Pension pot as ratio of gross salary

jainraghav74

To track if your pension pot is on track or not to give you comparable lifestyle pre- and post- retirement, then rather than looking at absolute values is it worthwhile to look at what ratio your pot is to your current gross salary... ?

Or is it too complicated due to variable of age and changing gross salary with time...

as an example, at age 33 my workplace pension pot = 1/3 of my current gross salary. This is my only pension saving. If at retirement (age : 65) I could get 1/2 of my current gross salary - I will be happy!

Dazed_and_confused

as an example, at age 33 my workplace pension pot = 1/3 of my current gross salary. This is my only pension saving. If at retirement (age : 65) I could get 1/2 of my current gross salary - I will be happy!

I may have misunderstood but are you comparing two different things?

If your pension pot is only 1/2 your salary it won't be that great a pension, relatively speaking.

But 1/2 of your salary would be much better

jainraghav74

If your pension pot is only 1/2 your salary it won't be that great a pension, relatively speaking.

1/2 current gross salary = Annuity that I get (after taking away 25% lump sum)
Sorry for confusion.

But back to question, is it a good way to measure whether pension pot is of good amount?

JoeCrystal

I think it is too complicated. Besides, you mentioned that your workplace pension pot is 1/3 of your current gross salary but, that is way too small. It should be more significant than your current gross salary at this point. My pension pot at the moment is 2.5 times my current gross salary at the age of 33, for example.

Your best bet is working out how much you need and want to work backwards to be on track. You also have the state pension to realise as well at your SPA.

jainraghav74 wrote: »

But back to question, is it a good way to measure whether pension pot is of good amount?

No, it isn't

Anonymous101

As Joe says its really best to work out what you need and work back from there.


What you need is a function of what you're spending not what you're earning. So first thing I'd suggest is to track what you're spending for a few months then extrapolate that out to give a rough annual spend. As a guide people on here tend to be in the range of £20-£40k. Personally I'm around £30k with Mrs Anon. being about £15k.


You can then calculate a guide to the pot size you require by multiplying your annual spend by 25. - All very rough as you'll no doubt have changes in annual spending and the drawdown rate which you eventually settle on my not be quite 4% which is what the 25x guide is based on.


Now you just have to plan how to get somewhere near that!


There's lots of pension calculator tools online, a quick google search will give you a few to choose from. I would think that if you're current pot is half your salary you're a little behind but at 32 not miles and certainly not something that you can't make up. As pensions are long term investments the power of compounding cannot be underestimated its HUGE. So its best to front load pensions as much as possible. Of course its usually done the other way around, its more in peoples minds as they approach retirement age and they usually have more disposable income later in life but you'll be amazed at the difference investing hard into a pension early makes to the total lifetime contributions required to reach your goal. My advice is to go completely over the top with the level of contributions early in life. Your future self will thank you enormously for it.

enthusiasticsaver

I do not think looking at your pension pot (DC pension presumably) is that useful. Even comparing a DB quote with your salary is not the only measure I used.

We tracked expenditure for quite a few years and of course you have very little deductions from a pension as no NI, pension payments and usually reduced or no tax unlike a salary.

What we did do was keep 3 years of expenditure in reasonably accessible savings as we retired early.


We also did a cashflow spreadsheet showing when the various sources of income came in so we knew how much we needed to plug the gap between early retirement and all our pensions kicking in.

AnotherJoe

Also you talk about an annuity. Very unlikely that will be the best way to get your pension immediately you retire unless you work until age 75 .

Albermarle

Not sure how a 33 year old can make any kind of sensible estimate of what their expenditure might be 30 years later .
Might have 10 grandkids to support , or may have been through a messy divorce and lost half the pension anyway .
I think at that age if you are at least building up a pension and putting in as much as you can reasonably afford then that is already a good start.

green_man

It seems a better measure than purely numerical size as it introduces an element of current spending. What is missing is some figures showing how a typical pot grows over a 30-40 year contribution period, which would allow for salary increases, growth etc etc. Given that you should be able to work out a required growth path to give a specific final pot size.

My feel is that you would be behind the curve with only 1/3 salary at 33. You should have had over 10 years to build that pot so (say 10% contributions a year) I might expect a pot of around 1.5+ salary. Of course some people dont get a proper job until late 20s so it would need to be an individual plan.

Anonymous101

Albermarle wrote: »

Not sure how a 33 year old can make any kind of sensible estimate of what their expenditure might be 30 years later .
Might have 10 grandkids to support , or may have been through a messy divorce and lost half the pension anyway .
I think at that age if you are at least building up a pension and putting in as much as you can reasonably afford then that is already a good start.

I agree, however you see on numerous threads on here that most people's annual expenditure is between £20-£30k pa. My advice would be to give yourself the best chance and do what you can to get that amount of income in retirement secured (in loose terms) as soon as possible.


More individual requirements can then be factored in nearer the time. Whenever than is. Don't forget some people retire at 33 so you need to start with a level of income and be flexable when dealing with long term planning.