£900,000

murgord

I am hoping to reach £900,000 in my sipp by the time I am 55 and am hopefully on target to retire then...I am looking for an income of circa £50,000 a year after tax is this acheivable through income drawdown on these figures??

dunstonh

murgord wrote: »

I am hoping to reach £900,000 in my sipp by the time I am 55 and am hopefully on target to retire then...I am looking for an income of circa £50,000 a year after tax is this acheivable through income drawdown on these figures??

If you are married then ideally look to make the pot £450k each (or as much as you can) for tax reasons. You may need to consider or it may be better to consider phased drawdown given the tax position and your figures. Even with that you would be pushing it.

Linton

Sounds over ambitious to me if you want to be sure of matching inflation.

£50K AFTER tax means about £65K before tax. So you would be planning to take about 7% annually. Others will be able to tell you the legal limits but assuming that you didnt meet those, a quick bit of Excel tells me:

Assuming inflation at 3%:

If you want to be sure you dont run out of cash for say 40 years you would need a return on your investments of about 11%.

If you assume £5K comes from state pension you need an investment return of about 10%.

Loughton_Monkey

As a very rough guide, it's always good to look at annuity rates. For a 55 year old, on £900,000 you could receive about £50,400 level, or £27,900 for a RPI linked annuity. Both Gross.

These are based upon typical fixed interest yields used by annuity companies, and of course their profit.

Not sure on the GAD limits, but these won't be a million miles above the £50K a year. So to draw down more than this, you would have to shove about £360K into a level annuity, and then put the rest in flexible drawdown. Then you could legally and physically withdraw the amount you require, but I would strongly suspect your investment returns would be nowhere near enough to last more than a few years.

murgord

thanks guys looks like I will have to plough a bit more in per year ....another alternative could be, is myself and my wife currently have about 360k in isa savings hoping to get that to 500k in 10 years by adding to it perhaps a better option would be to live off that for say 5 years and let the pension keep growing...what do you think???

Techno

The thing is, any return from your ISA is tax free so you need to think about that as part of your tax planning

dunstonh

You may be able to achieve the requirement with Phased Drawdown but ultimately, once you are fully crystallised, you will be short of £50k unless GAD rates increase. If you could spread the phased drawdown to be in your 60s you may should be a bit closer.

jamesd

For my own calculations I use 6% income as a working figure and that's £54,000 before tax if you use the whole £900,000. But that's above the limit you can take for drawdown at age 55, even though it's below what your investments could deliver. A higher safety margin than 6% allows would also be good.

Because of the limits imposed by the GAD calculations you'd need to have a fair chunk of the money in a stocks and shares ISA instead of in the pension. Then you can draw down the capital in the ISA as rapidly as you need to to hit the income target until the GAD limit is high enough.

So no, I don't think you can sensibly get £50,000 after tax income from that pension pot size.

If you took 25% lump sum you'd have £675,000 left and at 6% that's £40,500 gross income, about £33,800 after basic rate tax. But the GAD calculation would prevent you from taking this much at age 55. At the moment you'd be limited to £35,775 before tax, about £28,400 after. But you'd have the lump sum of £225,000 available. Ignoring growth on this and inflation that's £17,300 a year tax free for 13 years, until an age 68 state pension age. £28,400 + £17,300 = £45,700 so you're still short of your target after tax income. And your state pension might be around £7,000, perhaps a little more, so it won't be enough to replace the lump sum you'd have spent.

£40,000 would probably be reasonably achievable and sustainable. You'd use £150,800 of the lump sum to achieve that and have £74,200 left. That's enough to generate around £4,450 a year income tax free plus say £7,000 state pension that's taxed down to £6200 (using 10k allowance now). So that would be ongoing £28,400 + £4,450 + £6,200 = £,39,050 ongoing income. Given me ignoring growth and interest on the tax free lump sum that's close enough to being £40,000 and you'd make that, but without much safety margin.

It'd be easier if the pot was split between you and a spouse and you got about £14,000 combined personal allowance instead of the £7,000 approximation I used. That would add £1,400 a year to the after tax income level before getting the higher personal allowance due to age. And another £600 or so after.

From an earlier discussion, here's how the reduced income levels work out from April 2011, using a 3.75% gilt yield to maturity and the current GAD rates, not the new ones that are pending:

                Male              Male              Female        Female
Age           Old income      New income   Old income    New income
55             6.36%           5.30%           6.12%          5.10%
56             6.48%           5.40%           6.12%          5.10%
57             6.60%           5.50%           6.24%          5.20%
58             6.72%           5.60%           6.36%          5.30%
59             6.84%           5.70%           6.48%          5.40%
60             7.08%           5.90%           6.60%          5.50%
61             7.20%           6.00%           6.72%          5.60%
62             7.32%           6.10%           6.96%          5.80%
63             7.56%           6.30%           7.08%          5.90%
64             7.80%           6.50%           7.20%          6.00%
65             8.04%           6.70%           7.44%          6.20%
66             8.28%           6.90%           7.56%          6.30%
67             8.52%           7.10%           7.80%          6.50%
68             8.76%           7.30%           7.92%          6.60%

jamesd

Some things you can do about this:

1. If you're overpaying on a mortgage, stop throwing money away. Invest it and clear it with some of the pension lump sum instead, or with that and some capital from a stocks and shares ISA once you retire. Or just pay it off to its full term out of the ongoing income.

2. Use your spouse to get more income tax allowances.

3. Plan to delay by a few years so you have fewer years to rely on the lump sum top up and more years of investing to boost the pot value.

4. Get the money into the pension and ISA sooner, so it has more time for compounded investment returns to increase the value.

5. Reduce your target income level.

Loughton_Monkey

Yes, the answer is simple, really. By all means 'fine tune' your investments, savings, and ISA wrappers etc. but otherwise calculate it all on a spreadsheet. Every year you delay retirement is an extra year's full income (large proportion saved) and an extra year you do not have to supoort yourself in retirement.

So simply work out at what age you can hang up your 'overalls' and retire on the income you need.

You can probably do it at 57 or something. Far better to wait until then than to go on a 'marginal' basis, since if it all goes a bit 'wobbly' at age 64 it's all rather too late.

gadgetmind

I'm not sure whether it's good etiquette to hijack this thread or whether to start a new one, but my situation is similar to Murgord's so I hope it's OK.

I'd love to retire in seven years at age 55. By then, if everything goes to plan, I'd hope to have £600k in pensions (mainly my personal pension, but also dribs in my protected rights and that of my wife from when she worked), £250k in ISAs (mainly S&S), and £125k in cash investments (non-ISA due to ISA limits). We also have a mortgage free property worth £750k-£850k.

We might invest in some smaller properties in the mean time, but lack experience as we haven't done this before.

Even with what I thought was pretty sensible retirement saving, it's becoming depressingly clear that retiring at 55 won't be at all easy. I guess I'll have to work another few years.

Do I need any advice now, or should I just keep maxing out the ISAs and pensions for a few years and see how it looks nearer the time?

How can I work out whether it's worth starting a cat pension for my wife and lobbing £2.8kpa into this? I'm considering this as my contributions will be at the limit and I'm already going to be into 40% tax territory in retirement.