Where do I go from here?

Milky_Mocha

atush wrote: »

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.

I do plan to buy an annuity.
I mentioned reduction in equities because I understood that's what some pension companies do to make returns less risky as the retirement age approaches.
Thanks

Milky_Mocha

FatherAbraham wrote: »

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

I heard this mentioned on the radio some time ago but was driving so couldn't write it down and forgot so thank you.

Milky_Mocha

xylophone wrote: »

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?



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

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

I don't believe any of my schemes are DB or with safe guarded benefits. I've never been in a final salary scheme, for example.

I'm employed by my limited company. Some people describe this as self employed but I don't think that's strictly true.

I assumed two years of having no job hence not contributing towards the pension (as I don't know what the future holds). In reality, those two years could be spread across the next 20 years but I assume this would likely occur more as I get older.

Milky_Mocha

jamesd wrote: »

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.

James's - thank you so much.
The first time I read this, I didn't understand almost any of it. I read it again and I follow most of it. My takeaway is that my intended £3k contribution gives me a chance.
I realise I might not need to spend all of the amount received after retirement but I'm working towards maximising my health potential to give me the strength and capability to travel more plus I'd like to be in a position to provide for my children and grandchildren while I'm still alive. Next stop is to understanding tax laws and how to ensure the greedy government doesn't get the better of my assets when I depart this earth.

Thanks once more.

Milky_Mocha

jamesd wrote: »

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.

My accountant mentioned the 40k limit but didn't mention the additional prior 3 years so thanks. Thanks also for the caution about future allowance laws.