Pension pot could get "too big"?

Pat38493

Albermarle said:

In this case the projections show that the chance of the pot running out before you are 90/95 is acceptably low. 

Out of interest what do you consider as acceptably low?  I assume you are using one of those tools like Timeline or cfiresim.  I'm never quite sure whether we should aim for 100% or 80% or whatever.  I saw an IFA mention 90% as the figure he generally recommends to clients as a baseline.

NedS

Pat38493 said:

Albermarle said:

In this case the projections show that the chance of the pot running out before you are 90/95 is acceptably low. 

Out of interest what do you consider as acceptably low?  I assume you are using one of those tools like Timeline or cfiresim.  I'm never quite sure whether we should aim for 100% or 80% or whatever.  I saw an IFA mention 90% as the figure he generally recommends to clients as a baseline.

As it's just a starting point, I would aim for a high success percentage and be prepared to adjust my plan during retirement as events unfold. One thing is for sure, whatever it is at the start of the plan will not be the same as it is at the end, or 10 years in.

Those with no ability to be flexible or adjust their plan should aim for 100% as anything else may result in failure.

Albermarle

Pat38493 said:

Albermarle said:

In this case the projections show that the chance of the pot running out before you are 90/95 is acceptably low. 

Out of interest what do you consider as acceptably low?  I assume you are using one of those tools like Timeline or cfiresim.  I'm never quite sure whether we should aim for 100% or 80% or whatever.  I saw an IFA mention 90% as the figure he generally recommends to clients as a baseline.

I am not doing my own calculations, just approx outlining the usual description of SWR's. I think it is usually 90 or 95% that is aimed for. But as Neds says, although the SWR procees is quite rigid in theory, in practice you will tend to review if from time to time anyway.

Albermarle

beeza650 said:

@Albermarle I'll try that out - what do they suggest to use as the inflation figure though?

Nothing is suggested as an inflation estimate.
You increase the income you take by whatever inflation happens to be.

For example
Pension pot of £400K 
4% of that is £16K you take in the first year.
If inflation is say 5% , you increase the £16K by 5% .
You do this regardless of whether your pot has gone up or down in the previous 12 months.
Historical statistical modelling shows that even in the most difficult 30 year market periods, you should hopefully not run out. If markets are kind then you will have a lot left.
That is just the basics though and there are variations, such as where you do vary income more in line with your pots performance. This explains some of the ideas.
Setting a strategy for retirement withdrawals (vanguard.com)

beeza650

Hmm - so based on the 40% tax situation you could extrapolate that a pot at retirement of which 4% is the 40% threshold is one place to start. i.e. assuming you were retiring tomorrow the pot needs to be about £1.25M for 4% to be £50,271.
What that doesn't take into account is state pension though - meaning 4% of private pension + state might put you into the 40% bracket.

NedS

beeza650 said:

Hmm - so based on the 40% tax situation you could extrapolate that a pot at retirement of which 4% is the 40% threshold is one place to start. i.e. assuming you were retiring tomorrow the pot needs to be about £1.25M for 4% to be £50,271.
What that doesn't take into account is state pension though - meaning 4% of private pension + state might put you into the 40% bracket.

Yes, taking State Pension into consideration, if your desire is to stay under the 40% tax threshold you'd either need a smaller pot or take a lower percentage, both of which are presumably a good thing?

bostonerimus

There's an easy way to tax efficiently control the size of a pension pot; give to charity.

If you are lucky enough to have a big pension pot with a probable surplus beyond your retirement income needs then you should to do some estate planning. That's going to involve tax planning, wills, maybe trusts, and you should consider gifts and charitable giving.

MoosMum

beeza650 said:

Hmm - so based on the 40% tax situation you could extrapolate that a pot at retirement of which 4% is the 40% threshold is one place to start. i.e. assuming you were retiring tomorrow the pot needs to be about £1.25M for 4% to be £50,271.
What that doesn't take into account is state pension though - meaning 4% of private pension + state might put you into the 40% bracket.

Same quandary as OP. Current DB I am due to take shortly  means I can get some out of DC  pot at 20% over next few years but with DB increases and SP will be paying 40% in a few years . I understand that there is a gain from paying in now and claiming back HR tax from HMRC and I suppose personal allowance  and tax thresholds will eventually go up. I could reduce my DB and take higher lump sum but as DB linked to CPI and conversion rate very poor not a lot I can do , unless I'm missing something ?

Albermarle

Avoiding paying 40% tax should not be a primary objective.
You should decide what you would like your retirement income to be + maybe things like early retirement date, inheritance strategy etc.
If you can achieve this without paying more tax then great, but if to get where you want to be, this means paying some more tax then so what.
Having to pay 40% tax in retirement, means you have won the game anyway .