Is your pension pot going to be large enough?

chucknorris

My wife and I were talking about how much you need/want when you retire and we concluded about 16k (gross) a year. But we then wondered if most people will have this, as 5k of that is state pension (using a single persons rate because you cannot guarantee that your partner will live as long as you) so you need 11k of top up pension.

In a DC (defined contribution) pension that would mean a pension pot of about 285k. That's quite a sizable pension pot to have accrued.

vivatifosi

£285k is not that bad if done over 45 years and allowing for compounding of interest/investment returns. The big problem is that people don't save for pensions from their twenties onwards and that's why there is a mountain to climb later in life. £285k is a heck of a lot to find for people who don't start saving for retirement until their forties.

chucknorris

vivatifosi wrote: »

£285k is not that bad if done over 45 years and allowing for compounding of interest/investment returns. The big problem is that people don't save for pensions from their twenties onwards and that's why there is a mountain to climb later in life. £285k is a heck of a lot to find for people who don't start saving for retirement until their forties.

More or less what we were thinking which was that the average is about late 30's when people start to really contribute to their pension. So about 7k a year needs to be contributed (if you assume that the compounding doesn't add that much over inflation).

LilacPixie

We have been thinking about this too. TBH I cannot see the statepension being around when I retire in 2040 something and my husband is 3 years younger than me. We were hoping to have a gross income of around 20k at todays rates so really now (27 and 30) we need to get a move on and see exactly what position we are in and adjust contributions if we need too. My pension started when I was 23 and DH was 25.

System

I started my pension last month (I'm 29). I have no idea how much it will give me when I retire.

This is the scheme:

Procrastinator333

Why only £5k state pension? Assuming you have the NI contributions and your OH has worked or looked after kids (or other way round). The state pension is £163 for a couple isn't it? That is £8,476.

The numbers you are quoting, I would assume you have been looking at indexed linked pension. A decision all need to make, but personally, I don't think it is index linking quite a large chunk of your pension income. I expect my spending (in real terms to decrease with age). The state pension is index linked. Maybe purchase another £4k ish of index linked pension. Then after that I would take the rest as a level income. Yes the value of it will decrease, but as a comnparitive, £100k will buy a male something like £6k level, joint cover 50%, no growth. That same £100k buys £4k joint 50%, growth of 3%.

It takes almost 12 years for the income to get to that £6k. After that, in profit yes. But by then you are 77. Do you really need the additional income at 77+, or at 65? It is all personal choice, but personally I think index linking 40-50% (including the state pension) and taking the rest as level payments is the way to go.

I would also point out that the amount you highlight as being required to save is gross. Basic rate taxpayer gets 20% relief. Many people will have access to a company scheme with matching conributions. This will be true for many more as it becomes a requirement.

Also, I don't think ignoring compounding is a good idea. Compound interest is very powerful. If the investments can average 1,2,3% per year ahead of inflation, over 30 years that is a massive difference to the required cost. But yes they are expensive and it is so important to start early. Otherwise, get to 45 and it is a mountain to climb.

Procrastinator333

Joeskeppi wrote: »

I started my pension last month (I'm 29). I have no idea how much it will give me when I retire.

This is the scheme:

That is a very generous scheme, especially once you are over 5 years service and 35 years old. Bite their hand off.

chucknorris

LilacPixie wrote: »

We have been thinking about this too. TBH I cannot see the statepension being around when I retire in 2040 something and my husband is 3 years younger than me. We were hoping to have a gross income of around 20k at todays rates so really now (27 and 30) we need to get a move on and see exactly what position we are in and adjust contributions if we need too. My pension started when I was 23 and DH was 25.

Well I think you are certainly ahead of most by thinking about it now. I think a lot of people stick their head in the sand and don't think about it until it's getting too late.

I started my pension when I was 20, but stopped it a few years later (I'm 52 now). But I did invest in property in the 90's so have no problems with retirement. But I think a lot of people are in for a shock now that final salary schemes are disapearing. I can see a lot of poverty for pensioners in the future.

System

Procrastinator333 wrote: »

That is a very generous scheme, especially once you are over 5 years service and 35 years old. Bite their hand off.

That's good to know. I have 10 years service at the moment so well in the extra part.

chucknorris

Procrastinator333 wrote: »

Why only £5k state pension? Assuming you have the NI contributions and your OH has worked or looked after kids (or other way round). The state pension is £163 for a couple isn't it? That is £8,476.

The numbers you are quoting, I would assume you have been looking at indexed linked pension. A decision all need to make, but personally, I don't think it is index linking quite a large chunk of your pension income. I expect my spending (in real terms to decrease with age). The state pension is index linked. Maybe purchase another £4k ish of index linked pension. Then after that I would take the rest as a level income. Yes the value of it will decrease, but as a comnparitive, £100k will buy a male something like £6k level, joint cover 50%, no growth. That same £100k buys £4k joint 50%, growth of 3%.

It takes almost 12 years for the income to get to that £6k. After that, in profit yes. But by then you are 77. Do you really need the additional income at 77+, or at 65? It is all personal choice, but personally I think index linking 40-50% (including the state pension) and taking the rest as level payments is the way to go.

I would also point out that the amount you highlight as being required to save is gross. Basic rate taxpayer gets 20% relief. Many people will have access to a company scheme with matching conributions. This will be true for many more as it becomes a requirement.

Also, I don't think ignoring compounding is a good idea. Compound interest is very powerful. If the investments can average 1,2,3% per year ahead of inflation, over 30 years that is a massive difference to the required cost. But yes they are expensive and it is so important to start early. Otherwise, get to 45 and it is a mountain to climb.

I am using the single persons pension because you can't guarantee your partner will live as long as you.

I'm not ignoring componding I agree with you on that (actually on the pension board I have just valued someone's pension for them and assumed 3% over inflation).

I did take into account the tax for a pensioner because I used a tax/salary calculator on the net and inputted my age as 70

Procrastinator333

chucknorris wrote: »

I'm not ignoring componding I agree with you on that (actually on the pension board I have just valued someone's pension for them and assumed 3% over inflation).

Apologies, had taken the quote below to mean you were ignoring it as only neglible and so not including it.

chucknorris wrote: »

(if you assume that the compounding doesn't add that much over inflation).