Are my pension planning assumptions correct???

uk1

jamesd wrote: »

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.

Please explain how the OP can invest in the FTSE for 22 years without incurring any charges?

Aegis

uk1 wrote: »

Please explain how the OP can invest in the FTSE for 22 years without incurring any charges?

You can't. However, you also can't invest in the FTSE without receiving the annual dividends, which won't be included in the simple index prices. As such, the real return from investing into a FTSE tracker should be better than those calculated simply by using the FTSE values over time.

uk1

Aegis wrote: »

You can't. However, you also can't invest in the FTSE without receiving the annual dividends, which won't be included in the simple index prices. As such, the real return from investing into a FTSE tracker should be better than those calculated simply by using the FTSE values over time.

And what in the OP's post leads you to believe that all or almost all of the OP's pension is invested in the FTSE? Or do you believe where his pension is invested is irrelevant to such advice - and that it possible to offer such advice without this information?

gadgetmind

Dwelling on the detail might be blurring the message, and the message is that money invested with a sensible asset/sector/territory spread outperforms cash and inflation as long as you look at multi-decade terms, and as long as you consider investments trickled in over the period rather than invested as a lump sum at might what be the top of a market.

jamesd

uk1 wrote: »

Please explain how the OP can invest in the FTSE for 22 years without incurring any charges?

You can't. There was a limit on how much time I was willing to put into what was already a few hours work to get the present numbers and it was originally written for a different discussion. If you want numbers that include typical current fees and inflation I've told you the data source so you can do the calculations. You could also investigate tracking errors and see what difference those would have made with funds or ETFs.

FTSE trackers are readily available these days for around 0.3% in charges, some as low as 0.1%. 0.1% on money invested for the whole of 22 years reduces the total return by just 2.2%. 0.3% reduces it by 6.6%. The actual cost is lower because the money wasn't all invested for 22 years. If someone wanted to pay 1.5% for a tracker that would produce a 28% reduction over 22 years but there's rarely a reason to pay that sort of money for a plain tracker these days.

The 10.5% was from a Pensions Commission report and is after costs and inflation.

Aegis

uk1 wrote: »

And what in the OP's post leads you to believe that all or almost all of the OP's pension is invested in the FTSE?

This isn't an assumption I've made, so I'm not sure why you're asking me this.

Or do you believe where his pension is invested is irrelevant to such advice - and that it possible to offer such advice without this information?

Again, I have offered no advice, so I'm not sure why you're asking me this.

All I did was respond to your question about FTSE charges.

Zelazny

gadgetmind wrote: »

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?

It's not a form of income tax, it's called an Annual Allowance Charge, and is at a fixed rate of 40%. So in this case it would be £400 tax.

Details here:
http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm06200070.htm

gadgetmind

Zelazny wrote: »

It's not a form of income tax, it's called an Annual Allowance Charge, and is at a fixed rate of 40%. So in this case it would be £400 tax.

Thanks, that backs up my (very unqualified) reading of it.

My back-of-an-envelope calculations (which also include the lost opportunity of income from the tax paid being invested) show the situation to be break-even at 40%, beneficial at 50%, and a no brainer at 60%. However, I'm lucky in that my sal sac gets "unlift" from my employer as I save then employer's NIC.