Is my DB pension enough?

rottcodd

I'm in my late 30s and I joined my current employer 12 years ago. I'm likely to remain with them for the rest of my working life, and probably not get much of a pay rise. I've been paying into my pension since I've joined, and I'm lucky that it's a DB pension. So far, I have built up an annual income of £7k with a lump sum of £21k. If I stopped working today and never worked again that's what I would get at retirement age. I probably intend to retire around 65 years old. 

When I play around with my pension provider's retirement calculator, if I continue paying into my pension with the same company as I have been doing, by the time I reach 65 years old I can choose to take a lump sum of anywhere from 0% to 25%, and the annual income is adjusted accordingly. Some scenarios it gives:

with 0% lump sum, I get just under £27k a year

with 10% lump sum, I get lump sum of £52k plus £24k a year

with 25% lump sum, I get lump sum of £132k plus just under £20k a year


I'm just about to become a home owner so over the next couple of decades my focus is going to be to throw everything into over payments on the mortgage as much as possible so that I'm ideally mortgage free by the time I reach retirement.

Moving house is making me just check my finances and really the only reason I'm posting is just a sense-check, that my pension deal is pretty amazing and I don't need to focus on doing anything else - just carry on doing what I'm doing, am I right? It seems like a very good deal but I don't really have anything to compare it too. 

arthurdick

If you see yourself working there a long time, why not use the in-house AVC's, I did, only for 9 years, but it saved me taking any lump sum out of my final pension. just a couple of hundred per month until you finish would be better than overpaying the mortgage, then when you retire, pay whatever is outstanding on your mortgage with the amount built up in the AVC.

Edit
Sorry , I am assuming you are in the LGPS, check to see if your company does any in-house AVC's.

rottcodd

arthurdick said:

If you see yourself working there a long time, why not use the in-house AVC's, I did, only for 9 years, but it saved me taking any lump sum out of my final pension. just a couple of hundred per month until you finish would be better than overpaying the mortgage, then when you retire, pay whatever is outstanding on your mortgage with the amount built up in the AVC.

Edit
Sorry , I am assuming you are in the LGPS, check to see if your company does any in-house AVC's.

Thanks. Ah that's interesting - I did think about the AVC option but felt like throwing everything into the mortgage was a better tactic, since interest on it currently (c.5%) is not great. 

From very briefly looking at the AVCs for my scheme, it didn't seem great. For example. to get an extra £1k a year at retirement age, I'd have to pay £7,477. Not quite sure mathematically how to work out whether that's better or £7,477 paid off a 5% mortgage is better....

NoMore

You need to determine how much you think you will need in retirement, to know if its enough. Nobody else can tell you.

rottcodd

NoMore said:

You need to determine how much you think you will need in retirement, to know if its enough. Nobody else can tell you.

Thanks. Yeah I've come across that advice before and find it very difficult to put a figure on. It's very hard to have a predictable idea of where I am going to be in around 30 years time, how much stuff will cost, if I'm living with someone or not,  living abroad, whether I decide I want to "do" something on retirement that will cost a lot, where / how much I will inherit, etc. It seems like so many wildly fluctuating variables that I don't know how to arrive at a sensible figure. 

Linton

NoMore said:

You need to determine how much you think you will need in retirement, to know if its enough. Nobody else can tell you.

This is essential to retirement planning and a good first step is knowing how much are you are spending now that you will also need to spend during retirement.  Arguably the best siruation to be in is when your standard of living you are accustomed to when working remains unchanged during the rest of your life.

ussdave

rottcodd said:

arthurdick said:

If you see yourself working there a long time, why not use the in-house AVC's, I did, only for 9 years, but it saved me taking any lump sum out of my final pension. just a couple of hundred per month until you finish would be better than overpaying the mortgage, then when you retire, pay whatever is outstanding on your mortgage with the amount built up in the AVC.

Edit
Sorry , I am assuming you are in the LGPS, check to see if your company does any in-house AVC's.

Thanks. Ah that's interesting - I did think about the AVC option but felt like throwing everything into the mortgage was a better tactic, since interest on it currently (c.5%) is not great. 

From very briefly looking at the AVCs for my scheme, it didn't seem great. For example. to get an extra £1k a year at retirement age, I'd have to pay £7,477. Not quite sure mathematically how to work out whether that's better or £7,477 paid off a 5% mortgage is better....

If the pension is LGPS as arthurdick has guessed then AVCs will almost certainly be a better option than mortgage overpayments.  Also worth noting that the figure you've quoted sounds more like APCs, which are slightly different (though still a good deal in many cases).

AVC - the money you put in goes to a pot that you can then draw tax free up to a certain limit.
APC - the money purchases additional benefits (e.g. the yearly figure that you will be paid will increase).

I'm not an expert on LGPS but AVCs for it are often a really good option as you can build up a significant tax free lump sump without impacting your normal LGPS benefits.  You also have an option at retirement to convert some (or all, I think) of this cash into yearly payments instead, so it gives you a decent amount of flexibility.

As this is a pensions forum we may sound biased but in most cases it will make sense to overpay your pension before your mortgage.  The tax relief outstrips the interest costs significantly.  Often the recommendation is to pay off the mortgage with some of your tax free lump sum (TFLS) or pension commencement lump sum (PCLS).

QrizB

rottcodd said:

From very briefly looking at the AVCs for my scheme, it didn't seem great. For example. to get an extra £1k a year at retirement age, I'd have to pay £7,477. Not quite sure mathematically how to work out whether that's better or £7,477 paid off a 5% mortgage is better....

Assuming that you're a basic rate taxpayer, that £7500 pre-tax pension contribution will only cost you £6000 in take-home pay.

A £6000 overpayment on a 25-year 5% mortgage would reduce your payments by £420 a year and save £4500 in interest.

So do you want £420 a year, fixed for 25 years, or £1000 a year increasing by CPI from retirement age and for the rest of your life?

I think the £1000 sounds a better deal but it's up to you.

Mutton_Geoff

Linton said:

NoMore said:

You need to determine how much you think you will need in retirement, to know if its enough. Nobody else can tell you.

This is essential to retirement planning and a good first step is knowing how much are you are spending now that you will also need to spend during retirement.  Arguably the best siruation to be in is when your standard of living you are accustomed to when working remains unchanged during the rest of your life.

This is absolutely good advice. I was fortunate to have a DB pension for part of my career and later a DC scheme. I maximised my pension inputs to 50% of my salary over a long period of time (more than 25 years) such that when I retired a year ago, my pension (combo of DB, SP and drawdown) now exceeds the income I had when I was working.

I appreciate this is not possible for many people but I just learned to live within my deliberately reduced income and still had the customary huge mortgage etc during my working life.

In your 30's you have the biggest advantage ahead of you. Time and compound interest.

leosayer

rottcodd said:

NoMore said:

You need to determine how much you think you will need in retirement, to know if its enough. Nobody else can tell you.

Thanks. Yeah I've come across that advice before and find it very difficult to put a figure on. It's very hard to have a predictable idea of where I am going to be in around 30 years time, how much stuff will cost, if I'm living with someone or not,  living abroad, whether I decide I want to "do" something on retirement that will cost a lot, where / how much I will inherit, etc. It seems like so many wildly fluctuating variables that I don't know how to arrive at a sensible figure. 

It doesn't need to be 100% accurate and it never will be because so many things in life can change. If you change your mind then change the target.

This is a good place to start: https://www.retirementlivingstandards.org.uk/

The reason for arriving at this figure is to give you the ability to assess the impact that big financial changes (career moves, house purchases, car purchases etc.) will have on your retirement plans. It's a powerful tool as it means you can make such decisions with more certainty than you otherwise would.

rottcodd

ussdave said:

rottcodd said:

arthurdick said:

If you see yourself working there a long time, why not use the in-house AVC's, I did, only for 9 years, but it saved me taking any lump sum out of my final pension. just a couple of hundred per month until you finish would be better than overpaying the mortgage, then when you retire, pay whatever is outstanding on your mortgage with the amount built up in the AVC.

Edit
Sorry , I am assuming you are in the LGPS, check to see if your company does any in-house AVC's.

Thanks. Ah that's interesting - I did think about the AVC option but felt like throwing everything into the mortgage was a better tactic, since interest on it currently (c.5%) is not great. 

From very briefly looking at the AVCs for my scheme, it didn't seem great. For example. to get an extra £1k a year at retirement age, I'd have to pay £7,477. Not quite sure mathematically how to work out whether that's better or £7,477 paid off a 5% mortgage is better....

If the pension is LGPS as arthurdick has guessed then AVCs will almost certainly be a better option than mortgage overpayments.  Also worth noting that the figure you've quoted sounds more like APCs, which are slightly different (though still a good deal in many cases).

AVC - the money you put in goes to a pot that you can then draw tax free up to a certain limit.
APC - the money purchases additional benefits (e.g. the yearly figure that you will be paid will increase).

I'm not an expert on LGPS but AVCs for it are often a really good option as you can build up a significant tax free lump sump without impacting your normal LGPS benefits.  You also have an option at retirement to convert some (or all, I think) of this cash into yearly payments instead, so it gives you a decent amount of flexibility.

As this is a pensions forum we may sound biased but in most cases it will make sense to overpay your pension before your mortgage.  The tax relief outstrips the interest costs significantly.  Often the recommendation is to pay off the mortgage with some of your tax free lump sum (TFLS) or pension commencement lump sum (PCLS).

Thanks for that, interesting! Yes you're right it's an APC. The pension is SAUL, a Uni of London pension scheme.