37 years old - My current situation and savings/retirement plan

kimwp

NB, if you are planning on retiring early, it's worth running the numbers - I was so focused on saving into my pension, I'm going to end up paying more in tax because I didn't think about pre-pension savings.

Simon11

@Simon11 - My apologies, but my knowledge of tax is very sparse except knowing the 20%/40% tax brackets and that pensions contributions deducted from gross salary can help lower the amount of tax. I'm trying to make sense of what you've said but please correct me if I'm wrong - My pension contributions are paid from gross salary before tax/NI is deducted. As I am about £4K over the 20% tax bracket, my reading/understanding of what you've said is I should consider increasing my total contributions so that £4K is paid into the pension, which then moves me in to the 20% tax bracket, and any spare money is then put into the S&S ISA. This could then give me more freedom with money and allow more retirement options pre age 57. Please let me know if this is wrong.

I think you are getting in a slight muddle!

As per your first post, you are earning £54k gross per year. You personally put in 15% of your salary into the pension which I assume is from your gross pay under a scheme called salary sacrifice?

Thus you currently put in just over £8.1k into your pension and the HMRC will only see your earnings of £45.9k which then get taxed (thus nothing at the 40% rate).

n15h

@Simon11 - Yes, I could be getting muddled as I've found tax to always be complex to fully grasp and try to be as tax efficient as I can be. However, I see where you're coming from - What I've not accounted for is that I get a £6,000 annual car allowance in addition to my gross salary. I only focused on the gross salary as the 15% pension contribution is based only on that. So the £54K + £6K = £60K overall annual salary gross. Putting £8.1K into the pension, leaves £51.9K to be seen by HMRC, which would be 40%.

Yes, the pension is taken from my gross salary. In my work place its referred to as Smart pension - I presume this is the same as salary sacrifice.

n15h

kimwp said:

NB, if you are planning on retiring early, it's worth running the numbers - I was so focused on saving into my pension, I'm going to end up paying more in tax because I didn't think about pre-pension savings.

Good to note. My aim over the lifetime is to have as much of my savings in an ISA to reduce any tax issues (depending on whether current/future governments keep/remove ISAs). I do try to use all of my ISA allowance each tax year.

n15h

Hi all,

Since starting this thread and getting some useful pointers from all the replies (thanks!), I’ve taken the time to reflect on my plans.

Change to pension contributions

For this month, I increased my contribution to my workplace pension. The increase is from 15% contribution to 23% + employer contribution 12%. This means 35% will be contributed monthly to my pension. This will also bring me into the 20% tax bracket, as currently I am in 40% bracket.

Calculations / thinking on pensions

My current spend is £2300pm for all expenses including mortgage and additional spend e.g., a holiday. In today’s money, at retirement my expenses could likely to be ~£2000pm.

I did some calculations to get a better idea of what the pension needs to look like at retirement age of 58 and if inflation was at 4% or 3.5% per year from now until I retire. Based on that, my simple calculations are:

• 4% inflation: 2000 x 12 = £24,000 per year @ 4% inflation each year for 21 years (58 – my current age) = ~£54.7K income per year.
• 3.5% inflation: 2000 x 12 = £24,000 per year @ 3.5% inflation each year for 21 years (58 – my current age) = ~£49.5K income per year.

This means that roughly, I need a pension income of £49K - £55K at retirement to cover my expenses plus any extra spend e.g., a holiday or 2 every year. This is based on the mortgage being paid off before retirement or just when starting retirement.

If I didn’t pay off the mortgage (for any unexpected reason) then the above calculations look like:

• 4% inflation: 2300 x 12 = £27,600 per year @ 4% inflation each year for 21 years (58 – my current age) = ~£62.9K income per year.
• 3.5% inflation: 2300 x 12 = £27,600 per year @ 3.5% inflation each year for 21 years (58 – my current age) = ~£56.8K income per year.

Of course, the target is to be mortgage free as soon as possible. However, if that wasn’t possible by retirement, then the income requirement could increase to £56K - £63K (worst case scenario).

If I use the highest figures of each range i.e., £55K and £63K, the minimum I believe I should have saved in the pension to achieve these are:

• £55K - £1.375m
• £63K - £1.575m

As in my opening post on this thread, my target for the pension was £1.4m. This would fall in the range of £1.375m - £1.575m. I may need the pension to work harder to achieve the top end of the range by retirement.

The above doesn’t account for state pension or any other income (e.g., from savings, LISA etc.). This post solely focuses on the pension for simplicity as that is my main income vehicle for retirement.

I’m sure there are more knowledgeable posters on this forum that can give guidance on the above figures. However, I just wanted to share my thoughts and thinking, and with the increased pension contributions, I am hopeful to achieve this.

MallyGirl

The increase will definitely help you to reach your goal. 

I wouldn't ignore the state pension as it could end up supplying a good 20% of your retirement income. Not an insignificant contribution.

n15h

@MallyGirl thanks, I agree about the state pension and you are right that it is a significant contribution.
It's just my aim for retirement is at age 58-60 years and will be some time before I reach SP age, so my calculations/thinking is focusing on my employer pension which will be the bulk of my income at the age I retire.

noclaf

Just my 2p but I think you are doing great OP. I am in my early/mid 40's and still struggle with the tax side of it especially when it comes to really digging into the numbers and calculations. At your age my pension and S&SISA were nowhere near your numbers so we'll done there and keep going.

I can't help on the granular numbers and you may have this covered but remember to keep an eye on your investment fees and choices in particular in your work pension as sometimes they can be rather limited in choice..certainly my experience having worked in various firms.

FWIW and this is only my approach (no right or wrong, based on your own risk appetite etc) I keep my pension/SIPP and S&S LISA 100% Equities as they are all longer term investments whilst my S&SISA is currently around 75% Equities with the rest in bonds and a small amount in a gold tracker as that's the only account where I am not fully comfortable with 100% Equities.
Best of luck but I think you are all over this and enjoyed reading your investing journey!

BobR64

n15h said:

Hi all,

Since starting this thread and getting some useful pointers from all the replies (thanks!), I’ve taken the time to reflect on my plans.

Change to pension contributions

For this month, I increased my contribution to my workplace pension. The increase is from 15% contribution to 23% + employer contribution 12%. This means 35% will be contributed monthly to my pension. This will also bring me into the 20% tax bracket, as currently I am in 40% bracket.

Calculations / thinking on pensions

My current spend is £2300pm for all expenses including mortgage and additional spend e.g., a holiday. In today’s money, at retirement my expenses could likely to be ~£2000pm.

I did some calculations to get a better idea of what the pension needs to look like at retirement age of 58 and if inflation was at 4% or 3.5% per year from now until I retire. Based on that, my simple calculations are:

• 4% inflation: 2000 x 12 = £24,000 per year @ 4% inflation each year for 21 years (58 – my current age) = ~£54.7K income per year.
• 3.5% inflation: 2000 x 12 = £24,000 per year @ 3.5% inflation each year for 21 years (58 – my current age) = ~£49.5K income per year.

This means that roughly, I need a pension income of £49K - £55K at retirement to cover my expenses plus any extra spend e.g., a holiday or 2 every year. This is based on the mortgage being paid off before retirement or just when starting retirement.

If I didn’t pay off the mortgage (for any unexpected reason) then the above calculations look like:

• 4% inflation: 2300 x 12 = £27,600 per year @ 4% inflation each year for 21 years (58 – my current age) = ~£62.9K income per year.
• 3.5% inflation: 2300 x 12 = £27,600 per year @ 3.5% inflation each year for 21 years (58 – my current age) = ~£56.8K income per year.

Of course, the target is to be mortgage free as soon as possible. However, if that wasn’t possible by retirement, then the income requirement could increase to £56K - £63K (worst case scenario).

If I use the highest figures of each range i.e., £55K and £63K, the minimum I believe I should have saved in the pension to achieve these are:

• £55K - £1.375m
• £63K - £1.575m

As in my opening post on this thread, my target for the pension was £1.4m. This would fall in the range of £1.375m - £1.575m. I may need the pension to work harder to achieve the top end of the range by retirement.

The above doesn’t account for state pension or any other income (e.g., from savings, LISA etc.). This post solely focuses on the pension for simplicity as that is my main income vehicle for retirement.

I’m sure there are more knowledgeable posters on this forum that can give guidance on the above figures. However, I just wanted to share my thoughts and thinking, and with the increased pension contributions, I am hopeful to achieve this.

Rather than trying to predict inflation and working in terms of future values that are adjusted for inflation, I find that it is much simpler to adjust growth figures so that you are working with growth post inflation. You can then assume that everything is in current prices - that is, your target income and your eventual pension savings - and everything becomes a lot easier to reason about.

Brenster

Just to add, in my future forecast i assume 6% per year pension growth on average (I find that 4 in every 5 years this is at 10%+, so think this is a safe assumption), and 3% per year erosion for inflation.