Apparently pensions aren't worth it?

kidmugsy

luckyduck83 wrote: »

I've been talking to a lot of friends/family who pretty much all say don't bother with a pension. To have a meaningful annual payout you need a massive sum invested.

Ask them where they buy their crystal balls. Or abbreviate that sentence to its last word.

Many people on this forum are naive, even gooey-eyed, about investing in equities. They routinely misrepresent financial history and talk blithely about how their investments "should" give them a yield of 4% p.a.

Even given all that, the idea that with a realistic prospect of a Trotskyist government in the near future you are bound to do better as a landlord sounds downright stupid to me.

Terron

luckyduck83 wrote: »

SWR? (post is too short so adding this to make it longer)

SWR = Safe Withdrawl Rate


In the US most people build up a fund then withdraw a certain amount each yeat to live on. People worked out using historical data what the highest withdrawal rate would have a 90%+ chance of not running out of money for 30 years. This was assuming you started taking that %age then adjusted your income according to inflation each year. For the US that number was 4%,, Turning it around you needed to save 25 times the income you aimed to have.


I the UK the rate would be closer to 3.5%, but the state pension complicates things allowing you to get away with less. So if you are paying NICs then 25 times you target income seems a reasonable first approximation if you are aiming to retire at 60. So for £30,00pa you would need ~£500,000..

Malthusian

kidmugsy wrote: »

Many people on this forum are naive, even gooey-eyed, about investing in equities. They routinely misrepresent financial history and talk blithely about how their investments "should" give them a yield of 4% p.a.

I've never seen anyone claim that. What people generally say is that it should be "safe" to draw 4% per year from a pension without running out of money. Part of that 4% comes from spending down the capital. To the extent that even if you ran out of money the day after your death, this would be considered proof that the 4% rule was "safe" (though it would have felt anything but safe for the past 5+ years of your life). This is very different from talking about a yield of 4% per annum, which would mean your original capital would at minimum stay the same.

It is a rule of thumb. It is not a sensible retirement drawdown strategy. The purpose of the 4% rule is to inform long-term planning, not to tell you how much you should withdraw in the short term.

Let's say I have a £100,000 pot and I want to know if I have enough money to retire on at some point in my mid-60s. The 4% rule says that if I want £3,000 per year, I am probably fine, if I want £5,000 per year, it's possible but I will have to be prudent with my withdrawals and in bad stockmarket years I will need to strongly consider freezing my income or even cut back if I don't want to have to face an even more drastic cut later.

We need a 4% rule of thumb because if you use inflation-linked annuity rates it's too low a percentage (and leads to people saying "well what's the point then") and if you use past stockmarket performance the figure is too high (failing to allow for the law of diminishing returns). 4% is somewhere in the middle, is easy to grasp, and stands up well to academic scrutiny. It is not, and never has been, a suggestion that when you retire you should just take 4% of your original capital, increase that by RPI every year and forget about it.

Thrugelmir

Malthusian wrote: »

We need a 4% rule of thumb

A reasoned piece of research on the US stock market , which had US Treasuries yielding above 4% for the entire duration of the study. Has been morphed into the discovery of the Holy Grail for UK investors. Might as well ask a guy down the pub for an uptodate rule of thumb.

Prism

Just wanted to highlight the enhanced tax advantage of paying into a pension directly from your limited company. Worth about 25% or more

Anonymous101

Thrugelmir wrote: »

A reasoned piece of research on the US stock market , which had US Treasuries yielding above 4% for the entire duration of the study. Has been morphed into the discovery of the Holy Grail for UK investors. Might as well ask a guy down the pub for an uptodate rule of thumb.

Or ask your mates which is better pensions or BLT?

Mnd

We are working that my wife will have a pot of approximately £100k when she can retire at 61.5 in 3 years. We will be taking the equivalent of her state pension up to 66 (or possibly longer) say £10k a year, then scaling back to aim at her being 90...then she might have to stop buying so many boots, makeup.etc etc.

Pennywise

Malthusian wrote: »

You need a better accountant. It was your accountant's job to a) tell you how much more tax-efficient it would be to draw money out via a pension and b) talk you through how it worked.

Most accountants aren't qualified IFAs so they're not legally allowed to give pensions advice. They can tell you the tax benefits of investing into a pension, but that's it. It's not their job to talk you through how it works - that's the realm of the IFA.

Audaxer

Malthusian wrote: »

I've never seen anyone claim that. What people generally say is that it should be "safe" to draw 4% per year from a pension without running out of money. Part of that 4% comes from spending down the capital. To the extent that even if you ran out of money the day after your death, this would be considered proof that the 4% rule was "safe" (though it would have felt anything but safe for the past 5+ years of your life). This is very different from talking about a yield of 4% per annum, which would mean your original capital would at minimum stay the same.

Some well established ITs currently have yields of well over 4% and have increased dividends every year for decades. So you could currently have an income portfolio of £100k capital with natural income from dividends of over £4k per year increasing with inflation. Although the capital value will fluctuate, natural income from some of these ITs and funds seems to be more consistent even in falling markets.

Malthusian

Pennywise wrote: »

They can tell you the tax benefits of investing into a pension, but that's it. It's not their job to talk you through how it works - that's the realm of the IFA.

"Talking you through how it works" is generic guidance, not advice, and any accountant worth their salt should be able to demystify pension tax relief.

Audaxer wrote:

Some well established ITs currently have yields of well over 4% and have increased dividends every year for decades.!

PPINGTTF. Investing all your retirement fund in a handful of investment trusts that have delivered a given yield in the past is also not a good drawdown strategy.

Investment trusts can cut their dividends (even those that have managed not to do so before) and the SWR assumes that the investor does not want to ever cut their income, and even increases their income by inflation year in year out regardless of market conditions.