Is my Pension Pot too Small? 16 February at 4:20PM edited 16 February at 4:31PM in Pensions, annuities & retirement planning 37 replies 5K views

SieIso

Hi All,

I have just turned 39 and I have a pension pot of £73k, I pay in 7.5% of my salary and my employer pays in 11.5% (I am on £39k but up until this month have been on £30k). However, a number of people have said my pot it alarmingly low and that I need to address this. Nobody is clear on what my pot should be, is there a formula for working this out? I do want to address this issue if my current pot is dangerously low.

Thanks in advance.

lisyloo

I can do a very rough formula, but it does depend on what kind of lifestyle you want.

So as a rough and ready example, I want 28K net to live on which is 30K gross (you have to pay income tax).
So I think I need a pot of £750K for that.
That would be for quite a comfortable retirement with nice holidays.

So yes I'd say your pot is low.

What level of income do you want? start from there.

I have mine broken down, so for example I know I want £2K to run my vehicles and £1200 to spend on travel (petrol, parking), £1500 on gifts and £2500 on entertainment.
I worked this out by looking at my current spending.

So the important question is how much per annum do you want to live on Net of tax?
From there we can work out gross and size of pot.

Th rough formula I'm using is 
25 x annual gross (before tax) income requirement

Some will say that's not quite right but I think it's ballpark for the stage your at right now - which I'd call macro rather than micro planning.

SieIso

lisyloo said:

I can do a very rough formula, but it does depend on what kind of lifestyle you want.

So as a rough and ready example, I want 28K net to live on which is 30K gross (you have to pay income tax).
So I think I need a pot of £750K for that.
That would be for quite a comfortable retirement with nice holidays.

So yes I'd say your pot is low.

What level of income do you want? start from there.

I have mine broken down, so for example I know I want £2K to run my vehicles and £1200 to spend on travel (petrol, parking), £1500 on gifts and £2500 on entertainment.
I worked this out by looking at my current spending.

So the important question is how much per annum do you want to live on Net of tax?
From there we can work out gross and size of pot.

Th rough formula I'm using is 
25 x annual gross (before tax) income requirement

Some will say that's not quite right but I think it's ballpark for the stage your at right now - which I'd call macro rather than micro planning.

The formula we were taught was up until 40 years of age, the pot should be double your age so at least £80k.

R_P_W

SieIso said:

Hi All,

I have just turned 39 and I have a pension pot of £73k, I pay in 7.5% of my salary and my employer pays in 11.5% (I am on £39k but up until this month have been on £30k). However, a number of people have said my pot it alarmingly low and that I need to address this. Nobody is clear on what my pot should be, is there a formula for working this out? I do want to address this issue if my current pot is dangerously low.

Thanks in advance.

It probably is a little on the low side, ideally at 40 I think they say 3 x your salary.  However, the good news is that the pension contribution from your employer is pretty decent at that % so you have nearly 20% of your income going into your pension.  If you assume that is the case for the next 20 years with an average return of 8% then you start to approach the 750k pot, however if average returns are closer to 5% then obviously that number will reduce.

You are where you are, looks like your income has increased nicely recently.  Play about with some numbers and see where you think you want to get to and when - that will help inform whether you need to do anything more now if you can afford to.  Remember its likely that you will remain invested when you reach retirement age, unless you buy a fixed income annuity.

Albermarle

I do not think anybody said it was ' alarmingly low', . Probably it is quite a bit higher than average, although many people have inadequate pension pots  However as you were asking about what to do with £115K, then in that context adding some of it to your pension seemed a good idea, as it was not that high either.
Now you have said that nearly 20% is going in it, with an increased salary that sounds positive.

Nobody is clear on what my pot should be, is there a formula for working this out 
A lot depends on your plans/objectives.
If you plan to work until state pension age and are then happy to live a relatively modest lifestyle, then your pot looks more than  fine.
If you plan to retire a few years earlier than that, and/or you have ideas about a more comfortable retirement, then good that you are adding a decent % each month and maybe adding a lump sum to it and seeing your salary increase.
If you plan to retire at 55 and/or spend your retirement on expensive holidays, having new cars  etc then probably best to get another better paying job.

Also it depends on other assets you might have at retirement, although typically a pension is the biggest one. Also it is cheaper for two to live together than one ( usually anyway )

So you can pick any figure you like, within a big range.
As an example the current state pension is £10K pa. If you wanted an additional  sustainable similar income from a pension you would need a pot of approx £250,000
If you wanted to retire early and have a pretty decent lifestyle, then maybe a Million would be needed. Although there are many posters on this forum who have retired pretty early on a lot less, but they tend to be rather careful spenders.

Currently you are maybe on target for a Third of a Million @ age 60 ( real back of a fag packet calculation), which is way above average and seems a big figure, but as you might well live until 90+,  you can't spend it all too quick.

eskbanker

SieIso said:
The formula we were taught was up until 40 years of age, the pot should be double your age so at least £80k.

If measured against that then your pot would be adequate, but what does that 'rule' entail doing once you reach 40 with a potential need to boost it significantly (depending on your retirement plans)?

cloud_dog

SieIso said:

Hi All,

I have just turned 39 and I have a pension pot of £73k, I pay in 7.5% of my salary and my employer pays in 11.5% (I am on £39k but up until this month have been on £30k). However, a number of people have said my pot it alarmingly low and that I need to address this. Nobody is clear on what my pot should be, is there a formula for working this out? I do want to address this issue if my current pot is dangerously low.

Thanks in advance.

Fidelity offer some useful retirement guides.  You may want tot look at the 'Power of 7'.

https://retirement.fidelity.co.uk/retirement-savings-guidelines/#/

Albermarle

OP, A few different figures flying around so for clarity .
I said 
Currently you are maybe on target for a Third of a Million @ age 60
Another poster said 
If you assume that is the case for the next 20 years with an average return of 8% then you start to approach the 750k pot, however if average returns are closer to 5% then obviously that number will reduce.

The difference is ( I am pretty sure anyway ) is that the third of a million is in todays money, so takes account of estimated inflation. The £750K does not take account of inflation and £750K in 20/25 years time will not be worth anything like that much in real terms due to inflation. 
Although there is quite an element of 'finger in the air' for both calculations.

Another poster said 
So as a rough and ready example, I want 28K net to live on which is 30K gross (you have to pay income tax).
So I think I need a pot of £750K for that.

However your state pension will kick in at some point ( or two if you have a partner) so this means that your personal pension has to generate less , or you can start spending more .

Finally how your pension is invested can have a significant effect on the outcome.

Grumpy_chap

lisyloo said:

So as a rough and ready example, I want 28K net to live on which is 30K gross (you have to pay income tax).
So I think I need a pot of £750K for that.

Th rough formula I'm using is 
25 x annual gross (before tax) income requirement

That formula is the inverse expression of 4% SWR.

That pot value is what you need at retirement age - I am not sure how that equates to what you need at 20 - 30 - 40 - 50 - 60

lisyloo

Grumpy_chap said:

lisyloo said:

So as a rough and ready example, I want 28K net to live on which is 30K gross (you have to pay income tax).
So I think I need a pot of £750K for that.

Th rough formula I'm using is 
25 x annual gross (before tax) income requirement

That formula is the inverse expression of 4% SWR.

That pot value is what you need at retirement age - I am not sure how that equates to what you need at 20 - 30 - 40 - 50 - 60

Yes correct 4%, which some say is too high, others say is fine if you don’t have beneficiaries (and I said was simplistic for macro planning for ball park).

you would need to do further calculations (personally I find excel easy) to work out whether your on track, but my main point was that first you need to start with whether you want £250k, £500k, £750k, or £1 million.

no one can be clear on what the pot should be until they know the end goal

bd10

One thing we need to keep an eye on is inflation. Sure, current levels are quite extraordinary and are unlikely to stay with us for a prolonged period of time. However, even an additional 1% over the central bank's target rate, compounded over say 25 years reduces the purchasing power of £1.00 to 78p. So even if using today's price levels I would eye-ball my savings pot size to support a 3-4% safe withdrawal rate, I'd need an additional 28% of that pot size in today's money just to compensate for an additional 1% inflation rate.

I don't have a crystal ball for the inflation dynamics over the coming years and decades, but I am running my own calculations on a real basis (2022 = 100) and compensate my nominal savings by the observed rate of inflation to meet my real growth of pot size. If I end up saving too much for a (few) years, then so be it, might even afford me to retire bit earlier, but the downside risk is much more scary, not realising the erosion of purchasing power over say a decade and then having one decade less of compounding when trying to make up for it then.