How much to live on

[Deleted User]

scottish_lassy, sounds like a very good plan. A huge income is not necessary. Its the quality of life that is important.

blue.peter

[Deleted User] said:

scottish_lassy, sounds like a very good plan. A huge income is not necessary. Its the quality of life that is important.

Quite so. As I said a while back,

The issue is... being happy vs. being unhappy.

It's much more important to be happy than to be wealhy.

Madrick

To add to the commutation rate discussion..... 

I have just taken up my Royal Mail DB pension at aged 60

Something I paid into for 8 years from age 18

The figures offered were an annual taxable sum of:-

£2,871.35.   (no lump sum) 

£2,493.38.   
With a £7,480 Tax free lump sum

£2,127.05
With a £14,180.30 lump sum


So to calculate the rate, do I take

The difference of £744 between the two pension amounts,
divided into the £14k lump sum
giving a factor of 19? 

Is that correct as a commutation rate? 


If the £14k was invested into a S&S ISA 
and grew at a decent rate (say 5%) would that not produce more than the £744 plus any annual pension increase (on the £744 difference)? 

This years pension increase for Royal Mail pensions in payment was 0.5%

blue.peter

Madrick said:

£2,871.35.   (no lump sum) 

...

£2,127.05
With a £14,180.30 lump sum


So to calculate the rate, do I take

The difference of £744 between the two pension amounts,
divided into the £14k lump sum
giving a factor of 19? 

Is that correct as a commutation rate? 

Yes.

That's more favourable than others quoted above, but still not anything that I'd consider good.

By the way, I should have mentioned earlier that commutation rates, like annuity rates, should be age-dependent. The annuity rate that I used was for a 65-year old.

Madrick said:

If the £14k was invested into a S&S ISA 
and grew at a decent rate (say 5%) would that not produce more than the £744 plus any annual pension increase (on the £744 difference)? 

This years pension increase for Royal Mail pensions in payment was 0.5%

There's a massive assumption in there, and one that I wouldn't recommend relying on. Even if you can average 5%/year (which might or might not be achievable), it absolutely will not be a smooth run. There will be downs as well as ups. And the timing of those downs matters hugely. If they come early in retirement, they'll have a disproportionate effect because there will be less capital left after a withdrawal to make up for the loss. If you've withdrawn, say, 5% of the fund just after a 20% fall (and don't think that that can't happen - I've seen falls of that order on my own ISA), the remaining 95% of the fund has to regain more than 20% growth in order to make up the loss of value. and it has to do this before the next withdrawal if the effect of isn't to be magnified then. You might find this blog of interest (although it's about income drawdown, the principle is valid for your ISA idea).

As for your hypothetical ISA, let's see how that works. I'll assume 2% indexation, i.e., Bank of England's inflation target.

Amount invested = £14,000 - £740 (first year's income - you do want it as soon as you retire, don't you?) = £13,260

After 1 year:

fund = £1,3260.00 * 1.05 - £740 * 1.02 = £13,168.20

So there's a reduction in the fund value, even if you achieve a nice 5% growth.

My maths isn't up to working out how long the fund would last without going through a tedious iterative process. Sorry, but I'm not up for that. My point, though, is that you shouldn't expect it to last forever. The question, then, is whether you'll outlive that ISA and, if you do, how you'll manage without that bit of income. (For the avoidance of doubt, I'm merely suggesting that you think about it, not that you tell the rest of us here unless you want to.)

Remember that the £744/year indexed pension that you've given up would have been guaranteed for the rest of your life, however long that is. I think that it would also provide something for your spouse after your death and for the rest of her/his life. (Sorry, I can't remember if you've said anything before about your marital status, and don't feel like scrolling through a long thread to check.)

Time4T_Accounts

Or, to look at it in a slightly different way, £744 / £14,180 gives a withdrawal rate of 5.25%, which is higher than the often-quoted “safe withdrawal rate” of 4%, and so, as blue.peter suggests, you could be at greater risk of the fund running out while you still need it (depending on your age and circumstances, of course).

hugheskevi

blue.peter said:

By the way, I should have mentioned earlier that commutation rates, like annuity rates, should be age-dependent. The annuity rate that I used was for a 65-year old.)

The Pension Protection Fund lump sum commutation factors are handy to use as a reference in this regard, getting up to a commutation rate of almost 45 for a 50 year old in certain circumstances.

Even for a 65 commuting pension that doesn't increase once in payment and has no survivor pension, the lump sum commutation rate is over 19.

blue.peter

hugheskevi said:

The Pension Protection Fund lump sum commutation factors are handy to use as a reference in this regard, getting up to a commutation rate of almost 45 for a 50 year old in certain circumstances.

Even for a 65 commuting pension that doesn't increase once in payment and has no survivor pension, the lump sum commutation rate is over 19.

Thanks for that. As you say, it's a useful comparison.

Whilst the PPF rates are certainly a good deal more favourable than those quoted upthread, I still don't think that they look wonderful. For example, the rate for post-97 pension with 50% BIWP for a 65-year old is 27.5. That's a bit better than the 25:1 that I was told was commonly used a few years ago. But it still doesn't look like good value for money when compared with the relevant annuity rate. I wouldn't take cash from even the PPF unless I desperately needed it.

missile

Farway said:

missile said:

I retired early when most of my contempories were working. I missed the banter, meeting new people and the challenge. I went back to work as a consultant. I found the office politics were far worse than I remembered and retired again. I took up charity work and enjoyed helping those less fortunate than I. 

This in bold, when I started work a lifetime ago we all seemed to get along fine, scratch my back & I'll cover yours, pub on Friday lunchtimes etc.

But as the years went by it seemed to me that there was a gradual rise of back stabbers and some deliberate misdirection, or maybe I just became more aware of them?

Only saying because it made me even happier to be out of it

When I started working. The company regarded it's employees as it's greatest asset. People took pride in their workmanship and felt part of a team. I attended several leaving returement parties for those who had worked for the company all their lives.

This company, like so many others, was taken over and the culture changed to employees being subject to work study and those who took too long to complete a task were regarded as an expensive liabilty.

blue.peter

missile said:

This company, like so many others, was taken over and the culture changed to employees being subject to work study and those who took too long to complete a task were regarded as an expensive liabilty.

Not just the "underperformers". The term "Human Resources" for what often used to be called the Personnel department is dehumanising, albeit accurate. I've always hated it, because it recognises the senior management attitude that all staff are just a resource to be used and then thrown away. It's another indicator that a company doesn't consider its staff as people.

DairyQueen

Having worked my way through several employers during my career my anecdotal experience has been that the bigger the company, the worse the culture. Small companies invite and give flexibility, value teamwork and foster good relationships. Large companies? Cog-in-wheel, full of over-paid 'politicians' and/or unionised jobsworths.

I am now a happily-'retired' volunteer.