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What am I missing?
I was trying to demonstrate by example how to get a living income out of the fund without paying more than very minimal tax
I turn 43 this year and whilst I have no thoughts on retiring, I'm a little nervous given I only have about £100k in total savings (mostly pensions). Seems I'm in it for the long haul.
you are better off than I was at 43, I had 65k in my pension. With a tail wind (8% p.a) for the next 7/8 years I hope to have 500k at 60. If not then I will work on. As others said, compound interest/time is your friend.
was trying to demonstrate by example how to get a living income out of the fund without paying more than very minimal tax
Righto. I'll re-read it tomorrow to see if I get it. Not that it matters 🙂 . Cheers for elaborating
No worries, it was just an example
For those who are just starting out with pensions or a fair few years from retirement but want to add as much as they can, if you are in a role which pays a bonus of any sort its well worth checking with the company HR people about salary sacrifice. You can put a bonus directly into your company pension ( I think you can with a SIPP style pension as well but I have no experience in that) thus avoiding paying tax on the bonus now.
I've been fortunate to pay in money for the last 7 years via this method and it has given my pension a needed boost over and above the normal monthly contributions.
If you are higher rate tax payer and go this route you will need to check in annually with HMRC to claim back the tax relief (another nice bonus) this is fairly straightforward via the .Gov website. If you are standard rate this is done via PAYE.
On the early retirement front I recently watched a video about annuities and how they had to change after the government changed individuals access to pensions years ago coupled with auto enrolment in DC schemes. I hadn't really considered them as a flexible option, but they are.
I have a DB pension kicking in at 65 and state at 67, so I toyed with dropping my 2 DC's into an annuity from 55-65 and see what I was offered. I figured I would look for some work 2-3 days a week to keep the brain ticking over as well.
a quick check using a calculator at L&G website and for my £180k pot they offered £15k pa for 10 years, £45k upfront and £18k at end of 10 years. Which has my interest, only 14 months to think about it! Although by then we will probably have had another interest rate cut which usually has an effect on annuity prices.
Annuities seem to get fairly poor reviews, though clearly safe and conservative. I guess the reduced returns vs drawdown is the insurance levy that you are being charged for stock market variation protection.
Annuities seem to get fairly poor reviews, though clearly safe and conservative.
I think they’ve been poor investments in the recent past but rates are better now Worth looking into if you want to increase the “base load” of your pension
How you mean ‘base load’ ?
@white101 are you sure about needing to do anything with HMRC? I salary sacrifice my entire bonus every year and it just gets added to the pension - since it's taken before tax there isn't any tax to claim back is there?
How you mean ‘base load’ ?
I just meant, by analogy with electricity supply, an amount of money that’s coming in regularly and reliably, like state pensions and defined benefit pensions. It can be reassuring if that “base load” is enough to cover normal monthly bills, leaving other investments, DC pensions etc for holidays, home renovation, medical expenses etc. That’s my thinking, anyway 🙂
you sure about needing to do anything with HMRC? I salary sacrifice my entire bonus every year and it just gets added to the pension - since it's taken before tax there isn't
It depends in your employer. Mine does the same as yours ( I presume)... Any extra I put in my pension goes straight in with no tax paid at all.
And they even chuck the Employer's NI on top code they're angels ,:-)
How you mean ‘base load’ ?
Agreed, it's a weird choice of expression. I think guaranteed base would be better. It's not necessarily increasing the level at all, it's just setting it at a known, guaranteed level
i am so glad i didnt read a post like this nearly 5 years ago.
it would of put us off retiring ........ ever.
some of the figures people mention needed to retire are fabulous.
we could only dream of such amounts.
@ewan When I was under the 40% threshold everything regarding tax relief was done at source by my employer. I went £400 over this salary threshold when my company was taken over (given a new contract and pay) and I was informed I have to contact HMRC to claim the tax relief. I'd seen a couple of people on YT talk about this and also when the pension provider finally responded to my request for confirmation they agreed I would need to claim it via HMRC.
With a DC pension your pot is made up of a few different contributions, your personal monthly amount, your employers amount and tax relief, hopefully there is also a growth amount showing since you started it.
Generally all this information should be on show on the pension providers dashboard when you log in, showing you each contribution total.
For clarity its the salary that takes you over the threshold not your bonus payment.
i am so glad i didnt read a post like this nearly 5 years ago.
it would of put us off retiring ........ ever.
some of the figures people mention needed to retire are fabulous.
we could only dream of such amounts.
@ton I know where you are coming from and that’s one of the reasons I’m trying to keep the thread going. Many of us are finding ourselves in a retirement option situation not entirely of our choice and it’s fascinating to hear how folks have made it work outwith the golden £1M, or even half of that, pension pot, at age around 60.
keep them coming.
(I know you guys have done great out of a much lesser amount which is inspiring to read about)
I just wish you could pay extra into your state pension and receive more.
We are now expected to be insurance experts and be able to guess how the markets will fare. We are only a Lord Far Far away from pensionmageddon.
Plus the government would welcome the extra cash.
@zippykona I think you raise an interesting issue there. We all don't actually have a state pension pot to pay into, its based entirely on tax revenues at the time.
So the tax we pay today is funding OAPS now and in the future youngsters (today) will fund us.
Its a bit of a ticking timebomb as there has been a lot more people living far longer than the State pension was designed for and also there is a population issue, not enough being born to pay into that pot in the future.
That Damian Talks Money channel on YT did a pretty good breakdown of the situation in the last week, worth a look.
^^ and I wonder how long till the State Pension age is increased again … 🙄
Not sure if it has been mentioned in this thread but Denmark has just legislated to raise its retirement age to 70 in 2040 from the current level of 67
^^ and I wonder how long till the State Pension age is increased again … 🙄
My eldest is 22, pretty much not expecting any state pension.
I have 7 and a little bit years to go, at the moment….
Boys are 22 and 19 and also not expecting they will ever see such a thing.
I am trying to calculate the annual rate of return of my pension - can any of you clever people help me.
I will use hypothetical figures so please show your workings
£250k invested since 2015 has generated a £500k pot. (500-250)/250 = 1 x 100 = 100%. That looks quite good.
But how do I then calculate that as annual rate of return over the 10 years to see if compares anything like say the 8% quoted in this thread. Do I just divide by 10 so I would have 10% p.a
Thanks
That’s about 7% a year.
10th root of two (ie your money doubled over ten years), converted to a percentage
Thanks both most helpful.
Ah but hang on the £250k wasn't all invested on year 1. Lets say it has been invested at a rate of £25k p.a. for round numbers.
Ah but hang on the £250k wasn't all invested on year 1. Lets say it has been invested at a rate of £25k p.a. for round numbers.
In that case Excel is your friend, but I haven't got it and can't remember the function you need.
(or else just ask ChatGPT a more complicated question)
In that case Excel is your friend, but I haven't got it and can't remember the function you need.
It's about 15%, I think ...
I suspect the state pension will morph into a bigger pay as you earn scheme.
So people who choose to opt out or not work will get next to nothing.
Then there will be a bigger range of government pensions for those who are able to contribute more , work for more years or can buy in at a later date.
The starting age will rise over time to 68 or 70. Then your legible for the both the state and company pensions , the state pension being like earnings related with reward the highest earner who will have also paid more income tax in the previous decades
yes it will be roughly double the original calculation because the money's been invested for half as long on average. Not precisely true but probably close enough.
rule of 72 is useful for doing these sort of things in your head. 1% compounded for 72 years or 2% for 36 years or 18% for 4 years etc....or 7.2% for 10 years, is a doubling. Approximately, good enough for most purposes though.
See also: (1+1/n)^n ~= e for large n
Maths can be useful in real life shocker.
Many of us are finding ourselves in a retirement option situation not entirely of our choice and it’s fascinating to hear how folks have made it work outwith the golden £1M, or even half of that, pension pot, at age around 60.
keep them coming.
(I know you guys have done great out of a much lesser amount which is inspiring to read about)
Ok someone with more knowledge than me needs to check the numbers the nominal values of my pensions are from memory from previous discussions. Remember there is no actual pot of money to access. This is not meant as a humblebrag but indicative of how well you can live on what to many folk would be insufficient money
I have an NHS pension giving me £700pcm. I believe thats worth ( tho there is actually no pot) around £125 000 ( ???) I have a widows pension of about £250 pcm so thats worth a pot of around £50 000 ( ???) I have a small rental flat worth £200 000 ( which is in the process of being sold). I currently make around £600pcm off this. I have a chunk of cash that is the cash out values of Mrs TJs pensions of around £125 000
I am now 64 and despite my travels I have only spent a small % of this pot. In total it would have a nominal value of around £500 000. I also own the flat I live in outright. Council tax is low but insurance is high. I end up with an income of around after council tax and insurance of around £1300pcm. I can live well on that. The cash on hand gives me a huge cushion and peace of mind.
I am intending to move house and will be restructuring my money and will end up probably with no cash reserves, a small interest only mortgage but more assets in housing and the potential to make a lot more in rental income
So for me that pot of £500 000 ish gives me an income that is plenty to live on and also allows me to have taken a number of trips and have plenty in reserve.
I camp tho rather than stay in hotels, I ride a bicycle rather than drive a car. I cut my cloth according to my means
3 years until I get a state pension tho I was contracted out so I believe that means I do not get a full state pension. Once I get that I will be rich in my book tho it will take me into a bracket where I have to pay more tax
I consider myself both very fortunate ( tho how I got here was rather unfortunate) and extremely well off. Of course there is only me to be funded off this
Thanks tj, fascinating reading, and quite uplifting/reassuring.
3 years until I get a state pension tho I was contracted out so I believe that means I do not get a full state pension.
I don't fully understand the contracting out bit. I was contracted out from when it started to when it stopped, but according the the Govt website, I'm still due to get the full state pension. I thought this would be reduced a bit? (Private sector if it makes a difference.)
The contracted out pot was worth over £100k, but I've taken out 25% and the rest on monthly drawdown.
3 years until I get a state pension tho I was contracted out so I believe that means I do not get a full state pension.
You can log into HMRC and check your amount of NI and what you are predicted to get.
+1 with @ton on this one. Amazing how much people are saving and have an aim and expectation for. I am nowhere near that, despite now earning well above average income, and while saving damn hard I will not have anything like the pot so many people have. I also have an ill wife who is (to be brutal) unlikely to make it to state pension age and has been able to drawn down her pension early (age 51) due to ill health - but that means a halving of her income. So our plans for a 'two income' pre and post retirement have changed in the last year. So that is leading to all sorts of plans and thoughts in my head at present.
i am so glad i didnt read a post like this nearly 5 years ago.
it would of put us off retiring ........ ever.
some of the figures people mention needed to retire are fabulous.
we could only dream of such amounts.
All of this ^^
In total it would have a nominal value of around £500 000.
I think you're significantly underestimating. Based on the 4% "rule" you seem to have about £600k equivalent pot, which by any reckoning is pretty substantial.
( Well at least by my reckoning)
Fair enough - perhaps even more. Its a bit tricky because in a private pension there is a pot of actual money whereas with the NHS / LA pensions there is not. the pensions die with me and I cannot exchange them for cash I don't think
I fully accept I am both well off and lucky ( tho some of that "luck" is down to decisions taken)
@ewan When I was under the 40% threshold everything regarding tax relief was done at source by my employer. I went £400 over this salary threshold when my company was taken over (given a new contract and pay) and I was informed I have to contact HMRC to claim the tax relief. I'd seen a couple of people on YT talk about this and also when the pension provider finally responded to my request for confirmation they agreed I would need to claim it via HMRC.
With a DC pension your pot is made up of a few different contributions, your personal monthly amount, your employers amount and tax relief, hopefully there is also a growth amount showing since you started it.
Generally all this information should be on show on the pension providers dashboard when you log in, showing you each contribution total.
For clarity its the salary that takes you over the threshold not your bonus payment.
Yeah, I'm at 40% anyway and im pretty certain it's all done at source. Whether it's bonus or just normal contributions. I will double check tho as that's a lot of money otherwise!
I was contracted out from when it started to when it stopped, but according the the Govt website, I'm still due to get the full state pension.
There are (correction WERE) two state pensions, the basic one and an earnings-related one (SERPS = state earnings-related pension). You were probably contracted out of the latter. I think that's my situation.
SERPS closed down a while back, then there was something else possibly similar (also abandoned I believe), I was abroad at the time and based my financial plans on never having any meaningful pension. Fortunately my wife and I had the salary to manage this ok (well when I say fortunately, it was a significant factor in our decision to work abroad for so long).
that makes sense - ta thecaptain. I am useless with this stuff!
Re pots. If you have a DC pension fund then the pot is the pot. If you have a DB scheme, the pot is worth whatever the pension scheme is says it is worth - so if they applied the 4% rule it would be worth 25 times the pension payment. That is if you can find an adviser who is prepared to do the work (for various reasons they are increasingly unwilling to handle transfers and levels of 40-50x no longer exist). However, if you have a DB pension in payment (as per TJ) for the purposes of Lifetime Allowance calculations HMRC use a flat rate multiplier of 20x. So TJ's own NHS pot is notionally worth 700x12x20 = £168,000. I haven’t a clue whether the widow’s pension is calculated for HMRC purposes - I suspect not because it wasn’t TJ’s pension in the first place - but for this exercise it has a notional value of 250x12x20 = £60,000.
Re tax relief on pensions. In general, when you put £5,000 into the pot the pension fund provider will add in effect £1,000 to the contribution as a reflection of the 20% relief. If you are a higher rate tax payer, when you fill in a self-assessment tax return and inform HMRC of your pension contribution and the relief given so far, by the magic of the tax calculation it will give you a further relief at your higher tax rate. I don’t know quite what reliefs are given where for salary sacrifice schemes but i guess PAYE mechanics may cover it all, but worth declaring to HMRC.
IANIFA
in a private pension there is a pot of actual money whereas with the NHS / LA pensions there is not. the pensions die with me and I cannot exchange them for cash I don't think
I would disagree and say you do have a pot. My ‘pot’ is in stocks/shares, some use the ‘pot’ to buy an endowment that dies with them, your ‘pot’ is your flat and cash on hand.
Oh yes that is true - but my NHS pension and LA widows pension do not have an actual pot of cash - just a nominal value
Anyway - my explanation of what I have was meant merely as an illustration of how its possible to have a good retirement on much smaller sums than financial advisors and some folk think
In general, when you put £5,000 into the pot the pension fund provider will add in effect £1,000 to the contribution as a reflection of the 20% relief
I think you might need to correct your arithmetic....
Doh, £1,250 added.
Salary sacrifice, money is taken out before tax so relief is immediate and full. There's no amount to claim back after. Dumb example but say threshold for higher rate is 50k, you get gross 60k, and want to put 5k into pension (cos maths easier)
If taken after tax your 10k was down to 6k, you put 4k in pensco adds 1k and you claim 1k extra in relief that taxman gives back to you (not into the pot) You have 2k plus the 1k the taxman gave you =3k of your own money and 5k in the pension to show for your 10k of earnings
Salary sacrifice....put 5k in (because thats what you want to contribute in total) and pay 40% tax on the 5k left and you end up with 3k of your own, as above.
Be lovely if taxman gave you even more.. .so if I'm wrong say so as I'm due a big windfall!!!