Planning - mid thirties

HCIMbtw

Hi all, I'm just seeking a bit of advice on how navigate pension planning.

I am 35, currently have about £70k in DC pension I should be able to access at 55, no plans to move it (as I will lose age of access). I also have about £5-6k in a SIPP that I use to be tax efficient on occasion I am paid a bonus - making my effective salary just less than the higher rate, I won't be able to access this until 57 I think.

In the next few months I am moving jobs, and getting a decent step up in pay and benefits, I would be able to max annual pension contributions (could actually go a little further than this for a couple of years due to carry forward), but I am really doubting if I should.

I'd like to retire at 55 at the latest but preferably earlier. I've no idea what the future holds with health, employment or pension regulations but if I were to max out pension contributions for the next 20 years even with modest growth I would breach current LTA by the likely time of access.

I'd generally like to have more flexibility with my current take home pay and be putting money into my ISA (I have only taken money out of it this past year). For the next few years I've a lot of childcare costs as well so the extra take home would be useful.

My strategy to date has been simple, avoid higher rate tax, put everything over into pension. But I am now trying to work out what amount I should be actually putting in? e.g. £30k a year, with 4% pot growth, stop working at 52, would see a pot hit just over £1mil at 58.

I've no idea if 4% growth is a good figure to use (I am very risk tolerant with fund selection), how to plan a target pot 20 years from now (e.g. how to incorporate inflation) .. so much unknown it makes it quite tough. 

Any advice on how people decide or plan for the right level so far out would be appreciated. 

Dh6

Hi, I’m in a near identical situation to you. 

Whichever planning assumptions you make are guaranteed to be wrong. My strategy is to save as much as I’m able to for the future and still be able to live for today. 

I use SIPP, S&S ISA and LISA for our early retirement plans. If it all works out then great, if not, we work for another few years. They’re certainly first world problems when you put them into context. 

You can only give yourself the best possible chance which it looks like you are. 

Best wishes

Linton

The easiest way to deal with inflation is to work entirely in current prices.  For my planning I assumed 1% growth above inflation of 3% which corresponds to your 4%.

So with a quick spreadsheet calculation:
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Assume £70K now, invested at 1% until you are 57 (you wont be able to access your pension before age 57 at least) with a contribution of £30K/year, inflation adjusted, gives a pot of around £700K at current prices.

Multiply the pot size by 0.035 (a reasonable sustainable drawdown rate increasing with  inflation) gives an annual income from your pot of £24.5K inflation linked.

But you will need to compensate for not getting SP for  the first 10 years which will cost you 10 X £10K leaving you with £600K for income.  £600K X 0.035=£21K + £10K=£31K/year total income.  So perhaps comfortable rather than luxury.

Assuming 2% above inflation return the pot size increases by about 11%, not an enormous difference.
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One item not included is employer's pension contribution.  And there are several numbers picked out of the air.  But with a spreadsheet based on a year by year calculation it should be straightforward to use whatever assumptions you want.

dunstonh

? e.g. £30k a year, with 4% pot growth, stop working at 52, would see a pot hit just over £1mil at 58.

You are 35.   At 58, £1m will have the spending power of around £448k.   Which would give an income of around £15,680 a year in todays terms.

HCIMbtw

Linton said:

The easiest way to deal with inflation is to work entirely in current prices.  For my planning I assumed 1% growth above inflation of 3% which corresponds to your 4%.

So with a quick spreadsheet calculation:
----------------------------------------------------------------------
Assume £70K now, invested at 1% until you are 57 (you wont be able to access your pension before age 57 at least) with a contribution of £30K/year, inflation adjusted, gives a pot of around £700K at current prices.

Multiply the pot size by 0.035 (a reasonable sustainable drawdown rate increasing with  inflation) gives an annual income from your pot of £24.5K inflation linked.

But you will need to compensate for not getting SP for  the first 10 years which will cost you 10 X £10K leaving you with £600K for income.  £600K X 0.035=£21K + £10K=£31K/year total income.  So perhaps comfortable rather than luxury.

Assuming 2% above inflation return the pot size increases by about 11%, not an enormous difference.
------------------------------------------------------------------------

One item not included is employer's pension contribution.  And there are several numbers picked out of the air.  But with a spreadsheet based on a year by year calculation it should be straightforward to use whatever assumptions you want.

I like this way of looking at inflation, thanks linton. For reference I just bundle the employers contribution into the theoretical £30k. think it simpler to talk about like that rather than trying to split. 

I have been told the trust my current 70k pension is part of has an unqualified right of access of 55 though, which is one of the reasons I won't be moving it.. planning to use it as part of the bridge to other pots available at 57-58. 

HCIMbtw

dunstonh said:

? e.g. £30k a year, with 4% pot growth, stop working at 52, would see a pot hit just over £1mil at 58.

You are 35.   At 58, £1m will have the spending power of around £448k.   Which would give an income of around £15,680 a year in todays terms.

What rate of inflation did you use for that? 

The whole idea of being invested is preserve value relative to inflation and with your example I'd be losing almost 25%. 

But it is this type of inflationary risk that makes me consider stop putting so much money into pension wrappers...

dunstonh

What rate of inflation did you use for that? 

The whole idea of being invested is preserve value relative to inflation and with your example I'd be losing almost 25%. 

I ignored growth and used 67% over 10 years.

But it is this type of inflationary risk that makes me consider stop putting so much money into pension wrappers...

Not sure I follow why.   The tax wrapper you use doesn't change the rate your money is affected by inflation.

HCIMbtw

dunstonh said:

But it is this type of inflationary risk that makes me consider stop putting so much money into pension wrappers...

Not sure I follow why.   The tax wrapper you use doesn't change the rate your money is affected by inflation.

Ahh.. I left a lot unsaid here.. was thinking about property investment and ability to withdraw money pension.. and my issue not really inflationary risk, but more (and not to be to sky is falling down here) currency collapse

ORC

I'm in a similar position also, just a few years further down the road. I've not managed to find a perfect solution but the key things for me are:

1. Flexibility / use of money outside vs inside pension - in particular I've built up an emergency fund and focused on reducing my mortgage. I also have a wife and family, and therefore we try to balance saving/investing/paying down mortgage with enjoying our money now.

2. Tax - there are some horrendous effective tax rates connected to higher rate tax, children benefit, childcare free hours, personal allowance removal. I tend to focus on these more immediate issues than the prospect of the LTA applying many years down the line. That's not to say I don't bear the LTA in mind when I'm planning our family finances though (wife won't get near LTA).

Good luck!

Cornish_mum

We are both in a similar situation, though a bit older and only recently bumped up into HTR. Currently we both Salsac to just below 50k (child benefit threshold). 

I have been concerned about LTA for my husband (he is the higher earner), & isn’t keen on early retirement as he really loves his job, and hence is likely to breach LTA or will have to forgo employer pension contributions (which would be extremely annoying as these are a DB/DC very generous hybrid scheme). I am planning to retire as soon as I approach the LTA.

I am concerned I have fallen into a tail wagging the dog strategy focusing on short-term tax advantage rather than the longer term. Currently I think we will carry on as we are for a few years and review again, when my husband next gets promoted. 

We previously also overpaid the mortgage but we lucked out and remortgaged December 2021 (.94%), so now we are saving into cash (informal overset). These funds will be used when the fix ends to pay down the mortgage or for a substantial renovation/extension project on our home, which isn’t necessary but will add value. 

I also save monthly into S&S ISA (this the kids wedding fund) ~15 years time, which may proceed my retirement.  

The kids have separate (university) savings accounts in cash which we contribute to when we have a bit spare. These are to be accessed in 7-10 years. 

We also have a 12 months emergency fund in cash. All of which inflation is rapidly eroding. But we are quite cautious so prefer to have cash on hand and top up from income, as we value always having enough to hand for life’s surprises rather than maximising our total amount.

Albermarle

I have been concerned about LTA for my husband (he is the higher earner), & isn’t keen on early retirement as he really loves his job, and hence is likely to breach LTA or will have to forgo employer pension contributions (which would be extremely annoying as these are a DB/DC very generous hybrid scheme)

There are scenarios, where the benefits of continuing to pay into a pension scheme can outweigh LTA penalties.

I am not saying this is one, but it might be. Do not let 'fear' of paying LTA cloud your judgement too much. For a higher rate taxpayer now, and a basic rate taxpayer in retirement, there is no loss or gain if you have to pay LTA. So any benefits on top like employer contributions etc are a gain, even minus LTA charge.