AIMING FOR £50,000 per year of pensions at 65

peterg1965

My aim is to retire at 65 (in 2030) with at least £50,000 per year of pensions (at todays money), between myself and my wife. I recognise that this is a very large sum to retire on but I need to make sure that this is a realistic target/aspiration. Having just turned 41 I have turned my attention to making sure my finances are in order to achieve this aim. We are both very fortunate to both be in final salary pension schemes, me (Forces pension) wife (NHS contributory scheme) The pensions will be made up as follows (all at todays money):

State pension - £8400 pa myself and my wife (wife pension in 2027 mine 2030). I recently requested a National Insurance statement and we are both fully paid up (me 24 yrs contributions) wife 23 including time spent not working raising the children.
NHS pension wife - £5000 pa currently stands at £3400 (forecast Nov 06) so remainder is based on predicted future employment (she is part time 2/3 full time)
Personal pension - £4000 pa This is the fund that I need advice on. It was started when i opted out of Serps 87-93. The fund has been dormant and has not been funded since 93 and currenty stands at £16,000. It is a Scottish Equitable 'Mixed' fund.
Forces Pension - £30,000 pa. This is based on my current rank and me leaving the forces at 53 (in 2018). It comes with a 3x tax free lump sum at 53 and the pension is immediate, and RPI linked from age 55. I may be promoted further in which case pension will rise by another £6,000 based on leaving at 55. Promotion is not guaranteed, therefore I will certainly not count on this.

Total - £47,400 pa at today's prices.

I would certainly hope to work from age 53 to 65 and therefore possibly have another occupational pension. This will hopefully increase the figure further. I would value some advice on my current personal pension (scot equit):
- can i contribute to this NOW. I know that pension legislation has recently changed. If so, what is the maximum amount and can i claim the extra tax relief at 40%?
- Is this Scottish Equitable pension in a good performing fund or should i seek IFA advice to transfer? It is 'average' risk, but i cannot find out how it performs against other funds.
- A further option for me and my wife is to downsize our house in about 10 years time (the mortgage should be paid off by the time I am 55), and we could invest some of the equity with a view to buying annuities when we claim the state pension.
- Is there anything else I can do to optimise my pensions?

Any comments gratefully recieved!

btloptingout

peterg1965 wrote:

Personal pension - £4000 pa This is the fund that I need advice on. It was started when i opted out of Serps 87-93. The fund has been dormant and has not been funded since 93 and currenty stands at £16,000. It is a Scottish Equitable 'Mixed' fund.

Total - £47,400 pa at today's prices.

I think there must be a mistake in your calculations or in how you have written your post. From reading the above you seem to be making the statement:

£16,000 pension pot at todays valuation giving £4,000 pension per annum in todays money....i.e. 25% return.

I would suggest the figure would be nearer £800 per annum at todays rate.

I'm certainly not qualified/experienced to offer advice, personaly I'd consider transfering this fund to a SIPP and topping up with some contributions but only at your 40% earnings bracket.....but as you are saying that you want £50K per annum pension that will take you into HR bracket so there seems little advantage in topping up on pension.

peterg1965

I suspect that I am confused by the financial statements given to me by Scottish Equitable. You are no doubt correct, the £4000 is not at today's money but is probably the predicted pension at 65 assuming an annual growth of about 7.5%.

dunstonh

State pension - £8400 pa myself and my wife (wife pension in 2027 mine 2030). I recently requested a National Insurance statement and we are both fully paid up (me 24 yrs contributions) wife 23 including time spent not working raising the children.

State retirement age will be 66 by 2030.

Personal pension - £4000 pa This is the fund that I need advice on. It was started when i opted out of Serps 87-93. The fund has been dormant and has not been funded since 93 and currenty stands at £16,000. It is a Scottish Equitable 'Mixed' fund.

That fund and current value isnt going to give you £4000 a year in real terms. £1000 a year would be a more reasonable assumption.

- can i contribute to this NOW. I know that pension legislation has recently changed. If so, what is the maximum amount and can i claim the extra tax relief at 40%?

100% of your earnings upto £215,000 with 40% relief applying to your earnings above the higher rate band only.

- Is this Scottish Equitable pension in a good performing fund or should i seek IFA advice to transfer? It is 'average' risk, but i cannot find out how it performs against other funds.

The Scot Eq product is fine and has a fairly large range of funds. I am not a fan of them due to rubbish service standards but thats because the agents covering my area are absolutely awful. Other areas could be different.

- A further option for me and my wife is to downsize our house in about 10 years time (the mortgage should be paid off by the time I am 55), and we could invest some of the equity with a view to buying annuities when we claim the state pension.

There are better ways of doing that and annuity purchase is not that desirable. And dont rely on downsizing. The costs involved in moving house and paying fees and stamp duty etc often wipe out a lot of the amount you would gain. Equity release can be a better option but again, that is a fall back option and not really something you want to plan on unless you have to.

- Is there anything else I can do to optimise my pensions?

Stop looking at this as pensions and start looking at it as investments. Pensions are probably not the most suitable product for you. As mentioned above, you may get 40% relief going in but you are going to be paying 40% relief out the other side, or at least be damned close to it.

Your planning is currently top heavy in your name so if you die first, your wife will see a significant drop in income whereas you will not on her death.

Do you want to purchase annuities that die with you or, if you build a spouse option into it, reduce the income to an amount lower than savings accounts?

Are you utilising your ISA allowances?

I suspect that I am confused by the financial statements given to me by Scottish Equitable. You are no doubt correct, the £4000 is not at today's money but is probably the predicted pension at 65 assuming an annual growth of about 7.5%.

Scot Eq use a variety of projections depending on the version of pension you have. It sounds like yours is 7% p.a. with no deduction for inflation.

peterg1965

Thanks for that dunstonh, very useful. I ran my age and my wife's age (41 and 44) throught the pensions service website calculator and it came out with 65 as a retiring age for both of us.

jamesd

There are plans to change retirement ages, so don't rely on any calculator that doesn't take into account the plans.

Dunstonh has covered the highlights, as is to be expected from a professional financial adviser. Some things I'd highlight:

• ISAs. You should each invest the full 7000 a year allowance in your own names every tax year. Use an equity ISA and a broad range of funds, initially no less than one fund per thousand pounds invested, in a broad range of regions and market sectors. That's potentially 14 funds each by the end of April or this time next year, a good selection. ISAs don't force you to buy an annuity so you're likely to be better off than taking the built-in loss that comes with an annuity.
• The recent government pension plan mentioned that overall 75 was likely to be the financially best age to buy a pension annuity, so consider doing that with at least a fair chunk of the pension part of your retirement investing. Think of annuities as something to avoid, not something to desire.
• For the pension income until 75, use income drawdown from the pension fund, not annuity purchase, since this lets you keep the money invested and growing even while you're drawing on it, so you can expect to end up better off.
• If you already have cash ISAs and want to switch them to fund investing, hold them until the budget, which is expected to announce a plan to let you transfer cash ISA money to stocks and shares ISAs.
• For both ISA and pension fund investing, the choice of investments is the most important factor. Funds described as "mixed" are a poor choice, generally speaking, unless you're getting close to retirement and want to start being safe. Learn about "asset allocation", which is how you manage your risk and maximise your likely returns. A wide initial spread of funds is one part of this.
• From your age and already assured income, it seems very likely that your ideal risk profile for investments is quite high. Whether you're personally comfortable with the fluctuations in value that come with that is another matter and that's something you must decide. You surely can afford the risk, but if you can't sleep, it's still not worth taking that level of risk. Risk is a sliding scale and with asset allocation techniques you can choose any desired level of risk, which generally shows up as volatility and fluctuations in value over the year or a few years. Higher risk implies higher returns and more money at the end.
• Aim for a fairly equal retirement income for each of you, from sources that at that time are independent of the other. It's more cost-effective and helps to protect the survivor from major drops after one dies. Maximum ISA contributions for your wife, possibly helping her to buy additional rights in the NHS pension and/or possibly starting a personal pension for her are some options.
• Your wife is likely to live five years or more longer than you and hence will get a lower annuity income for a given pension fund value. Plan for this, providing higher fund value for her if practical.

The amounts you're considering also make it well worth considering taking advice from an IFA, particularly if you don't really want to learn about investing or don't have the time. Personally I think that those who are "new model IFAs" are using the remuneration model for their income that is most likely to be to your benefit. Dunstonh seems like an excellent example of this type. Within this sort of IFA, those who do mostly investment business are probably best for your needs, not those who do a lot of mortgage business.

Advisers and banks and building societies or at any company selling you a product aren't IFAs and don't come with their required performance standards and insured guarantees of suitable product selection for your needs. Avoid taking advice from these other people, since they can generally only suggest products from their own company, regardless of whether those are best for you.

EdInvestor

It's well worth studying the tax structure after 65.

Everyone gets an age-based personal allowance of currently around 7,200 pa.So ideally that's the maximum income that should be derived from pensions, which are taxable.

The rest of the income should ideally be derived from ISAs, or from directly held investments in shares or equity funds (dividend income from these is tax free to basic rate taxpayers). ISA income is tax free also, whatever the investment class used.

Once your taxable (usually mainly pension) income gets to a bit over 20k, the Revenue starts to take back your higher age allowance at a punitive rate until it has gone completely.

So ideally

#Income should be split between partners, with pension income ideally coming in at around 7k each

#If pension income is over this level, try to make sure it falls well short of 20k to avoid age allowance clawback, or between around 25k and the bottom of the 40% band.

#Maximise investment ISA allowances (7k x 2) annually to raise tax free income.Take as much tax free cash as possible from the pensions (some people like to take it out as early as possible - you can currently take 25% out at aged 50) and reinvest the money into ISAs every year in both names so income later is tax free.

#Learn how to invest, how to choose good quality investment funds, and/or how to invest in shares at lower risk.

#Re the Scot Eq PP, I would use this fund to experiment with learning about investment because it is so small. First move it to a low cost Sipp where you have a big choice of quality funds and low charges.IMHO the best choice for a learner is the one at Hargreaves Lansdown.

https://www.h-l.co.uk

HL has no annual fee, offers a good range of top funds and rebates the charges.There's also a lot of useful info on the site to help people learn about investment.You can also invest in shares and investment trusts, both lower cost options not available in ordinary pensions. Aim for top performance and low charges.

To transfer the pension, ask Scot Eq for a transfer value in the first instance and compare that with the fund value at present to see if there's a penalty.Even if there is, it's usually bets to bite the bullet with these old pensions as the charges are so high you can never get them to perform.

Then open an account with HL and instruct SE to send over the money.

Then work on how to invest it.

I wouldn't pay any more money into it, but rather put extra savings into both your investment ISAs @14k a year.

There's no reason why you can't run your SIPP and your ISAs side by side, both invested in the same funds, once you have settled on an investment style that suits you.

peterg1965

A lot to get my head round there, many thanks. As far as minimising 'pension' income and maximising tax free investment income to reduce the prospect of abatement of age related allowances, this will be difficult for me. For me, my Forces pensions is likely to keep me in the top rate tax bracket ad infinitum[/I in retirement. As far as I am aware there is little I can do about this, but it is a 'nice' problem to deal with.

I will certainly look into transfering the SE Pension fund to an investment based SIPP with Hargreaves Lansdown. I will read the website today. The latest transfer value of my SE fund is actually £14,810, as of Feb 06. I know the fund value has increased since then and I have actually requested online access trhough SE to check the current value, which I estimated to be close to £16K.

As far as ISA's go, I do not have a lot of disposable income at present, large mortgage, expensive wife and three children to pay for! However I have some savings - £6,000 in a cash ISA (Nationwide) and £4,000 in ING online account as an emergency fund. (it is easier to get at online) and this is a joint account to reduce the amount paid at 40% tax. I suspect I will not be a position to commit lots of extra money to savings until the children are older (when i will probably have to part fund university!) and the mortgage is paid off.

I am coming around to the idea of seeking professional IFA pension/investment advice. Agree comment ref shying away from a 'run of the mill' IFA. I have always been very independent when it comes to finances, I always arranged my mortgages/life insurances either direct with a company or via internet brokers (Cavendish) because I know excatly what I want. Will a specialist pensions/investment IFA cost me much in the way of fees?

dunstonh

Will a specialist pensions/investment IFA cost me much in the way of fees?

On NMA basis, you are looking around 1% of amount invested plus 0.5% p.a. Compare that to HL which is 0% and 0.5% p.a. The cost of advice is therefore just 1%. Thats if you go with SIPP or hybrid SIPP/fund supermarket pension. On maximum commission terms then that can go to around 4% plus 0.5% p.a.

Before any decision to move the Scot Eq pension takes place, you need to know what fund range it has available. They have had different versions over the years and some have a very large range of funds, including external, and that could be cheaper than moving it to a SIPP. Especially if a few of the internal funds are used as part of the portfolio. If its one with a more limited fund range, then its worth the move (if Scot Eq dont charge too much for doing so).

peterg1965

dunstohn, please excuse my ignorance but what does 'NMA basis' mean? Is it worth speaking to Scot Eq directly about their products and the options open to me by remaining with SE before looking elsewhere? Do they give advice on their own products?

jamesd

Your own income is likely to disqualify you for the age allowance but do try to optimise that of your wife, since she does have options to do that. ISA income doesn't count.

It's also worth saying more about your mortgage in case there's some possible improvement there, now or when remortgage time arrives.

You should be getting at least 5.30% on your cash ISA. If you aren't, it's worth investigating a transfer.

If your wife is paying basic rate tax it makes sense for the non-ISA cash to be in her name alone. You can also optimise the return on the non-ISA income using regular saver accounts, which pay as much as 12% a year on contributions of up to 250 a month (the Alliance & Leicester account). They often come with catches like having to open a current account and transfer some money in each month, which you can then just transfer back out again. The ING account could be shifted to one of these month by month. The Lloyds TSB one pays less but is more flexible, since you can only get at the money in the A&L one by closing the regular saver account.

Fees from the NMA (new model, that better remuneration structure I mentioned) IFAs are likely to be very reasonable. For example, one quoted me 100 up front and a 0.4% annual charge reduction for a Scottish Widows personal pension on execution only (no advice) basis. Cheaper than buying direct. Always worth asking an NMA IFA to see if they can do it cheaper, since they often can.