7% pa return over 30-40 years

koru

Going back to the original query, 7% would be very optimistic for an after-inflation return.

Over the very long run, worldwide equities have given average real (ie, after inflation) returns of about 5% pa and bonds have given less than 2%. (Source: Credit Suisse Global Investment Returns Yearbook 2014) So, a mix of bonds and equities has given 3-4%.

There's a lot of variation around the average, and there's no certainty that the average will continue at these levels, however. Maybe returns will be higher than this over the next few decades, or maybe lower? Many expert economists expect returns to be lower in future than they have been, but studies show that experts' forecasts are wrong more often than if they were just making random forecasts, so I give these forecasts little credence. But of course they could be right.

Unless you think there's good reason to be confident that future returns will be nearly double the long term average, then 7% is overoptimistic.

yatinsardana

jem16 wrote: »

Which is exactly what I had at your age - although ISAs didn't exist then!

Now I'm about 2 years till retirement - the idea was to show you how to build it up.

Unless you are a higher rate taxpayer I wouldn't bother with a SIPP (or Personal Pension which is likely to be cheaper for just funds). I use it purely to avoid paying 40% tax.

Thanks for your advice!

yatinsardana

koru wrote: »

Going back to the original query, 7% would be very optimistic for an after-inflation return.

Over the very long run, worldwide equities have given average real (ie, after inflation) returns of about 5% pa and bonds have given less than 2%. (Source: Credit Suisse Global Investment Returns Yearbook 2014) So, a mix of bonds and equities has given 3-4%.

There's a lot of variation around the average, and there's no certainty that the average will continue at these levels, however. Maybe returns will be higher than this over the next few decades, or maybe lower? Many expert economists expect returns to be lower in future than they have been, but studies show that experts' forecasts are wrong more often than if they were just making random forecasts, so I give these forecasts little credence. But of course they could be right.

Unless you think there's good reason to be confident that future returns will be nearly double the long term average, then 7% is overoptimistic.

Agreed. I think I was being over optimistic to not only think 7% return on average would be possible but to also think that they would be so reliable that I could base my pension income from it.... Unwise

gozaimasu

Isn't one of the drawbacks of the defined benefit pension scheme that there are restrictions on taking the 25% tax free lump sum, making it disadvantageous to do so?

For a lot of people I think the tax free lump sum is what they're most looking forward to!

yatinsardana

gozaimasu wrote: »

Isn't one of the drawbacks of the defined benefit pension scheme that there are restrictions on taking the 25% tax free lump sum, making it disadvantageous to do so?

For a lot of people I think the tax free lump sum is what they're most looking forward to!

I don't know about defined scheme in general but the NHS one gives you lump sump of 4.28*annual pension which according to my calculations make it a little more than 25%

yatinsardana

yatinsardana wrote: »

I don't know about defined scheme in general but the NHS one gives you lump sump of 4.28*annual pension which according to my calculations make it a little more than 25%

Calculations were based on working under pension scheme your whole career (40y).

bsms1147

yatinsardana wrote: »

I don't know about defined scheme in general but the NHS one gives you lump sump of 4.28*annual pension which according to my calculations make it a little more than 25%

The lump sum cannot be more than 25% of the total capital value of the pension.

planteria

jem16 wrote: »

Unless you are a higher rate taxpayer I wouldn't bother with a SIPP (or Personal Pension which is likely to be cheaper for just funds). I use it purely to avoid paying 40% tax.

so you just pay in the difference between the 40% threshold and your earnings, jem? if you were a 20% taxpayer, you wouldn't invest in a pension at all?

planteria

gozaimasu wrote: »

Isn't one of the drawbacks of the defined benefit pension scheme that there are restrictions on taking the 25% tax free lump sum, making it disadvantageous to do so?

For a lot of people I think the tax free lump sum is what they're most looking forward to!

i nearly mentioned that. i think that it is generally 'not done' for those with DB pensions, but very much 'done' for those with DC pensions.. a good friend of mine has been saving hard into his pension for many years, and is about to use his tax free lump sum to pay off his two mortgages.