I think we've been naive, still time to rectify?

Thrugelmir

Fancy_China wrote: »

We thought we were being so smart overpaying our mortgage, and with less than 2 years to go, it seems a shame to not follow through, however, we will look into all the options posted.

With the mortgage cleared make the same committment to a pension fund for a period of time. With income being reinvested on top of the tax relief, it's surprising how quickly the fund grows.

kidmugsy

Fancy_China wrote: »

Thanks for your comments - I think all our mortgage payments may go straight to pension payments!

It's pretty wise to at least pay enough into the pension so that he avoids all higher rate tax. After that you can pause for thought. But he's going to have to save by one route or another.

atush

It's not a bad thing yo pay down your mortgage, and people's priorities and preferences vary.

Generally speaking I would agree. However, many have mtg rates at 1%. And paying tax on income at 40% and overpaying a 1% mtg don't make financial sense.

Well, other than it making you poorer than not doing it but investing the money instead.

And overpaying a mtg when you could get 3-6% in income funds doesn't make a whole lot of sense either.

And do actually pay attention to the whole CB thing- are you getting it clawed back or not? Second, if you are saving the CB, do it in equities, in the child's name. Otherwise you are paying 40% tax on it is it is your OH name, 20% in yours? Do you actually use your Cash and S&S ISAs?

xylophone

Yes we do have a child. We're still receiving child benefit, even though I am not sure if we should, so I put it in a separate savings account each month, in case we have to pay it back.

See http://www.legalandgeneral.com/library/pensions/technical-information/CHILD_BENEFIT.pdf
http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9781037/Child-benefit-how-to-beat-the-tax.html

See also https://www.gov.uk/workplacepensions re automatic enrolment.

FatherAbraham

jamesd wrote: »

The annuity rate is based on the current low rates, depressed by [low] interest rates and fiscal easing. They are likely to improve a fair bit before he retires. It's also not necessary to buy an annuity. He can use income drawdown instead. That can produce an income in the 4-6% a year range and have decent inflation provision.

This is dangerous, and wishful, thinking. Even a withdrawal rate of 4%, the lower end of your range, carries a danger of serious income falls over an average retirement period (let alone a prolonged one).

Even before the current era of lower expectations of investment return, a withdrawal rate of 4% carried a risk of income collapse -- whereas an annuity doesn't -- an annuity, once bought, is almost risk-free (the only risk involved is counterparty risk, since it's a contract). The annuitant knows what will be received from that contract for its term.

I know that you've said in the past that you simply don't agree with the conclusion of the FSA's research into likely future returns on investments (namely, that the twentieth century was uncommonly good for equities, but future rates are likely to be significantly lower, http://www.fsa.gov.uk/static/pubs/other/projection-rates12.pdf), but that does rather leave you with the problem of justifying why you think you know better than a big, expensive, extensive, peer-reviewed study commissioned by the pensions regulator.

In relation to current thinking on future returns, it looks a little like you're living in the golden-era past -- if you were a pension provider, and implied the kind of growth rates which you are now, then you'd be stopped, and you'd be fined significant amounts of money.

There's no problem with telling people that drawdown is an alternative - but there's an immense problem with you not telling people that there are risks way above the alternative route of buying an annuity.

There's also a problem with you claiming a 6% withdrawal rate is a good idea. Where on Earth do you get that idea from? Maybe I'm just ill-informed, so perhaps you could provide a link to some reliable research supporting it?

Warmest regards,
FA

FatherAbraham

Fancy_China wrote: »

Is the situation rectifiable without crippling us until we're 65?

In case you're wondering, I'm more fortunate in that I have a company defined benefit pension which is projected to be worth about £15k pa.

Firstly, I don't think you've been naive -- I think you've done very well to restrain you current consumption and repay the outstanding debt on the house. Whether repaying that debt in preference to investing provided the best return is actually a minor point, compared to an alternative scenario where you'd just spent the money on immediate gratification through the years -- congratulations, you've in a relatively good financial position overall, from what you say.

If you've been self-disciplined enough to put money aside regularly to overpay the mortgage, and significantly reduce its term, then presumably making the same sort of extra payments into the pension fund rather than the mortgage account won't be "crippling" -- you're already used to that level of saving.

£100/month in contribs is a very low amount for someone earning £53k, there's no denying that. How much "should" one contribute? Well, to get started on that, you need to set a target retirement date, and a target income level for that retirement. If you do that, there are plenty of people on here who'll be able to suggest a contribution which will have a good chance of achieving that. For this kind of planning purpose, it would be useful to know how much is in the pot already.

As I said, I don;t think you've been naive at all. What's happened is that people with defined-contribution pension schemes have perhaps been unlucky, in that the cost in present=day terms, of providing retirement income has proven to be significantly more expensive than was believed a decade-and-a-half ago. Or maybe it was obvious, and we just didn't wnat to listen.

There's no point crying over spilt milk; the sensible thing to do is to save as best one can for a non-uncomfortable retirement. With you attitude, I'm sure you'll be all right.

Warmest regards,
FA

jamesd

The FSA's study says "We treat the period to 2016 as one in which the economy returns gradually to its long-term trend path following the financial crisis. We then combine projections for the period to 2016 with longer-term trend estimates to provide a medium-term view (for a 10-15 years investment horizon)", from pages 3 and 4.

So, to break that down:

1. There is a prediction of slower growth until 2016.
2. Then return to normal trend for the rest of the 10-15 years of prediction.
3. With a blended return of the two periods to get to the lower than long term trend 10-15 year projection.

Those in this discussion are currently 40 years old with any planned retirement anticipated to start 25 years from now and with a finishing date that for half the population will not end until an additional 23-25 years, with prudent planning going for at least another 15 years beyond that, for a total investment term of some 65 years.

For such long projections, historic averages are far more likely to be applicable than deliberately depressed nearer term ones and as you'll note from the quote I just gave, the FSA projections are that there will be a return to those long term trends from 2016, which is now some two and a bit years away.

If you would like to use some of that data you might perhaps try the study's blending approach and use below normal growth until 2016, then 45-60 years of normal.

The returns used in the predictions are far more applicable to those who are going to try hard for 15 years to catch up on most of a working life of not putting enough away, but completely ignore their investment choices and stick to a balanced managed fund, then buy an annuity at the end of the term.

I do not disagree greatly with the predictions of lower growth until 2016 and lower growth if gilts are used.

In addition to paying attention to the term for which the projection is valid and the expectation it gives beyond the end of that term, I questioned the mixture of investments used and the effect they would have on lowering growth rates. Even though they anticipated low gilt returns and a drop in gilt prices, they continued to use a high gilt component in their investment mixture. I'm unsure about you but I'm not greatly inclined to deliberately buy investments when I anticipate that they are going to drop in value, yet the FSA prediction does.

It is not true that the only risk of an annuity once bought is counterparty risk. There is also the risk of inflation for the vast majority of annuities purchased in this country, which are level. Even those with some inflation protection tend to have caps on the amount they will compensate for. The "once bought" wording was a nice choice that skips a key point at which big losses from using an annuity happen: at the time of purchase. This does not mean that annuities are useless or always inappropriate, just that those who use them need to be aware that they are paying a significant price for what they are getting. Many - and indeed most - will then choose to pay that price for at least some of their income provision at some point in their retirement. It's quite likely that, should I live to an old enough age, I may also do so.

The purpose of accumulating a pension pot and drawdown is to produce an income. An income range in the 4-6% range is likely to be entirely fine for that, including if it is gradually depleting capital, because that's what the money is for. Someone who wants to do planning might usefully explore the Firecalc tool to see what it would have taken to survive past events using drawdown. My personal opinion is that some investigation using that tool and various income and income adjustment scenarios is very highly desirable for anyone using drawdown.

Naturally, if there is a desire to preserve the capital for inheritance (instead of say giving away money out of drawdown income while alive) the drawdown rate will need to be set to a level that will do that. A standard annuity is, of course, completely inappropriate when there is a desire to preserve the capital used to purchase the annuity, because there is a guarantee of zero remaining money for inheritance, with no risk at all of failing to reach zero.

You also seem not to be giving any consideration to "I'm more fortunate in that I have a company defined benefit pension which is projected to be worth about £15k pa". Add two state pensions to that and the likely guaranteed household income is about £30,000 a year. You might find it useful to see what that amount of guaranteed income does to the historic chances of failing to have a liveable income when using income drawdown.

For anyone who is interested in the FSA predictions I recommend reading the document and paying careful attention to the basis of the predictions so they can be applied only for the terms and asset mixes involved.

PennyForThem_2

If you have paid off most of your mortgage pay what you would have paid into your pension pot. As you are quite young you have at least 10 years to accumulate a good pp

Get the advice of an IFA - yes it will cost up front, but you should recoup the cost through the advice you get. And, boy does it take the hassle out of pensions!

lawriejones1

I would see a financial adviser I guess, but having no mortgage means you can bang away some serious savings, I'm sure!

I earn about £38,000 and save 10% in a workplace pension then a further £100 a month in a private one, which I will increase as I get older (and hopefully earn more).

On top of that I save at least £300 in a stocks and shares isa. It's not brilliant, but it's a start.

To make up for the fact you only start investing a bit later I guess you'll need to put more in...

Fancy_China

I just want to say thank you so much for everyone's comments - it's given us food for thought.

Despite not looking at his pension, we consider ourselves quite good financially, and will now show the same commitment to pensions as we did overpaying our mortgage.

kidmugsy wrote: »

It's pretty wise to at least pay enough into the pension so that he avoids all higher rate tax.

Is there a way of working out how much this should be? A nifty calculator somewhere? Tax (and avoiding paying so much) is also another subject that baffles me, but I guess I need to do more homework.

Our initial thoughts are to increase his payment towards his pension to £500 per month - but I haven't worked out how much this is likely to provide in return.

By the way, he found out yesterday that his company are due to have to offer a pension with contributions from about summer 2015. He will definitely be joining that.

Thanks again.