Pension calculation help to get me to 25k pa

It_Aches

Would really appreciate guidance on what is needed in terms of future investment by me to get me from my current position to my goal of circa 25k pa pension excluding state pensions.

My wife and I spent yesterday looking at our spending patterns and determined - in todays money - that in order not to impact lifestyle too significantly we would need 25k pa after tax in retirement.

So I'm curious if someone can perhaps point me in the right direction on how to calculate what is needed from this point to get to that goal - but with different scenarios.

I'm about to turn 44. I have approx £31k in a private pension (Clerical Medical) which has not been contributed to for 8 or 9 years since I joined my current employer. My company pot stands at around £161k - so a combined total of approx £192k. If I was to stay with my employer then the target may not be too difficult to achieve (I put away 5% plus 2% AVC and employer contributes 12% which means gross around £1.5k per month going to the pension). My wife is a non tax payer.

However I'm more interested in testing a scenario where I no longer have that level of contribution - I dream about a job change which would mean significant reduction in income and I would need to rely on the current pot plus much reduced contributions from me only going forward.

How do I calculate what I would need to contribute from this point in additon to the current pot to achieve a net £25k pension in 3 scenarios: at age 55, at age 60 and at age 65?

We decided yesterday when the kids have left that we could downsize - in todays terms that would mean the ability to add between 50k to 100k to the calculation - but I'm not sure how to integrate that in to the formula.

Guidance would be greatly appreciated.

fizio

I'm no expert by any means but a 5% return is not a bad 'finger in the air' guide. So 25k=500k pot. Its bound to be more complicated than that though..

mania112

haf63 wrote: »

I'm no expert by any means but a 5% return is not a bad 'finger in the air' guide. So 25k=500k pot. Its bound to be more complicated than that though..

That's more or less right, although in todays terms it will need to be higher.

It's a question of how to get that target value.

The best suggestion (to see what needs to go in each month) is to use a calculator like this: http://www.hl.co.uk/pensions/interactive-calculators/pension-calculator

ukjoel

Couple of points to consider.

Your wife is a non taxpayer so if you go for an annuity that covers you both (if you die first) then that will be more expensive than one just covering you.

The 500k pot mentioned above would get you maybe 30k at 65 but if it was to cover you both may come down to 20k. If that was to be inflation linked it may drop to 15k or lower.

Your approach is spot on with your key question BUT your second key question needs to be what type of pension as this will impact the sums quite considerably if you go down the annuity route.

It_Aches

Thanks all - I've played with the calculator.

I must say, given the pot value I have to date then the results are still eye opening and actually eye watering.

If I were to do nothing more with my pension from tomorrow and leave the current to investment growth only then that would provide around £13k pa income at age 60.

To retire at 60 with the target 25k net then I still need to contribute £1300/month gross for the next 16 years - assuming no other retirement income. To try to achieve that by age 55 requires £2600/month - and both examples are assuming 0% tax free lump sum. Good lord.

ukjoel - looking at the advanced options of the calculator then I note in relation to your points that the spouses option is set to 50% which I guess is reasonable and the 'pension increase in payment' is set to 3% which I assume just about covers inflation.

Even if I took in to account a £100k injection of cash to the pension pot at some stage - then according to my crude method of calculating this it still means a gross monthly contribution of around £900 for the next 16 years.

So, I guess I'm shocked at the answer - but equally pleased that I went through this exercise at age 43/44 and not in 10 years time.

Not sure where this leaves my line of thinking - if I were to leave my current job then those types of required contributions to achieve £25k would likely be pie in the sky. I think the first thing I do whilst I absorb all this and whilst I can afford it is to consider upping my AVC from 2% to a little higher - my employers contribution is maxed out at 12% but at least the 40% tax relief remains attractive.

Thanks all - any thoughts? Spotted any errors?

Whiteflag

Good post It Aches. A good financial adviser that uses one of the cash flow modelling tools will undoubtedly be able to help you come up with a financial plan that will answer all the questions you have raised.

mgdavid

Whiteflag wrote: »

Good post It Aches. A good financial adviser that uses one of the cash flow modelling tools will undoubtedly be able to help you come up with a financial plan that will answer all the questions you have raised.

why does one need an IFA to do simple arithmetic?

Dunroamin

Wouldn't your wife becoming a tax payer by working be the best thing for her pension?

Loughton_Monkey

It_Aches wrote: »

......

How do I calculate what I would need to contribute from this point in additon to the current pot to achieve a net £25k pension in 3 scenarios: at age 55, at age 60 and at age 65?

Personally, I would come at it from a totally different angle. It's your own words "not to impact lifestyle too significantly" which are, to me, the red flag.

As a deliberate early retiree, I started my own working life rather less 'aware' than you are now, but did simply bang away a load of money on the basis of it being a 'good thing'.

But at roughly your own age I attacked it a different way. Although I wanted to retire 'early', I posed the question "How much can I spend to ensure that when I retire, I can continue to spend the same. Inflation provided."

[*Note that the word 'same' was my own deliberate choice. It could well have been spending more, or less, depending upon what I chose to do in retirement, but for me, the ratio of work spending to retrement spending came to 1:1 It really needs thinking through in some detail - what you want]

I recognised the truths that:

(a) It is spending and not 'saving' which is the 'active verb'. OK, what we don't spend is, by definition, saved. But believe me by focussing on spending rather than saving, you will achieve a far, far, better plan.

(b) At the end of the day, when we say 'lifestyle' we normally mean 'spending money'. So that's what to focus on. By keeping accurate accounts on where the money goes, it is not difficult to envisage your 'desires' in retirement, and calculate the price tag. It is normally similar to what you spend now, but just on a different mixture of things. And,

(c) To pose the question the way you have done gives you a dilemma. In your mind, you have a 'fixed' retirement date and want a fixed amount of income then. Although that's what I started doing, I soon realised that by focussing on spending and posing the question as I did, it allowed me simply to model my income and spending going forward, and spreadsheets are so powerful you can simply 'cut' that income at any time and see how it pans out. So your retirement date becomes an extra 'variable'.

Like me, you probably do not know whether you will have 'had enough' by 55, or 60, or whether you are the type to work happily until 70. But if you use the approach I have outlined, and 'fine tune' your spending [and thus saving] to [finger in the air] age 61, say, then there is a strong prospect you can achieve that. If things get a bit wobbly, then no matter, you can either adjust spending, or move out your retirement date.

My suggested approach takes a bit of time initially, and some interesting spreadsheet work, but boy it did me proud. I had aimed to retire at 55, and achieved it 5 months into age 56. My spreadsheet of income and spending developed (as did the assumptions) right up to the day I retired. Since then, I still use those figures and run my finances according to them. There have been swings and roundabouts, but after almost 8 years of retirement, I have built up a 'contingency fund' despite living just the lifestyle I wanted. I want (financially) for nothing more.

patanne

If you paid into a pension for your wife. I THINK the figure you can pay in is £2880 which goes up to £3600 after the tax is added in. Then on retirement this should save you tax as she presumably will not have a lot of other pension provision. If you did this for 10 years it would be in the region of £1800 per year instead of £1440 per year (just a guestimate).

FatherAbraham

patanne wrote: »

If you paid into a pension for your wife. I THINK the figure you can pay in is £2880 which goes up to £3600 after the tax is added in. Then on retirement this should save you tax as she presumably will not have a lot of other pension provision.

Yes, I agree -- there's a strong tax case for using the untaxed wife's tax-relieved contribs in preference to his own. Income saved in a pension for the wife will get an effective tax rate of 0%, until her tax-free income limit is reached. Putting the same income into his own pension gives an effective tax rate of 15%.

Low-earning wives are an expensive luxury for many couples these days.

Taking a low-paid, dream job at 44 is also an expensive luxury for many of us.

Warmest regards,
FA