What size pot for £25k pa

Mick70

If was age 55 this year and wanted to retire and to have £25k pa pension and increase that yearly with inflation (say it settles back to 2-3%), and would reduce slightly once get SP at 67, what size DC pot would you need now ?  Discussing this with a colleague (we both in 50s) , I thought 600/650k ?
but know more knowledgeable people post on here 

thanks
mick 

SouthCoastBoy

People often quote the 4% or 3.5% drawdown rule, so as a ballpark figure a million would be a reasonable starting point

GazzaBloom

How much you need can be a variable amount based on several factors such as state pensions, what the DC pension pot in invested in, what your tax minimisation strategy and drawdown plans are, i.e. UFPLS, flexi-access lump sum then drawdown etc. Also, how much flexibility you have with being able to adjust your drawdown amount, ie could you reduce 5% drawdown after a market decline, as an example?

It can be a bit of a moving feast with a range of numbers. I use software tools, as I'm sure many financial advisors do, to help plan this out and give me some level of confidence with planning for the leap into the dark.

Stubod

..also depends on when you are planning on dying and whether you intend to leave anything? The last time I checked annuity rates £100k would buy you about £4k per annum, index linked so I would guesstimate around £700k give or take, or a million just to be safe??

QrizB

Mick70 said:

If was age 55 this year and wanted to retire and to have £25k pa pension and increase that yearly with inflation (say it settles back to 2-3%), and would reduce slightly once get SP at 67, what size DC pot would you need now ?

In part it depends on what you mean by "slightly". Here are two example scenarios.

Hargreaves Lansdown's current best buy tables show that £100k will buy a 55-year-old £3257 of RPI-indexed annuity.

To generate £25k indefinitely would cost £770k.

To generate £15k indefinitely would cost £460k. You could top this up with £120k of index-linked gilts maturing to give £10k pa (as state pension replacement) for the next 12 years, to 67. That's a total of £580k.

Drawdown would probably cost less than this but then you're the one taking the risks, not the annuity provider.

Edited for typos.

OldScientist

Mick70 said:

If was age 55 this year and wanted to retire and to have £25k pa pension and increase that yearly with inflation (say it settles back to 2-3%), and would reduce slightly once get SP at 67, what size DC pot would you need now ?  Discussing this with a colleague (we both in 50s) , I thought 600/650k ?
but know more knowledgeable people post on here 

thanks
mick 

While a more detailed calculator would be useful, a quick and dirty approach might be to split  the retirement into two parts - pre-SP and post-SP.

Assuming you want a total of £30k post SP (you mention reducing the £25k a little), you would require a portfolio income of £20k - assuming 3.5% (upper end of historic 30 year UK retirements using a portfolio with 60% stocks and 40% fixed income) then you'd need about £600k to cover the post-SP part.

For the pre-SP period, you'd need £25k from the portfolio for 12 years. If you could build an inflation-linked gilt ladder, you would currently need about £300k (based on a real yield to maturity of 0.8%, pmt then gives a payout rate over 12 years of about 8.1%). In the absence of individual gilts, you could could approximate a nominal ladder with two funds* - a short term bond fund (duration~1-2 years) and a longer-term bond fund (duration~10 years) and achieve something similar, but with inflation risk. An alternative would be short term bonds funds and MMF, although both inflation and interest rate risks are then present.

Overall amount, not too far from the £1m suggested earlier.

Finally, as a rather different approach, a single life RPI annuity taken at 55yo (5 year guarantee) currently has a payout rate of 3.26% and therefore an income of £25k would require about £760k in total. Of course, if you have beneficiaries/legacy motives, then a longer guarantee or joint annuity might be more suitable (and would require more funds). The difference in funding level required between this approach and the drawdown approach (about £200k) could remain invested.

* This approximation cannot be done with an inflation linked ladder since, AFAIK, currently no short duration IL gilt (i.e. UK) funds are available (unless someone knows differently).

NannaH

Can people please stop saying ‘quick and dirty’ when referring to things. It’s absolutely vile. 

As is any reference to food being ‘dirty’ 🤢

Bimbly

Or...

3% drawdown rate. £25k divided by 3, multiplied by 100 gives you £833.33k. So, say a pot of £834k. That means, if you could achieve the annuity detailed above, it sounds a good deal!

You would have to believe in the principle of a 3% drawdown rate (I've erred on the cautious side, especially as starting at 55). You could probably reduce that a bit if you wanted less from age 67. Although, a buffer could be handy.

Pat38493

SouthCoastBoy said:

People often quote the 4% or 3.5% drawdown rule, so as a ballpark figure a million would be a reasonable starting point

This seems pretty high - OP is quoting £25K so £720K would be needed at 3.5%.  This would be further reduced if full state pension is available which would give 10.6K of the £25K from a certain point.  This means only £15K would be needed as a draw from 67 so that's more than a slight decrease.  

You would probably need to look at it as 2 steps - how much would you need at age 67 to provide 15K income for life, and then how much additional would you need to provide £25K for 12 years.

There is software and online tools that might help to estimate this.

Gut feel is that the OPs estimate is actually in the right ball park.

Exodi

SouthCoastBoy said:

People often quote the 4% or 3.5% drawdown rule, so as a ballpark figure a million would be a reasonable starting point

25000/0.04 = £625,000
25000/0.035 = £714,285

I think "a million would be a reasonable starting point" is a bit far-fetched, even if OP wanted to increase drawdown in line with inflation (which will likely be more than mitigated by the OP drawing down less when they claim SP). The 4% rule is also (theoretically) intended to preserve the original capital, which OP may not want to do.

Even a guaranteed income in the form of an annuity wouldn't cost that much:

For an annuity paying £25,000 per year, increasing by 3% single life with a 5 year guarantee, they'd need (25000/4087)*100000 = £611,695

For an annuity paying £25,000 per year, increasing by RPI single life with a 5 year guarantee, they'd need (25000/3257)*100000 = £767,577

And these are actually more than the OP asked for, as they said they'd be happy to reduce their drawdown when they hit SP age.

Source: https://www.hl.co.uk/retirement/annuities/best-buy-rates

OPs estimate of £600-£650k seems pretty close to be honest.

dunstonh

If was age 55 this year and wanted to retire and to have £25k pa pension and increase that yearly with inflation (say it settles back to 2-3%), 

Modelling inflation at 2-3% would be lower than average.   So, it would be a dangerous assumption to use over a 30-40 year range.  You should model higher than that.

You haven't given enough information to say what the figure should be.  For example, someone with 100% equities would have a different outcome to someone with 20% equities.    By quite a big distance.   However, assuming a higher amount of equities, then for the UK,  2.5% to 3% is considered a sustainable draw for someone in their mid 50s.         If you are looking to fund the gap until state pension age and then have a reduction, then you would need software modelling or a spreadsheet.  Modelling would be better as returns and inflation never have a straight line return or impact.