both me and my employer, it suggests a monthly income of £834 so £10,008 per year.

So all in, £5,078+£8,202+£10,008 = £23,288 per year so very slighly under my target.

Then Tax! From 65 the personal allowance is roughly £9500, above this, I assume would be 20% tax and no NI once retired? so on £23,288, I would pay (23,288-9,500)*0.2 = £2,758 meaning I would actually receive £20,530 per year so need to increase my contributions by roughly £150 per month now to reach my £2k a month retirement income.

Further to this from 60-68 I would only recieve Personal pension of roughly £10k, with 60-65 incurring roughly £700 tax and 65-68 virtually nothing, so I would need savings of 5x£14,700 + 3x£14,000 = £115k (in todays money) to top up these years to £2k a month

Sorry for such a long first posting, it's been playing on my mind for a while and would just like to know I haven't got the wrong end of the stick.

Thanks in advance for any advice

sandsy

I can talk about some of the bits and others will have to fill in the rest:

Basis state pension: seems correct

S2P: I have no idea on this - will look forward to other answers to fill me in too!

Money purchase: you'd actually get more than indicated on that calculator as it only allows for tax relief at basic rate, not at higher rate. Multiply your answer by 1.167 (1.4/1.2) to get an indication.

Tax: I know the tax allowance drops again once your income goes over £9490. It drops by £1 for every £2 over the limit so that by the time your income is in excess of £22900, your tax allowance is back to its normal £6475 level.

Shimrod

SaverT wrote: »

S2P. This is where it gets hazy for me... Again, i will easily have 30yrs, I have always been contracted in and don't plan to change this, I am currently (and hopefully will continue to be) in 40% tax bracket.
The maximum seems to be an additional £157.74pw so £8202 per year. Would I get this? Have I mis-understood?

Various governments keep twiddling with this - I think the latest change due in is going to cap this at £60pw regardless as part of simplifying the whole pension structure. This should be offset in part when (if) the state pension is linked to earnings again. I'm sure someone with a bit more knowledge will be along to confirm this shortly.

SaverT wrote: »

Then my personal (Money purchase) pension. I used the calculator on 'moneymadeclear.org.uk'....it suggests a monthly income of £834 so £10,008 per year.

Further to this from 60-68 I would only recieve Personal pension of roughly £10k, with 60-65 incurring roughly £700 tax and 65-68 virtually nothing, so I would need savings of 5x£14,700 + 3x£14,000 = £115k (in todays money) to top up these years to £2k a month

I think you are mixing up your money terms. The pension income is in today's terms, but in monetary value (the amount you would actually get when you retire) would be closer to £24,000. So using your calculation above, although it comes to £2k per month, in today's terms that is going to be closer to £1200 per month.
As a higher rate tax payer you may be better off increasing your contribution into your pension than trying to fully fund the difference from savings outside the pension.

mitchaa

Yes, work until retirement at 65, gradually increase your contributions, say 1% every 5yrs or so and then retire on around a 30-40% final salary if your GMP scheme does well. You will obviously be earning your usual salary 60-65 and will only have 3yrs to push with no state pension/S2P.

As to your questions, impossible to say as what is true today in terms of tax thresholds, state pension entitlements etc will be different 10yrs down the line never mind a further 30yrs on so i wouldn't over analyse.

SaverT

Thanks for the responses! I'm closing in on being able to understand!

A couple of questions though...

S2P - if it's potentially going to be capped at £60pw. £60pw is £3120 per year so an annuity of 5%(?) means needing a pension fund of £62400 to replace this by opting out over 30 years is £2,080per year and opting out gives 2%(?) back from NI so would need a salary of £100k+ to generate the same return. But then I've not accounted for pension fund growth exceeding inflation or maybe your only opting out of ERS NI so 2% of £38k or so... I think I'll leave this one!

However if it is capped at a much lower amount then obviously I need to increase my personal pension.

Sandsy - I think on the MP side, basic tax would be right, my understanding is that each month I have £173.33 net deducted from my pay, this is grossed up at basic rate to £216.67 (£173.33/0.8). I then get the other 20% tax back through my tax code (I have spoken to tax office re this and tax code has been adjusted) so I get 40% tax relief by getting 20% added to my contribution and being taxed less to the equivalent of the other 20%. Is this right?

Shimrod - I probably am mixing up money terms but I thought by my calculations it did work out to £2k in todays money meaning much more then (i.e. 2010 - £2k, 2040 - £3k rather than 2010 £1.2k, 2040 £2k)

Mitchaa - I really want to avoid working to 65 (or 68) if I possibly can I guess thats why I'm looking at it now. I agree I certainly should be trying to increase contributions, it would just be nice to be able to see what effect it would really have.

I totally agree with the general advice that is always given 'you should think ahead and plan for retirement' but it seems to be impossible to do! I am thinking ahead (I was financially rubbish for years but removed my head from the sand a couple of years ago), I would like to be able to retire with approx 2/3 the income I have today but I have no idea how to work out what I really need to do to achieve this.
I guess the only answer is put as much into a pension as possible but I don't really want to start to put another £500 a month into a pension, therefore not having that money now only to find I have more than I want in retirement!

Maybe I am over analysing, I just would like to know with reasonable certainty, in order to have £2k a month when I retire, I need to be paying £xxx per month to a pension. Maybe I should just take the easy route and pay more into it and see what happens...

Any other advice welcomed

CLAPTON

I would look at it like this

at 60 you want to retire on 24k take home
so thats about 28,500 gross of basic rate tax

state provision will be about 8.5k
so you need to fund 24k at 60 dropping to 16k at 68

so get an 16k pension in todays terms at 60 indexed linked to inflation means a pension pot of about 16k/3% = 533,000

plus you need to fund 8 years at 8k i.e. 64k

you have 41 years to save almost 600,000 in round terms

assuming a 1% growth in real terms then you need to save (in real terms) about 12k per annum (gross)

1% real growth may seem a bit low but you have to remember inflation and all the pension fees

dunstonh

Often its best to disregard S2P in the earlier years. If you get it, its bonus. If you dont then you havent banked on it. Whilst the basic state pension is relatively stable. The additional state pension has historically been played around with many times. Graduated pension, then SERPS, then S2P. Each with its own rules and accrual methods. Four times in the last 30 years the benefits of the additional pension have been retrospectively reduced. The self employed dont qualify for it and there are calls to get rid of it altogether and replace it with a single state pension.

Use S2P as your safety buffer for a margin of error that can work in your favour. Dont include future accruals.

Also, think about budgeting to age 70 as the state pension age. Whilst the state pension age is going up to 68, its quite probable that it may be brought forward and another 2 years added (its meant to be going up to 66 in 2024 but that is on the cards to be brought forward to 2016).

SaverT

CLAPTON wrote: »

I would look at it like this

at 60 you want to retire on 24k take home
so thats about 28,500 gross of basic rate tax

state provision will be about 8.5k
so you need to fund 24k at 60 dropping to 16k at 68

so get an 16k pension in todays terms at 60 indexed linked to inflation means a pension pot of about 16k/3% = 533,000

plus you need to fund 8 years at 8k i.e. 64k

you have 41 years to save almost 600,000 in round terms

assuming a 1% growth in real terms then you need to save (in real terms) about 12k per annum (gross)

1% real growth may seem a bit low but you have to remember inflation and all the pension fees

:eek::( Thats a good way to look at it (I always seem to overcomplicate!) but really disheartening! made worse by the fact that if I want to retire at 60 I have 31years not 41 which by my reckoning means £16k+ rather than £12k.

Is real terms 1% growth normal for pension funds? I thought is was quite a lot higher than this.

I guess the "good" news is that unless I get a couple of 100% payrises, I don't need to worry about ending up with a pension bigger than I hoped for!:cool:

SaverT

Bit of a daft query, I had thought a pension of 2/3 current net income was pretty reasonable but it looks like this involves putting a significant amount away (getting on for 30% of income for 30years!) Do many people actually achieve this?

Ginger_Red

SaverT wrote: »

Bit of a daft query, I had thought a pension of 2/3 current net income was pretty reasonable but it looks like this involves putting a significant amount away (getting on for 30% of income for 30years!) Do many people actually achieve this?

With retirement age looking like being 70 for people currently aged 40, 30 years of investing isn't that long.

Bear in mind that however long you save for, you'll want to live off it for 20-30 years, and like others have said, you can't save £100 per month and expect to get £1,000 a month in return.

For what it's worth, I started at 23, and currently contribute to a personal pension alongside a final salary scheme. I've never earned very much, but it should get me about 3/4 of my salary when I retire (at 65 hopefully !)

CLAPTON

getting a 2/3 of gross salary in pension is reserved for the very very few
it's true that pension experts talk about this as a target but it's not realisitic for the many

if how you have a final salary pension and work the full 40 years then its achieveable. however bear in mind that the employee puts in 6 or 7 % and the employers funds the other 20% which is why public sector pensions are expensive.

do bear in mind that being retired may be less expensive than you think; normally the mortgage is paid off; kids have (hopefully) left home, no commuting costs; you can travel and holiday and play golf at off peak time and at off peak prices.


is 1% growth realistic... well pension fund will probably quote 7% but you have to consider costs and inflation.


basically think about it like this

you have 31 year to save
you then have say about 25 to spend
how can say 10% of salary being saved over 30 years pay for 66.6% spending for 25 years even with a little bit of compound growth