Is my Pension Pot too Small?

Marcon

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.

If nobody is clear on what your pot 'should' be, how they also be sure it is 'alarmingly low'? That's certainly far from the case for someone who, until recently, was on a £30K salary.

The old adage of 'save as much as you can as early as you can' still holds good - to a point. The power of compound interest is a wonderful thing, but you also need to fund your living costs today without having to resort to borrowing.

If you can comfortably afford to pay more into your pension, do so - and then review again in a few years. You might also check the suitability of the funds in which you are invested. If they are too cautious, you'll limit the potential for significant growth; too adventurous (depending on your risk appetite) and you could end up frightening yourself as the value of the pot moves around!

mark5

There was a similar topic on here last week a guy asking if a pot of 70k was low at 40.

Personally I don’t think your pot is low for your age based on past earnings of 30k, I don’t think its high either btw.

I think my pension was touching 90k at 39 so not a massive difference with yours, I was earning about 35k at the time but with the minimum employer contribution. I’ll never see 9k pay rises either.

I do think your lucky to have a decent employer contribution but think your slightly throwing this away by not contributing a decent amount yourself, just my opinion though.

You often find the ones with massive pensions are the ones in defined benefit pensions who are quoting cetv figures etc, don’t compare your pension to these or people who earn twice as much.

eskbanker

Marcon said:

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.

If nobody is clear on what your pot 'should' be, how they also be sure it is 'alarmingly low'?

I don't recall anyone using the phrase 'alarmingly' or 'dangerously' low but to provide some context, OP's other thread highlighted a pension pot of £73K while concurrently wondering what to do with over twice that amount sloshing around in easy access accounts, while tinkering with a regular saver and a S&S ISA:

https://forums.moneysavingexpert.com/discussion/6424050/what-to-do-with-115k/p1

Workerdrone

Your comment caused me to look back at mine. At 39, mine was around 58k.  Divorce, losing a house and a good 6 years disastrous self employment where I couldn't afford to contribute had a knock on effect. But to be honest I wasn't worried back then. I was quite pleasantly surprised by how it had racked up. But it did make me take pension saving more seriously for the past decade. I've only just hit 38.5k salary last month. I'd definitely be putting more in if I were you. I also wouldn't take heed to anyone who says its disastrously low at 39. I know plenty of people who have less than that in there 50's. Now that to me is worryingly low.

noclaf

OP, I would say you are doing fine and as other have mentioned, where you can increase contributions then do so whilst balancing with enough take-home pay to support your living costs and of course some 'living for the moment' as life can be short. 

I am interested to know from other posters, what assumptions do you make when trying to calculate your monthly pension contribution levels Vs your target pension value at retirement?

I am struggling with this now, as with a young child in tow am more mindful of the need to build up my 'accesible' investments (ISA's) as well as maintaining a rainy day cash buffer however like the OP I think my pension needs some focus. For example if I was trying to take my overall DC pot(s) value from £100k to £500k in 15 years aside from putting in as much as possible how else would you approach it esp in ref to assumed return from Global Equities during that period and required monthly contributions? I am trying to 'front load' big contributions now in the hope that even if I drop them down a bit after child costs increase it will help balance out....reasonable approach? 

bd10

noclaf said:

I am interested to know from other posters, what assumptions do you make when trying to calculate your monthly pension contribution levels Vs your target pension value at retirement?

I start with the pot size in today's money, how much I would need if I were to retire today at 60 or 65 with a low annuity rate of say 3% for 30-35 years using standard life expectancies. Tax is factored in. Next I calculate the annual real savings I would need to get to these pot sizes given real return assumptions. For those I am using conservative estimates for equities and bonds going back as long as possible, not extrapolating from the past decade of cheap money. Doing this in a spreadsheet, this gives me real growth curves, each year with a real equity value, starting with today's pot size all the way to retirement at 60 or 65. As real numbers are never observed, I then translate those into nominal terms for which I need to make an assumption for the rate of inflation. Once I have the nominal amounts, I then can compare yearly what my account balances are against my nominal targets.

If market returns look poor, I throw more savings at it to meet my target.

As for the amount I need to save, I can calculate this by solving this in excel (goal-seek) or numerically otherwise given a rate of return. That's really the crucial part. If I were to assume 5% real returns for example and that I needed to save 10k per year to achieve my target, then I'd be looking at how I am saving today: how much DC already, how much can I put away separately to meet my 10k real per year.

Hope this makes sense. Not easy to describe my spreadsheets in words.

Workerdrone

bd10 said:

noclaf said:

I am interested to know from other posters, what assumptions do you make when trying to calculate your monthly pension contribution levels Vs your target pension value at retirement?

I start with the pot size in today's money, how much I would need if I were to retire today at 60 or 65 with a low annuity rate of say 3% for 30-35 years using standard life expectancies. Tax is factored in. Next I calculate the annual real savings I would need to get to these pot sizes given real return assumptions. For those I am using conservative estimates for equities and bonds going back as long as possible, not extrapolating from the past decade of cheap money. Doing this in a spreadsheet, this gives me real growth curves, each year with a real equity value, starting with today's pot size all the way to retirement at 60 or 65. As real numbers are never observed, I then translate those into nominal terms for which I need to make an assumption for the rate of inflation. Once I have the nominal amounts, I then can compare yearly what my account balances are against my nominal targets.

If market returns look poor, I throw more savings at it to meet my target.

As for the amount I need to save, I can calculate this by solving this in excel (goal-seek) or numerically otherwise given a rate of return. That's really the crucial part. If I were to assume 5% real returns for example and that I needed to save 10k per year to achieve my target, then I'd be looking at how I am saving today: how much DC already, how much can I put away separately to meet my 10k real per year.

Hope this makes sense. Not easy to describe my spreadsheets in words.

Seems eminently sensible. What return does your historical analysis give for equities only over the longer period?

Anonymous101

Objectively I'd say you were doing ok but not well.
As other have said to get a more accurate picture of how you're doing you really need to set it in proper context. What is the desired outcome? When do you expect to start drawing this down and by how much? They are the two critical factors really and without these its difficult to say how you are doing.

Also you have to measure bear in mind your recent salary has been £30k. A bump up to £39k is a substantial increase and although no doubt much of it will be taken up by cost of living increases increases like these are an ideal time to nudge up your pension contributions.

bd10

My personal assumptions are: long term inflation rate of 3% and for asset returns 5-6% nominal. For 2023 I am using 6.3% inflation, 4-5% for 2024 and then 3% thereafter. As you will notice, my nominal equity returns are below historical averages and here I make a judgement call to err on the cautious side. The era of QE and cheap money is over, we have an accelerating demographic change to deal with, re-shoring of supply chains keeping the costs higher and thus corporate profits lower and last but not least the huge costs of trying to achieve net zero. So I end up using 2-3% real returns which may sound poor and I may be well below the actual returns which we may see in the future, totally agree. Who knows. But here's the thing: I am more likely to over-save than under-save and if I keep at my own pace of aggressive savings I may be able to retire a few years before 65 instead of being overly optimistic and then realising I am behind target.

You can have a look at Vanguard's returns outlook, even Jack Bogle had a chapter partially dedicated to that in his Little Book of Common Sense Investing. Credit Suisse's outlooks are similar to both as well.

Anonymous101

noclaf said:

OP, I would say you are doing fine and as other have mentioned, where you can increase contributions then do so whilst balancing with enough take-home pay to support your living costs and of course some 'living for the moment' as life can be short. 

I am interested to know from other posters, what assumptions do you make when trying to calculate your monthly pension contribution levels Vs your target pension value at retirement?

I am struggling with this now, as with a young child in tow am more mindful of the need to build up my 'accesible' investments (ISA's) as well as maintaining a rainy day cash buffer however like the OP I think my pension needs some focus. For example if I was trying to take my overall DC pot(s) value from £100k to £500k in 15 years aside from putting in as much as possible how else would you approach it esp in ref to assumed return from Global Equities during that period and required monthly contributions? I am trying to 'front load' big contributions now in the hope that even if I drop them down a bit after child costs increase it will help balance out....reasonable approach? 

I try to simplify as much as reasonable. So assume everything is in todays money and reduce my annual returns to expected above inflation. I use a model incorporating "compound interest for principle" and "future value of a series" within Excel to work out a range of possible pot sizes based upon various scenario's and update month by month. Sounds much more complex than it is.

I'm in a similar space with two young children and associated childcare costs. My view is that I intend to contribute as much as possible as early as possible. All my contributions are likely to be from the 40% tax bracket so that isn't an additional consideration.

Once childcare costs reduce I'll likely increase pension contributions further for 3-5 years keeping an eye on both my income tax and likely growth. I have a low water mark in terms of what I need and ensure that I'm always above this. At the upper extreme of this is the LTA. If I were to begin to forecast breaching current LTA then I'd scale back additional contributions and focus on ISA's (both mine and the wifes) and my wife's pension.

I think your plan is reasonable. It's wise to set off down a path and then keep adjusting as you progress. Things change, income changes, spending and costs change and rules change for you need to be flexible whilst still holding in mind the end goal.