Long term pension calculator

nowreetired

I have decided to buy pensions for my very young grandchildren

I have an anecdotal quote that if you invest £10000 by age 18 at retirement age this "MAY" be worth £10000 pa

Does anyone have any links or indeed calculations that would allow me to speculate on this. I am well aware that the future cannot be foretold

BTW yes you can start a pension for young children £3600 each year gross.

AnotherJoe

nowreetired wrote: »

I have decided to buy pensions for my very young grandchildren

I have an anecdotal quote that if you invest £10000 by age 18 at retirement age this "MAY" be worth £10000 pa

Does anyone have any links or indeed calculations that would allow me to speculate on this. I am well aware that the future cannot be foretold

BTW yes you can start a pension for young children £3600 each year gross.

Why?

Why not ?
- money they can put towards a house which will be useful for their whole lives, and not when they are around age 70
- money they could put towards education expenses which would help them get better career or lifestyle and they can use when you are still alive

Why lock up money for what will be around 70 years, that they may never need, or even use, that they may indeed even begrudge you for in later life "here I am in this tiny one bed flat which is all i can afford, if only stupid old grandad had enabled me to get on the housing ladder 20 years ago before house prices soared instead of locking up the money for another 30 years"

nowreetired

Thanks for that helpful comment :-) They are getting that as well

AnotherJoe

nowreetired wrote: »

Thanks for that helpful comment :-) They are getting that as well

What do you expect if you dripfeed information ?

So, there's nothing particularly difficult about estimating what £10k invested will be worth in X years time, just guess the rate of growth above inflation and feed it into a compound interest calculator. 5% would be conservative and reasonable based on the past, some might say going forward 4% is better. Just google for "compound interest calculator".

That gives you a lump sum.

If you want to work out what that lump sum will provide as an income, 3.5% of that is a reasonably conservative estimate of what drawdown will provide sustainably and better than an annuity will provide (if they even exist in 60 years time).

The unknowns are - what will tax rules, pension age, longevity and events we cant even imagine now, mean how realistic that is in the year 2076. If they are alive of course.

Life expectancy for someone born now is about 80, so all that money would have been invested, statistically, for just ten years of use, and thats if pension age isnt even further beyond 70.

And it doesn't do any good for them if they plan to retire at say age 40 or 50 or even 60 (in 40 years time, retiring at age 60 may well be the equivalent of retiring at 40 now).

There's quite a movement building of FIRE, (Financial Independence retire early), so working until you are 70 to get your rewards tmay not seem so enticing to someone aged 30, in say 20 years time, as it does to someone who is likely 60 or so now.

Whatever you are doing now in other ways, I'd say do more of that or otherwise arrange it so they get much earlier access to their money than locking it away at the whim of who knows how many governments over the next 60 years.

Why not set up a tontine for them and their classmates instead, it will likely be equally useful to them?

jamesd

If average UK stock market returns of 5% plus inflation less 0.5% for charges were sustained for fifty years the money would increase in real value to nine times the starting value and produce a pot of £90,000. If the 4% rule was used that would produce an annual income of £3,600 a year.

To calculate this just type 1.045 than the ^ or x^y button then 50 = in common windows or android calculator when in full or scientific mode. Or in a google search box. Then multiply by the initial amount and by 0.04 to get the income.

Real value means inflation-adjusted or today's money terms.

If you want to facilitate retiring at say 55 the reduction to 37 years of growth cuts the multiplier to 5.1 and the income to £2,038 a year per google.

jamesd

Keeping the age 55 target you can see that you need to accumulate about 10,000 / 2038 or roughly five times as much as 10,000 by age 18, call it £50,000 for convenience to generate that much income.

So open a regular savings calculator and enter 300 a month at 4.5% for say 16 years, assuming very young means age two. You'll see that the answer is £84,133, exceeding your target need of £50,000. Cut back to 180 a month gross and you'd just reach the target.

Not unduly hard to facilitate £10,000 a year of income at 55 and with that assumed sixteen years to age eighteen you could get to 300 / 180 * 10000 = £16,666 a year's worth by paying in for sixteen years to the maximum with relief £3,600 gross.

Note that in theory the 4% rule is for thirty years in retirement and US investments. More modern rules can be used that make higher levels like 5-6% safe with high probability at 30 years or less for fewer so I stuck with 4% for simplicity and to give some extra safety margin.

From these tools you should be able to work out how to get to any other desired target.

jamesd

One advantage of long term gifting like this is that the amounts will not be subject to inheritance tax because they would clearly have to be gifts out of income to be sustained for so long. Same for ongoing child ISA payments.

Since death happens and children get born at different times you might want to have your will specify allocating up to x Pounds first to try to get the total accumulated by each child to the same level, so more for younger than older in top up so they all get your target level or as close to it as doable.

While I mentioned age 55, the earliest age for pension money taking is likely to be 60 or older by the time they get there. So they will need some non-pension bridging pot of money to achieve 55.

You might also consider that pension auto-enrollment requires significant employer contributions so it's most efficient overall for you to let those do some of the work while they are adults. Combine this with your money and the state pension and they could well have income in the £40,000 a year sort of range after state pension age.