Are my pension planning assumptions correct???

uk1

property.advert wrote: »

Errrr ... dividends ?

OK, the FTSE is down over that period but if the index remains static which you seem to think is a good starting point, then your argument also assumes that dividends merely match inflation.

I counter that this model is overly pessimistic as with no growth and no real dividend, there is no incentive to invest given the lack of a risk premium. To balance the argument, there must, over time, be some real growth.

You're argument for a forecast is possibly (who knows?) correct. And this approach clearly works for you.

Presumably the model is an annualy updateable spreadsheet in order to help the OP ensure that he has sufficient pension. For that purpose the model will be more helpful if it errs on the side of pessimistic because it is easier to make up shortfalls early on and to reduce if necessary rather than find that unforeseen eventuality leaves insufficient time to make up a shortfall.

We hear all of the time people realising they are short of pension, but I've yet to hear many complain that they miscalculated and have too much.

efrieze

Thanks for all your comments. If I plug in 5pc or 7pc growth of pension fund nett of charges, the numbers get too high and make me nervous that they are unrealistic.

Btw I'm a she not a he!

efrieze

westy22 wrote: »

I certainly hope so otherwise we will all have been wasting our time on these forums! I think that you can be fairly confident of getting 5%-7% pa over the next 20 years provided you don't pay too much in investment charges which could have the effect of 2%-3% pa drag. Then again, I am a 'glass half-full' type of person.

I thought that the major advantage of pension savings as this stage was saving tax at 40pc now, getting the growth on the gross amount and then paying tax possibly at 20pc (on today's rates) when you reach retirement.

efrieze

uk1 wrote: »

You're argument for a forecast is possibly (who knows?) correct. And this approach clearly works for you.

Presumably the model is an annualy updateable spreadsheet in order to help the OP ensure that he has sufficient pension. For that purpose the model will be more helpful if it errs on the side of pessimistic because it is easier to make up shortfalls early on and to reduce if necessary rather than find that unforeseen eventuality leaves insufficient time to make up a shortfall.

We hear all of the time people realising they are short of pension, but I've yet to hear many complain that they miscalculated and have too much.

I update it monthly and plot a graph on whether I am above or below target, which will be reviewed annually.

efrieze

gadgetmind wrote: »

Dear OP, your spreadsheet sounds much like mine.

A few comments.
1) I have growth at 6% and inflation at 3.5%. Who's right? Who's wrong? Who knows?
2) Your employer is very generous, and your contribution very small. Maybe start paying more in now in case things change?
3) Drawing 5%pa from age 55 is ambitious and will seriously erode your capital more than you might want. However, you only need to do this for the 11 years between 55 and 66, so you should be OK.
4) Have you figured in income from your PCLS (aka lump sum)? This can add more income and it can be done pretty tax efficiently.
QUOTE]

Thanks
1) I will look at how those assumptions affect my numbers
2) Yes - I have alwasy had 15% pension from my employer and alwasy added more on top. About to come to the most expensive years with childcare/school fees so 20% is my mas at the mo plus I have investments elsewhere
3) I meant an annuity which would pay me 5% of the remaining 75% pot - is that not the right thing to assume?
4) I was planning on using the whole 25% tax free amount to pay off my mortgage as we are only doing interest-only (weel offset at the mo but same thing) on our mortgage of £270k.

I am also assuming that my pension income is my sole income, and not counting any other income I have from investments (which don't currently total THAT much anyway!)

uk1

efrieze wrote: »

Thanks

2) Yes - I have alwasy had 15% pension from my employer and alwasy added more on top. About to come to the most expensive years with childcare/school fees so 20% is my mas at the mo plus I have investments elsewhere

As you are maxing out contributions ..... I've not been in an employee pension for some time so you need to check ... but it use to be that you could pay contribtions of up to 15 % of your salary AND taxable benefits. So this could include car value etc. I'm not certain whether this has changed. This is effect meant that I use to contribute 16%+ of my salary. As this was at my top rate of tax it was attractive.

Loughton_Monkey

I think your last paragraph is the most telling.

I have long advocated that retirement planning starts with spending and not with saving. OK, we all understand that income less spending by definition is 'saved', but it is vital to know your spending. And by 'spending' we mean 'lifestyle' spending. So costs of putting the kids through university are not particularly relevant. Costs of servicing a large mortgage while working is not relevant either.

When I retired aged 56, my only concern was to be able to continue spending on the same lifestyle - inflation proofed - for the rest of my life. The financial resources required to fund that lifestyle come (and will come) from a variety of sources. Pension schemes, Cash savings and investments, maturing life assurance policies, and eventually house downsizing.

I guess I was in the lucky position that throughout the latter part of my working life, I found myself - for no particular reason - getting to a 'plateau' in what we wanted and needed to spend. So excess income was salted away. When I fancied a new computer, I would simply buy one. If the washing machine packed up, we would get a new one..... and over a large number of years, the cost of all this became pretty static in real terms. So the only question I needed to ask was "at what age will my financial resources be sufficient enough for me to give up earning and simply continue spending for the rest of my life." With sufficient safety margin, this told me "age 55" [which I missed by 4 months for practical reasons].

By all means optimise your 'savings'. Maximise tax relief. Maximise Tax Free shelters etc..... But the 'driver' to all this as you go through life is the cost of the lifestyle you choose - and this changes with maturity. So don't ignore investments/pensions, but do concentrate on spending first.

gadgetmind

3) I meant an annuity which would pay me 5% of the remaining 75% pot - is that not the right thing to assume?

Check the current annuity rates. If you want a pension that rises with inflation (which you do if retiring at 55!) then you need to work on less than 4%pa, perhaps 3.5%. If you want to get 5% out, then it will be a "level annuity" that pays out the same every year. Over the decades, the value of your pension will fall.

However, if you use drawdown, then your pension pot remains invested and you can take up to the GAD limit each year, which is the same as you'd get from a level annuity (assuming capped). You could then draw 5% pa for 11 years until your state pension kicks in, and then back off to 3.5% or buy an annuity.

The Hargreaves Lansdown website has a nifty pension calculator. You can enter current pot, salary, percentages, performance, and fees, and see what you'll get in money terms. Make sure you play with "advanced" tab and see what difference it makes if you switch between level annuity and escalating.

gadgetmind

uk1 wrote: »

As you are maxing out contributions ..... I've not been in an employee pension for some time so you need to check ... but it use to be that you could pay contribtions of up to 15 % of your salary AND taxable benefits.

It's all changed. You can now put your entire taxable income into a pension, should you so choose, and should this be less than the new annual cap.

You can even exceed the cap (currently £50k pa) but you incur a tax charge. What I can't work out is whether this charge triggers withdrawal of personal allowances.

For instance, if someone earning £151k pa puts £51k (all gross) into a pension via salary sacrifice, what is the tax rate for the excess? Said person's income is less than £100k, so they get a full personal allowance, and the excess on top of this is in the 40% band, so is it just £400 tax?

jamesd

0% real growth is extraordinarily cautious for regular investing over 22 years. I'm not sure that there's been a time in the UK markets where there's ever been 0% growth for 22 years of regular investments. The FTSE average for 1978 to 2003 was 10.5% real, after inflation, total return. It'll probably be lower in the future but you shouldn't be sticking to the FTSE over that sort of timeframe anyway.

There's one useful optimisation for what you're doing. Cut back the contributions when everyone is saying the markets are booming and talks about new paradigms. Increase them correspondingly after a collapse. That'll lower your average buying price and improve returns. You don't need to be perfect, just reasonably close and patient.

Data on Yahoo Finance can be downloaded to a spreadsheet so a few months ago I was tempted to work out the value of £100 a month starting back in 1984 using the FTSE 100. Here are some sample values using the first day in February:

2011: value: 62246 paid in: 32300 as %: 193%
2010: value: 55132 paid in: 31100 as %: 177%
2009: value: 38470 paid in: 29900 as %: 129%
2008: value: 57669 paid in: 28700 as %: 201%
2007: value: 59320 paid in: 27500 as %: 216%
2006: value: 54510 paid in: 26300 as %: 207%
2005: value: 45637 paid in: 25100 as %: 182%
2004: value: 40088 paid in: 23900 as %: 168%
2003: value: 31566 paid in: 22700 as %: 139%
2002: value: 42603 paid in: 21500 as %: 198%
2001: value: 48101 paid in: 20300 as %: 237%
2000: value: 49476 paid in: 19100 as %: 259%

That's the results for anything from 16 to 28 years of pension investing. No inflation adjustment for contributions, I just kept the flat £100 each month to make calculation easier for me. No fee deductions or inflation adjustment for values either.

What those numbers also do very well is show why people buying an annuity need to be becoming more cautious as the annuity purchase date approaches, just in case it happens to be during a down time.