£1m pot is a sensible aim if you want a comfortable retirement and enough for contingencies, plus hopefully enough left to leave to the kid(s)…
I won’t need to take 25% as a lump sum as the only cash we will need will be car/cars and I think sticking with 4yr PCPs will be more tax effective.
You might have a rethink on that
1/ if you leave it in and drawdown then you'll pay tax on it as income above the threshold; having it sat as 'savings' that you can dip into is not income.
2/ if it's in stocks and shares type funds then you might need to be drawing out during a crash, which will cost you more as a % of your pot even if the absolute is the same. Holding some in cash or bonds to ride out a storm might be prudent.
I wrote more on (2) in another thread but I don't think we want to then have three threads on the same topic running at the same time, so here's the link to it.
You’re going to get 25% tax free either way - I guess the better option is to use this in the earlier years and minimise tax, then once you reach state retirement age try to use savings more? That way minimising tax bill as state pension contributes to taxable income.
I have previously been lured into the idea that a £1M pot is required to keep a good lifestyle
I have read the same but if you have say £1m, take £200k in cash tax free for whatever reason and assume that makes no interest but the rest invested.
At 5% pa, that is making £40k a year in interest (FTSE100 last 25 years = 6.3% annualised as a reference)
Add in two state pensions - at say £12.5k pa - you could have 65k per year, minus tax, and your 800k remains untouched. That would be pretty decent lifestyle for most, I'd say, assuming mortgage free, kids free, and so on....
Of course, 65k won't be worth 65k in 20 year's time, so pot will diminish due to effect of inflation meaning you need more than 40k, and then also as pot diminishes you get less than 40k pa interest, but even then I can't see £1m being anything other than very conservative.
Yes , but there is an alternative.
You use the 25% lump sum to invest in something called a Bond Ladder.
Fixed interest Bonds with a set maturity date . The returns are fixed and at maturity you either keep the cash or re - invest it.
Thus eliminating some of the market volativity in favor of financial security.
Government Bonds are traded , but you arent trading these . Just using them as fixed term interest vehicle.
Presumably though once you decide to reinvest the 25% you’re liable to pay tax on the proceeds? I’d have thought leaving it invested in the pension still makes more sense, then take 25% tax free each time you draw money down. You can easily transfer a percentage of your pot into bonds / bond funds etc without withdrawing it from the pension first.
Pension will be roughly half my salary but I’m taking a 25% lump sum
That was my original thought, then a watched a couple of YouTube vids and I now realise that I don't have to take a "lump sum", but can take it over years to keep my taxes lower - once my State Pension kicks in even if the allowances rise it may be possible I'm paying higher-rate income tax.
For me my only planning has been ensuring I've always paid in enough to my (various) work pensions to ensure I get the maximum contribution from my employer, plus I've +15 years of Final Salary Pensions from earlier in my working life. Kids left home years ago and the mortgage was paid off +10 years ago.
I was going to retire at the beginning of 2024, and then realised I was better waiting until 1st March and resigning as my 3-months notice would run into the new tax year so I'd get the tax paid back. At the beginning of February the Bank I work for announced it would be closing and the likely run-out was 12-24 months. I've been there enough years that the redundancy is worth waiting for. I'm now just waiting to be let go.
My OH retired early in 2024.
Money-wise we should be fine, and worse-case we'll down size.
I’d have thought leaving it invested in the pension still makes more sense, then take 25% tax free each time you draw money down
this was my thinking, though I didn’t really explain it well.
my pot is likely to be made up of approx 60% SIPP, 30% inheritances, (so cash or invested), and 10% S&S ISA (I am putting the maximum annual of 20k into this and will continue to do so post retirement from the inheritance cash/investment fund if tax allows)
Andy .
The point is to remove risk of a market adjustment just before you have to realise capital. Your going to be taxed regardless , clever people juggle it to avoid 40%. So you accept the potential gains / losses of shares wont be happening by moving your money out of the stock market, which is volatile . Then buying fixed terms bonds / Gilts with the intention of holding them , Its what PPP fund with Life Strategy kind of do . Switch out of Shares into bonds and cash as you near retirement so you dont get clobbered in a down turn . You are just doing it with a tax free lump sum outside of the pension provider. You have the option , once 55 , to leave your money in risky investments and hopefully time it to switch to fixed term bonds at a high point in the market inside the pension wrapper .
Its not as critical as it used to be , when you had a set time period to purchace an annuity .
You can do staged drawdown , which you hope the markets stay bouyant , but if theres a big adjustment it can take years for stocks to recover . some never do.
So you build a Bond Ladder to enable you to sleep at night a little better as you know your lump sum is safe , its earning a competetive rate of interest and you are in control. As always there is a risk.- firstly interest rates / inflation will soar and fiscal drift means your capital is being erroded and the rate of return is now un competetive . Plus , you might mis time your crystalistaion and buy a shed ton of Bonds as the market jumps on a Bull run and you miss out on a spectacular 20% jump so that Benatau 38 is now a Mirror Dinghy.
Yes - get all of that although I can’t easily find Bonds other than Bond funds on my SIPP. I’m sure there is a way of doing it but not really a concern for some time yet.
On Interactive Investor there is a not terrible 3.3% interest on cash balances although I guess you’d hope for closer to 5% on bonds. Just haven’t exactly worked out how to do it yet! Bond funds have terrible returns over the last 5 years but that’s still massively affected by COVID.
Theotherjonv, I did, so yes my pension will be considerable.. i'll likely see no drop in income when I retire. If I get to enjoy it, great.
My point is, you can plan but the future is unpredictable. While singlevand paying extra into a pension I was heading for an early retirement, but then I met my wife, had kids, circumstances changed. I'm still in a good position but not the same one.
Oh and you have to balance, live now vs save for future. I remember a fit 58 year old at work dieing one Christmas of a cardiac arrest. I had been about to stick a bit extra in my pension but chose to buy a Ti456 instead when they happened. I don't regret that
That's also fair. I've said I'm worried about running out, but also there is a 'fear' of overdoing it - 'no pockets in coffins', etc. At least you can spend it on kids, or leave it to them in the worst case. I wonder if akin to the 'wish I'd spent less time at work' there are many who really regret scrimping as their younger selves; I'd suspect maybe not as by its nature investing for a pension is small C conservative and risk averse.
I was impressed by the advisor that came into work for that reason. I know IFA's don't get a good write up in general, and undoubtedly he'd take your money if you wanted specific advice but at the same time as espousing the benefits of free money from the company, tax efficiency, and the miracle of compound interest he was very fair that paying down debt (not student loans though) and living a little also need to be priorities - as he said, you won't be 20-something living on the edge of one of the world's great cities for ever.
The point is to remove risk of a market adjustment just before you have to realise capital....
I'm not convinced by your arguements..it would be true if one were buying an annuity, but assuming you draw down then I don't see why you'd do what you describe. Be interested to hear more.
have read the same but if you have say £1m, take £200k in cash tax free for whatever reason and assume that makes no interest but the rest invested.
£1m pot....
At 5% pa, that is making £40k a year in interest (FTSE100 last 25 years = 6.3% annualised as a reference)
Add in two state pensions
But each person only gets one pension. You seem to be suggesting that the £1m target is for a couple, rather than each?
I've also heard the mill figure, but had assumed it was per person.....
it would be true if one were buying an annuity, but assuming you draw down then I don’t see why you’d do what you describe.
If you're doing drawdown then you need to be regularly converting investments (stocks and shares in the main) into cash. If those shares are depressed because eg covid, or financial crisis, then you have to cash in at a time that you don't really want to. You can't get by with no money waiting it out.
So you need some held in safer forms, that you can use when the time isn't right to realise capital. If you were going to use all for an annuity - that's the 'old' thinking of as you get closer to retirement move more and more into low risk bonds, etc., but as per other thread I hope to be retired for 20+ years and can therefore hope that any downturns will also have time to recover.
But each person only gets one pension. You seem to be suggesting that the £1m target is for a couple, rather than each?
I’ve also heard the mill figure, but had assumed it was per person…..
It's not a firm number, but my reasoning is that you don't get double costs for a couple - one house, one heating, council tax, etc..... I've seen about £50k for a single person and £65 for a couple. A million would get to that £65k by the calc above with 2 state pensions and doesn't take into account any pension the second partner has, so that £1mill is probably still plenty for a couple where both have pensions irrespective of how much each brings, and if both have £1mill pensions then they have plenty - can probably have over £100k per year between them.
you need some held in safer forms, that you can use when the time isn’t right to realise capital. If you were going to use all for an annuity –
I've tried a few times to trace our mutual quotes, but TBH it's not clear which point I'm even replying to, as you appear to be replying on behalf of someone else. Either way, we both appear to be saying exactly the same thing - that you can keep s bit of your dough in non equities so you aren't forced to sell at a loss to pay for short term stuff, but you should keep the vast bulk in equities or you ain't making any money long term.
that’s the ‘old’ thinking of as you get closer to retirement move more and more into low risk bonds, etc., but as per other thread I hope to be retired for 20+ years and can therefore hope that any downturns will also have time to recover
Exactly
Agreed - when I saw an adviser last year they told me the long term yield from a properly balanced portfolio (ie mix equities/ bonds) has historically been 7-8% but could be lower if you are unlucky and particularly if there is a fall early in retirement and you have to sell off equities at a loss (sequencing risk).
Key is to keep a balanced portfolio for the long term to achieve this return.
By holding sufficient bonds hopefully can “sit out” any stock market fall and not have to sell early - and if bonds carefully selected they may be even counter cyclical (ie increase in value when equities fall) providing an extra buffer.
I’m in the final stages of getting ready to retire - I’m aiming to hold 2 years worth of income as bonds / cash - I’m lucky enough that I’ve got a reasonable sized pot so can sit out any fall for a few years and hopefully get decent long term returns on equities. Given growing warnings about inflated stock valuations I’m thinking of adding an extra year to the “buffer”.
OK, point taken and I'll try to stay in lane.
that’s the ‘old’ thinking of as you get closer to retirement move more and more into low risk bonds, etc., but as per other thread I hope to be retired for 20+ years and can therefore hope that any downturns will also have time to recover
Yes, but the rational is that you'll not earn any more money to be able to top it back up - your approach is 'riskier'.
Yes, but the rational is that you’ll not earn any more money to be able to top it back up – your approach is ‘riskier’.
I would argue that's potentially not actually the case. If you leave more invested then you are indeed at risk of it dropping. BUT if you take it out and put it in something safe and hence less lucrative you are also actually taking a risk of not making as much money. In fact the likelihood of that risk is much higher than his risk. You don't realise it is a risk, precisely due to that high probability.... you probably see it as a fact or certainty and just accept it
£1m pot is a sensible aim if you want a comfortable retirement and enough for contingencies, plus hopefully enough left to leave to the kid(s)…
So we know comfortable is subjective, particularly for people who don't already live that standard of living!
Comfortable probably also changes as you age - expectations as an early retiree in late 50's might be very different from early 80's, and obviously the income changes when state pension age is reached.
Then we have "contingencies" which are clearly just guesswork.
And then a notional idea that "we" have kids or the same number of kids, or that in order to build up the magic million to give them some of when I die I might forfeit giving them cash today (e.g. to help with a house deposit). Assuming its an either or question would £15K today or £100K in perhaps 30-40 years time help my children (and thus their children) have a better foundation in life?
So it is really just a plucked out the air convenient number, before anyone even considers if that's for one or two people; if you have a house you might downsize; if you may be likely to inherit anything yourself (probably a really bad retirement planning strategy - but in terms of what might get passed on to my children is likely to be a factor) etc...
My number is that when we both reach 67 and I fully retire we will be slightly better off than we are while I work 22 hrs per week just now. A combination of Mrs IRC getting her OAP tax free as no other income and me dropping part time job income but gaining OAP and no longer being a higher rate taxpayer.
The big question is whether I want to retire fully before 67. Actually I like my part time job and have the shifts arranged so I am off for a full week at least once a month for doing hobbies.
Still not as much as the supposed income requirement for a couple to have a comfortable living but it seems comfortable enough to us.
