What would you do?

tony4147

I'm 50 y/o with a pension fund value of £130K, a total contribution of £1K goes into my pot every month (I intend to increase contributions 5-10% annually), I'm hoping for a pot of approx. £500K when I'm 65 y/o.

I'm beginning to wonder if I'm putting too much into my pension!!

Am I correct that under the new rules, for instance if I have a pension pot of £500K and I'm 65 y/o.
I can -
Take £125K as a TFLS, leaving a fund of £375K.
Use approx. £75K to buy an annuity of £4.5K / yr, which with the state pension of £7.5K would give me the £12K (needed for flexible drawdown).

This will then leave me with a pension pot of £300K, that I can then withdraw over say a period of 9 years at approx. £33K / year to keep the tax payable to 20%. (Of course the £300K will still be invested over the time it takes to withdraw, so may go up or down, which may mean the 9 years could be more or less).

Then put £15K, of the £33K withdrawn annually from the pension pot into an ISA, which will leave me with an income of £7.5K + £4.5K + £18K = £30K for 9 years.

After that I will then have my guaranteed income of £12K (SP+annuity) + ISA (£15K / year at 3% int = approx. £175K) / 10 yrs = £17.5K = £29.5K/year for ten years, which gets me to approx. 84 y/o

Of course I still have the £125K TFLS that I even haven't thought about yet, maybe invest or maybe wine, women and fast cars lol.

One problem I have now at age 50 y/o is, I don't believe that I need £30K/yr pension in today's money, I believe that I could probably manage on £20K/yr (my wife will have a pension as well), also I might be naive but I don't expect to want the same level of pension at 85 y/o as when I was 65 y/o. Also people in my family tend to fall off the planet between 80-90 y/o

So the question is are my contributions set too high at £1k / month?? (my contributions are at this level as I'm HRT and pay by salary sacrifice)

Linton

Some thoughts....

You dont seem to have included inflation in your calculations. Try a year by year plan on Excel.

Retire earlier? I retired at just 56, best decision I ever made!

Average life expectancy for someone aged 50 now is around 88. So you have a 50% chance of living longer. For planning puposes I would suggest you assume death at 95 at least. Dont rely too much on "all my family died early" arguments - did they smoke, do you? Did they have an out door or manual labouring job? Do you? And things which killed people early a few years ago now often dont.

Do you want to leave anything to deserving descendents/relatives/charities etc?

In retirement you dont want to just "manage". There are plenty of things to spend excess money on.

Under the new proposals for 2015 you wont need £12K to get flexible drawdown, everyone will have it. On the other hand you may well like to have some guaranteed income in case your investments fail.

Triumph13

First up, flexible drawdown / capped drawdown disappears from April 2015. You can take the money out as you wish from then on irrespective of what other income you have so you don't 'need' to buy that £4.5k annuity.

Second point is that £4.5k annuiy is going to be flat rather than escalating at that price. 20 years of inflation are likely to leave it looking very sick indeed.

Third point is that there is evry likelihood that you could live a lot longer than 20 years in retirement. Life expectancies are going up all the time.

Fourth point is that there will possibly be very little reason to move funds out of the pension and into an ISA each year as they are likely to be virtually identical.

Having said all that, the question of 'are you paying too much' untlimately comes down to the sacrifices you have to make now to pay that amount (or more) into your pension vs the quality of life you want to have in retirement and that is a very personal question only you can answer. Some feel they will need much less money as they will lose the costs of working, etc. Others feel they will need more money as they will have more time to fill with holidays and hobbies. You need to work out that balance for yourself.

nearlyrich

tony4147 wrote: »

One problem I have now at age 50 y/o is, I don't believe that I need £30K/yr pension in today's money, I believe that I could probably manage on £20K/yr (my wife will have a pension as well), also I might be naive but I don't expect to want the same level of pension at 85 y/o as when I was 65 y/o. Also people in my family tend to fall off the planet between 80-90 y/o

So the question is are my contributions set too high at £1k / month?? (my contributions are at this level as I'm HRT and pay by salary sacrifice)

Nice problem to have though, worst case scenario you get the tax relief going in and you might not spend it all...as long as the payments in are not causing hardship now I would carry on.


You might decide that you don't want to work to 65 anyway if you can control your own money it's more attractive to take early retirement.


I agree you don't need as much money at 90 as you need whe you first retire and you want to travel and do interesting things with all that free time you used to spend at work. Also if you own your house you won't have any rent or mortgage payments and things like work clothes are no longer needed, you have time to cook from scratch etc I save a lot of my take home into ISA's etc and I know I could live on less than £20 k a year as a retiree.

tony4147

Thanks for the replies.
Yep I missed the inflation.
Your correct in that life expectancy is going up all the time and I haven't smoked for 20 years and I'm not a heavy drinker, so yes I might get past the 90.
I'm not making big sacrifices to contribute the £1k/month, I pay that more to keep money out of the tax mans greedy hands, and the way I pay with salary sacrifice every £100 in only costs something like £54/56 pounds. Also I've worked my b*lls of all my life to have a nice house, car, holidays and hobbies etc, and would like to have the same within reason when I retire.
So too much will be much better than not enough.

Retire early, well couple of things, years ago when I set up my pension the idea was 50/55 but now that I'm 50 I don't feel I want too retire, happy with work etc, maybe 62 ish, plus I need years for the pot to grow and my mortgage won't be clear until I'm 60.

I wasn't aware that flexible / capped drawdown were being removed in 2015, that makes a difference as I never felt comfortable going annuity route if I can help it. I'm reasonable happy to invest myself and take a bit of a risk.

kidmugsy

Everyone still working needs a "get stuffed!" fund. How nice that you can accumulate yours with a tax break.

nearlyrich

kidmugsy wrote: »

Everyone still working needs a "get stuffed!" fund. How nice that you can accumulate yours with a tax break.

Got mine invoked it in 2010 I was only out of work a month but I agree it's nice to have and especially with a tax break.:)

OldBeanz

Why not take out an annuity for an inflation linked £12.5k. This will then give you a pension including your SP of £20k index linked for the rest of your life.
You then have the rest for wine, women and song or investing in riskier areas.
You do not want to be spending too much time watching your investments.

kidmugsy

nearlyrich wrote: »

I agree you don't need as much money at 90 as you need whe you first retire

Medical and care costs?

sandsy

Lots of good comments from Linton.


Your plan is similar to mine although I've revamped my retirement income spreadsheet over the weekend to allow for complete drawdown flexibility.


I'd definitely support thinking about everything in real terms. But also having target incomes in mind at different ages. If you've no need for the full PCLS at outset, consider phasing chrystallisation of your fund to feed ISAs. Also, try building in your other half's pension arrangements so you can take full advantage of both tax allowances and ISA allowances.

tony4147

Thanks for the comments.
Looking at my pension I'm relatively happy with the contribution level and my expectation for the next few years.

It might be more sensible instead of increasing my contributions over the coming years that I increase contributions into my wifes pension.

She is 51 y/o teacher, has been in the Teachers pension about 11 years, and as she keeps telling me there are no teachers in her school over the age of 60.

As she is also a HRT it might be best to pay more into her AVC's to help bridge the gap of when she retires to being able to claim the state pension.