Pension planning - initial thoughts

Lomcevak

Hi folks. I'm in the process of constructing a detailed pension plan for the first time, and would appreciate a cross-check. I know the board has all the answers already, but i'm drowning in information, so plan to iteratively refine it as I go on. Top-level details:

• Married, both 44, senior engineer and university professor, household income (pre-tax) ~£150k
• Will be mortgage-free next year, no current plans to move
• DC pension (me), current value ~£400k, DB pension (TPS)
• Plan to retire at 57 (me), 60 (Mrs. L)
• Target retirement income £48k (in real terms)

I enjoy my job, but it's high-pressure and high-stress, and I would look to leave it once we're financially ready. Professor L. enjoys her job, so is in less of a hurry to retire. She might change her mind once I'm a gentleman of leisure

I contribute the full annual allowance into my DC schemes (SIPP, and current work pension), and expect to continue to do this until retirement. I also have a deferred DC pension from previous job. Mrs. L has purchased full TPS additional pension already.

The plan is to use her income (which is above target retirement income, so fine) to span the gap from 57 - 60, at which point she would retire too. She has approximately £8k/pa of old TPS pension payable at 60, which will be adjusted upwards with CPI, and I have around £2k from an old civil service DB scheme also payable at 60. So we have a big shortfall in the DB schemes at this point, which we'd fill from my DC schemes. More on that in a bit.

Then, at 67 her remaining TPS DB pensions kick in (it'll have been dormant since 60, but can't be taken before 67 without reduction), with the state pension kicking in at 68. Total DB + SP would then be about £36k/pa in today's money, and should be reasonably inflation-linked. That still leaves a shortfall of about £1k/month in today's money to fill from my schemes, but it's much less than the shortfall in the 60 - 67 gap.

So I think we'd be looking to draw down about £400k from my DC schemes to get from 60 to the DB schemes fully kicking in at 68, followed by about £15k/year after that. My DC schemes are in roughly the right place for this already, but i'll be putting in approx. £500k here over the next 13 years (assuming no political reduction in the annual limits) so there should be plenty to spare. I'm assuming they grow at the rate of inflation only, that's conservative but i'd rather be surprised than disappointed. The hope is to have a decent surplus in the DC schemes at retirement, which we'd probably then use in a U-shaped way (travel etc. early, then subsequent care when needed later)

So ... i've come away feeling quite optimistic about things. There's plenty of road to travel, but we seem to be roughly on target. Any thoughts welcome though, have I missed anything obvious?

kidmugsy

(i) Have you both checked your expected State Retirement Pension? If your wife was contracted out of the old SERPS for much of her career she might find a case for making extra contributions to "buy" a full SRP.

(ii) Do you both currently contribute enough to pensions to let you avoid all higher rate tax, or at least as much as possible of it?

Lomcevak

I've checked my state pension, but not hers, will do.

Mrs L. is just under the higher-rate threshold after TPS additional pension and some modest AVCs, I'm still a bit above it after putting as much into my SIPP as I can.

Triumph13

Are those income numbers you are quoting post tax? If pre-tax your figure for future accrual for Professor L would seems rather low.

p00hsticks

You don't mention any other savings - if not already, then when you are mortgage free you could look to both be making use of your ISA allowances to provide another source of income to plug the gap between retirement and state pension age.

Lomcevak

Thanks both.


Triumph13 - think the numbers are correct, they're based on the numbers on the TPS site, but will check. The problem with an academic job is that you spend a long time in low-paid PhD/postdoc and part-time roles before you get a permanent job, so although she's 44, she's only got about 14 years in the TPS at this point. She was made professor last year, so most of that's based on lecturer / reader scales.



p00hsticks - you're right, I'm not using all joint ISA allowances at the moment. We have about six months of current spending in savings (mostly cash, some S&S ISA in VLS60), but this will become more of a focus in the future. Our current spending is very high though, including two university-aged children and one secondary-school teenager, so if we needed to stretch out savings they'd go a lot further than six months if we tightened our belts.

I had intentionally left non-pension savings out of the picture for now, but we'd either use them to bring forward retirement dates, supplement our spending in the early years of retirement, or both. Plus liquidity for emergencies, of course.

Triumph13

It was actually the future accrual I was questioning as 2 state pensions plus the £10k of DBs you already have between you gets you to £27k so it seemed unlikely that the prof would only accrue another £9k over 16 years - but if the £36k you quote is post tax then that would explain it.
We are in a somewhat similar position of having to bridge a gap to when the various DBs start although our gap is a bit bigger - 11 years before they start coming on line. My logic has been to split the DC and non-pension amounts into 3 buckets (not physically, just in the spreadsheets):

• One drawdown pot planned to last forever - this gives the extra above the DBs that we want to reach our number.
• One bridging pot to run down over the gap until the the DBs come on line - this needs to cover all spending in that period not covered by pot one.
• Anything leftover = gravy

Lomcevak

Thanks again - i'll recheck those numbers, as there's some estimation going on at the moment. Don't think they are post-tax, more likely an error from me.


I like the three-pot idea too, I'll look at that - at the moment I think i've lumped it all in to one, which makes it a bit harder to align.

Suffolk_lass

Can I suggest you look at the figures for some other options so you have considered them.

Take pensions early - Having attended a pre-retirement course at work (public servant), there was a lot of discussion about taking DB Pensions early and the cost-benefit calculations. It is usually assessed as 5% actuarial reduction for each year you take your DB Pension early against your pension income, but only 3% p.a for anything against a lump sum. I had always written this off as something I would never do. I did not take into account the value of having that regular income for three years before my scheme retirement date. I recall the presenter made reference to a cut-off point at about 3 years before scheme retirement date where the reduction pays for itself. With the new TPS this may change as I think it is average now. So worth you doing some extrapolation in your spreadsheets! - The thing we presumed was a straight-line for our consumption needs but as I get closer (my retirement is later this month!) the realisation is that we want to do more when we are younger and fitter, so we want to front-end load our disposable income.

Re someone else's point about opted out of Serps, it is a good thing to check for your wife. I cannot attain a full standard pension, only basic+ by my state pension age (66). However, I can get reasonably close by paying a voluntary NI cont year for each year between stopping work and getting there, and it will take only four years to pay for itself, based on current voluntary cont rates. I suspect with 16 planned working years left, SERPS opt out will not impact your wife.

Do your own DB inflation-tracking I would also begin to map the CPI impact on both yours and your wife's DB frozen schemes - most recently, 3% in 2017 and 2.2% in 2018 all helps. There is a simple google search result that will tell you the Sept rates so you can calculate as I do not believe the pension statements apply this until you ask for your quote. I may be wrong as my quote was based on the best of my last 3 years (suspect your frozen DBs are the same) and in my case this was in year 1 so the inflator rates have been applied to determine my accrued pension. If your £2k was in the 90s, you would have up to 20 years of RPI then CPI inflation to consider. My friend stopped work at 45 (20 years ago) and said his inflation increases meant his frozen DB had enhanced to the point where it was the same as if he had worked the other 15 years on the same salary - so again, worth doing the maths.

We also made a lump-sum contribution to my husband's TPS around 3 years ago - so he was mid 50s. The earlier you pay it in, the better the return. We paid for spouse widows benefits too. From memory a lump of £22/23k for £2,500/£1250 p/a benefits plus lump sum enhancement, and tax back on the contribution.

Risk profile of your investments - We also drew down a TFLS early from one of his DC pots, to pay down the mortgage more quickly (reducing interest) and projecting for higher income to replace savings once that has gone. I know you are already overpaying your mortgage as I "see" you on MFiT(4) and MFW(19) so that may not help, but the point was that the advisor from the scheme (now managed by Scottish Women without husbands) advised that as we get closer to relying on the funds it is worth reconsidering your needs from the funds you are investing in - they suggested no greater than 40% equity. I noticed your reference to your S&S ISA is VLS60. Have you considered funds for dividend or taking income rather than accumulation funds yet? In your position I would also look at the managed funds in your DC pot(s) including the charges, investment funds and their performance and consider whether these are performing as you would wish.

You don't mention children/legacy - I assume you have some, based on the approach to £48k income that does not plan to deplete your capital over time. That is a whole other discussion thread when you start to consider those things at retirement... I do feel I have left it all a bit late personally and wish I had looked much earlier

kidmugsy

Suffolk_lass wrote: »

the realisation is that we want to do more when we are younger and fitter, so we want to front-end load our disposable income.

That's reasonable. It's also a good argument against those doctrinaire souls who insist that they are going to drawdown 4% per annum come hell or high water.

Suffolk_lass wrote: »

they suggested no greater than 40% equity.

I'm persuaded by the argument I've seen that your % equity might reasonably be set according to what size of drop in your portfolio would cost you sleep. If you reckon you could tolerate about a 15% drop then 40% equity might be reasonable. If even a 15% drop would cause you too much anxiety, then drop the %age equity a bit.

Even that argument depends on your guessing an upper limit on the percentage fall in the stock markets that might occur in your remaining lifespan. But how could you know?

badmemory

Whilst I am on much lower overall income than most on here I am not altogether sure I can agree with everything that is assumed. Perhaps I am older then most - who knows. Whilst I agree that when a younger retiree the costs seem to be about travelling, seeing the bits of the world that you didn't get chance to see. But the additional costs as one ages change. If we want to travel half way around the world can we really do it economy class? Do we want to be mowing the lawn weekly when it means we spend a couple of days after horizontal on pain killers?


That last is my & has been my "oh no" for the last few years. It doesn't come free! The future does not come with reduced spending but just with spending on different things. Just because you know you are only going to go to America/Australia etc for the next few years does not mean that you are not going to need that same money for somthing else.



There is no guarantee that life in your 60s/70s is going to be any cheaper than life in your 70s/80s.