What number are you aiming for - solely DC pot

jimi_man

Also annuity rates are particularly low at present as far as I'm aware? So surely, even if you could obtain such a quote, it's not going to be very objective. 

MEM62

michaels said:

What would the 5k at 60 cost as an annuity compared to how much she has paid in to get the dc 100k pot?!

Considerably more, I would think. 

Mistermeaner

Deleted_User said:

That’s not “reality”. That’s a random prediction.  Predictions are not worth all that much. Even less when there is no period of time specified or whether its in real terms. 

its not random ; a number of studies have shown that a safe withdrawal rate from a pot of money during retirement is 3-4% of the original starting value. This allows for increasing your withdrawal each year by inflation and the pot lasting about 30 years ish
Its as good a rule of thumb as any
Look at it another way... a 10% withdrawal rate would more or less guarantee running out of money in around 11-15 years ish

Mistermeaner

jimi_man said:

But how do they work this out? My pension for example, is a DB one and I've been getting it for just over 3 years (I'm mid 50's) and it's a little over £30k. Yet I get a slip every year that tells me it's worth about 68% of the LTA or something like that. They multiply it by 20 or so to get the figure possibly, which seems somewhat low to provide those level of benefits?
Yet £1.5 million seems rather high. Maybe it's one of those unquantifiable sums. 

The X20 valuation of DB pensions for the life time allowance check is another disparity where IMO DC pot holders are unfairly penalised - it suggests an annuity value of 5% which is simply unachievable - even more so if you add in surviving spouse and escalation (which is not included in the X20 calc at all)

BritishInvestor

Mistermeaner said:

Deleted_User said:

That’s not “reality”. That’s a random prediction.  Predictions are not worth all that much. Even less when there is no period of time specified or whether its in real terms. 

its not random ; a number of studies have shown that a safe withdrawal rate from a pot of money during retirement is 3-4% of the original starting value. This allows for increasing your withdrawal each year by inflation and the pot lasting about 30 years ish
Its as good a rule of thumb as any
Look at it another way... a 10% withdrawal rate would more or less guarantee running out of money in around 11-15 years ish

What fees/investor underperformance are assumed with these studies?

Novice_investor101

I’m single, 38 years old & will get a full state pension from 68 & also a DB of £3.5k (or that’s what it was about 3 years ago when I asked, will be more now, Index linked) from 65. 

I was a bit late to the DC party as my old employer ran the DBscheme. 

I have just over £20k in my DC now, after 3.5 years, maxing out my works contribution. Invested in 100% equities as I won’t touch it til I’m at least 60-65. 

No idea what it’ll be worth come retirement, hopefully as much as possible! I will start to dial down the risk at about age 55. 

I do pay into a LISA at £250 a month (including bonus) in a very high risk Technology fund. This is just opportunity money & im happy with the risk. 

& a stocks ISA at £200 a month, again, pretty high risk 100% global equities. The aim is for growth & I’ve had these for just over 3 years now. They are worth about £25k together. I thought about opening a SIPP but the LISA seems a better option (Tax free on the way out) over a private SIPP or increasing my Sal Sac pension as there’s no more employer matching over what I pay now. But I plan to up my pension payments when my mortgage is gone, as the tax plus NI saving is 32%, & my LISA payments have to stop at 50. 

Incidentally, I’m a low earner. £22.5k a year. I’m just not a big spender & am good at maximising every penny. 

I’d be happy to retire on the equivalent of£25k per yer based on having no mortgage to pay then. I’d find that a pretty comfortable lifestyle with a few walking & camping holidays a year. 

State & DB will cover my basic costs so I’m really just saving for a comfortable lifestyle & the option to retire early or go part time if I chose. 

Albermarle

Mistermeaner said:

jimi_man said:

But how do they work this out? My pension for example, is a DB one and I've been getting it for just over 3 years (I'm mid 50's) and it's a little over £30k. Yet I get a slip every year that tells me it's worth about 68% of the LTA or something like that. They multiply it by 20 or so to get the figure possibly, which seems somewhat low to provide those level of benefits?
Yet £1.5 million seems rather high. Maybe it's one of those unquantifiable sums. 

The X20 valuation of DB pensions for the life time allowance check is another disparity where IMO DC pot holders are unfairly penalised - it suggests an annuity value of 5% which is simply unachievable - even more so if you add in surviving spouse and escalation (which is not included in the X20 calc at all)

The 20X calculation of DB pensions for LTA calculations is far too low and should be revised . In fact if you take the DB pension early , it is 20X the reduced pension , which is even more favourable .
We see on this forum that DB schemes offer various higher multiplications to buy people out. 30X is typical and probably more approximately  represents the real value. 

Mistermeaner

BritishInvestor said:

What fees/investor underperformance are assumed with these studies?

I dont have anything specific to hand but the 3-4% is well acknowledged as a good 'rule of thumb' - there are clearly lots of variables, the biggest possibly being the sequence of returns where a 10 year average investment return of e.g. 2% above inflation can impact sustainability massively depending on volatility in that period .... this is perhaps another point worth emphasising that those enjoying DB schemes (and especially unfunded public sector schemes) have absolutely no risk exposure at all - where as someone with a DC pot has complete exposure to risks..... hence 3-4% being the rule of thumb for sustainability - sure you may get lucky with pulling 5% out but a few bad years of stock market performance and some higher than normal inflation and your pot could start disappearing much quicker than planned

hugheskevi

Albermarle said:

The 20X calculation of DB pensions for LTA calculations is far too low and should be revised . In fact if you take the DB pension early , it is 20X the reduced pension , which is even more favourable .
We see on this forum that DB schemes offer various higher multiplications to buy people out. 30X is typical and probably more approximately  represents the real value.

Whilst I do not disagree with the valuation, I do wonder if we need further complexity in pension taxation?

Let's assume a 30x rate is better, and the LTA valuation is amended to that. Would you provide transitional protection for all those with existing Defined Benefit pensions? What about for those who were previously below the LTA but are now above it - that looks very much like retrospective taxation so would some sort of protection be appropriate, as done for previous LTA changes? If you do provide transitional protection for some, it will be strongly correlated with age, so would the policy be vulnerable to an age discrimination legal challenge? How frequently would the multiplier be reviewed, and would new protections be needed at each review?

Given we already have Primary Protection, Enhanced Protection, 2012 Fixed Protection, 2014 Fixed Protection, 2014 Individual Protection, 2016 Fixed Protection and 2016 Individual Protection from previous changes to the LTA, would further protections just make things insanely complicated?

Most of those affected by the change would be in the NHS (most private sector DB schemes having closed some time ago, at least to new members, and higher earners in the public sector being most common in the NHS scheme). Given the unforeseen consequences on NHS doctors of amending the Annual Allowance regime (the tapered Annual Allowance) would there be similar risks of changing the LTA rules?

Given the peanuts revenue (in the context of taxation) that comes from the LTA I can see why change does not seem a priority.

princeofpounds

Albermarle said:

The 20X calculation of DB pensions for LTA calculations is far too low and should be revised . In fact if you take the DB pension early , it is 20X the reduced pension , which is even more favourable .
We see on this forum that DB schemes offer various higher multiplications to buy people out. 30X is typical and probably more approximately  represents the real value. 

And the rest. Given the inflation protection and spousal benefits many public sector DB pensions provide, 40-50x is actually closer to the truth nowadays.But good luck on getting the public sector to put us all on a fair platform with them.

Anyway, what number am I aiming for? The LTA. I've got a long way to go (20yrs until my target retirement date) but I'm on track. Or at least I was until the government whipped away my annual allowance to almost nothing, which is effectively a huge tax hike. Yes, it's a good kind of problem to have, I've done well in recent years. But I am in a very insecure profession, so that won't always be the case and you now get unfairly punished by the system for for earning money in large bursts (which is precisely what pensions were supposed to provide - a system of smoothing earnings over time).

But because my wife isn't working that's pretty much all we are going to have. Without state pensions it would be ok but not quite the income level I'd like to retire on. With state pensions added (assuming they exist as they do now) I would probably feel well-off, but speaking frankly I'd rather have the money in my 60s than my 70s.