Working out what we need and how far away we are...

Temrael

Hi all,

Sorry, this will probably be a bit of a long one, you might want to grab a tea.

DW and I are having a bit of a review of our pensions and have become a bit lost in terms of...

a) Working out what retirement income we need
b) Calculating how far away from this we are/when we will get there.

A bit about us...

- We’re both aged 40.
- After lots of hard work we’ve no mortgage or debt of any kind (yay!).
- We’re both lucky enough to be on good salaries with a fairly large disposable income at the moment.
- We’ve got two grown-up "kids" (DS has just finished uni and DD has 2 years of uni left but we have already set aside money for our contribution to that).
- In addition to the money set aside for DD’s uni we’ve saved up an emergency fund of one year’s outgoings (£20k).
- We’re aiming to retire at 65 (though obviously state pension wouldn’t kick in till 67).

Our current pension provision...

DW
- Small stakeholder pension set to pay out an annual pension of around £2.9k p.a. if she keeps contributing as currently (£200 pm). Current total fund around £15k which if she made no more payments would mean £600 p.a.
- Anticipated state pension of around £7k p.a. from age 67

Me
- 2 x Old/deferred final salary schemes set to pay £4.8k p.a. between them.
- Current company stakeholder scheme set to pay out an annual pension of around £11k p.a. if I pay in £700 per month until 65. This is under a salary sacrifice arrangement and my employer is contributing 5% of salary (included in the £700). The current fund value is £46k which if I made no more payments it would currently pay out £2.8k p.a. Note though that the current monthly contribution being made between myself and the employer in £1600 per month as I’m deliberately overpaying at the moment (I’ll come onto this in a minute).
- Anticipated state pension of around £7k p.a. from age 67.


So between us, looking at the underlined figures above, even if we didn’t make another pension payment, we believe we already have a total annual income in retirement of around £22k from the point the state pensions kick in at 67.

Does that make sense/look right?

Although we are very well paid at the moment we aren’t looking to be anything like as rich in retirement and so we think that a joint pension of around £40k pa would be good to aim for.

So, now the questions.

a) We save really aggressively each month anyway but how much must we ensure put aside each month for the next 25 years to ensure we definitely bring that £22k up to the £40k we think we need? And is that the best way of looking at it? e.g. Is it ok to assume the state pension will be at that sort of level by the time we come to retire? Should we just look at current £20k annuity prices and work back from there?

b) Is it a concern that so much of our provision is in my name, as DW would only get half on my death after 5 years I believe?

c) We believe my salary may drop by as much as two thirds in the next year or two due to redundancy, hence me deliberately making very large overpayments on my current pension. What is the best way of taking this into account when planning (given that we’re likely to be saving harder now while my income is good but less later)?

d) Anything else that, given our current situation described above you would change in our overall retirement planning? e.g. Less focus on pensions, more on ISAs, look at BtL etc. etc.?

Thanks in advance for any constructive comments, we feel like we are probably doing ok/headed in the right direction but it's all a bit confusing at the moment.

kidmugsy

My own habit used to be that I would assume that I'd want a pension income that increased in line with the earnings-inflation index, and that my pension investments and pension contributions would grow at that same rate. That meant that I could do all the sums in nominal terms, i.e. do without separate assumptions about inflation, growth, and desired income.

So, suppose you want at age 67 total annual income of £40k before tax between you. Subtract your assumed state pensions of (say) £14k p.a., and your FS pension of £5k p.a.; you need to generate £21k p.a. To do that for (say) 20 years needs £420k. Subtract your current £61k: to save that over 27 years would need £13k p.a. i.e. in the neighbourhood of £1k p.m. Higher now while you are so well paid, lower when it'll be tight.

Refine these calculations by all means; allow for tax relief, allow for possibility of DW not being a taxpayer in retirement, allow for tax-free lump sums, if you're confident they'll survive.

In your shoes, if I were the beneficiary of salary sacrifice contributions, I'd exploit them to the max, since someday surely a govt will stop incentivising this avoidance of its own income taxes and National Insurance quasi-taxes. Certainly avoid all higher rate income tax, and be quick about it. This morning's Tel carried yet another story about the 40% relief vanishing during the course of the next government.

Temrael

Thanks a lot for that Kid, that's really helpful.

Yep part of the reason for the high salary sacrifice contributions I'm making at the moment is to bring me below the 40% tax limit.

£1k per month feels like a lot, I thought we were closer than that. I guess as you say though, if we over-achieve that for now while we can, then it reduces the burden a little later on.

Is there a particular calculator you've used for the £420k = £21k p.a. over 20 years btw? It'd be good to play with/get a feel for the figures a little.

kidmugsy

Temrael wrote: »

Is there a particular calculator you've used for the £420k = £21k p.a. over 20 years btw?

Fingers (metaphorically). £420/20 = 21. It assumes that you'll take out all the money by drawdown. Then you'd better pray that neither lives beyond 87, or modify the whole argument to have you buying annuities at age 75 or 80 (say).

CLAPTON

Temrael wrote: »

Thanks a lot for that Kid, that's really helpful.

Yep part of the reason for the high salary sacrifice contributions I'm making at the moment is to bring me below the 40% tax limit.

£1k per month feels like a lot, I thought we were closer than that. I guess as you say though, if we over-achieve that for now while we can, then it reduces the burden a little later on.

Is there a particular calculator you've used for the £420k = £21k p.a. over 20 years btw? It'd be good to play with/get a feel for the figures a little.

you can look up annuity rates for indexed linked pensions for two people at 65 ... it's round 3.5%
so 420k would give you 15K pa indexed linked

Thrugelmir

One rule of thumb is to save 25 times your desired level of income. Looking forward is a very subjective exercise. Compounding is the investors friend. So the more years that there is for the income generated to be reinvested. The more chance you have to reach your target.

kidmugsy

CLAPTON wrote: »

you can look up annuity rates for indexed linked pensions for two people at 65 ... it's round 3.5%
so 420k would give you 15K pa indexed linked

I think they might reasonably hope for more per £ invested at a later age. But if they were feeling risk-averse, they could buy an annuity at 65. Buying at 75 eliminates the risk of annuitising one of them only for that one to die between 65 and 75, and might allow more to appear in the way of illnesses, presumably increasing the annuity rate.


I suppose they could just wait and see, pouncing on an annuity when they think its value looks good.

wotsthat

Thrugelmir wrote: »

One rule of thumb is to save 25 times your desired level of income. Looking forward is a very subjective exercise. Compounding is the investors friend. So the more years that there is for the income generated to be reinvested. The more chance you have to reach your target.

The trouble with this rule of thumb is that when someone multiplies their desired retirement income by 25 they'll be looking at a big number - there's a danger it'll turn people off.

It's where adding complication helps i.e. subtracting state pension from that income etc.

bilbo51

wotsthat wrote: »

The trouble with this rule of thumb is that when someone multiplies their desired retirement income by 25 they'll be looking at a big number - there's a danger it'll turn people off.

It's called a reality check.

Linton

The first step is to determine how much money you need. The best starting point in my view is to assume it will be at least the same as you need now minus any major expenses (eg mortgage) that wont apply after you stop working. Dont rely on retirement being cheaper than working - you have got used to a particular standard of living and could find it difficult switching to a life of relative poverty. Part of this required income will come from state pension, the rest from your own pensions/savings.

It is relatively easy to predict when you will have sufficient saved to retire if you are used to working with Excel. Just have a column for each year with estimated income and expenses allowing for inflation, save the difference and increase your savings with a reasonable annual investment return.

Temrael

Thanks for all the replies guys and girls.

The main reason we think we will be happy living on a lot less than currently is that at the moment, about 66% of what we earn is either going straight into pensions or into long term savings. That obviously won't need to continue in retirement. We live pretty frugally, to the point where I'd like to think we are over saving it at the moment.