Pension plan - divide pension pot by 20?

roadweary

Hi,

Probably because I'm not in a great place right now stress-wise, I've started to wonder about the following for peace of mind.

For context, I'm sure I've read about the dive in people's ability / desire to travel and generally aspire to a particular 'wealth-based' style of living over 75 / 80.

Having saved quite heavily into my pension, yet the various calculators being so complex, I was thinking about just taking my project pension pot at 60 and dividing that by 20.

So, imagine it were **EDIT** 900k, that would be 45k per year until I reach 80.  That's drawing it down and kind of hoping that continued growth of the remaining pot helps it keep pace with inflation.

And of course there is the State Pension.

What do people think?

Pat38493

You would probably need to provide more information like do you have a full state pension or any other DB type pensions, to get much useful comments.

There is a very general rule of thumb that is used more in the US that you need 25 x your annual spending to be able to stop working, which corresponds to withdrawing 4% of your pot each year.  For the UK this is seen as a bit over optimistic and more like 3.5% is more apt, so this would be more like 28.5 times.

Taking the view that you only need your pot to last 20 years, and taking into account state pension, might make it look better, but, if that means you would only have the state pension from a relatively young age, this could be a very big drop.  Without knowing your exact figures and further details we could only make very vague generalisations.

roadweary

Hi,

Analysing spending is a tough but obvious step.  In reality I'm hoping to get the pension pot closer to 900k (excuse my first post).  I'll have full state pension.  No other pensions.  Mortgage is paid off.  In terms of saving, there should be a minimum of 30k in premium bonds.

On that basis things are looking healthier.

I feel like having £3 - 4k coming in per month would give me a very nice lifestyle.

There is also every chance that once I reach 60 I'll either try to move to compressed hours so that I'm working a 4-day week.....or just drop a day.  I've been in my job for over 10 years and hopefully my employers would rather retain my skills for fewer days per week than replace me.

And if I had to get another part-time job, well based on the fact that I currently salary sacrifice 40% of my earnings.....I could work fewer days, get a less well paid job and effectively have a very similar income by continuing to work for a few years but not putting much (or anything) into my pension pot......as effectively I'd be improving my financial situation my delaying the need to access it.

I hope that helps?

dunstonh

Having saved quite heavily into my pension, yet the various calculators being so complex, I was thinking about just taking my project pension pot at 60 and dividing that by 20.

So, on that basis you would probably run out of money somewhere between age 70 and 95.

What do people think?

Only time will tell.   All we do know is that you would get away with it in some periods but not in others.   

It also depends on how much money you are allocating to capital expenditure items.  e.g. cars, refurbishments, boilers etc.   People often forget the unexpected costs/capital costs.

roadweary

dunstonh said:

Having saved quite heavily into my pension, yet the various calculators being so complex, I was thinking about just taking my project pension pot at 60 and dividing that by 20.

So, on that basis you would probably run out of money somewhere between age 70 and 95.

What do people think?

Only time will tell.   All we do know is that you would get away with it in some periods but not in others.   

It also depends on how much money you are allocating to capital expenditure items.  e.g. cars, refurbishments, boilers etc.   People often forget the unexpected costs/capital costs.

Apologies if I'm missing something very basic....but how would 900k run out in 10 years?

barnstar2077

With your kind of assets, I would stop working as soon as I could access the works pension (probably at 57) and cut my cloth accordingly.  If you stopped at 57 and took £40k a year instead of £45k, what would that look like for your numbers?  Those three extra years may not look like much, but you will never be as young or as healthy again.

roadweary

barnstar2077 said:

With your kind of assets, I would stop working as soon as I could access the works pension (probably at 57) and cut my cloth accordingly.  If you stopped at 57 and took £40k a year instead of £45k, what would that look like for your numbers?  Those three extra years may not look like much, but you will never be as young or as healthy again.

I'm not as healthy as I was just a few months ago - but I won't go into that - but yes, that's exactly the sort of calculation going around in my head.  Just knowing that I could stop comparatively soon, is good for my mental health.....options and all that...

Lowtrawler

Assuming you retire at 60, you will not receive your state pension until 67. To cover those 7 years with the same income as in the next 13, you will need an extra £84k. Hence, if you genuinely want equal income for the 20 years, you would calculate (£900k less £84k = £816k)/20 = £40,800 with £12k extra for the first 7 years and state pension for the next 13 = £52,800 Gross, probably around £46k net i.e. a little under £4k per month.

However, as Pat has said, using a drawdown rate of 20 is likely to leave you with only a small pot at 80 and you may still have 20 years in front of you. If you were to use a rate of 25 instead, it would reduce the £40,800 to £32,640. Using a rate of 28.5 reduces it to £28,630. Both these approaches would still give you net income over £3k per month.

As you are looking for a simple approach, you may want to consider an annuity or annuities as the rates are currently very good. As I understand it, for £900k, you would keep £225k tax free and you could get a flat rate, single life annuity of over £47k per year or a 3% escalating annuity of over £30k per year. You could even run a fixed term annuity for the 7 years until your state pension kicks in.

roadweary

Lowtrawler said:

Assuming you retire at 60, you will not receive your state pension until 67. To cover those 7 years with the same income as in the next 13, you will need an extra £84k. Hence, if you genuinely want equal income for the 20 years, you would calculate (£900k less £84k = £816k)/20 = £40,800 with £12k extra for the first 7 years and state pension for the next 13 = £52,800 Gross, probably around £46k net i.e. a little under £4k per month.

However, as Pat has said, using a drawdown rate of 20 is likely to leave you with only a small pot at 80 and you may still have 20 years in front of you. If you were to use a rate of 25 instead, it would reduce the £40,800 to £32,640. Using a rate of 28.5 reduces it to £28,630. Both these approaches would still give you net income over £3k per month.

As you are looking for a simple approach, you may want to consider an annuity or annuities as the rates are currently very good. As I understand it, for £900k, you would keep £225k tax free and you could get a flat rate, single life annuity of over £47k per year or a 3% escalating annuity of over £30k per year. You could even run a fixed term annuity for the 7 years until your state pension kicks in.

Thank you - this is complex!  I had figured I would take less until 67 and/or do bits of work here and there although I appreciate that impacts tax.  I am less worried about what happens over 80 based on life expectancy of males / dementia in my family, but I know that is easy to say now.  And if having £3k per month after tax in my pocket from my private pension makes the long term outlook better, I'm sure I could make that work.

I probably would need to get a good IFA once I'm closer to making a decision (I'm 54 now).....when I've looked at the calculators online they have given quite poor numbers or I've been confused by all the options....I haven't factored my wife into these calcs yet.....

Cobbler_tone

Ultimately....if you even have the £900k in the bank at 60 (appreciate you can't transfer £900k to a bank but in theory it should be worth more in a pension), plus the state pension to come you should never run out of money.
Clearly some caveats. Your house is paid for, so your basic bills will be £x a month, probably covered by the state pension in a few years.
Your lifestyle can be tailored in terms of travel, i.e. do you intend to have 4/5 long haul first class holidays a year?

I don't see there is any risk whatsoever, apart from if you invest your money somewhere it may plummet, or start buying cars for £100k+

Then you get in the world of wanting to leave £500k left for care needs. Depending what picture you paint it'll never be enough money, hence why some people never stop working.
The one thing you do have with a pot that size is plenty of time and scope to adjust spending if needed.

roadweary

Cobbler_tone said:

Ultimately....if you even have the £900k in the bank at 60 (appreciate you can't transfer £900k to a bank but in theory it should be worth more in a pension), plus the state pension to come you should never run out of money.
Clearly some caveats. Your house is paid for, so your basic bills will be £x a month, probably covered by the state pension in a few years.
Your lifestyle can be tailored in terms of travel, i.e. do you intend to have 4/5 long haul first class holidays a year?

I don't see there is any risk whatsoever, apart from if you invest your money somewhere it may plummet, or start buying cars for £100k+

Then you get in the world of wanting to leave £500k left for care needs. Depending what picture you paint it'll never be enough money, hence why some people never stop working.
The one thing you do have with a pot that size is plenty of time and scope to adjust spending if needed.

I do have to keep my job and my health and work incredibly hard to get to that number, and hope pensions don't plummet due to the crazy world that we live in....but also I do appreciate how fortunate I am to be in this position......

And I've never bought a new car yet, or taken a first class flight (well my wife did pay to upgrade one leg of a journey at the airport once years back).....so I don't think there's too much risk of me doing something massively foolish....but you never can tell!

At some stage though, I will need to find an IFA I can trust.....