How Much to Save?

Ma77hew

Hi All, I'm hoping someone with some knowledge on calculating pension funds and annuities can help me out a bit.

I'm currently 25, have a pension fund around £13k and contribute around £350 per month (my contributions plus employers plus contracted out).

What I'd like to do is build up a pension pot as quickly as possible that will get me a pension of around £10-£15k per annum (in todays money), excluding state pension, assuming I retire around 55/60.

I'd like to know roughly how much I would need to have in my pension fund in say 10 years so that if I didn't contribute to it anymore I would still be able to achieve that level of pension, Also how much would I need to have in it by the time I reach retirement age.

I keep coming up with crazy figures (Which I hope are incorrect).

Not sure if it would be achievable but I'd like to have a crack at it.

Thanks.

Flamehearted

It is insane ammounts of money - you would need arround 200000 to produce that sort of income. If your money is going into a unit trust then that will help it grow over the years.

meester

Ma77hew wrote: »

Hi All, I'm hoping someone with some knowledge on calculating pension funds and annuities can help me out a bit.

I'm currently 25, have a pension fund around £13k and contribute around £350 per month (my contributions plus employers plus contracted out).

What I'd like to do is build up a pension pot as quickly as possible that will get me a pension of around £10-£15k per annum (in todays money), excluding state pension, assuming I retire around 55/60.

I'd like to know roughly how much I would need to have in my pension fund in say 10 years so that if I didn't contribute to it anymore I would still be able to achieve that level of pension, Also how much would I need to have in it by the time I reach retirement age.

I keep coming up with crazy figures (Which I hope are incorrect).

I think it depends on about four variables:

* the amount you drawdown
* the amount your money grows by
* inflation
* the rate of increase of your monthly pension payment

Let's assume your money grows at 7% per year, and inflation is 3%.

By the same token, let's assume you can safely take 2.5% from your money at 55 in drawdown (I think this is about what you'd get from an annuity).

These are fairly conservative assumptions.

So at 55 you need £12.5k in today's money, i.e. 12500 * 1.03^30 = £30,340 per year.

With 2.5% drawn down each year, then you are looking at a pot of £1.22m in 2038's money to make £30,340 in 2038's money.

Assuming your payments grow by 3% per annum, then the question is what you need to pay in each month.

On £350 per month, growing at 7%, and uprated 3% each year, you would have £692,000 at 55. To get to £1.22m you need to pay £665/month into your pension.

At 8% growth, this would fall to £535/month.

If you increased your payments by 4% each year, OTOH, at 7% you'd need to pay in £585/month.

But, the maximum GAD amount is much higher, 6% based on current gilt yields, for a 55-year old male. Obviously at this rate, your money is going to dwindle in value - but then you are going to die at some point after your retirement, and you won't need it then.. So if you withdrew the maximum, and didn't take your 25% tax-free cash, you'd only need £505k.

You'd exceed this comfortably on your current contributions, and even with taking 25% tax-free you are going to have £520k left over, which should fund that £12,500 (the middle of your range) pension income.

I think £15k, or even £20k is a better target because even though inflation might be 3%, lifestyle inflation takes its toll, as we find more things to spend money on over the years. By moving your retirement age back to 60, the GAD rate goes up to 6.5%. You'd have a £1.05m pot on current contribution levels, take out £262k tax-free, leaving you with £18.1k in today's money.


Actually, quite interesting to pay with this stuff. My pension pot is only slightly larger than yours, I'm 26. I earn about £150k/year, and I pay in £6k/year, so I'm not even close to having adequate pension contribution. But I mostly do it to avoid paying tax today, I dislike paying taxes. I will hopefully have sufficient alternative means not to care too much. A £40k/year pension looks like it would require a payment, assuming my retirement in 29 years, of £1190/month. So I should probably double my payments. But I won't, unless I'm saving lots of tax.

Ma77hew

Thanks, they were the same kind of figures I was coming up with so it would be a massive task.

I find it quite depressing working out how much you need to pay in to get the pension you want.

I think it will take a little longer than the 10 yrs I'd hoped.