Pension Planning

ForestBluebells

Hello money gurus.

I’m 36 and only really thought about pensions this year. 

I have worked really hard on turning things around, created a detailed budget which I have stuck to increasing my savings 10fold from previous years, got a freelance 2nd job to help boost my contributions along with any spare money getting chucked in my pension. I’ve gone from only having £3,800 in a pension to over £15,000 so far this year, obviously I’m still well below where I want to be but I’m now actively trying. I’m simultaneously building my emergency fund (happy with this now at £10k) and now saving towards a replacement car fund (currently £1k) for when my car finally gives up the ghost. 

I want to now try and make sure I’m definitely paying in enough to live comfortably at retirement, and ensuring I’m paying enough into the right kinds of accounts. 

I’m currently using my workplace pension (employer only pays in legal minimum), a LISA, a SIPP and a S&S ISA. 

I’m finding it confusing to understand my “number” that I need to comfortably retire and which is the best platform of the above to use to get to this. I saw someone previously mentioned the tax benefits of each but I can’t seem to find it again. 

If I look at my budget and minus my mortgage I only need £1050 per month however im living rather frugally (I think) and would like a bit more budget in retirement for enjoyment. 

I had in mind I’d like £27,000 in retirement including state pension (assuming that’s even still a thing when I retire) perhaps this figure is plucked out of thin air slightly and I could survive on less.

on top of this I do want to move to a bigger home in the next few years as I don’t want to die in a 1 bedroom flat. 🙈 I’m delaying moving as I can save more while my mortgage is cheap but I’m aware house prices may rise and price me out of moving somewhere nicer if I leave it too long.

anyway, how best do I check I’m on track savings wise?  I haven’t posted any specific figures but can if that helps?

barnstar2077

First of all, well done for putting some effort in, and congratulations on what you have achieved so far!

27k is quite a lot more a year than you say you can live on.  How much are you taking home at the moment please? 

ForestBluebells

barnstar2077 said:

First of all, well done for putting some effort in, and congratulations on what you have achieved so far!

27k is quite a lot more a year than you say you can live on.  How much are you taking home at the moment please? 

I’m on £39,000 base salary, an extra £2k roughly in commission and roughly £4000-4500 from my freelance job, this is all pre tax figures. 

I currently have roughly £225 a month ish going into my company pension (both me and employer), £285 (£356.25 after tax relief) i pay into my SIPP (was going in my LISA but that’s full for this year), all of my commission and freelance earnings go into my SIPP (saving aside 20% for tax), £200 a month goes into my S&S ISA, £519 a month is currently going into cash savings (I do have a significant amount of cash savings at just under £28k but as I may use some of this in the short term as emergency fund/car replacement/home renovations it’s not invested. Once I have topped up my replacement car fund I can funnel some of this into additional pension contributions, maybe another year of saving I would have this spare. 🤷‍♀️

I have £1k left on my student loan so this will be paid off next year so by around April/may I’ll have an extra £157 a month spare to invest. I’m considering just paying this off in full and getting rid of it a bit early. 

I can’t help feel I’m still not saving enough. I think I’ll feel happier in 5 years time once I have bigger figures invested but I just can’t work out how much I need and if I’m on track or still falling short. Obviously I have a lot of lost time to make up and I not only need to boost my pension but also money towards a bigger home

Alexland

What age are you wanting to retire? Makes a big difference to how much you need to contribute.

ForestBluebells

Alexland said:

What age are you wanting to retire? Makes a big difference to how much you need to contribute.

As early as I can get away with 😂🙈

barnstar2077

I would take my bills and mortgage away from my wages, then budget yourself some spending money.  Everything else can be saved / invested.  A good budget will go along way to getting you were you want to go.  Take a look at all of your regular outgoings and see if they offer you value for money.  Think about what you need for spending money realistically, but also what you think you can get it down to.  It is a balancing act for sure.  Personally, as I have a set budget I transfer x amount as soon as I get paid into my investments,  Then I do my best not to go over budget, and if I do I borrow some money back again and reign in the spending for the next month to try and make up for it.  Like you I am also seeing good results.  The more I manage to invest the more I believe my plan might actually work lol! :  )  I am trying to retire by 55 at the latest.  It is possible I may do it a few years earlier, but I am waiting on a few unknowns at the moment.

ForestBluebells

I pay all my savings/investments on the 1st of the month. The only bit of my budget I perhaps could cut back on is I give myself £214 per month spending money but this is for everything such as eating out (not really doing that much now), gifts, entertainment/going out, general things I might need for my home or myself,  vets bills (well I actually save towards that for anything not covered by insurance but try use my spending budget instead of withdrawing from savings), I’m not sure how I spent this much really as I honestly haven’t bought myself much at all but it’s stopped me spending hardly any of my sinking funds. 

How do you forecast how much you need to retire and how you will get there?

Alexland

ForestBluebells said:

How do you forecast how much you need to retire and how you will get there?

I do all my calculations in current spending power and expect that I would need a retirement pot around 35x drawdown at 58 (or 30x at 68) plus £9k extra for each year before the state pension becomes payable at 68.

So assuming you want to have an income of about £30k pa (as there would be a little bit of income tax to pay in retirement) and wanted to retire at 58 you would need a pot of around (£9k x 10 years missing state pension) + (35 x £21k) = £90k + £735k = £825k. A regular contribution calculator tells me that starting with £15k this would require a contribution rate of £2,425 per month for 22 years (between age 36 to 58) at an average growth rate of 2% above inflation and fees.

Or if you wanted to retire at state pension age 68 then you would only need a pot of (30 x £21k) = £630k which could be achieved by starting at £15k and contributing £1,125 per month for 32 years (between age 36 to 68) at an average growth rate of 2% above inflation and fees.

All of this is rough maths but hopefully it gives an idea of the mechanics and scale of the challenge to catch up. Some people might argue my 2% real return rate is too pessimistic but asset prices are currently not cheap and you would probably be derisking from an adventurous to balanced asset allocation as you approached retirement.

p.s. does your employer opearate salary sacrifice to save the National Insurance on your workplace pension contributions as this would likely be more efficient than directly contributing into a SIPP?

barnstar2077

I don't drive, and without my mortgage my bills would be less than four hundred a month.  That doesn't include spending money or one off expenses, like buying a new fridge etc.  I have had a budget of sorts going back quite a few years, and surprisingly my bills haven't really gone up that much.  I also chop and change things if I feel they are becoming too expensive.  I do the same with my food shopping.  If something I like to eat goes up too much I either eat it less regularly or find something else instead.  As my bills haven't changed that much for years, and as I want to retire in nine to twelve years time(I'm 43), I figure if I budget for £500 a month for bills that will probably be enough.  As the personal allowance is £12.5k a year before you have to pay income tax I figure that would give me just over a grand a month, or five hundred pounds after bills are paid.  Not exactly a fortune, but with some savings in an ISA to cover any big expenses I should be okay.  I enjoy the simple things in life, so will be happy just to be finally be able to get a dog, spend more time with friends and family, and enjoy not having to go to work.

My take home pay is £1400 a month after I pay 10% of my salary into my works pension.  I then put a further £500 into a SIPP and £200 into a S&S ISA.  I maybe able to retire from 53 onwards, but I won't be able to access my pensions till I am 58 probably, so the ISA is there to bridge the gap.

I have no idea if it will actually work out, but it beats moaning about work, but doing nothing about it like the rest of my colleagues! :  )

ForestBluebells

I don’t need 30k, it’s only me for now,  27k is much more than my current spending (I’m assuming same rate of tax is paid in retirement and used a salary calculator to work out what would be left after tax), so 27k would give me 1,833.48 per month after tax?  Given I currently spend £1050 comfortably if I minus my mortgage and money going into savings/investments then this realistically gives me a lot of wiggle room for wanting to spend more when I fancy and not having to worry?

squirrelpie

ForestBluebells said:

How do you forecast how much you need to retire and how you will get there?

There are no guarantees ... How much do you need to retire? Think about (i.e. write down!) how much you spend now, and then think about what things you won't need to pay when you retire (e.g. commuting costs, lunches) and what extra you might want/need to pay when you retire (e.g. holidays, lunches). Once you have written down how much you think you might need, you're much better placed. You might want to write down bare bones survival numbers as well as OK numbers and luxury numbers.

How do you get there? Well, saving, basically. Maybe some in an ISA as an emergency fund as a gap-filler if you want/need to retire before you can access your pensions. If you have access to a DB pension scheme then contribute as much as you can. Add any extra (or the whole amount) to a job-related or private DC scheme.

When you get older and closer to the date, you can think in more detail about the best way to use whatever resources you have built up and decide when exactly you want to retire.

Some people know exactly what should happen and then it does. Others don't for a whole variety of reasons, so don't wed yourself to a full plan yet, just concentrate on building up savings.