The £35K at 35 rule - Am I on track?

ExMugPunter

I realise that the 35k at 35 years is only a general rule of thumb, but whenever I see it posted on here it always gets me worried!!

If I am honest, I have been a little slow to the party with regards pension planning, but am actively trying to make amends now. So please feel free to critique and rip my current arrangements to shreds if I am going wrong. I will value all opinions.

I will try to give as much info as I can, but apologies if i miss out anything important.
I am 38, married with 2 kids and another on the way so I have a fair bit of financial challenge ahead of me!
We have £39k left on our mortgage that should be paid off in 11 years time (If I can control the wife's urge to move to a bigger 'better' pile of bricks).

I am currently working as a primary school teacher so am paying into the TPS. This is great and I really value the benefits that I am accruing, but I only have around 3 years benefits so far and the way teaching is going, there is no guarantee that I will last until 60 in this job!

I have 2 other pensions from previous jobs. One is the LGPS which is valued at around £700 per year at last statement and is not being paid into anymore.
The other is one that I (maybe mistakenly) transfered into a SIPP and is currently worth £15k. I am continuing to pay £100 per month into this (topped up by the tax relief). I am beginning to see this as a sort of bridging pension between possible early retirement and the onset of my TPS/LGPS and state (if it exists by then).

With regards to how much I think I will need in retirement, I have identified a personal target of £20k as being adequate if not spectacular. My wife works for the NHS so is also accruing a good pension, but she is working part-time (due to the kids) this obviously affects that. Her pension would be in addition to the 20k I have targeted above.

My parents are retired and have an income of £25k between them and they are living a decent lifetsyle which is not too different to one I envisage for us. So I am thinking that if my wife and I can aim for £30-35k between us, we should be ok?

A few years ago, we were struggling financially (nothing too serious, but it did affect us mentally). Basically, I vowed to never go anywhere near those days again so that is why I can be a bit panicky about all this.

So in a roundabout way, am I/we doing enough?
I have played with the calculator on HL, but as my I have 3 (4 if you include the state) pensions, I am finding it difficult to nail it down.

Ps sorry for long post.

Ok, all opinions (and criticism) is welcome!

Linton

I think you are doing very well, taking the issue seriously and planning for the future. A total income of £30K-£35K for a retired couple together with a fair amount of savings for any major one-off expenses should be fine for a very comfortable retirement at current prices - we (a retired couple) are living on about that now and that includes running a canal boat. Though of course it depends on what lifestyle you become accustomed to.

A suggestion you could think about is whether you should be putting your extra money in a SIPP or whether it may be better to think about an S&S ISA to cover the gap between when you stop working and when you can draw your TPS, LGPS, and State Pensions. With your safe TPS/LGPS pension and your wife's NHS pension giving up a small amount of tax relief for increased flexibility may be worthwhile. The new rules planned for 2015 should help considerable with pension flexibility but on the other hand there are the suggestions that the minimum age at which a pension can be accessed will increase from the present 55. Also it could help cover you and your family in the event of a major long term problem - eg serious illness.

N1AK

A £35k income from pensions in retirement could require a considerable increase in the amount you contribute. Do you want that £35k to increase in line with inflation, do you want it to stay at that level, or at least a minimum amount if one of you died shortly after retirement?

I don't know the terms on a teacher pension but you'd need a pot of around £1,000,000 in today's money to retire at 60 and then take the equivalent of £35k per year from it (increasing with inflation) and for it to last reliably to around 95 years old.

So you'd be aiming to have £1.75 million in a pension pot, so that you could take £60k a year (which will have the buying power of £35k today).

Now those figures are ignoring state pension, which you would hope will mean you need less private pension, but it will only be a few thousands and won't kick in until your late 60s at the earliest.

Triumph13

Thanks to those lovely DB pensions you should be fine, depending on when you want to retire. Basic rule of thumb is the earlier you want to go the earlier you have to start planning!

The one bit of info you didn't give is your pensionable salary as obviously that could make a huge difference.

The biggest question is when you want to retire. If you keep going to, say 60 you would have 25 years service. If you are on say £30k then you are accruing £500 a year of TPS pension. 25 x £500 = £12,500. Add £7,500 for state pension and your £700 LGPS and you would be at £20,700 from state pension age, but would need something in the region of £125k in your SIPP to bridge the gap between 60 and your pensions coming on line (without taking an actuarial reduction)

In your situation my priorities would be:

1. Thank my lucky stars for the DB schemes that will eventually keep you comfortable
2. Build up a decent emergency fund in cash ISAs
3. Once 2 was done start feeding as much as I could into a PP or SIPP to fund early retirement

If, on the other hand, you were looking to maximise your income in retirement rather than minimise the age at which you retired, then I would be looking closely at any options that existed for purchasing additional pension within the TPS (I don't know much about the TPS, but many PS schemes have some very good deals available on extra pension / extra years)

ExMugPunter

Linton wrote: »

A suggestion you could think about is whether you should be putting your extra money in a SIPP or whether it may be better to think about an S&S ISA to cover the gap between when you stop working and when you can draw your TPS, LGPS, and State Pensions. With your safe TPS/LGPS pension and your wife's NHS pension giving up a small amount of tax relief for increased flexibility may be worthwhile. The new rules planned for 2015 should help considerable with pension flexibility but on the other hand there are the suggestions that the minimum age at which a pension can be accessed will increase from the present 55. Also it could help cover you and your family in the event of a major long term problem - eg serious illness.

Thanks Linton,

I have been undecided about what to do with my extra payments. I chose paying into the SIPP because that way I know that it is stuck in there and wont get slowly filtered off and used for other things. Initially I thought the new pension rules would be fantastic for me in using them to bridge the pension age gap, but as you hint at, I am beginning to think that there will more strings attached eventually.

Therefore ISA's are probably the best option for flexibility, and i do pay £100 per month into a S+S ISA. But at the moment I like the fact that once its in a pension, it stays in. My goal for this next couple of years was to get a solid pension platform to build on. Therefore, once I am comfortable that I have done that, I will expect to use the ISA more.

ExMugPunter

N1AK wrote: »

A £35k income from pensions in retirement could require a considerable increase in the amount you contribute. Do you want that £35k to increase in line with inflation, do you want it to stay at that level, or at least a minimum amount if one of you died shortly after retirement?

I don't know the terms on a teacher pension but you'd need a pot of around £1,000,000 in today's money to retire at 60 and then take the equivalent of £35k per year from it (increasing with inflation) and for it to last reliably to around 95 years old.

So you'd be aiming to have £1.75 million in a pension pot, so that you could take £60k a year (which will have the buying power of £35k today).

Now those figures are ignoring state pension, which you would hope will mean you need less private pension, but it will only be a few thousands and won't kick in until your late 60s at the earliest.

Thanks N1AK,

I have absolutely no intention of funding £35k per year through a defined contribution pension. I couldnt get anywhere near that!
Also the £30-35k per year is for both of us not just me.

My back of a fag packet calculations are (roughly speaking):
10k my teaching pension (20 years of contributions @ 25-30k wage should just about get me there)
10k wifes NHS pension. (Should be doable when she goes back full time).
£700 from my LGPS
the above are all index linked so some inflation proofing there.
Then there are 2x state pensions (me and my wife)


I am also aiming for a minimum of £100k in my SIPP/ISA which seems doable using the HL calculator.
Obviously I would have to choose whether to use this to bridge a gap or increase income after retirement, but at least it is a target I can aim for.

pleasedelete

10k my teaching pension (20 years of contributions @ 25-30k wage should just about get me there)

It wont be anything like that. You need 40 years for a full pension which would be 50%. You may be able to waive the lump sum and get more.

it is 1/80th of salary x years in scheme

hugheskevi

I am currently working as a primary school teacher so am paying into the TPS. This is great and I really value the benefits that I am accruing, but I only have around 3 years benefits so far and the way teaching is going, there is no guarantee that I will last until 60 in this job!

What significance does age 60 have (if any)? Your State Pension age will be 68 (indicative, based on current stated policy). Most of your Teachers' Pension will also have a Normal Pension age equal to your State Pension age. If you want to take the pension 8 years early there will be an actuarial reduction of around a third.

My parents are retired and have an income of £25k between them and they are living a decent lifetsyle which is not too different to one I envisage for us. So I am thinking that if my wife and I can aim for £30-35k between us, we should be ok?

Given you are about 25-30 years away from retirement, it is probably better to think of a target as a % of your salary. Or make sure you don't target £30-35K in cash or even price terms, as otherwise the purchasing power is likely to be disappointing.

In the long-run, earnings growth is expected to be about 2 percentage points above CPI (or maybe a bit more). So if you target £35K in CPI terms, it will halve in value relative to earnings over the next 30 years and your purchasing power is likely to disappoint you.

I am also aiming for a minimum of £100k in my SIPP/ISA which seems doable using the HL calculator.
Obviously I would have to choose whether to use this to bridge a gap or increase income after retirement, but at least it is a target I can aim for.

If you leave at 60 there is an 8 year gap to fund before you can access unreduced private pensions and also the State Pension. Even though that £100,000 is probably in constant price terms, it is not going to cover more than a few years.

the above are all index linked so some inflation proofing there.

There is, but it is all different. It ranges from CPI (deferred LGPS) to earnings (state pension) with different figures for Teacher and NHS revaluation for active members (in the post 2015 schemes).

The ages of payment vary too - for accurate planning you need to bring it all together and look at a consolidated and consistent picture, not just think it is all pension and it is all indexed so that's fine.

It wont be anything like that. You need 40 years for a full pension which would be 50%. You may be able to waive the lump sum and get more.

it is 1/80th of salary x years in scheme

Most of the OPs service will be in the post 2015 scheme, which has a 1/57th accrual rate with revaluation of CPI+1.6%.

Ok, all opinions (and criticism) is welcome!

My main concerns would be:

• Planning for a pension amount in constant price terms is likely to lead to disappointing purchasing power
• Even on the numbers above, there is little slack for unexpectedly retiring early (due to health or redundancy)
• The nature of revaluation in the post 2015 Teachers Pensions means you will lose quite a lot if you leave the scheme early (the pension increases by 1.6 percentage points less each year once you leave than when you are active). That would compound the impact of an early departure.
• You would benefit a lot from some simple spreadsheet work, looking at your income needs and pension plans and seeing how they stack up relative to your income over time (nothing sophisticated, just simple projections increasing current values by appropriate %s)

ExMugPunter

Thanks Hugheskevi.

There is a lot to consider there. Much appreciated.

jem16

pleasedelete wrote: »

10k my teaching pension (20 years of contributions @ 25-30k wage should just about get me there)

It wont be anything like that. You need 40 years for a full pension which would be 50%. You may be able to waive the lump sum and get more.

it is 1/80th of salary x years in scheme

As the OP has only been in the scheme for 3 years he will be on the 1/60ths scheme so 20 years at £30k would give him £10k as he states. There is no automatic lump sum with this scheme.

However as hugheskevi states, the TPS is shortly to become a career average scheme with a 1/57th accrual rate so not much difference in accrual but the main difference being the increase in retirement age from 65 to 68. 60 was never the retirement age for this section of the scheme.

ExMugPunter

Thanks to everybody for their comments so far.

I think I have caused a bit of unnecessary confusion by stating a possible retirement of 60. I know that I would not be able to access the TPS or the tiny LGPS pension at 60 without actuarial deduction. Further, I don't intend to take the pensions early unless I really have to.

I guess I put the '60' in as a fanciful retirement age that might be achieveable if my other pensions/savings can be utilised to bridge the gap. It is not something I have set my heart or expectations on. However, thanks to the info provided by Hugheskevi, that may not be an appropriate option either.