Question about Pension Calculators and Retirement Income

VDOT47

Hi,


I'm realising that I need to look more seriously into pension planning, over and above just paying the required amount under auto-enrolment each month.


I have an initial question about how the pension calculators work (eg. Money Advice Service).


That calculator says that a pension pot of £400,000 at age 55 would give the ability to withdraw £100,000 tax free (agreed) and an annual income of £12,000. Is this simply calculated as £300,000/25 years = £12,000? If it is, then surely this ignores the fact that your pot will presumably still be earning interest after age 55? Therefore, is it assuming that you will diminish your pot to nothing over the 25 years or not?


I would have (perhaps naively) assumed that a pot of £300,000 properly invested might accrue 3-4% interest pa (therefore £9000-12000 pa) and therefore you would in year one be able to drawdown about £20,000 and still have c.£290,000 in the pot. Obviously this amount will diminish each year as the capital drops and therefore the interest to be earned on it drops, but it still seems like the annual income figure stated should be more than £12,000? When you factor in the state pension from age 68, you may even be able to take something closer to £25,000 pa for the first 13 years and still have enough left to pay a reasonable amount each year after 68.


Am I missing something really simple (like the pension pot stops accruing interest at 55)??


I had been thinking that if we could get to 55 and be mortgage free with perhaps £100k in cash ISAs and £400k in pensions that that would allow for a comfortable £30,000 pa from 55-68 (perhaps funded £6,000pa from interest on the £100k ISAs and £100,000 tax free sum which would be added to those ISAs and then £24,000 from a combination of capital and interest on the remaining pension pot as described in the paragraph above) and then after 68 we would only need to fund £15,000 pa ourselves as that state pension for a couple would contribute the other £15,000? Does this sound right or horrendously off the mark?


Thanks in advance!

HappyHarry

See the arrow at the bottom of the estimates labelled "Find out the assumptions our estimates are based on"


This tells you that the estimates are based on;
1. Your funds growing at 5% per year, and

2. Your fund is used to purchase a level annuity at retirement.

tony4147

Also note that £300k, in drawdown at 4% = £12k
4% being the figure that is often quoted for DD, not that I'm saying the figure is correct

VDOT47

HH - thanks, so if you didn't want to take an annuity and wanted to take annual cash withdrawals (which obviously would be taxed at appropriate rates - it would make sense split the pension pot I presume so that each of myself and my wife could make use of our personal allowances) would my calculations above roughly make sense?


Tony - yes, I assumed that is how it had been calculated, but it doesn't seem to allow for continued interest on the lump sum.

AlanP_2

You can't split a pension pot, each individual has their own that they contribute to.

For you and your wife to have a split at retirement you both have to earn an income and contribute. What you can't do is build yours up to £400k and "gift" half to your wife.

drumtochty

Because you will not increase you capital in the years that the capital stays constant or the bad years that it drops in value. You are assuming making money every year. Not the case over the longer term.



You have also not allowed for the various charges in keeping a pension or stocks and shares ISA operating.


Further an annuity which you did not advise it was based on gives you the income for life but the profit of the life assurace company has to come from somewhere and that is in reduced payouts to the punter.


At the moment if you assume a person will retire around 65 and live to 95. At best it is thought that covering all the ups and downs in the market etc at best you can assume 3.25% to 3.5% market growth over that time. Also that the fund will be exhausted at 95.



The assumption of a 4% return long term is now considered too high. In saying that a number of people who have based their retirement provision on a 4% return are less than impressed by the research that has recently been published.


I assume you are in that group, readers here would be interested how to provide say 4% to 5% growth over 30 years or so and cover charges and market ups and downs.

greatkingrat

AlanP wrote: »

You can't split a pension pot, each individual has their own that they contribute to.

For you and your wife to have a split at retirement you both have to earn an income and contribute. What you can't do is build yours up to £400k and "gift" half to your wife.

Unless you do a "tactical" divorce!

Thrugelmir

drumtochty wrote: »

Further an annuity which you did not advise it was based on gives you the income for life but the profit of the life assurace company has to come from somewhere and that is in reduced payouts to the punter.

Much will depend on the acturial life expectancy tables. As with any form of pooled risk. There'll always be winners and losers. Several hundred pounds a year to insure your house against loss from fire. Few ever claim total loss. Those that do are quids in of course. Likewise one of the lucky ones that lives past a 100.

Investing money directly isn't fee free either. Nor will elderly people have the capability to manage their finances fully possible in later life.

A sensible balance needs to be achieved.

bostonerimus

You're forgetting inflation and also that investment returns are variable and might be negative some years. It's a very rough rule of thumb that from a 60% equity and 40% fixed income portfolio you should be able to withdraw an inflation adjusted 4% for 30 years and have a 95% chance of having some money left at the end.

bostonerimus

drumtochty wrote: »

Further an annuity which you did not advise it was based on gives you the income for life but the profit of the life assurace company has to come from somewhere and that is in reduced payouts to the punter.

But the mortality credit should give you a boost in income over a DC plan income using similar rates of return.

VDOT47

Thanks for the comments.


To ask a very straightforward question, once you start drawing down from your pension, does the remaining amount in the pot continue to be invested and therefore get a return of 3-4%pa or does the pot effectively crystallise and stop earning interest?


I don't think any of the advice/calculators appear to be very clear on this point.