Is my DB pension enough?

rottcodd

QrizB said:

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.

Thanks for you're reply. That makes sense to me (yes I am a basic rate taxpayer). . I seem to remember reading somewhere in the scheme documentation (I can't find it now), but for SAUL I don't think the APC amount increases in line with CPI - I think it will always be £1k. But I will investigate that...

Linton

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....

One possible advantage with an AVC is that, dependent on the scheme rules, you may be able to take a full DB pension and take the corresponding DB tax free lump sum from the AVC.  This is obviously very tax efficient.

A down side is that you may not be able to take the AVC without taking the DB pension.  If you want flexibility for early retirement a separate  DC pension may be the best option.

Universidad

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. 

Well to a limited extent you can stop worring about "how much stuff will cost", because you're fortunate enough to have a DB pension that will be revalued each year in line with inflation.

One "finger in the air" figure that people often suggest is that your retirement income will want to be around 2/3rds of your income prior to retirement. So if you are currently earning 30,000, then you might aim for 20,000 in retirement.  This is not a recommendation, it's just a bit of common wisdom, which may not apply to you. 

The reasons you are likely to need less in retirement are various. For example: you probably no longer have expenses related to working (commute, etc), you may be less active (certainly in later years), you are probably no longer making pension contributions (!), you currently won't pay national insurance after SPA, your student loan will be paid off or written off, and in many cases you no longer have a mortgage to pay - and you are already planning for that last bit. 

And, of course, the less you earn the greater proportion of your earnings you keep, which does make some difference: 30K gives a take home pay of 26.5K, and 20K gives a take home pay of 18.5K - so the gap between 20 and 30K is only 8K difference, not 10K difference in practical terms.

You also can factor in the state pension, if you trust it will still be there, which is currently over 10,600. So if you were aiming for a retirement income of 20,000 pa in today's money, you may already be closer than you think - you've already got nearly 18K pa in the bank from SPA (currently 68) - assuming that you do get a full state pension.

The way I look at it is this: I know what I'm likely to be able to survive on, and once I've hit that threshold I am officially no longer worried about retirement. From that point on, it's all quality of life improvements - and it's important to balance quality of life now against quality of life in the future. I'm not about wealth maximisation, I'm about risk minimisation, and beyond that it's pretty much hedonism all the way out.

ussdave

rottcodd said:

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. 

I'm not very familiar with the rules for SAUL so please do double-check what I said above regarding taking the AVC sums out tax free.  

Even if you can't do that entirely it's likely that pension will still beat mortgage overpayments though. 

Southend_2

IIRC Saul has quite a harsh inflation cap for revaluation. Can't remember whether that applies only to deferred pre retirement membership or post retirement too. Might be worth checking and factoring in if necessary, given that you still have some way to go before retirement.

rottcodd

leosayer said:

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.

Sorry to drag this thread up again, but just wanted to sense-check something. I found that retirementlivingstandards website you linked to very useful so thanks for that. This is what my current spreadsheet plan is, if we were aiming to retire at age 60. We'd obviously keep a check of it yearly and re-adjust accordingly, but:

At age 60, my DB pension would provide a guaranteed annual income of £20k, which hits the "basic" standard of retirement for a couple. The "comfortable" standard, is around £34k, meaning we are missing £14k a year to reach "comfortable".

By age 68, we would both get the state pension (which would be combined around £20k), so it's just those 8 years from age 60 to 68 where we are missing the £14k a year to hit "comfortable". 8 x £14k = £112k.

So, if my partner aims to hit at least £112k in their SIPP by 60, then, very roughly speaking and as a ball-park figure, we would be able to retire relatively comfortably (assuming mortgage paid off) at age 60.

Does that all sound like it's making sense and I'm not missing out anything major? 

Albermarle

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. 

Firstly just to put things in perspective. Having a DB pension as part of your employment package is a very good thing to have. It is very expensive for the employer to fund ( on top of your contributions) .

Most private sector DB pensions have been stopped due to the cost and replaced by DC pensions where the employer contributes a lot less. 

So to some extent you can relax that whatever happens you will have that guaranteed income at 60. Probably you can take it earlier with a reduced pension if you wanted.

At age 60, my DB pension would provide a guaranteed annual income of £20k, 

It is £20K in today's money, in reality it will be £20K + inflation between now and then.

So, if my partner aims to hit at least £112k in their SIPP by 60

Yes you could take this over 8 years until there was nothing left, but it would need to be £112K + inflation, as £14 K pa in 25 years time will not buy you what £14Kpa buys you today. However hopefully the investments in the SIPP will keep up with inflation ( and more).

This is the beauty of DB pensions of course, you do not have to worry about investments, stock markets, inflation etc

Somebody

Don't forget tax.  Today, £20k pa gross would equate to around £18.5k nett; or just under £18.8k with the marriage allowance transferred from your spouse (assuming little or no income).

LHW99

Your main issue would be that you have at least 20 years before you hit 60, and inflation over that period is unknown - they don't really know for sure if it will stay the same, edge up (as some think) or edge down (as hoped) this year.

While £112k should be OK if invested over that period, in terms of keeping up with inflation, you won't know until you get there. So I would personally look on that as a minimum, and hope to exceed it.

Gemok

Since you're under 40 don't forget a S&S LISA can be a useful addition for retirement savings if you are basic rate tax payer. Same gov contribution going in but not taxed coming out after 60.

If you're used a LISA to buy a house you can still use one for retirement just instruct your conveyancer to leave a pound in it so it doesn't close the account.