What is a "proper" pension pot nowadays?

mark5

I'm limited myself with investment choices from my employers pension but a few of the funds in it are doing well, I think mines called the invesco global equity, I also pay a small percentage into the global bond.

I use the money saving expert cash Isa's calculator for working out roughly what a fund might be worth in the future, I assume a growth rate of 2-3% above inflation.

grey_gym_sock

jumperabv3 wrote: »

Can I ask if I'm only 30 years old now and got at least 25 years ahead ... then linking the pension pot to the safest products (e.g. investments like fixed deposits) isn't this a good choice because as you can see ... the rates in the US have gone up finally ... and maybe at "worst" case scenario 3-4 years from now the rates in the UK will be lifted high enough to generate those 3% profits on the pot per year ... so let's say this way the pot would grow by 3% per year for 20 years at least or something like that? I mean we won't stay with low rates forever, won't we?

i dunno, we might ... but actually, it doesn't make that much difference, because interest rates tend to roughly track inflation - i.e. now rates are low, but so is inflation; if rates went up to 3%, then inflation would probably be near to 3% ... so if you keep your money in cash (or anything similar to cash), you can expect to roughly preserve its real value, i.e. how much you can buy with it, but not to see any real growth in its value.

OTOH, if you invest at a higher risk level - meaning put most of it in shares (that includes funds which invest in shares), you might expect to get a return of, on average, perhaps as much as 5% more than inflation per year. over 25 years, that would give you about 3X as much as the real value you put in, which is also about 3X what you'd get from staying in cash.

however, 5% per year is only on average. in some years, you could be up 30%, in other years you could be down 25%; occasionally, you might get a fall of as much as 50% ... over many years, it tends to even out a bit, so after 25 years, while you probably won't get exactly an average of 5% a year - it could be more or less - but the chances are very good that you will do better than staying in cash (which is likely to give you about 0% real return).

when you are putting money away for 25 years, there is a strong case for putting most of it in shares. if you use cash instead, you might need to put in about 3X the money to give you the pension income you're looking for, or alternatively to settle for about 1/3 of the pension income you might have got if you'd been investing in shares.

when you are much nearer to retiring, shares become less attractive, because those big drops in shares (25% or even 50%) can come at any time, and you have less time for the average gains of about 5% per year to work in your favour. so it usually makes sense to gradually scale down the % you have in shares as you approach retirement.

Orwell

Everyone's expectations are different, but anything less than 50% of the LTA (i.e. saving £500k) would seem to be insufficient to retire on.

bigadaj

Orwell wrote: »

Everyone's expectations are different, but anything less than 50% of the LTA (i.e. saving £500k) would seem to be insufficient to retire on.

That's a sweeping statement, if you're looking at 4% drawdown then £20k income annually and a state pension on top would put you at or above average uk earnings.

Similarly those who retire with a Dc pot of half a million must be a tiny percentage of the population. There will be a fair few with db pensions that would translate as being if that order, but many of these are historic, not available to most on the private sector now and being partially eroded even in the public sector.

somethingcorporate

I guess the two key questions not yet asked are 1) how much do you earn and 2) how much do you need when you reach retirement?

You'll need to put a fair bit more aside if you are serious at retiring at 55. I am 31 and have £1,300 (30% of my salary) a month going in and still not going to be enough to retire in just 24 years.

kangoora

somethingcorporate wrote: »

I guess the two key questions not yet asked are 1) how much do you earn and 2) how much do you need when you reach retirement?

You'll need to put a fair bit more aside if you are serious at retiring at 55. I am 31 and have £1,300 (30% of my salary) a month going in and still not going to be enough to retire in just 24 years.

I'd be very surprised if that wasn't enough in 24 years.

• 12 x 1300 x 24 = 374k.
• 374k*4% = £15k/12 = £1250/month.

That's allowing for no growth, promotions, pay-rises, share schemes etc. and you are already almost at 50% of your current disposable income (£2,600?). Presumably you have a mortgage, assuming that is paid off then that is another chunk of cash monthly you don't have to find when retired.

Looks to me like you should be OK. I suppose the key thing is not to get lifestyle inflation when you get promotions etc. If you keep the same relative lifestyle and just save more then your retirement age becomes earlier.

According to Mr Money Mustache, saving 30% of salary gives you the option of retiring after 28 years, presumably you've already had a pension for a number of years....

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

somethingcorporate

That's cool - thanks

My take home after pension, sharesaves etc is only £2,400 which is a pretty big dent from my ~£4,800 basic.

cns06

Also consider other investments. Pension should only be one income stream. Putting all your hopes into one pension is a bad idea. A 3 or 4 sided plan is key - IMHO. Esp if you want to retire at 55 (like we do) in case one investment fails.

I am mid 30s and been paying into my pension from 18. Just spent 10 years paying off our mortgage. We have now bought another house to live in and we are renting out our old house. The rent pays our new mortgage.

We also started our cash savings around 5 years ago. Not a fortune but it all adds up. Will be interesting to see how this goes now the mortgage is paid..

Lastly we invest in our business, which hopefully we will sell in 15 years.

The pension and house will hopefully be worth the same by 55. We can then sell the house and not touch the pension if the markets are not doing as well. Also even if the housing market is in a dip it will still be worth more than what we paid.

The business, well that's impossible to say. If we sold it now it might be worth about 30-40% of what we would like in 15 years.

The cash savings will be a fall back and will defo be the smallest part of our pot but so long as its enough to clear the remaining mortgage at 55 and leave a bit left over for a few months somewhere warm I don't care.

The main thing is you keep on top of it and review it often. We don't earn a fortune so we have to really put a lot of effort into it. Have a plan and follow it - change if needed - but review it every month if needed!

somethingcorporate

cns06 - have you seen an accountant about your plan?

It would make more sense to have the mortgage on the B2L poperty which you can offset the interest element against tax rather than on your new property which makes your entire rental income taxable.

I agree diversification is important but pensions are usually diversified so referring to it as a single source of income is not wholly accurate. The pension element is just a tax wrapper and you can invest in (commercial) property from a SIPP as well as a whole host of different fund options.

I suggest you consult an IFA to understand your overall plan because dealing with them separately is an easy way to make bad decisions.

cns06

I do. He would probably agree with you.. he has certainly tried to sell us BTL mortgages!
BUT I very strongly think you should never borrow money for an investment.
I also think people who are doing interest only BTL are making a big mistake in regards their ROI. My (small) tax bills may seem wasteful but at least its 100% mine and if I need the money I could sell the house tomorrow and get access to the value of the property minus any CG.

I don't disagree with you re the pension, but its so locked in re access. What happens if I put 100% of my retirement income into my pension and the retirement age goes to 60 or higher? I want to go at 55, or sooner. Also as a lower rate tax payer the kick back is only 20% - so that makes things a bit worse too for us.

Also - its alright saving tax now but what about later when you may struggle to access large lump sums. Pensions are generally designed to trickle money out. My accountant tells me stories all the time of people who have huge pots but get quite a tax bill each year...

That's another reason why I like to keep everything separate - because its only c.15 years to go now and I don't want to risk anything. But either way I think the OP should be considering not just a pension but ISAs or something else to run along side the pension.