Pension pot for £15k

Pincher

If you think in terms of: it's your money, but they keep it out of your control for 40 years. Yes, in the long term, it will grow, but the middlemen are also taking bites out it for all those 40 years. It's like you have a child, but they take it away from you, because they consider you too incompetent to look after it. So, by law, you have to PAY a child minder to look after it: for 40 years!




If you could pay pension contributions, which attract tax relief (more money that you earned in the first place), and then use that money to get a mortgage and buy a house to live in, it kills two birds with one stone.


Bird one: The pension is making a really good return on capital, because it's a leveraged set up. Well, initially until yo upay off the mortgage.


Bird two: You can get a mortgage, and have a house to live in.


You do have to pay rent to get the HMRC off your back, which just adds to the return for the pension account.


In 40 years time, sell the house, use the 25% lump sum to buy a retirement place, and the rest can be used to purchase an annuity. Obviously, you would have been trading up through your life, unless you bought a big one initially.


I have already got to the £500k asset stage, in less than 20 years, without doing it the pension way. Imagine where I would be if I had tax relief. It's just too sweet a deal for HMRC to stomach, unfortunately.

hyubh

robatwork wrote: »

As there are obviously some teachers on this thread can we be more specific. For example for how many years would an average (yes, I know) teacher work to get a 15k annual pension?

You don't need a teacher for that, you need a web browser and a calculator (the source data is all in the public domain - current and historical rules of the Teachers Pension Scheme, nationally-agreed pay scales). Gets a bit complicated if you want to look in terms of a teacher retiring now vs. a hypothetical teacher retiring in 40 years time however.

jem16

robatwork wrote: »

As there are obviously some teachers on this thread can we be more specific.

Who would they be then? I can't see anything obvious.

For example for how many years would an average (yes, I know) teacher work to get a 15k annual pension?

40 years.

Let's say this teacher ends up typically as a deputy head at an upper school (we have 3 levels in my part of the world).

Your typical teacher doesn't end up in management.

jamesd

Best not to do it with an annuity. You can expect on average to be fine for even a quite long life if you take 4% of a pension pot as income each year, increasing with inflation. So to get £15,000 on top of the state pension would take 25 times that, £375,000.

However, that's just the average sort of value. It's not enough. The problem is investment variability and the chance that there might be a big drop the day after you retire that lasts for decades. You need to protect yourself against that possibility somehow. What I like to do is use a 50% or 100% safety margin on top. If the exceptionally bad thing happens, the great depression happening again from the day you retire, then you should still hit your income target. In more normal conditions you'd instead be 50% or 100% over the target. So while the total amount might be more than an annuity you get the upside benefit, unlike with the annuity.

It's also possible to exploit a level annuity to manage the risk. These decrease the real payment over time because they don't increase with inflation. But that's the sort of thing you want when your risk is concentrated at the start, as it is with investments. Annuity rates are pretty dire at the moment, being only 6.1% or so at age 65 for a person in normal good health. But this does let you buy some market volatility protection to get you the desirable safety margin at lower cost than doubling 4% cost - 6% from the annuity instead of doing it all with 4% drawdown. Unfortunately if you are planning to retire early, at 55 the annuity would only pay out 4.9% of the purchase price and that makes it far less useful.

Another possible approach is to use a term annuity. These pay out for a fixed time. Much of the amount paid out is based on how much you spend but some is based on interest rates at the time of purchase. You can use one of these to provide protection early on.

You can also buy options or covered warrants that will pay out if there is a large drop. This may well be the cheapest way to get the protection.

kidmugsy

MRMX9 wrote: »

Yes – its generous – but then a teacher earning above £45k now pays 11% of their salary in pension contributions rising to 12.5% for headteachers (before tax relief).

So the employees have paid for a proportion of the costs out of their earnings since becoming a teacher.

Its not the fault of teachers – blame those who are responsible for the collapse of private pensions. It’s a bit like blaming the blind and disabled getting benefits for the banking collapse and government deficit!

You've completely misunderstood my point. I hope you're not a teacher.

kidmugsy

jamesd wrote: »

You can also buy options or covered warrants that will pay out if there is a large drop. This may well be the cheapest way to get the protection.

Can these be held in a tax shelter, such as a SIPP, jamesd?

jamesd

Yes, both of those are eligible for a SIPP. HL is one place that offers at least the covered warrant choice, not sure about options.

Neither qualifies for ISA but that could conceivably be handled via conditional buy/sell orders for leveraged ETFs that do qualify, though this is far from as good as options or covered warrants because you get the loss potential if the market moves against you, rather than merely suffering no gain. It's somewhat unfortunate that the main risk limiting investments aren't available in the ISA wrapper.

Options can be done also via spread betting, though I haven't looked at how competitive the prices are. Since spread betting is under gambling law any gains there are tax free. At least the place I looked at only offered relatively short term deals for this so it wouldn't be particularly suitable. This might be a better choice than ISA to protect in the non-pension case, given the limits on what ISAs can hold.

robatwork

jamesd wrote: »

Options can be done also via spread betting, though I haven't looked at how competitive the prices are. Since spread betting is under gambling law any gains there are tax free. At least the place I looked at only offered relatively short term deals for this so it wouldn't be particularly suitable. This might be a better choice than ISA to protect in the non-pension case, given the limits on what ISAs can hold.

Fascinating approach - although I expect a few pensions advsiors would be squirming in their seats with the thought of "pension pot" "annuity" and "spread betting". I wonder if any advisors would ever recommend spread betting?

Pincher

robatwork wrote: »

I am trying to teach my children about aspects of finance, including the need to start a pension early, and part of that is careers advice.

Very curious how you will put it to them.


As we are now, with zero hour contracts proliferating, the bottom layer of the economic pyramid has no hope of saving anything like £500k, if at all. So what is the answer to


"How do those people on minimum wage save up enough to live on, daddy?"


Answer: Oh No darling, they can't save, so we give them free food and some money, so they can still have a nice Christmas.


"If I work in Tesco for 40 years, will I have £500k when I get old?"


Answer: "No darling, that's not going to work. You need to study hard, and get a job that pays more."


"So what happens to those people that didn't get their GCSEs?"


Answer: "Life is like a box of chocolates, you never know what you'll gonna get. They will be like Forrest Gump. They are SPECIAL."




Must say that when I was in my teenage, when Final Salary schemes were the staple, I instinctively knew it was a good deal, and so white collar work was a no brainer. I did think how terrifying it must be for those without the protection of a big corporate pension piggy bank that COULDN'T GO BUST to rely on. In those days, it was still possible to say study hard, get into a paper pushing job, and you'll be set for life. You would be WRONG as it turns out, but you wouldn't be lying.

greenglide

"How do those people on minimum wage save up enough to live on, daddy?"

They don't aspire to £15,000 in retirement do they as this is probably more than they earned during their working life. Taking into account the £8,000 or so that the single tier pension will pay this is well above their income in working life.

The minimum wage earners will see the single tier pension as a reasonable income - it is intended to be at the pension credit single guarantee amount after all.

Fair? Of course it is not fair.