Where do I go from here?

Milky_Mocha

Thanks.
This is what I needed to know as a start.
Realistically, if I pay in £3,000 per month towards a pension for the next 18 years (remaining 2 years i prudently exclude as assuming no income) , investing in equities/bonds for the first 10 years and lower risk options for the remaining 8, what should I expect as an annual pension on retirement?

Is there a website I can enter figures into, that would give me an idea of how to tweak figures to achieve the desired pension? I'm not savvy enough to create a spreadsheet.

justme111

Search for compound return calculator, for example http://www.moneychimp.com/calculator/compound_interest_calculator.htm

If you are serious about trying to achieve 6k/month income in retirement it may be worth to see an IFA as with sums like that you may want to explore options of ISAs/VCTs and may be some other clever schemes existing as tax would be eye-watering and with your present level of knowledge you may lose considerable money due to not best planning.

atush

If you dont plan to buy an annuity, not sure you would be reducing equities in the final 8 years- or at least all 8 of them?

With that amount in pensions, and setting up a plan going forwards, you probably should see an IFA.

FatherAbraham

Milky_Mocha wrote: »

Turned 40 and now seriously considering retirement planning.
Can someone please give me that link to free unbiased pensions advice?

Pensions advice is never free, and must be paid for.

"Unbiased" is a web-based business providing a directory of independent financial advisors. These advisors are unbiased because you pay them for their service, rather than comissions on sales influencing them.

Pensions guidance can be free, look for the PensionsWise service funded by the state.

Warmest regards,
FA

dunstonh

Pensions guidance can be free, look for the PensionsWise service funded by the state.

it's actually funded by a levy on financial services companies. Including advisers. We have that joy to pay next month!

xylophone

Are any of the schemes deferred DB/money purchase with safeguarded benefits?

Are you currently employed/self employed?

Why do you assume no income after age 58?

if I pay in £3,000 per month towards a pension for the next 18 years (remaining 2 years i prudently exclude as assuming no income)

It may be to your advantage to consult a professional about your retirement planning.

https://directory.moneyadviceservice.org.uk/en

jamesd

First thing to do is work out how much you need to have accumulated by age 60, 20 years from now. To do that I'll use cfiresim and adjust the starting pot size until I reach the goal of £72k including 8k state pension that I'll assume starts at 68, 28 years from now. Initial inputs are:

Portfolio value 1,000,000
Investigate max initial spending, success rate 90%
Fees 0.68
Spending plan Guyton-Klinger, floor 43,200 (60% of target)
Pension1 State, 8000 starting 2025 (8 years after start)
Run simulation

Initial income 55,829 so increase pot size by 72000/55829 = 1.29 times, to 1,290,000. Run simulation. Starting income 71,510. Almost there, change starting pot size to 1,300,000. Starting income 72,051. So that pot is the target at 90% success rate.

Change the success rate to 75% 1,300,000 pot gives starting income of 81,990. 72000/81990 = 0.88 so cut pot to 0.88 * 1,300,000 = 1,144,000. Run simulation. Starting income 72,594. Tweak starting pot to 1,134,000. Run simulation. Starting income 72,002, close enough so that's the 75% success rate target pot size.

Next stop a lump sum growth calculator. Amount invested 159,645, duration 20, interest rate 4 (UK stock market long term has been about 5% plus inflation, deduct 0.5% for charges and another 0.5% assuming some non-equity investments). Investment will be worth 354,825, call it 355,000. That's the contribution of your existing pot to your target pot sizes.

On to the 90% target, subtract 355,000 from the 1,300,000 = 945,000 to accumulate with regular savings. In the regular savings put 1000 a month, 20 years at 4%. Resulting pot size is 366,774. 945,000 / 366,744 = 2.58 so increase the monthly amount to 2580. Resulting pot 946,278, close enough. So that's the required monthly amount for the 90% success rate.

On to 75% success rate. 1,135,000 - 355,000 = 780,000 to accumulate with regular savings. 780,000 / 366,744 = 2.13 so monthly amount 2,130, change to that, resulting pot 781,229, close enough. So that 2,130 is the required monthly amount for 75% success rate.

Both of those monthly amounts have to be increased by inflation each year. They are gross amounts, including the pension tax relief.

Success rate is the percentage of historical cases where the pot would have paid at least the minimum specified income - 43,200. So 90% means that 90% of the historic starting points would have delivered at least that much, most of them the 72k target or more. For the other 10% you'd need to pay attention to the investment performance over the first ten years and cut more rapidly to maintain that level if you happened to live through those worse cases. The 75% target is a rough recommendation by a US practitioner to increase the amount spent while young with a relatively high chance of still being alive. Used as I'm using it here it helps to illustrate the potential for more time in retirement. Spending tends to drop as people get older, by around 35% between ages 65 and 80, so that looks like a good idea. You could also deliberately plan for reducing spending over time by adding some fake extra income at various starting years, the fake income being the reduction you plan for. This will illustrate the potential for earlier retirement and/or higher initial income.

The Guyton-Klinger method starts at a particular income level that increases with inflation each year. If investment performance is average to a bit below average it'll maintain or increase that income. If it's worse it'll first skip the inflation increases and if it's more bad than that it'll cut the income as well.

If 3,000 net or gross a month is affordable I suggest that you do start with that. It gets you the potential to retire sooner or pay less in the future or additional safety margin.

There's a lot more useful material for planning at Drawdown: safe withdrawal rates.

jamesd

There are two problems, though: pension annual allowance and pension lifetime allowance.

The pension annual allowance is the maximum that anyone can put into a pension for you in each tax year. That is gross and it includes both your own contributions and those of an employer or company. Current allowance is £40,000 a year. 40,000 / 12 = 3,333 a month. A bit above what you might need. But it may drop in the future so if it's affordable you might want to go for the maximum for a few years to get some safety margin. Go over the allowance and you pay a tax charge that takes back the pension tax relief.

You can carry forward unused allowance from the previous three years if you were in any pension scheme, paying in or not and you clearly were. That's another potential route to getting more safety margin early on.

The annual allowance is cut for high earners, currently those earning more than £150,000 a year. A likely political target for reduction, particularly under Labour administrations. Potentially an issue for you, depending on how high your income might be.

Your personal contributions are restricted to qualifying income, gross pay for employees. No limit other than the annual allowance for company contributions.

The pension lifetime allowance is a limit in pension pot size. Go over it and you pay a punitive tax charge as you take out the part above it. No extra charge for the part within it. It's currently £1 million and set to increase by inflation each year. But in recent years it was cut from £1.8 million and it's likely to be a target for future governments looking to make some money. This is a problem for you because your required pot sizes are above the current allowance, let alone any reduced one.

That implies that you can't sensibly just use pension investing but must do something else as well to avoid the lifetime allowance charge.

jamesd

Venture Capital Trusts (VCTs) are a potentially interesting tool. These get 30% initial tax relief from HMRC, capped at income tax due in the tax year of purchase. This has to be repaid if you sell within five years, not after your death. Exempt from CGT and dividends are exempt from income tax, both regardless of how long you hold. This means that over the next twenty or so years you have the potential to get that 30% about four times.

Like most investments VCT risk levels vary greatly, from highly speculative to quite boring. I generally mention the more sedate end, asset-backed and/or late rather than early stage VCTs.

One of those is the Albion VCT, which does only asset-backed investing. Typical investments are three high end care homes, hotels, a couple of schools and assorted green energy producers. The buildings and plant provide significant capital value protection, though those values do go up and down, particularly during recessions. It expects to pay 7% of the purchase price before tax relief in dividends each year. Initial buying costs are about 2% and when selling there might be a discount of about 5% of the asset value at that time, which I'll pretend is the same as it is today. That's a projected gain over five years of roughly 30% + 5 * 7% - 2% - 5% = about 58%. Enough to meet your growth need and in addition save you a fair chunk of your ongoing tax bill. I've ignored the extra tax benefit of the dividend not being taxable at 20%, 40% or 45%. That adds very roughly 10-22.5% more gain over five years.

The combination of investment gains and the reduction in your effective tax rate, while not being subject to the pension annual or lifetime allowances, makes this quite interesting as part of your smaller companies investments.

Besides VCTs, S&S ISA investing can be used. Less attractive tax breaks than pensions or VCTs but still a usual part of the mixture, even more so if you reach the point where the VCT buying is capped by your tax bill.

Milky_Mocha

Ok.
The world of pensions is an involved one.
I need a financial advisor for sure.
With this wealth of information, I'm armed with some initial things to be aware of such as the government's attitude to people doing their best to secure their old age, VCTs and so on.
I'm truly grateful for these replies.