A reasonable chance of getting a good pension in three decades?

JoeCrystal

I want to check if I got the following plans right and a realistic one as well. After eleven years of contributing to a personal pension and contributing to a workplace DC pension for six years as well, I finally got a combined pension pot of £100k thanks to a significant rise over the previous 12 months. I got three plans in mind regarding the pension. However, I am currently 35, so quite a while yet until my SPA of 68 and that I am assuming that I can access the pension pots at ten years minus the SPA.

At the moment, I am contributing £253.33 gross per month or 10% of my salary. I am just checking if it is possible to stop contributing £100 per month gross to focus on paying off my loans and still meet my plan 2. I am still contributing to a workplace auto-enrolment pension to get a fantastic employer's contribution of 3% above the qualifying limit. 

Plan 1:
Retire on state pension income level at £9,339 at 58, using DC pensions until the state pension kicks in at 68. Providing I can live on State Pension, I do not need to worry about managing the DC pensions since they will be all spent by 68 ideally. My pension pot target for that plan is £103k since I consider 2% inflation for ten years before SPA. So at least this plan is achievable. I can live on it, but it would not give me any leeway in spending, and I will have to be frugal at least, but this is the last resort if I need or want to retire early as possible.

Plan 2: Retire at SPA at 100% net income, which is £23,544 or £1,962 per month after taxes, so I aiming for £26,300 gross since I may not be paying NI at that point. Assuming that state pension takes care of £9.339 part of that, this leaves me £16,961 per year to make up for it. So considering that the drawdown rate is 3% to 4% of the pension pot, I would need to have a pension pot of £425k to £785k in today's money. Is this kind of pension pot feasible at all with £253.33 gross per month pension contribution?


Plan 3: A mixture of plan one and plan two. I know that these plans are the extreme opposite, but I like to prepare for all possibilities. 

I would appreciate your thoughts on this matter. 

Thank you!

RoadToRiches

If you pick the right funds, increase contributions in line with salary increases, max out employer contributions and avc your bonuses if you can. With 30 years ahead of you you may hit your pot target with compound growth, but inflation will mean it’s not worth what it is today.

hugheskevi

With 4% annual growth after inflation and charges you would end up with around £600K so meeting target level.

However, you would expect your salary to increase by more than inflation over a period of 30+ years, so the target in Plan 2 will almost certainly end up being higher.

For Plan 1, the State Pension is almost certain to increase by more than prices too, so that target will increase, although you appear to have plenty enough to meet that basic target already. Fortunately, the increase to State Pension will reduce the target pot in Plan 2.

Any plans to use a Lifetime ISA? A LISA might be better value than DC contributions?

MX5huggy

Plan1 is already achieved, just keep paying in and hold your nerve through the stock markets ups and downs.

Plan 2 is basically on target using https://www.vanguardinvestor.co.uk/what-we-offer/personal-pension/pension-calculator shows you’re a little short using medium (5%) expected returns but doesn’t include the £97k tax fee pot so that takes you over the line.

But the question is should I pay off debt by reducing pension payments. That depends on the interest on the debt. I think if it’s under 3% then no and over 5% then yes between 3 & 5 % is grey zone depends on your view. Also consider the tax saving on the contributions which is minimum 20% or 32% is Salary Sacrifice is an option. 

So if the debt is a mortgage at 2% leave it. If it’s a credit card at 29% pay it off (or find another 0% deal), car loan at 5% difficult. Student Loan, really difficult to work out leans towards not paying it off but does depend, put the details up. 

Once the debt is paid off return to the previous pension contributions plus the loan repayment you are now not having to pay. 

Take all the free cash your employer offers as matched pension payments before paying off any debt unless you’re really sinking (sounds like you’re not). 

HardCoreProgrammer2

JoeCrystal said:

Retire on state pension income level at £9,339 at 58, using DC pensions until the state pension kicks in at 68.

I think it may be a tad optimistic to expect that in 33 years, the state pension will still exist in its current format (e.g. universal based on national insurance contributions, same level allowing for inflation, etc.).
Also, bear in mind that tax treatment of pension contributions and withdrawals may change (e.g. national insurance contributions may become due on withdrawals, less tax deduction on contributions, etc.).
Suggest keeping an eye on news, and be prepared to save more if needed.

Albermarle

HardCoreProgrammer2 said:

JoeCrystal said:

Retire on state pension income level at £9,339 at 58, using DC pensions until the state pension kicks in at 68.

I think it may be a tad optimistic to expect that in 33 years, the state pension will still exist in its current format (e.g. universal based on national insurance contributions, same level allowing for inflation, etc.).
Also, bear in mind that tax treatment of pension contributions and withdrawals may change (e.g. national insurance contributions may become due on withdrawals, less tax deduction on contributions, etc.).
Suggest keeping an eye on news, and be prepared to save more if needed.

Also in 33 years many things can happen in ones personal life , maybe expensive ones , so flexibility is a key point.

jamesd

A regular savings calculator suggests that each £100 monthly gross contribution from you, employer and tax relief will have these potential gross values:

1. In 22 years for age 58: £42,221 providing £1,477 a year for a 30 year plan with uncapped inflation increases, the 4% rule approach.

2. In 32 years for age 68: £77,669 providing £2,718 a year on the same basis.

Both assume investment growth of 4% plus inflation, the UK stock market having a long term average of a bit over 5% plus inflation.

The 100k today has these potential values with the same assumptions:

3. In 22 years £236,991 providing £8,284 annually. Or providing substitution for 10k of state pension for ten years deducting 100k fro value to do this, then providing annually £4,794 in addition before and after the state pension starts.

4. In 32 years £350,805 providing £12,278.

All figures are gross and inflation adjusted, so 100 is not nominal but 100 increasing with inflation.

Your plans:

Plan 1: you've already done more than required for this plan, as case 3 in this post illustrates for your existing 100k pot. You can not only retire ten years before state pension at the state pension level but top both up by an additional £4,794 a year even with no more pension contributions.

Plan 2 requires £16,961 from age 68 in today's money terms.  Case 4 provides £12,778, a shortfall of £4,183. Using case 2 4183 / 2718 * £100 = £154 a month of gross pension contributions needed to achieve plan 2 objective.

Assuming historic results it appears that both objectives are well within your reach and that it's possible to consider debt reduction. The consideration there being how debt costs compare with potential investment returns.

I've over-simplified the safe withdrawal rate at 3.5% in both cases, the 30 year plan level, needs to be a bit lower for 40 years but you might use Guyton-Klinger instead or start out less pessimistic.

coastline

Plan 1 and a part time job if needed ?. Much better and it gives you the extra leeway. You'll get to 58yo and ask yourself do I really need to go to 68yo. Fitness and health before money. Just need to look at what you can do for extra money. Maybe you've got a hobby which can provide income. Plenty people don't like gardening there's one for a start. Good luck.

Thrugelmir

If you have debt to repay. Make some sacrifices now.  Compounding does the heavy lifting , the longer your money is invested the better the final outcome. 

ex-pat_scot

Hard to forecast what will happen in the next 5 years, never mind 30 odd.

Better to concentrate on what you can control now.

1. how much you save.  Obvs the more the better. Make sure you maximise employer contributions.
2. where you invest. I would expect a high / 100% equity allocation, in a low cost passive global tracker
3. keep lifestyle creep under review. Divert a large part of payrises into savings / pension
4. diversify savings. LISA would be good. ISA also
5. don't sweat the short term issues. You have a 30 year planning horizon.
6. don't overpay the mortgage, for as long as rates are cheap. At the moment, it's better to be building your long term equity investments (pension, LISA etc) with any "spare" cash.
7. keep abreast of tax rules, and optimise wherever you can. This means salsac, watching out for child benefit thresholds, etc

Terron

At the moment, I am contributing £253.33 gross per month or 10% of my salary. I am just checking if it is possible to stop contributing £100 per month gross to focus on paying off my loans and still meet my plan 2. I am still contributing to a workplace auto-enrolment pension to get a fantastic employer's contribution of 3% above the qualifying limit. 

That depends on the loans.

There are almost certainly better options than reducing you payments into your workplace pension so don't stop that.

If the loan is a mortgage the interest rate is likely lower than what you earn in a pension.

If they are high interest loans and you can't replace them with lower interest ones then focussing on paying them off is probably a good idea.