A Paupers Pension Tale (Not many nuts to dig up)

barnstar2077

hugheskevi said:

barnstar2077 said:

Some days I think I am crazy even trying to work out where I will be financially years from now to be honest?  There are so many variables it seems unlikely that my plan will run smoothly, but I just keep thinking that the only thing worse than a bad plan is probably no plan at all.

I suspect you probably underestimate/overlook a lot of the benefits from planning, you already will have achieved eg,

• Understanding and arranging for the position of either surviving spouse, whether that happens early or late in retirement
• Understanding what might be the key pressure points, eg, perhaps the year or two immediately prior to State Pension age should investment returns disappoint
• Understanding any key risks specific to you, eg if planning to move house to another area, a difference in house price change between the areas may be important and so needs to be monitored. Children not becoming as independent as expected, and so on, might all be considerations.
  
• Risk allocation - probably lower risk assets for money early in retirement (eg ISAs), with higher risk for assets used later in retirement. On the other hand, perhaps you have plenty of assets for your plan, so prefer to reduce risk, even if it reduces expected return - why take unnecessary risk. For example, there is an inconsistency in my retirement plan that the required return from my ISA is higher than the required return on my DC pension - despite the ISA being invested more cautiously than the DC. This isn't serious, as the required return on the ISA is only 3.4% p/a which shouldn't be a problem, but it does demonstrate that my priority should not be more DC pension.
  
• Stress-testing plans, eg, sequence of return risk, etc
• Understanding minimum required, target amount and comfortable amount, and ensuring plans are robust to at least deliver minimum amount.

Once your plans have considered all the things like the above, you are in a great position to respond to uncertainty. The outcome will not be as originally planned, but you should be able to ride the waves pretty easily, confident that you have all the key things covered (and understand the situations in which this wouldn't be the case). A key part of planning is as much managing the journey as it is reaching the destination.

My biggest sticking point at the moment really is at which point do I say that I have enough in my pension and switch to stuffing my ISA.

I need £120k minimum in my pension to cover the ten years from when I can claim my private pension to get me to state pension age, plus top up money from then on.  I do not need a lot of money to live on, 12k would be enough a year, but extra money would mean a happier and stress free retirement, and stress free sounds pretty good!

At the moment I am thinking that when it hits £160k on my 48th birthday (just under 4 years from now, with 3% growth and continued contributions) I would switch my main focus to my ISA but continue to match my companies contribution into the pension for the free money.  It would then also have nine or ten years to grow before I needed it at age 57/58.   But then I think I may end up with a bigger pension pot than I may need.  Which isn't a problem is it?  Well, yes it is, because I can't access my pension until my late fifties and I want to retire earlier than that.  So the longer I pay into my pension, the longer I have to work for (as I am not growing my ISA.)  I want a cash buffer of at least 12k, preferably 24k (As an emergency fund, and in order to fund me for a year or two if I have any issues with my pension) and12k a year from my ISA to get me to the point when I can access my private pension. I could stop sooner at £140k in the pension and then top it up in the last couple of years of work if I don't think it is enough, but I have already reduced my target once already, and I don't know what the next ten or fifteen years are going to bring returns wise.  Which is why I just keep going round in circles.  It is a first world problem I know, but there are just too many variables as I said before.

michaels

barnstar2077 said:

Quick Update:

I have had a play with my retirement plan spreadsheet and I am now not sure if I will manage to retire at 53 or not.  I could drop down to two or three days at that point until the numbers add up, so all is not lost however.  The more I think about it, the more it appeals to me to drop down in days sooner, once my pension is suitably stocked.  These are decision's for closer to the time though.

One way of looking at it is that changing to fewer days is basically taking some of your retirement on a part time basis when you are even younger and more able to benefit from the free time....

hugheskevi

barnstar2077 said:

My biggest sticking point at the moment really is at which point do I say that I have enough in my pension and switch to stuffing my ISA.

I was in this position about 5 years ago. I concluded I should put as much as I could possibly justify into pensions by assuming a low future rate of return, but assume I wouldn't be able to access the pension until age 58 due to increase in minimum pension age. That was effectively planning for the most pessimistic outcome plausible. That all worked out quite well, as returns were much higher than expected but minimum pension age appears to be protected at age 55 (subject to legislation) and so everything ended up in about the right position.

At the moment I am thinking that when it hits £160k on my 48th birthday (just under 4 years from now, with 3% growth and continued contributions) I would switch my main focus to my ISA but continue to match my companies contribution into the pension for the free money.  It would then also have nine or ten years to grow before I needed it at age 57/58.   But then I think I may end up with a bigger pension pot than I may need. 

I grappled with exactly the same issues. Ideally I would have contributed in a much more balanced pattern to ISAs and pensions, so that contributions to all of the various ISA and pension pots could be managed so as to get to their target level at the same time. However, with threats to Annual Allowance and higher rate tax relief, I preferred to focus contributions on pensions first, and then ISAs later.

It is worth reflecting that pensions can only be managed through more contributions. Whereas ISAs can have money taken from them if desired, which could be used to fund pension contributions prior to ceasing earned income. ISAs can also be managed by varying retirement date, as retiring a bit later than planned significantly reduces ISA requirement but does not affect pension income requirement. So ISAs give huge flexibility, but at the cost of efficiency (ie tax relief).

I can't access my pension until my late fifties and I want to retire earlier than that.

Late fifties? Won't your minimum pension age be 55?

So the longer I pay into my pension, the longer I have to work for (as I am not growing my ISA.)  I want a cash buffer of at least 12k, preferably 24k (As an emergency fund, and in order to fund me for a year or two if I have any issues with my pension) and12k a year from my ISA to get me to the point when I can access my private pension. I could stop sooner at £140k in the pension and then top it up in the last couple of years of work if I don't think it is enough, but I have already reduced my target once already, and I don't know what the next ten or fifteen years are going to bring returns wise.  Which is why I just keep going round in circles.  It is a first world problem I know, but there are just too many variables as I said before.

Remembering that putting money into an ISA and then using that to enable pension contributions at a later date from earned income (ie withdrawing ISA and using that for living costs rather than earnings) will result in the same outcome as putting money into a pension straightaway, wouldn't that provide very helpful flexibility to ensure the ISA/pension balance is kept at an optimal level as you get closer to retirement? Note this assumes the same investments and charges apply in an ISA as applies to pension, there are no buying/selling costs (which is unlikely, but they should be small so not very significant), that future contributions made are within earned income amount, and that if salary sacrifice is available now, it is available on same terms in future.

barnstar2077

hugheskevi - Minimum pension access age is due to rise to 57 in 2028.  I have been assuming it will be 58 for me, so I won't be in trouble if it is moved again.

I think for now I will stop stuffing the pension when it gets to £120k (in a couple of years), then switch to saving into my ISA.  This will give me the flexibility in my early fifties to top up the pension, put more in the ISA or go part time to make the ISA last.

Thank you for the replies, especially the time it must have taken you hugheskevi.  I get more stressed about money now than I did when I didn't have any.  People are weird! (or at least I am! :  ) 

hugheskevi

barnstar2077 said:

hugheskevi - Minimum pension access age is due to rise to 57 in 2028.  I have been assuming it will be 58 for me, so I won't be in trouble if it is moved again.

It is , but with most pensions open as at February 2021 retaining minimum age of 55 (subject to legislation).

barnstar2077

hugheskevi said:

barnstar2077 said:

hugheskevi - Minimum pension access age is due to rise to 57 in 2028.  I have been assuming it will be 58 for me, so I won't be in trouble if it is moved again.

It is , but with most pensions open as at February 2021 retaining minimum age of 55 (subject to legislation).

Oh okay.  I will double check once the legislation has gone through what it means for my pension and then act accordingly.  Cheers.

harlequinnyc

I am trying to get my head around pensions/savings/tax and all the associated allowances but I am just not a natural at this, so would appreciate any advice (explained to me as if I'm around 12 years old please, jargon and abbreviations have me frantically googling )

I have just read John Edwards's recommended DIY Pensions book and am trying to digest these posts but a lot of it does seem to apply to DC pensions and I have a DB, which according to his book, it is the gold standard and if you have one, you are lucky and don't have much to worry about, right? I am learning a little but going around in circles at the same time and think I may be confusing myself unnecessarily.

Anyway, to get to my point(s):

I already have a DB pension, which I plan to leave alone until I am 60 (savings and OH full time salary will see us ok until then, 9 years). At which time, around £11K pa & £21 lump sum or, with commutation £1/£12 -  £8.5K pa & £55.5K lump sum. No mortgage, kids or expensive hobbies/holidays planned and this only needs to last 7 years until SP. So we will be comfortable.

I'm in my last 4 months of part time NHS employment and earn just under the personal tax allowance. (I will take advantage of married tax allowance when I have no income and buy my 3 more years NI, or claim Carers Credits to get full SP) So, what I'd love to know is, is this 'enough' or should I open a SIPP too, for the 'free' money? a) I am very nervous, as don't feel I know enough to be investing myself and do not want to lose anything. Is there an easy option? and, b) if I can put 'up to a years earnings' in, I would subtract what has already been paid into my NHS pension, yes? then when I have no income, pay in £2880 a year?

Also, do you think a big shake up is coming to pay for the pandemic, ie. is the current tax relief going to last anyway? ... get your crystal balls out

Last question, is an ISA worth it, if I don't pay tax on savings anyway? I like to have easy access, so the rates don't seem any better than a normal savings account.

I know you aren't qualified to advise but I'm trying to be tax efficient and not be a complete idiot. (although I am very aware I sound like one). So can I ask what you think please?

gambleruk

First of all I would set up a new thread and ask your questions there, I am sure you would get lots of help. After saying that it sounds like you have got your head around pensions as much as I have and you seem to have your plan set out. I am presuming you are 51 off your post so the same age as me, if that is the case and this is your last year of earning then I would be putting as much as I could into a pension this year then topping it up every year with £2880 as you already said. I do not know much about DB pensions so I cannot help with that part of it sorry. 

I have concentrated on putting any spare cash into a sipp knowing that I will be able to access it in 4 years time if need be and if my circumstances do not change then I will be able to withdraw money from it every year tax free so to me makes more sense to me than opening an isa, I very much doubt the tax relief on pensions will be changing anytime soon so I would not worry about that.

It really sounds to me that you are on the right track and if I was you I would keep reading this forum and doing your research as you are doing. Good luck with your retirement and please keep us informed on how you go on with your plans  

hugheskevi

harlequinnyc said:

I have a DB, which according to his book, it is the gold standard and if you have one, you are lucky and don't have much to worry about, right?

Far too many assume that. A DB pension is an extremely valuable asset, but it is a shame to just use the default DB pension as your only pension. A DB pension provides a great foundation upon which to build more flexibility.

When you compare DB and DC pensions, their strengths and weaknesses are almost exact opposites. This means they are very complementary products. The main strength of a DB pension is that it provides a guaranteed income as long as you live. However, that makes it very inflexible, whereas a DC pension has no guarantees at all and can be taken however you like - this provides valuable flexibility to complement the guarantee given by the DB pension.

I already have a DB pension, which I plan to leave alone until I am 60 (savings and OH full time salary will see us ok until then, 9 years). At which time, around £11K pa & £21 lump sum or, with commutation £1/£12 -  £8.5K pa & £55.5K lump sum.

The 12:1 commutation rate is terrible, it is almost certainly a bad idea to take the higher lump sum at age 60.

No mortgage, kids or expensive hobbies/holidays planned and this only needs to last 7 years until SP. So we will be comfortable.

So you may wish to start from your income position at age 67, when you reach State Pension age (or later, if your partner is younger than you, at their State Pension age). Add up everything you will have from State Pensions and DB pensions at that point.Assuming that is enough, then you just need to fund the years up to that point. DC pension is ideal for that, at least for the years after age 55.

So, what I'd love to know is, is this 'enough' or should I open a SIPP too, for the 'free' money?

The attraction of pension saving beyond the amount needed to get the maximum employer contribution is tax relief. The drawback is lack of access to the funds. The closer you are to age 55, the less of a drawback the lack of access becomes as you can take the money pretty much as soon as you put it in if necessary.

Personally, 100% of our income will come from pensions from age 55, it being the most tax efficient way to arrange financial affairs.

I am very nervous, as don't feel I know enough to be investing myself and do not want to lose anything. Is there an easy option?

Investing is as easy or complicated as you want to make it. However, you do want to lose something, otherwise you have no scope for gaining anything. The key is that you don't want to lose very much, ie, you want an investment with low volatility.

A key attraction of DB pensions is that you are not 100% reliant on DC income, and the investment horizon of the DC pension is likely to be shorter, as the DC pension is more likely to be used early in retirement in advance of DB and State Pensions becoming available. This all means that you are investing relatively little for a shorter time.

There are plenty of easy default options. If you are risk averse then you probably don't want anything much racier than a mundane multi-asset fund or something like the Vanguard 60-40 fund. If you want to be more defensive than that, there are investments which remits to protect money, for example a long standing Investment Trust with a remit to protect funds is Personal Assets Trust.

if I can put 'up to a years earnings' in, I would subtract what has already been paid into my NHS pension, yes? then when I have no income, pay in £2880 a year?

Yes, gross earnings, less your contributions to NHS or £3,600 (gross, £2,880 is net), which are your limits for tax relief.

Also, do you think a big shake up is coming to pay for the pandemic, ie. is the current tax relief going to last anyway? ... get your crystal balls out

Don't be concerned with that, take the incentives on the table, whilst they are on the table.

Last question, is an ISA worth it, if I don't pay tax on savings anyway? I like to have easy access, so the rates don't seem any better than a normal savings account.

ISAs are the obvious vehicle to provide any funds required before pensions become available at age 55.

Cash ISAs have been pretty pointless for years now, and it is unlikely you would want to hold more than the £20,000 annual ISA limit in cash (ie if things change, you could just open a cash ISA) so in most cases there is no point in having a cash ISA.

Investment ISAs are valuable, although for small investors it is more for convenience than the tax break they offer as most would find their Capital Gains Allowance sufficient to cover the returns on unwrapped investments.

harlequinnyc

gambleruk said:

First of all I would set up a new thread and ask your questions there, I am sure you would get lots of help. After saying that it sounds like you have got your head around pensions as much as I have and you seem to have your plan set out. I am presuming you are 51 off your post so the same age as me, if that is the case and this is your last year of earning then I would be putting as much as I could into a pension this year then topping it up every year with £2880 as you already said. I do not know much about DB pensions so I cannot help with that part of it sorry. 

I have concentrated on putting any spare cash into a sipp knowing that I will be able to access it in 4 years time if need be and if my circumstances do not change then I will be able to withdraw money from it every year tax free so to me makes more sense to me than opening an isa, I very much doubt the tax relief on pensions will be changing anytime soon so I would not worry about that.

It really sounds to me that you are on the right track and if I was you I would keep reading this forum and doing your research as you are doing. Good luck with your retirement and please keep us informed on how you go on with your plans  

Thanks so much gambleruk for your reply and I'm sorry for ambushing your thread! I You're right about a new thread but I think I felt 'safe' tagging onto yours, as it's such a relatable thread to me, I thought more like-minded folk would help.

I will definitely now focus on a SIPP rather than an ISA. My OH (who has workplace and very small private Royal London pension he was sold years ago) should also look into opening a one for himself, so we can use his full allowance to put more in, if we can?  

hugheskevi said:

harlequinnyc said:

I have a DB, which according to his book, it is the gold standard and if you have one, you are lucky and don't have much to worry about, right?

Far too many assume that. A DB pension is an extremely valuable asset, but it is a shame to just use the default DB pension as your only pension. A DB pension provides a great foundation upon which to build more flexibility.

When you compare DB and DC pensions, their strengths and weaknesses are almost exact opposites. This means they are very complementary products. The main strength of a DB pension is that it provides a guaranteed income as long as you live. However, that makes it very inflexible, whereas a DC pension has no guarantees at all and can be taken however you like - this provides valuable flexibility to complement the guarantee given by the DB pension.

I already have a DB pension, which I plan to leave alone until I am 60 (savings and OH full time salary will see us ok until then, 9 years). At which time, around £11K pa & £21 lump sum or, with commutation £1/£12 -  £8.5K pa & £55.5K lump sum.

The 12:1 commutation rate is terrible, it is almost certainly a bad idea to take the higher lump sum at age 60.

No mortgage, kids or expensive hobbies/holidays planned and this only needs to last 7 years until SP. So we will be comfortable.

So you may wish to start from your income position at age 67, when you reach State Pension age (or later, if your partner is younger than you, at their State Pension age). Add up everything you will have from State Pensions and DB pensions at that point.Assuming that is enough, then you just need to fund the years up to that point. DC pension is ideal for that, at least for the years after age 55.

So, what I'd love to know is, is this 'enough' or should I open a SIPP too, for the 'free' money?

The attraction of pension saving beyond the amount needed to get the maximum employer contribution is tax relief. The drawback is lack of access to the funds. The closer you are to age 55, the less of a drawback the lack of access becomes as you can take the money pretty much as soon as you put it in if necessary.

Personally, 100% of our income will come from pensions from age 55, it being the most tax efficient way to arrange financial affairs.

I am very nervous, as don't feel I know enough to be investing myself and do not want to lose anything. Is there an easy option?

Investing is as easy or complicated as you want to make it. However, you do want to lose something, otherwise you have no scope for gaining anything. The key is that you don't want to lose very much, ie, you want an investment with low volatility.

A key attraction of DB pensions is that you are not 100% reliant on DC income, and the investment horizon of the DC pension is likely to be shorter, as the DC pension is more likely to be used early in retirement in advance of DB and State Pensions becoming available. This all means that you are investing relatively little for a shorter time.

There are plenty of easy default options. If you are risk averse then you probably don't want anything much racier than a mundane multi-asset fund or something like the Vanguard 60-40 fund. If you want to be more defensive than that, there are investments which remits to protect money, for example a long standing Investment Trust with a remit to protect funds is Personal Assets Trust.

if I can put 'up to a years earnings' in, I would subtract what has already been paid into my NHS pension, yes? then when I have no income, pay in £2880 a year?

Yes, gross earnings, less your contributions to NHS or £3,600 (gross, £2,880 is net), which are your limits for tax relief.

Also, do you think a big shake up is coming to pay for the pandemic, ie. is the current tax relief going to last anyway? ... get your crystal balls out

Don't be concerned with that, take the incentives on the table, whilst they are on the table.

Last question, is an ISA worth it, if I don't pay tax on savings anyway? I like to have easy access, so the rates don't seem any better than a normal savings account.

ISAs are the obvious vehicle to provide any funds required before pensions become available at age 55.

Cash ISAs have been pretty pointless for years now, and it is unlikely you would want to hold more than the £20,000 annual ISA limit in cash (ie if things change, you could just open a cash ISA) so in most cases there is no point in having a cash ISA.

Investment ISAs are valuable, although for small investors it is more for convenience than the tax break they offer as most would find their Capital Gains Allowance sufficient to cover the returns on unwrapped investments.

Thanks so much for your clear reply, hugheskevi, I'm extremely grateful as above, I recognise the value of having the DC as well as the DB now. I am surprised to hear that the commutation rate is terrible. I thought that this seemed a good deal, so I will relook at my figures in relation to that. Do you mean it's a bad idea, as I would be paid more long term with the higher pension than the difference in the lump sums? As, this would only apply if I live long enough?

Thanks also for the investing vehicle ideas.  I will look into these also.

I am getting genuinely so excited for the time I hand in that notice now.  Just bought some lovely garden furniture to take advantage of