Pension Plan Thoughts

kev2009

Hi All,
Been looking at my pension on and off for a while and due to a recent post by @ExitStrategy, I've decided to posy my situation to get feedback etc on it and what i should be doing or if should be paying more in so welcome any feedback,

Goal ideally, would be a pension of 25k per year.

Current State
42 years old
£140,000 in SW Portfolio 2
Total pension contributions each month are £600
Would like to retire at 65.

65 to 68
Live off any savings I have by then and/or the 25% tax free lump sum from pension.

Currently on target to qualify for a full state pensions at 67/68.
£8,500 per year from my state pension .

Predictions based on taking Annuity at 65, 25% TFLS and 3% increase each year
My online portal via company predicts approx 440k pension pot at 65
110k tax free lump sum
9.7k per year in come

Meaning my total income would be 9.7k+8.5k = 18.2k so 6.8k short

I'm unsure if these is an accurate reflection as paying £600 a month seems a low return? or if this is worst case and in fact i may end up with substantially more?

At present i cant contribute any more as working on lowering mortgage but once that is more manageable or even cleared, then i plan to increase my contribution to pension but I fear that may not be until i'm 55 by which time it may be too late.

I've chosen annuity at present as i like the security of knowing I've got x income per month/year for life rather than investing it and there is a market crash and i'm loose a lot of my pension fund, maybe struggling with bills etc, don't want that stress/worry when i'm older.

Welcome any thoughts and opinions.

Thanks in advance.

Kev

kinger101

A few things to consider

(a) The predicted pension pot value will be conservative estimate. It seems to based on assuming an rate of return of 2.5% after inflation. Nothing wrong with that as it's good to be cautious. But at 3.5%, you'd have a pot of about £550K at 65.

(b) Current "new" state pension is £168.80 a week, which is £8791 pa.

(c) You don't have to use 100% annuity. You could combine drawdown with an annuity. With drawdown, you'd take a percentage of the funds value every year. A figure that's often touted is 4%, but it's safer to be flexible - taking more or less based on performance. There's a whole thread somewhere discussing drawdown strategies, such as Guyton-Klinger's rules. You might opt for an annuity to cover you up to the minimum you require. In which case, I'd go for one linked to an index rather than 3%. Otherwise, you'll see your income diminish in periods of high inflation.

I understand it's a bit more hassle, but you can also covert the drawdown pot into an annuity at a later date if the financial management becomes too much at say 75.

(d) Are you overpaying mortgage? This is usually not the best use of money - particularly where there are tax advantages to be had from increasing pension payments. Before we account for investment growth, under salary sacrifice a basic rate taxpayer effectively converts 68 p to 85 p (25% return). A higher rate taxpayer converts 58 p to 85 p (46.6 % return). [it's 85 p 'cos you'll pay 15% on withdrawal].

Factor in mortgage interest rates being lower than typical stock market returns, and the difference is amplified.

Albermarle

In the past pension estimates for the future tended to be too optimistic , but with new rules they now tend towards the pessimistic. SW portfolio 2 is approx. 70% equities . With 23 years to go you could think about moving up the %equity/risk scale for say 10 years and then slowly moving back down again .
In theory ( nothing guaranteed ) this should increase the fund growth over time.

kev2009

Thanks all. hmm 550k, sounds good, i wonder what the income via annuity would be from that? Have to find a calculator.

ah didn't realsie you could split it, i thought it was either you go for Annuity or drawdown, have to look at that nearer the time to see if worth doing depending on fund size. i'm not very good with investments hence im in default fund for pension as i'd have no clue what to invest in and probably loose it all I'm basic rate tax paying and whilst I am contribution to my pension at work (more than the minimum they wanted) I have only just started to overpay mortgage, i made a relatively small paying of approx 2k last year due to my concerns being if interest rates do go up, i don't really want to be having to find antoehr 100 quid or whatever a month for mortgage repayment so i'm planning on trying to make a larger payment thsi year and next year as i'm on a 5 year fix whcih ends next year so i want to reduce the amount so that if interest rates do suddenly shoot up, i'm hoping to offset some of the potential increase if i didn't overpay plus i'd love to clear the mortgage earlier and then be able to put more into my pension and also have more money to hopefully use for other things knowing i own my place outright My mortgage interest is currently more than i can get in a standard savings account (ignoring regular savers as your limited by what you can put in) so hence I've now started to look to overpay the mortgage as much as i can.

any particular fund you suggest @albermarle? I presumed 70% equities was a fairly good amount to gain some good returns? Although i do notice the % its made goes up and down some what

Thanks

Kev