Effect of inflation on pension spreadsheet + other questions

beeza650

Below is a screenshot of my pension calculator.
My plan is to take a lump sum at 57 and buy something - a place abroad probably.
I'd then withdraw up to the 40% tax threshold come 57.

Question 1. Do we think 25% tax free lump sump will continue to have a max cap based on LTA?

I've factored in full state pension inflation to be the same as average CPI over past years - 2.5%(though not the most recent 2 years as I set this sheet up a while ago)
Now the thing is the 40% threshold. If that lags behind inflation then the spending power of my total income aged 80 is going to be a lot less than at 58.

Question 2. Am I being too pessimistic with the 1% upper band threshold increase per year?

Question 3. Can/should I stop work earlier? I can't withdraw from my pension until 57 of course (but I have savings). My worry is I won't get to spend all my pension. 

If you're wondering why I'm ploughing so much into my pension this year it's because I'm a contractor through an umbrella company so I pay my own Employers NI and Apprenticeship levy. Even exceeding the yearly allowance, there's still a couple of % tax saving at least providing I withdraw at < 40% threshold. I may do the same next year - perhaps more so - running the sums on that today.

I'll paste 2 scenarios below - the first is described at the beginning of my post and based on a steady 4% growth.



The second scenario shows 3 chunky 10% drops - I suppose if we see a big drop before I intend to retire then I'd just work another year or two to counteract it so maybe it's not realistic to include the first one. If I didn't keep working then I'd run out of money in my early 80s - a WORLD APART from still having £750k - it's amazing the impact a few drops would have!!

Marcon

beeza650 said:

Below is a screenshot of my pension calculator.
My plan is to take a lump sum at 57 and buy something - a place abroad probably.
I'd then withdraw up to the 40% tax threshold come 57.

Question 1. Do we think 25% tax free lump sump will continue to have a max cap based on LTA?

I've factored in full state pension inflation to be the same as average CPI over past years - 2.5%(though not the most recent 2 years as I set this sheet up a while ago)
Now the thing is the 40% threshold. If that lags behind inflation then the spending power of my total income aged 80 is going to be a lot less than at 58.

Question 2. Am I being too pessimistic with the 1% upper band threshold increase per year?

Question 3. Can/should I stop work earlier? I can't withdraw from my pension until 57 of course (but I have savings). My worry is I won't get to spend all my pension. 

If you're wondering why I'm ploughing so much into my pension this year it's because I'm a contractor through an umbrella company so I pay my own Employers NI and Apprenticeship levy. Even exceeding the yearly allowance, there's still a couple of % tax saving at least providing I withdraw at < 40% threshold. I may do the same next year - perhaps more so - running the sums on that today.

1. Who knows? It'll only be guesswork and your guess is as good as anyone else's! That said, if Labour get in, they aren't likely to be increasing the cap on tax free cash any time soon.
3. Depends how much you enjoy working and how emotionally comfortable you'd be if you stopped work and knew you'd have no further earned income. You don't have to stop work to spend your pension - most of us manage to work and spend at the same time...

Linton

beeza650 said:

Below is a screenshot of my pension calculator.
My plan is to take a lump sum at 57 and buy something - a place abroad probably.
I'd then withdraw up to the 40% tax threshold come 57.

Question 1. Do we think 25% tax free lump sump will continue to have a max cap based on LTA?

I've factored in full state pension inflation to be the same as average CPI over past years - 2.5%(though not the most recent 2 years as I set this sheet up a while ago)
Now the thing is the 40% threshold. If that lags behind inflation then the spending power of my total income aged 80 is going to be a lot less than at 58.

Question 2. Am I being too pessimistic with the 1% upper band threshold increase per year?

Question 3. Can/should I stop work earlier? I can't withdraw from my pension until 57 of course (but I have savings). My worry is I won't get to spend all my pension. 

If you're wondering why I'm ploughing so much into my pension this year it's because I'm a contractor through an umbrella company so I pay my own Employers NI and Apprenticeship levy. Even exceeding the yearly allowance, there's still a couple of % tax saving at least providing I withdraw at < 40% threshold. I may do the same next year - perhaps more so - running the sums on that today.

I'll paste 2 scenarios below - the first is described at the beginning of my post and based on a steady 4% growth.



The second scenario shows 3 chunky 10% drops - I suppose if we see a big drop before I intend to retire then I'd just work another year or two to counteract it so maybe it's not realistic to include the first one. If I didn't keep working then I'd run out of money in my early 80s - a WORLD APART from still having £750k - it's amazing the impact a few drops would have!!

Q1/Q2) predicting future legislation is impossible.  All you can do is to make a sensible assumption based on current values, erring somewhat on the pessimistic side, and change your plans if circumstances change.  The way I handle those sort of unknowns is to ensure there is a reasonable amount of slack given by wealth remaining at the end of the plan. There is no gain in accuracy by making it more complex.

Q3)  You have not said how much income you need to live on.  This is a far more important driver of retirement plans than tax bands. Tax bands are an implementation detail.  Without this info it is difficult to say whether you can retire early,  For example if your tax-driven draw-down is well above your needs you could pay the excess into an S&S ISA in order to increase income later in life.

With a £1M pot one would have thought that an earlier retirement is possible whilst still continuing to live a comfortable standard of living.  But that really depends on what you consider to be "comfortable".

Other points
a) why stop at 81?  If you are in average health your life expectancy if you reach 81 is around 10 further years.

b) Your assumption of a series of 10% permanent losses as well as an historically low 4% gross return is unreasonable I think.  Better to assume a pessimistic average increase rate and then if you wish model a temporary crash and recovery.

DT2001

1. Yes is my guess as any increase will be seen as another helping hand to the wealthy.
2. Yes IMO although it won’t increase smoothly it will rise more in line with inflation to avoid greater fiscal drag
3. We need more information. How much are your savings and what are you going to spend/do in retirement? I think your stated concern of not spending all your pension fund is, personally, the wrong way to be approaching the exercise. The idea is surely to have enough to do what you want without worrying too much

Albermarle

Presume the 4% ( or 3% on average) growth is before inflation, so only 0.5% ahead of predicted inflation.
That is pretty pessimistic even for someone with a cautious outlook. Normally 1 to 2 % above inflation is seen as a cautious estimate long term.
Maybe leave the 4 % average return in, but ditch the 10% drops as the 4% average takes care of the ups and downs of the market. In reality it can swing a lot more than 10% anyway, in both directions.

Also regarding longevity, someone around age 50 can expect on average to live to around 83. That means 50% will longer than that, especially if you have education/money/no serious health issues or bad habits.
Living to your Nineties is quite common nowadays.

beeza650

@Marcon re: Qu 3.You're sort of onto something. I expect I spend nowhere near what most do on my income. I feel I need to get the stage where I feel comfortable enough to reverse that. Better holidays for the family, a cleaner etc. I've been "saving" for a nicer house but the kids are now in a school we can quickly walk to for the next 6 years.

@Linton I don't know how much I'll need. I can't realistically see it exceeding the 20% bracket + whatever I dip into from other savings. My folks in their mid(ish) 70s spend about £45K per year and I'd be happy with their standard of living. I'm not stopping at 81 - that's all I took a screenshot of. Perhaps 4% is fine then? The point of the other illustration was just to indicate how massive an impact it makes.

@DT2001 my goal is not to use up all my pension savings as such. It's to stop work as soon as I can - or at the very least know that I can. I've got £500k ish in savings (no debts) but a lot of that will go on my kids, they're 4 and 7 so a lot of outgoings there - especially if I help them onto the housing ladder. I'd also like to get a nicer home, at some stage, that will use a big, £300K+ chunk.

@Albermarle yes the 4% didn't factor in inflation. Leaving out the 10% drops I'd have half a million left at 95!!
I don't see myself living to a crazy age - I keep sort of fit (albeit only recently) but drink a lot and don't see that calming down in old age. Quite envy the old boys in the pub sitting by the fire

RogerPensionGuy

Question 1. Do we think 25% tax free lump sump will continue to have a max cap based on LTA?

A. I think possible they will put the max possible 268K/1.073M TFLS up and there's plenty of good reasons why they would do this.

I don't think it won't have an upper limit, but it could easily be set as say 300K or 350K and hopefully be placed on some sensible indexing, I think the current status of DC schemes and the current IHT rules, will indeed induce the TFLS X amount going up to temp more people to vent these TFLS in to the economy. 
☆☆☆

Question 2. Am I being too pessimistic with the 1% upper band threshold increase per year?

A. Think your assumption is okay, but plan both ways that your assumption turns out to be way off the reality. 
☆☆☆

Question 3. Can/should I stop work earlier? I can't withdraw from my pension until 57 of course (but I have savings). My worry is I won't get to spend all my pension. 

A. Maybe keep your plans fluid and adjust if desired or maybe work less and more time off in that zone between full time work and being fully out of paid employment. 
☆☆☆

The OP is certainly doing plenty of planning and that's good to view, maybe the planning should include a period of lower inputs or possibly zero for a few blocks.

I do wonder if the AA will indeed go down in the near future, that last increase of 50% in April2023, I would plan that it will actually go down as its been a political football for 15 years to this point.

Cheers Roger. 

Hoenir

RogerPensionGuy said:

A. I think possible they will put the max possible 268K/1.073M TFLS up and there's plenty of good reasons why they would do this.

Few people hit the ceiling. Politically not a good move. At a time when many people are struggling just to pay their bills. 

SouthCoastBoy

I think inflation at 2.5% is optimistic. I've factored 6% for next two years, then 4% for 3 years, I think it will be going back up, after this temporary lull, core inflation is still above 5% at the moment, from memory I think 5.7%

Also I would put the pension balance into real terms rather than nominal. I don't bother to increase state pension by inflation as currently it should rise with inflation, so it will always be in real terms (at the moment)

SouthCoastBoy

Albermarle said:

Presume the 4% ( or 3% on average) growth is before inflation, so only 0.5% ahead of predicted inflation.
That is pretty pessimistic even for someone with a cautious outlook. Normally 1 to 2 % above inflation is seen as a cautious estimate long term.
Maybe leave the 4 % average return in, but ditch the 10% drops as the 4% average takes care of the ups and downs of the market. In reality it can swing a lot more than 10% anyway, in both directions.

Also regarding longevity, someone around age 50 can expect on average to live to around 83. That means 50% will longer than that, especially if you have education/money/no serious health issues or bad habits.
Living to your Nineties is quite common nowadays.

I prefer a pessimistic outlook, better than an over optimistic one. For the next 5 years I've modelled negative growth once inflation is factored in

michaels

Effect of inflation on your spreadsheet?

If it gets out of hand you will need to make the columns wider....