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

lawriejones1

I used 'listentotaxman.com' to calculate my tax. Seems to be reasonably accurate...

xylophone

http://www.actuarialpost.co.uk/article/pension-contribution-can-help-avoid-new-higher-rate-tax-185.htm
might be worth a look.

Lokolo

Fancy_China wrote: »

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.



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.

It's pretty easy!

Get your tax code, usually 944, x10, so £9440, add £32,010. Then divide by 12 to get monthly amount. So a normal 944L tax code means you would need to earn £3454.17 before paying 40% tax. So anything over this could go in a pension, as you only get 60% outside.

MoneySaverLog

Lokolo wrote: »

It's pretty easy!

Get your tax code, usually 944, x10, so £9440, add £32,010. Then divide by 12 to get monthly amount. So a normal 944L tax code means you would need to earn £3454.17 before paying 40% tax. So anything over this could go in a pension, as you only get 60% outside.

Don't forget also if you have any savings outside of a ISA the interest will end up being taxed at 40% so you could take the equivalent of this interest out and put that into the pension too.

jamesd

Fancy_China wrote: »

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.

The most important thing to do there is to start learning about investments and investing if you haven't done that already. A good way to start is to each try to use your full S&S ISA allowance each year. Though don't compromise on putting higher rate income into pensions to do that.

I say ISA because those are readily accessible and can easily be converted into pension contributions later, by withdrawing and paying into a pension. Also, because they are accessible, they provide you with a pot of money that can be used to cover contingencies like unemployment or inability to work. If you wanted to do so, you could also use them combined with his workplace personal pension to retire earlier than 65, since personal pension and of course ISA income can be taken from age 55. You're both young enough that you could probably achieve retirement at 55 if you want to do it and make the required financial commitments.

Fancy_China wrote: »

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.

There are many pension calculators but it's not really too hard to do it. Start out by assuming that the £500 a month will increase with inflation each year, then use a regular savings calculator. Put in 500 a month for 25 years and an annual interest rate of 5.1 and you'll get the answer £302,240 at age 65. I used 5.1 there because that is the long term investment return after inflation from the main UK stock market. Now, for contingency planning, do the same again but reduce the rate to 4%. That gives £257,064.

Next step is the one of working out what income that will produce. At today's current depressed annuity rates if he wanted to buy fully RPI-protected annuity with spousal survivor's pension he would get about 2.9% of the capital as income. There are many annuity rate tables online that you can use to check current annuity rates. At 2.9% the amount in 25 years would be an annual payment of 8,764 at 5.1% or 7,454 at 4%. All of the numbers here are in today's money terms because all of the calculations are allowing for inflation.

Lets compare that to drawdown using Firecalc to check the safety margins and chance of failure. Start by using 12089 as the spending, 4%, and 302240 as the portfolio size. Leave years set to 30, assuming death at age 95 for now. What Firecalc tells you is that this plan would have failed in 6 of the 111 past situations, running out of money before reaching the target age. If you look at the picture you can see that the failure cases happen from around 25 years.

Now, in drawdown you are not required to take the same income continuously and should adjust things as required. Firecalc provides some tools for that sort of thing. Close the results window and click on the Spending Models button at the top. Click on the radio button next to Percentage of Remaining Portfolio and set the minimum spending in any year to no less than 95% of the previous year. Click on Submit and see how that does. Answer: it would never have failed. The worst it would have done is leave £183,079 at death, the best (using their investment assumptions) a remainder of £825,163, more than twice what you started with.

Now, that's at 4%. Lets see what happens at 6%. Go back to the Start here screen and change the spending to 6% of 302240, 18134. Click on Submit and this will use the same variable income planning you just set up. This time the lowest balance is 87,755 and highest 420,048. So again the flexibility in income levels has protected against failure. Have a look to see how the income levels vary by scenario and notice that the worst case ones drop to around 7,000 a year. Notice how the possible income levels compare to the annuity - usually well above but sometimes lower.

However, I missed out one big factor: the state pensions. Click on the Other Income/Spending choice and use one of the Pension Income radio buttons, setting an income of 7488 a year (52 weeks of 144) starting in 2017 (age 69). Now click on Submit. Lowest pot size in this case is 184903 and the lowest total spending drops to something above 10000 a year. But I didn't treat the extra income as spendable, so go back and adjust the initial spending level from 18134 to that plus 7488, which is 25622. Click on submit and you'll find the worst case leaves 7272 in the pot and the worst case income levels drop to around 10,000 a year. Here, the 95% restriction on the combined income is hurting the ability to adjust spending fast enough. If you change the permitted year on year reduction from 95% down to 75% you'll see that the worst case income levels do far better and the worst case ending balance is 116355. Being flexible in drawdown matters!

But do you really want to spend the same amount throughout retirement? Probably not, people tend not to do that. If you go back to Spending Models you might like to try Bernicke's Reality Retirement Plan, setting the current age to 65 to simulate retiring at that age. You'll see no failures and a worst case balance at death of 302240. With this planning the initial spending can be higher, when it's most likely that things that cost money will be done and enjoyed.

Going beyond that you might like to investigate things like early retirement, or the effect of household income combining his pensions with yours. Yours being guaranteed provides a low income protection level. I also ignored his initial pension pot size. To add that in, put 1.051 into Windows calculator and use xy button and enter 25. Result is 3.46791 etc. Multiply the current pension pot value by that to get a possible future value.

That's a quick run through of the sort of things you need to be considering if comparing drawdown with an annuity. Also an introduction to the flexibility that you are effectively required to have if using drawdown and with a desire not to fail.