Effect of inflation on pension spreadsheet + other questions

DT2001

beeza650 said:

@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

Q 3. You could stop earlier by using some of your savings or maybe go part time.
What are you aiming to do in retirement? Your younger child will be 12? when you are 57 - it can influence plans although having said that we took our youngest out of school in year 9 for two months to travel around the world. My OH could retire however she likes her work and we still have 2 more years before Uni.
I assume you will stay in your existing home for the next 6 years as it is walkable to school. In that case have you thought of buying your property abroad now from savings and using your 25% TFLS to help with a move in the U.K. in 8 years time. We bought in the alps when our eldest 2 were  4 and 5 - great to have accommodation during school hols! The property is not in my retirement plans however I know I have a source of capital if my funds took a severe hit in the early retirement years.

Albermarle

SouthCoastBoy said:

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

Granted you have been right about inflation in the last couple of years, but I do not think planning for growth of investments of 1% above inflation can be seen as overoptimistic.
The downside of too much pessimism is that you never pull the trigger on retiring, even when you can easily afford to by all normal measures .

Linton

beeza650 said:

@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

Another way of judging whether you have enough money to retire is to work out what could be done with 100% safety using an annuity.

In this case you have £1M in your pension at 57. I will assume you retire at that point.   We dont know whether you have a spouse/partner, so asume not ,nor how much is in your savings outside your pension, so assume none....


Working in current prices, you could drawdown 25%=£250K tax free and then use £750K to buy an inflation linked annuity.  From HLs figures it looks like £750K can get  an RPIlinked  annuity of about £26672 K/year guaranteed for the rest of your life.  After 67 you will also have your SP giving a total income of about £37K/year.  Between 57 and 67 you can take the missing SP income from your £250K llump sum.

This is not a proposal that you should take an annuity but it gives you a risk-free baseline to consider how much risk are you prepared to take to get a higher income.

Marcon

RogerPensionGuy said:

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. 

'Plenty of good reasons...' Would you like to give some, please, in addition to the idea that people are going to take maximum TF cash and pump it back into the economy? 

RogerPensionGuy

Marcon said:

RogerPensionGuy said:

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. 

'Plenty of good reasons...' Would you like to give some, please, in addition to the idea that people are going to take maximum TF cash and pump it back into the economy? 

My view is if they don't up that 268 figure we will see a great reluctance of taking cash out of DC pots, espically with 40% income tax being paid on it.

I think the current potential IHT benefits of DC schemes may well indeed rather let that potential "family" wealth mature instead of the more old fashionable 25% of a sensible 1.8 or probably 2 4M to be pulled out and yes indeed, find its way back in the economy sooner that later especially considering the current age demographics currently and baby boomers having large slices of available cash to feed the economy now.

I'm hoping that 268 figure will get rounded up to 300 or 350 this Wednesday. 

QrizB

RogerPensionGuy said:

My view is if they don't up that 268 figure we will see a great reluctance of taking cash out of DC pots, espically with 40% income tax being paid on it.

I would suggest that the proportion of DC pension pots exceeding £1M is a single-digit percentage. A fairly small single-digit percentage.

I would also suggest that "tax breaks for millionaires" is not the vote-winning strategy you think it is.

RogerPensionGuy said:

I'm hoping that 268 figure will get rounded up to 300 or 350 this Wednesday.

I'm half-expecting it to get rounded down to £250k.

MK62

QrizB said:

RogerPensionGuy said:

My view is if they don't up that 268 figure we will see a great reluctance of taking cash out of DC pots, espically with 40% income tax being paid on it.

I would suggest that the proportion of DC pension pots exceeding £1M is a single-digit percentage. A fairly small single-digit percentage.

I would also suggest that "tax breaks for millionaires" is not the vote-winning strategy you think it is.

RogerPensionGuy said:

I'm hoping that 268 figure will get rounded up to 300 or 350 this Wednesday.

I'm half-expecting it to get rounded down to £250k.

I don't think this government will lower it, but I wouldn't be surprised if that happened in the future.......who knows though! On the flip side I really can't see it being raised at all......by either side.....at least in real terms!

kuratowski

A pension tax-free cash limit (assuming it stays that way, that is, the LTA is not revived) is likely to be treated like any other limit, allowance or threshold, it could be adjusted in either direction at the whim of the Chancellor of the day.  Could be a lot more than rounding up or down.  Anyone else remember when the cash ISA limit went from 6k to 15k?  Or the Annual Allowance was cut from 255k to 50k?

Also, since the tax-free cash limit is no longer anchored to the LTA charge, there's no certainty that any future changes would be softened by a protection scheme, as used to happen whenever LTA itself was reduced.

MK62

kuratowski said:

A pension tax-free cash limit (assuming it stays that way, that is, the LTA is not revived) is likely to be treated like any other limit, allowance or threshold, it could be adjusted in either direction at the whim of the Chancellor of the day.  Could be a lot more than rounding up or down. 

It could be, but the optics of raising it (in real terms) wouldn't look good, certainly in the current climate and the forseeable future, as such a move would benefit only the top few percent (and of that few percent, some will already have access to more than the current "limit")

RogerPensionGuy

kuratowski said:

A pension tax-free cash limit (assuming it stays that way, that is, the LTA is not revived) is likely to be treated like any other limit, allowance or threshold, it could be adjusted in either direction at the whim of the Chancellor of the day.  Could be a lot more than rounding up or down.  Anyone else remember when the cash ISA limit went from 6k to 15k?  Or the Annual Allowance was cut from 255k to 50k?

Also, since the tax-free cash limit is no longer anchored to the LTA charge, there's no certainty that any future changes would be softened by a protection scheme, as used to happen whenever LTA itself was reduced.

I fully agree various governments have treated pensions, LTA, AA, MPAA like a football and now have started to de-link that old TFLS of 25% on to a % of an LTA that has been gone now, just making it so hard to plan.

One big point that's not maybe well spoken about, because of pension football, there will be plenty of younger type people absolutely filling pension vehicles whilst the pension rules have been made better for filling them up, plus we are currently in a high tax economy, so from a planning point of view, lots of cash will be pouring in to pensions in the short term taking best advantage of these items instead of flowing out to stimulate the economy. 

They really should stop playing football with pension, it's such a long-term negative. 

Reference any pension rules and limitations being reduced in the future, historically they have always put in place sensible various protections, not purfect, but generally helpful wherever a person finds themselves when these changes occur. 

Reference ISA and the like, think a person on the radio today said there's at least 6 types and some people find this confusing, sounds like ISAs will get some tinkering tomorrow. 

ISAs will probably be getting pushed towards how pension funds have been getting pushed in to investing in solely in UK stuff, start ups and the like with a % of the funds. 

Currently a well paid couple can plonk 60K in pensions and 20K in ISAs PA, that's 80K X two people is 160K PA getting locked away in this situation and people will do this because of all the football being played over the years.

I would like to see any pension negative movements have at least a 10 year period before change so people can plan more effectively. 

As another poster mentioned on a thread here, bear traps being put out on tomorrow's statement and guess more will be deployed spring budget 2024 and an election and then very uncomfortable for Labour to backtrack and remove these traps from a political point of view.

Looks like an interesting next 12 months in the UK.