Pension panic

[Pinkelephantintheroom]

If anyone can offer some advice I would really appreciate it.

I have two pension pots - one that has a few thousand in (probably about 3k), and a main one I have been contributing to since I was 25 (I'm 41 now) is at 70k. 13% of my salary has been contributed for the last 16 years (combination of me and employer) and the amount contributed has increased in line with wage increases since that time. I think I started on roughly 21k pa and I am now on just under 40k a year, plus bonus etc. For an example, I contributed just over 5k into the pot in the last 12 months.

I had a statement through this week to say that my predicted yearly income will be £4,900. This seems so little. So my question is, when the pension company make the estimate on how much the yearly income would be, do they assume the contributions will continue to be the same (e.g. if I pay in 5k a year until retirement at 67, that would be another 130k in pot, plus any growth the original 70k and these contributions would make)?

Or does the statement mean that if I don't continue to contribute and leave this pot as it is, when I come to retire, the estimated annual income on it would be approx. £4,900?

Even if it stayed at 70k plus 130k and didn't grow any further, that will still be a pension pot of 200k. I read somewhere that an annuity would pay roughly 5k per year per 100k - are these figures completely outdated now?

Also as a guide I was told that you should halve your current age when you start to make contributions and that is a good % to pay in each month. I started paying into the larger pot at 26 (13% would seem right for this theory).

I know in a few years (10+) I will be able to hopefully up the contributions as the mortgage will be paid off but right now with 3 kids I don't think I will be able to up it much.

In this situation would you advise me to pay for some financial advice? Or try to up the contribution to 20.5%? The £4,900 might just be liveable if the state pension is still around but I keep reading that the money for that will run out by the time I come to retire so I guess I shouldn't factor that in??

Any advice wise ones?

Thank you!!

@AnotherOldGeezer

I recommend a USA YouTube channel called The MoneyGuy which explains how and why to save for retirement. Ignore the technical 401K, IRA etc stuff

I’m sorry but I can’t agree with giving your house to your children. What happens if they divorce? And you have to be worth over £1m as a married couple for it to have much impact anyway

US tax and pensions and inheritance work totally differently to the UK so that is terrible advice.

Things I've been pondering

None of us know how long we will live

So when we are younger & hopefully fitter, do we spend money on enjoying ourselves ?

No point in putting everything into a pension, if we don't live very long

Surely there needs to be a balance

I have recently increased the amount that I pay into my pension. But I keep some money to enjoy my life now too

I am aware that some people have no spare cash to save, so I appreciate that I am in a fortunate position

@NightEnergyNights3

Things I've been pondering

None of us know how long we will live

So when we are younger & hopefully fitter, do we spend money on enjoying ourselves ?

No point in putting everything into a pension, if we don't live very long

Surely there needs to be a balance

I have recently increased the amount that I pay into my pension. But I keep some money to enjoy my life now too

I am aware that some people have no spare cash to save, so I appreciate that I am in a fortunate position

Balance is the thing for me as well.

I have always paid into pensions but only in the last 5 years have thrown most of the spare money into them but that is because I plan to retire early 50s in about 4-5 years time so now is the time to save more.

And spending will be stacked towards the first 10 years of retirement when hopefully my health will still be good and then plan to spend less. I use an IFA for pension advice so I am fairly confident I won't run out of money from drawdown at the levels I am intending assuming a conservative growth of funds.

@DreamAboutSleep

If you trust your kids, when you are fairly young put your property into their names, with a covenant that you'll live there until you die. If you die 7 years or more after that they'll pay no inheritance tax on the house.

Use drawdown for pensions. Be cautious in what you take out. Aim to be debt and mortgage free by retirement: this makes a BIG difference. Anything left in the pot can be left to kids when you die so isn't wasted like buying an annuity and then dying a few years later. Put power of attorney in place to at least two people jointly that you trust, before you lose your cognitive abilities.

Also start pension funds for your children while they are still children.

I have to agree that putting your place of residence in your children's names and continuing to live there is bad advice. If you do this, it will be treated as a "gift with reservations" - and remain in your estate for inheritance tax purposes. To avoid that you would need to be paying market rent. There are probably some options in this area but it is not something to do without proper advice!

[I am not qualified but some inheritance tax planning has been going on in my wider family and I've tried to understand some of the issues]

@Mindymomo

I have just turned 60 and one pension has reached the point where I can take a lump sum and put the rest in an annuity for life. Its worth around £30,000 and if I take a quarter, the balance would give me £62 per month, or £88 if I don’t take the quarter cash. I knew it wasn’t great, but I expected more than this. My DH had a similar pension, similar amount and it pays £200 per month. They also said if I wanted to take out an annuity there would be a cost of £500. I am going to leave it for a couple of years and see if it improves.

Don’t go for an annuity. Get good financial advice. For most people a drawdown pension is a much better option. Annuities are poor value for almost all people Get your free “ pension advise” session first and they’ll talk through your options and type of products. They can’t tell you exactly what to go for, but will explain all the options, which is a good starting point

to keep it simple:

• at 41 you're expected to carry on working for another 26 years, so lots could change in that time.
• the forecast for the 70k pension assumes you don't put anything more in to it, but that what's in there grows in line with inflation over the next 26 years, and an annuity rate of about 5% at the end.
• you are doing well already and have plenty of time to save more

Someone recently asked about how much they expect to need when retired: there's an old figure of ⅔ current salary but I think that's not very helpful.

I'm 63 so planning to retire in 3 years and can't see my cost of living is going to change very much but we have paid off the mortgage, our kids have left home, and our cost-of-working is minimal (work from home, no childcare costs, DH wears uniform and works locally).

If you subtract cost of working, cost of kids and mortgage from your current outgoings I reckon that would be just about right for retirement needs - but you'd have to add in a buffer for elderly care for the last 10 years or so.

Talk to your pension company and read up on sites like meaningful money or the pension advisory service, you’re putting 13% of your salary into the pension, but you don’t understand well enough what you’re buying (yet - hope that doesn’t sound patronising but I’ve been in your shoes) and the options of what you can do with it. Also look at what funds It’s invested in and what kind of growth you might expect - with 20 years to go are you investing in the right funds?

Gifts are potentially a way to save IHT but not if they have strings attached.

I would be very careful with the magic wand advice being dished out here.

Ten amount of time you have until retirement you need to be reviewing the investment risk profile. I have elected for a high risk profile (not that high risk ...just all invested in equities rather than bonds etc). Last performance over many years has been 8% but im lucky that the Covid turmoil has generated my 30% over the last 2.5 years.

Many pensions schemes has a much too conservative investment profile considering how far people are from retirement

Speak to an IFA for advice

Remember you'll likely spend more at the beginning of your retirement than the end. My DM is in her 60s and still wants to travel etc, so she still spends quite a bit. My DGM is 92 and doesn't even spend her state pension because her mobility is poor and she doesn't go out. For that reason I think an annuity is pointless. Use the money when you can make best use of it.

Thank you everyone, I really appreciate the comments and sorry I didn't respond to all posts. It looks like taking a drawdown would be the best option for me as it would stand right now but it's still a long way off and a lot can change in that time. I did manage to get online and take a look and the drawdown option would looking a lot better vs annuity.

@DreamAboutSleep

There is an old saying the inheritance tax is a tax paid only by those who distrust their children more than they hate the taxman, and it is so true.

Honestly @DreamAboutSleep this is some of the worse advise I've seen on here. How much do you trust your children's future spouse? The truly wealthy people I know who engage in planning and have bought their child a house have purposefully not put it in their name in case they divorce. I know of far too many situations including divorce, unexpected early death, and relationship breakdown to think this makes sense in even 50% of cases. At a minimum you'd want investigate trusts, but the simple fact is you're literally writing off and asset, and putting a financial burden on your children: impacting on any potential benefits they might need, whether they're first time buyers, etc etc.

OP if you look at online calculators, not specific to your fund, they tend to spell out whether they assume people will continue, or are basing it on amount currently in the fund: you can compare both projections. I have no idea why people keep taking about state pensions not existing: that kind of talk just makes it easier for government's to renege on commitments. There may be reform but the absolute majority of people do not have sufficient private pensions. Part of the issue about future pensions is the population imbalance, which at least shows a huge voting power will remain with pensioners.

@DreamAboutSleep - This is why people should pay professionals, and not listen to forum randoms.

As mentioned the house woudl be classed as a gift with reservation of benefit and would remain in the estate for IHT, the usage of the RNRB and gifting of cash would be a better option to reduce the liability. This would trigger the 7 year ruling (during which time they would be classed as a Potentially Exempt Transfer)

Secondly - as others have mentioned, if youc children divorce, half your house could go to the ex. Child becomed bankrupt, charge over your home.

Endless reasons not to do it, and not one reason to do it!

OK here is an actual example

In 2011, my fund was worth £130K

Sine then i’ve gradually withdrawn £60K, about half tax free

It is now worth £165K

Need to remember that inflation has been going on and that international investment returns have been exceptional. And I’m not expecting the next 10 years to be as good.

This may help people understand what can actually happen. Start off with low withdrawals and gradually increase them to say 4% a year. I now sell investments regularly to have about 2 years’ withdrawals In cash available at any one time in case there’s a crash

Yes, I think people don't factor in the effect of compound interest on the investments. Very few people with large pension pots have actually invested anywhere near the amount in cash that is contained in the pot at retirement, even when adjusted for inflation.

E.g. I am mid-30s. Just looked up my statement online and current value is around £150k. Estimated (inflation adjusted) total value at retirement if contributions remain at a similar (inflation adjusted level) is around £1m (obviously there's a range of predicted outcomes higher and lower but that's the middle). I am not projected to be making £850k of additional contributions before I retire!