How to account for state pension?

kimwp

How do you account for state pension when calculating the pension pot you need? I'm hoping to retire ahead of receiving my state pension, so it's not as simple as reducing the annual amount by the state pension.

Stubod

Not sure what you mean??? I have a spreadsheet that shows each year as a line, with predicted expenditure (in various categories with a total), and incomes (each listed separately again with a total) in columns and a running variation

In the early years since retiring and living of savings (and interest) I was running at an annual lose, then the various private pensions start to kick in (and eventually the state pension), whch then start to make up the earlier loses.

kimwp

Stubod said:

Not sure what you mean??? I have a spreadsheet that shows each year as a line, with predicted expenditure (in various categories with a total), and incomes (each listed separately again with a total) in columns and a running variation

In the early years since retiring and living of savings (and interest) I was running at an annual lose, then the various private pensions start to kick in (and eventually the state pension), whch then start to make up the earlier loses.

Thanks Stubod. I'm aiming for a pension pot total to be accessible at 58 based on needing 20kpa through retirement. So then the question is how to adjust that total to account for the fact that I'll get a state pension making up some of that 20k starting from 68.

QrizB

kimwp said:

How do you account for state pension when calculating the pension pot you need?

As an initial estimate, just think of needing an extra £11500 a year from (when you retire) until (when you get your pension).

So for example, you might aim to retire at 57 but won't get your SP until 67. You could earmark £115k of your DC pot as "SP replacement" then see what income the remainder would get you on top of that.

There are more complex methods but this will be the right sort of ballpark.

MK62

Some use a gilt ladder inside their pension to provide the equivalent to the SP from retirement to SP Age......some others use a fixed term annuity which pays out over the same period (aka bridging pension), and others simply drawdown more at the start of their retirement until SP kicks in (aka "front loading"). Without hindsight there's no way to know which will turn out to have been the best choice.

Personally I prefer the gilt ladder, as it's predictable and guaranteed (like the SP it's standing in for), and it can be undone should circumstances change drastically.......but it's a bit more involved, certainly initially, than an annuity.
Front loading is a viable option too, but depending on how your investments perform, could end up costing you a fair bit more (or less).....no way to know though.

OldScientist

kimwp said:

Stubod said:

Not sure what you mean??? I have a spreadsheet that shows each year as a line, with predicted expenditure (in various categories with a total), and incomes (each listed separately again with a total) in columns and a running variation

In the early years since retiring and living of savings (and interest) I was running at an annual lose, then the various private pensions start to kick in (and eventually the state pension), whch then start to make up the earlier loses.

Thanks Stubod. I'm aiming for a pension pot total to be accessible at 58 based on needing 20kpa through retirement. So then the question is how to adjust that total to account for the fact that I'll get a state pension making up some of that 20k starting from 68.

There are a number of quick and dirty ways of doing this.

As an example, one way is to split the calculation into two parts:
You need your 'pot' to supply inflation-linked £20k pa for 9 years (i.e., 58 to SP age)
Then it needs to supply £8k (assuming state pension of £12k index linked) for, roughly, an additional 30 years (taking you to 97yo).

First 9 years
Assuming your investments (more below) return 0% real (i.e., after inflation) then you will need 20k*9=£180k to cover that part of your retirement.

As @MK62 said, you can construct this using a ladder of inflation linked gilts, a fixed term annuity, a ladder of cash accounts (depending where the money is), MMFs or short term bond funds, or even, at a pinch, using drawdown from an equity/bond portfolio (in which case the calculation is slightly different). Each of these has pros and cons.

Subsequent 30 years
Assuming a 'safe' withdrawal rate (SWR) of 3% for drawdown from a portfolio of equities and bonds over a 30 year period, then an £8k income needs a pot size of 8/0.03=£267k

Given the assumptions made you'll need about 267+180=£447k.

Obviously, changing the assumptions will change the amount you need to plan for. I also note that it is very easy to get stuck in the weeds of exact values of assumptions but it makes relatively little difference to the amounts (e.g., taking SWR at 3.5%, the 30 year pot needs to be 229k and overall you'd need £409k, a reduction of less than 10%). Conversely, changing the assumed SWR to 2.5% means you would need £500k overall, i.e. an increase of about 10%). In other words, a good enough headline planning 'number' lies somewhere between about £400k and £500k.

ali_bear

You could have a few goes on the free pensions calculator at https://www.guiide.co.uk/ 

MK62

If you used IL gilt ladders to fund it all (from 58 to 97) you could do that today for around £350k........but that cost will change as time moves on (could go up or down). The advantage is that your income is then fixed (in real terms) and guaranteed (as far as it's possible to guarantee it).......the disadvantage is also that it's fixed (ie no chance of it ever increasing (in real terms), (or indeed decreasing)).
However there are many ways to fund retirement from a DC pension pot, including combining different methods with parts of your pot.......and as OldScientist stated above, they all have pros and cons - there is no "best" withdrawal plan (at least not without hindsight).

MK62

kimwp said:

How do you account for state pension when calculating the pension pot you need? I'm hoping to retire ahead of receiving my state pension, so it's not as simple as reducing the annual amount by the state pension.

It can be, but just reduce the annual amount at SP Age........so £20k pa from 58 to SP Age, then £20k minus SP for the remainder of your retirement.

Moonwolf

It is also worth looking at your budget.  I have a gross budget amount but I have a lot of deferred expenditure which is budgeted as monthly, for example, £300 a month (plus trade-in) for a new car every 3-5 years, but because I have savings and a DC pension I won't actively put that into savings.  In fact I might try and get 7-10 years out of this one anyway and see how electric cars are developing.  That would be my state pension.