Help with bridging the gap or alternative investment options??

mightyming2025

OK I am new on here but have been reading it for around 18 months now, Therefore, I would glad of any input or advice on the following situation from the more experienced people on here. Appreciate it is already a healthy position but just trying to understand options. 

I am 50 years old my wife if 44. Our current thought is that we would like to retire when I am around 62 and my wife is 56. Mortgage is just paid off.

I have a DC work pension with Scottish Widows. Based on the current predictions for a medium return of 2.5% this is due to have just short of £1.05m in it by that time. Their pension calculator suggests an annual income of £65k, or £48k plus £263k lump sum based on this sum and retiring at 62. I'm currently putting 21% in and my employer 10% so already pretty healthy monthly commitments. 

My wife has a DB teachers pension which she obviously wont be able to access until she is 58. The teachers pension website is currently saying that her pension at age 58 would be circa £30k with a 30-40k lump sum. So our approximate gross income when she is 58 would be £95k gross, or around £78k net, £6500/month.

Firstly, we would like to maintain our current combined approximate net income of around £8,000/month, £96k annually. So we have a shortfall there of about 18k/year net. By the time our state pensions kick in they will cover this shortfall but not in the intervening period.

Firstly, my current thinking is that we could overdraw on my pension pot (noting increased amount at higher tax rate) until my state pension would kick in to subsidise the shortfall. Hoping that I would not be needing the same monthly income once I get a lot older! Alternatively I could draw the tax free lump sum and invest separately relying on this income as well, but wont any income from  be taxed the same as anything I draw out of my pension pot? Or I could endeavour to increase my contributions further. 

Secondly, I would like to cover the 2 years with no pension for my wife. So, I am looking at addressing this shortfall in her having no income or pension for the 2 year period. Assuming this is 30k per year or a pot of about 60k by her retirement and we have 12 years to save that then I could put away about £300/month to achieve this, with luck. If we opted for an ISA then at least we could draw this tax free? Or would a SIPP be a better option noting that she would be saving 20% tax on these additional pension contributions now but this is effectively the same as being taxed 20% on (some of) the income if drawn at age 56. 

I’m also thinking of a combined approach to solve both issues above but not sure what this would entail besides either me putting more money in my pension to get 40% relief but then when I draw this out in future I will still get taxed on it at the 40% rate with the above figures in mind. Or do we opt for a SIPP or ISA in my wife’s name? Or a combination of both? Happy for any suggestions that the learned on here may have!

Thanks

 

DRS1

You want "pension" income of 100% of "working" income?  That is ambitious.  Are you sure you are going to need it?

The old Inland Revenue limits were geared to a pension income of 2/3rds of final remuneration.  Possibly because that was what the "gold plated" Civil Service Pension Scheme aimed for.

Hoenir

mightyming2025 said:

I have a DC work pension with Scottish Widows. Based on the current predictions for a medium return of 2.5% this is due to have just short of £1.05m in it by that time. Their pension calculator suggests an annual income of £65k, or £48k plus £263k lump sum based on this sum and retiring at 62. I'm currently putting 21% in and my employer 10% so already pretty healthy monthly commitments. 

 

Future returns are totally unpredictable. Pumping in as much as you can over the longest possible period of time is your best hope. Then also hoping your choice of investments was the right one.  I assume that 2.5% is a real rate of return above inflation.

Albermarle

With a targeted pension income of nearly £100K pa ( very high even by the standards of this forum) surely you can afford to pay a professional advisor/ IFA to sort all this out for you ?

Nebulous2

Are you netting £8k per month after pension contributions and tax? 

What are you spending, and do you have a budget for that now and post-retirement? 

Many people find that expenditure drops in retirement. No commuting costs, no National Insurance, less expenditure on children, no longer climbing the housing ladder, possibly sliding back down it. 

A lot of the high earners here aren't high spenders, and have concentrated on retiring early to get more time, rather than waiting until 62 with more money. 

We're all different however, look at the number thread, and yours is a perfectly valid approach, but for many of us it wont match our experiences. 

 

michaels

65k pa from a £1m ish pot is 6.5% which sounds considerably higher than commonly used SWRs in the 3-4% range but assuming that is realistic:

When you both have state pension (say 25k) you will be 7k over your desired income so rather than needing 65k from your pot 'forever' you actually only need 58k.  Using the 6.5% this could be funded from a pot of 890k k leaving you about 115k to help bridge the period until you both get state pensions.  However this is 5 years for you and about 11 (12?) years for your wife so a total of say 16 years times 12.5k state pension = £200k so you are 85k short.

Cus

If you need £96k nett today, that's the same as needing £130k in 12 years time based on 2.5% inflation. Are the figures of £95k gross from pensions the value in 12 years or as of today?

Olderbytheday

The Scottish widows estimate for annual income is based on taking a lifetime annuity with minimum 5 year period payout. I checked it on my SW account for the amount expected at Moneyhelper and it looked like a level annuity, no RPI increase, no money left for my wife after I die. The lack of RPI increase means its not really worth using for future calcs, in my opinion. 

I also think the 6% ish drawdown via annuity is too optimistic to plan/rely as a drawdown figure. 

The total pot value at mid level with 2% growth plus inflation isnt a bad estimate but 12 years isnt long if theres a crash in the middle. The new app calculator is quite good, but I think the annual income estimate is misleading. 

Worth checking monehelper if it shows the same as SW for you.