Pension situation sense check

Winterhouse

Hi all

Would greatly appreciate a sense check on situation and plan for early retirement.

Me -  late 40s with:

• DB pensions currently worth £6500 a year at retirement age, increases annually with inflation.
• Current contributions to DB pension will add approx £1100 a year income to it, increasing with inflation.
• Three DC pension pots worth approx £50,000 total.

Spouse - mid 40s with:

• DB pension currently worth £7500 a year at retirement age, increases annually with inflation.
• Current contributions to DB pension will add approx £600 a year income to it, increasing with inflation.

Mortgage will be paid off in 2 months.

Assuming financial situation continues as is and with budgeting, will be able to save approx £36000 a year (including tax relief) into SIPP for the next three years. Lets say £30,000 as maybe too optimistic.

Also assuming the DB pension contributions continue as they are for next 5 years.

Looking to retire in approx 10 years.

Don't want to be over optimistic so assuming 5 more years in these jobs and ability to save at this rate for 3 years.

Based on that estimate should have about £22000 income from DB pensions, say roughly halved due to taking early so £11000.

With both state pensions, once retirement age reached, income should be approx £34000 for these and DB income.

For the 10 years before state pension, will have £11000 DB per year plus £5000 if draw down all the DC pension (maybe more from that but increases could be taken by inflation so erring on side of caution).

Assuming another 5 years each of some sort of employment will get a further minimum £2000 a year pension income between us.

Thinking income of £30,000 will be enough so leaves £12,000 a year shortfall.

With the 3 years of £30,000 SIPP contribution, gives £90,000 so with full draw down there, almost  covers the shortfall.

Tax will be minimal as split between us so most under threshold.

Does this sound realistic, anything obvious (or not so obvious) not thought or incorrect?

Cheers.

Brie

Seems like you have a lot of the pension stuff covered - can't think of anything much on that front.

But what I don't know is will the income be sufficient for your lifestyle?  How much are your monthly expenses now?  Holidays?  Other activities?  Will you be continuing at the same pace?   How much do you think you will need to spend on maintenance or improvements to your home if you are there all day, every day?  I don't need any answers to any of this - it's just things that you might want to consider.  I know that some people ramp up the money spend with retirement (more frequent and adventurous holidays for instance) and then start to wind back as years pass.

leosayer

What are the retirement ages and early retirement factors for your respective DB pensions? A 50% early retirement reduction seems pessimistic.

Assuming you both will only remain in current jobs for 5 years also seems pessimistic unless you plan to go part time or change jobs.

Why are you planning to contribute to a SIPP? Does either of your employers offer an AVC and/or salary sacrifice scheme?

How is/will your DC/SIPP savings be invested?

Winterhouse

Thanks both

Required income is the bigger unknown yeah - basing it off what we get now net minus mortgage payment and savings we make. Would still be a bit of a reduction compared to that but also currently raising family so hoping there will be cost reduction in that area before the 10 years!
I so need to do more guesstimating re maintenance and lifestyle.

--------

50% reduction is a bit pessimistic yes - checked and it should be 35 to 40% so would be more like £13000 to 140000 for the DB income, an extra 2 or 3k.

Reasons for only looking at 5 years for job is firstly, in case of circumstances out of control, e.g. redundancy but also we have done similar work for a long time and getting sick of it! Can't imagine keeping on for ten years so maybe part time or a complete change.

Looked into AVCs but seemed similar to SIPP in terms of potential income and with additional flexibility as the AVCs would also be DB so no option to use them all earlier.

Re how they are invested - not sure, need to research but assume whatever is the most common way of doing it balancing risk and return.

Albermarle

50% reduction is a bit pessimistic yes - checked and it should be 35 to 40% so would be more like £13000 to 140000 for the DB income, an extra 2 or 3k.

Possibly still a bit pessimistic. About 4/4.5% a year seems to be the norm, but will vary a bit from scheme to scheme.

Re how they are invested - not sure, need to research but assume whatever is the most common way of doing it balancing risk and return.

If they are ex workplace pensions and you have never made any decisions about investment choice it will be in their default fund. This could be a bog standard medium risk fund or one that derisks as you get older.
With a SIPP, you must have chosen something to invest in , as otherwise it will just sit as cash.
You may want to look at consolidating them for ease of admin, especially before you start drawing from them.

Yorkie1

I may have missed it, but does your annual income allow you to put £36K into SIPPs as well as DB contributions?

Dazed_and_C0nfused

Yorkie1 said:

I may have missed it, but does your annual income allow you to put £36K into SIPPs as well as DB contributions?

That isn't totally clear but I think this indicates there is sufficient income between them to make that level of contributions as getting £600 and £1,100 extra DB pension per year is likely to mean combined income of >£70k.  Possibly even £100k in schemes with (relatively) poor accrual rates.

Current contributions to DB pension will add approx £1100 a year income to it, increasing with inflation.

Current contributions to DB pension will add approx £600 a year income to it, increasing with inflation.

Winterhouse

Albermarle said:

50% reduction is a bit pessimistic yes - checked and it should be 35 to 40% so would be more like £13000 to 140000 for the DB income, an extra 2 or 3k.

Possibly still a bit pessimistic. About 4/4.5% a year seems to be the norm, but will vary a bit from scheme to scheme.

Re how they are invested - not sure, need to research but assume whatever is the most common way of doing it balancing risk and return.

If they are ex workplace pensions and you have never made any decisions about investment choice it will be in their default fund. This could be a bog standard medium risk fund or one that derisks as you get older.
With a SIPP, you must have chosen something to invest in , as otherwise it will just sit as cash.
You may want to look at consolidating them for ease of admin, especially before you start drawing from them.

Yes default funds for the existing DC pensions.

Haven;t got the SIPP started yet - still looking into.

And yeas I was a bit pessimistic with the DB estimates - will be more like 60% of the full value with the early retirement reduction.

Winterhouse

Dazed_and_C0nfused said:

Yorkie1 said:

I may have missed it, but does your annual income allow you to put £36K into SIPPs as well as DB contributions?

That isn't totally clear but I think this indicates there is sufficient income between them to make that level of contributions as getting £600 and £1,100 extra DB pension per year is likely to mean combined income of >£70k.  Possibly even £100k in schemes with (relatively) poor accrual rates.

Current contributions to DB pension will add approx £1100 a year income to it, increasing with inflation.

Current contributions to DB pension will add approx £600 a year income to it, increasing with inflation.

Yes income is ok for this.

feynman33

Don't forget, your kids might want a home one day! 

Winterhouse

feynman33 said:

Don't forget, your kids might want a home one day! 

Indeed, thinking about that also!