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[LC0112G]

As an aside, I'm convinced my current calculations are wrong. Every pension planner says I need £xyz p/a income for a comfortable lifestyle.  I consider my current lifestyle to be comfortable - I'm soon off on my 3rd foreign holiday in a villa this year, so can't be grumbling.

So how come my current (heavily played about with via salary sacrifice schemes, so see how little I can live on*) income be very significantly lower than what the pension providers' calculators say, and I still feel comfortable?

I'm convinced I've missed something very fundamental


*Done it this way, as we all know you spend what is left in your account

The illustrations given by pension companies assume all sorts of stuff that may or may not be relevant to you. The rules are set by the FCA, and mean that every company should give their illustration in a way that can be compared to others, so it's not the pension co's fault. This usually results in very low estimates based on low returns, such as annuities. An annuity provider must pay out even if you live to be 150, but the FCA assumptions are for a negative rate of return after inflation on you pot, and this means you need a big pot to sustain a small payout.

Annuities do have a place for those with no appetite for risk - you are basically paying the provider for a guaranteed income, so the risk is all theirs. However, if you are comfortable with some risk yourself then you can (probably!) achieve a better outcome by using one of the more recently introduced pension freedoms like drawdown. But, if you stuff it up then you could end up penniless in your old age - which is another reason to get an IFA involved particularly if the pots are large.

[Migv6 le Frog Fan]

Then blow the winnings on hookers, hard liquor  & coke.

You'd last a fickin day....if that....you stupid old bastard 

Yeah, but what a day. 

[TheBoy]

Actuaries can work out how much cash a company has to put into the 'pot' to pay your £X forever, but that value can vary massively day to day, week to week. YOu only 'own' the promise to pay £X.

I had a feeling I'd seen a "total value" type number on it somewhere, but can't see it now.  It does have a 25% TFLS figure on it though.

But, yes, you've confirmed that it isn't really going to happen.  Obviously at the time, I'll still ask the IFA, but will plan for not taking the 25% from that pension.

[TheBoy]

The illustrations given by pension companies assume all sorts of stuff that may or may not be relevant to you. The rules are set by the FCA, and mean that every company should give their illustration in a way that can be compared to others, so it's not the pension co's fault. This usually results in very low estimates based on low returns, such as annuities. An annuity provider must pay out even if you live to be 150, but the FCA assumptions are for a negative rate of return after inflation on you pot, and this means you need a big pot to sustain a small payout.

I was thinking along the lines of the "your need £40k pa for a comfortable lifestyle" type calculations, rather than the 4/6/8% growth figures on a pension pot.

Reality is, I've set my current income hitting my account to what my (index linked) DB would pay today + what a SP would pay today, and find I can live reasonably comfortable on that, and they a guaranteed income for life.  Thus I have to self fund income until I can take my DB at 60 (penalties are a tad high for taking early) and my SP at 67/68.  One of my DC's would easily cover that even with pessimistic growth, leaving my other DC for rainy day and big ticket items. Clearly the longer I work, the less I have to dip into that 1st DC.


But I can't help feeling I'm missed something

[LC0112G]

The illustrations given by pension companies assume all sorts of stuff that may or may not be relevant to you. The rules are set by the FCA, and mean that every company should give their illustration in a way that can be compared to others, so it's not the pension co's fault. This usually results in very low estimates based on low returns, such as annuities. An annuity provider must pay out even if you live to be 150, but the FCA assumptions are for a negative rate of return after inflation on you pot, and this means you need a big pot to sustain a small payout.

I was thinking along the lines of the "your need £40k pa for a comfortable lifestyle" type calculations, rather than the 4/6/8% growth figures on a pension pot.

Reality is, I've set my current income hitting my account to what my (index linked) DB would pay today + what a SP would pay today, and find I can live reasonably comfortable on that, and they a guaranteed income for life.  Thus I have to self fund income until I can take my DB at 60 (penalties are a tad high for taking early) and my SP at 67/68.  One of my DC's would easily cover that even with pessimistic growth, leaving my other DC for rainy day and big ticket items. Clearly the longer I work, the less I have to dip into that 1st DC.


But I can't help feeling I'm missed something

Ahh, I see. I'm not sure I'd trust those sort of predictors. I doubt they're truly representative, and the risk is that they're just there to 'scare' you into saving more for your retirement.

Only you really know what you'll need to live on in retirement. Some costs will go down - travelling to/from work, associated car maintenance etc. Other costs go up - as you age you will typically use more energy to keep your home warmer, and since you'll be home more often and for longer, the heating and leccy bills are likely to be more. Travel insurance gets more expensive for those month long world cruises to Austraila and back. I'm sure some of the old bu99ers on here can give you an idea of other things that get expensive.

[Sir Tigger KC]

The illustrations given by pension companies assume all sorts of stuff that may or may not be relevant to you. The rules are set by the FCA, and mean that every company should give their illustration in a way that can be compared to others, so it's not the pension co's fault. This usually results in very low estimates based on low returns, such as annuities. An annuity provider must pay out even if you live to be 150, but the FCA assumptions are for a negative rate of return after inflation on you pot, and this means you need a big pot to sustain a small payout.

I was thinking along the lines of the "your need £40k pa for a comfortable lifestyle" type calculations, rather than the 4/6/8% growth figures on a pension pot.

Reality is, I've set my current income hitting my account to what my (index linked) DB would pay today + what a SP would pay today, and find I can live reasonably comfortable on that, and they a guaranteed income for life.  Thus I have to self fund income until I can take my DB at 60 (penalties are a tad high for taking early) and my SP at 67/68.  One of my DC's would easily cover that even with pessimistic growth, leaving my other DC for rainy day and big ticket items. Clearly the longer I work, the less I have to dip into that 1st DC.


But I can't help feeling I'm missed something

Ahh, I see. I'm not sure I'd trust those sort of predictors. I doubt they're truly representative, and the risk is that they're just there to 'scare' you into saving more for your retirement.

Only you really know what you'll need to live on in retirement. Some costs will go down - travelling to/from work, associated car maintenance etc. Other costs go up - as you age you will typically use more energy to keep your home warmer, and since you'll be home more often and for longer, the heating and leccy bills are likely to be more. Travel insurance gets more expensive for those month long world cruises to Austraila and back. I'm sure some of the old bu99ers on here can give you an idea of other things that get expensive.

Are Werthers Originals expensive?        

[tunnie]

From my research it's actually be advisable not to take the 25% - I'm in a simple world with just a single pension pot.

Huh? Why? It makes no difference when you take the 25% tax free. It's always tax free (well unless/until the chancellor changes the rules). I'm yet to hear a convincing reason NOT to take the full 25% TFLS from defined contribution pots.

The argument is different for defined benefit (aka DB/Final Salary) pots, because you usually have to commute some of the annual income in exchange for a lump sum. In those instances you have to work out the commutation rate. Would you prefer £10K p/a for life or £8K p/a for life and a £25K lump sum?

What I've read is that 25% is for the life of your pension, you don't need to take it in one go.

40% threshold is ~£50k

So pay yourself ~£49k from your pension pots (paying ~20% tax)

Then top up your income from your 25% tax free lump sump, say £15k over the course of the year.

So you get a £65k pension and only pay 20% tax.

You only ever pay 20% tax and over the course of your entire pension that would save far more.

[Sir Tigger KC]

I don't think anything will be tax free for much longer. 

[tunnie]

I don't think anything will be tax free for much longer. 

Exactly, so far you can put £60k a year in tax free plus previous 3 years un-used entitlement, can see that being taken away. 

[LC0112G]

From my research it's actually be advisable not to take the 25% - I'm in a simple world with just a single pension pot.

Huh? Why? It makes no difference when you take the 25% tax free. It's always tax free (well unless/until the chancellor changes the rules). I'm yet to hear a convincing reason NOT to take the full 25% TFLS from defined contribution pots.

The argument is different for defined benefit (aka DB/Final Salary) pots, because you usually have to commute some of the annual income in exchange for a lump sum. In those instances you have to work out the commutation rate. Would you prefer £10K p/a for life or £8K p/a for life and a £25K lump sum?

What I've read is that 25% is for the life of your pension, you don't need to take it in one go.

40% threshold is ~£50k

So pay yourself ~£49k from your pension pots (paying ~20% tax)

Then top up your income from your 25% tax free lump sump, say £15k over the course of the year.

So you get a £65k pension and only pay 20% tax.

You only ever pay 20% tax and over the course of your entire pension that would save far more.

It all depends on what are called 'crystallisation' events.

Say you have a £1M pot. You can.....

1) Crystallise £50K, and take 25% tax free, and then take the remaining 75% as 'income' an pay tax at 20/40/45%. You leave the remaining £950K inside the uncrystallised pension wrapper.
2) Crystallise £50K, and take 25% tax free, and leave the 75% inside the pension as 'crystallized' funds.  You leave the remaining £950K inside the uncrystallised pension wrapper.
3) Crystallise all £1M, and take 25% tax free, and leave the 75% inside the pension as 'crystallized' funds.

What you cannot do is crystallise £50K, but take 25% TFLS of the whole £1M pot. You can only take 25% of whatever you crystallise. Once it's crystallised, you can't take any further TFLS from the crystallised portion of the pot.

On the tax point, if you crystallise (approx) £66K, then the TFLS part of that will be £16K5, leaving £50K exposed to income tax. You have a £12.5K personal allowance, so will pay 20% on £37K5, which is £7.5K. Therefore, you will receive £58K5 into your bank account, and pay £7.5K tax - an effective tax rate of 12.8%.