Reply With QuoteOK, it depends how long you live, and how much growth (or loss) there is on your investments, and on how much your basic cost-of-living is going to be. No-one can answer those questions.Originally Posted by Montello
What you describe is drawdown .... you build a pot of investments which continues to grow which you draw an income from.
Hopefully your pot is diversified between stock, bonds, property, commodities and cash, and maybe some other products.
These assets continue to appreciate (except cash) and you draw off what you need to live.
The objective is that the pot is both big enough and growing at a rate greater than your drawdown that you can live well for as many years as you survive.
OK, it depends how long you live, and how much growth (or loss) there is on your investments, and on how much your basic cost-of-living is going to be. No-one can answer those questions.
But surely you can assume you won't live to be 110 years old so you don't need the pot to last forever, particularly if you have no dependents to pass it onto. I'd expect to exhaust our pot (prob spent on watches lol which could be sold after death - noe THAT will be the SC listing of all listings) and leave the properties as assets to be sold to provide care for our son.
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Indeed, all those figures will be estimates which is why you need to be conservative. I’m thinking a draw rate of less than 3% will mean no problems but a horrible long term bear market would seriously screw me and everyone else.
My intention is to not deplete my pot through retirement as that is conservative. If you plan to erode your capital during retirement that seems risky. Of course if markets are bearish some capital reduction maybe enevitable but hopefully markets will, over the long term, continue to rise.
This is why investment diversification is key.
That's true, however the length of time you need the money to last is only one of the variables - we also don't know interest rates, inflation, stock market returns, bonds etc.
What we CAN do is take some assumptions (assets we target to have, how much we want to spend, how much we think they need to last), and there are calculators which run those numbers against all of the past economic history to see how they might fare.
For example;
https://firecalc.com
http://www.cfiresim.com
Exactly, my personal calculations allow for the ‘pot’ to be gradually eroded to zero.
Ive used that first one which gives assurance... the second one is a bit US centric and I gave up with that one.
As observed there are a whole heap of estimates that have to be made, it’s not easy.
Plus all sorts of other things can mess things up, pandemics, war, global warming, failure of states and so it goes on. You have to make an estimate and go when you feel ready.
I’m sure most will leave things later than they could have got away with.
I suspect my £££ will peak the day before I die, and we have no kids.
NoTAGlove, think we work for the same outfit...
Yes, I’d rather have more spare time now while I’m still relatively fit and healthy. Also, maybe I’ll have a much younger wife who is happy to carry on working and, while I relax more - who knows what the future holds! I’ve already decided to buy a much more expensive house to hoard all my crap in, so that will need paying for too :(
I found the following website/blog very helpful:
https://earlyretirementnow.com/safe-...l-rate-series/
The spreadsheet allows you to add future supplemental monthly income (for example state pension if you’re retiring before state pension age) and expenses.
27 days to go for me. Excitement and nerves in equal measure.
https://www.retireeasy.co.uk/
Might be useful for someone
Please excuse my ignorance! There are clearly some very switched on people here, in regard to pensions. I therefore have a question that I hope you clever people can be answer. I’ve been head down working since I left the forces, actually very happy running my own small business, hence no real plans to retire. Obviously things in life can change and change suddenly, so whenever I read threads like this it makes me wonder. My questions is, as a armed forces pension does not (far as I am aware) actually have a pot of cash, how do I therefore value it or indeed get a valuation in those terms and how does it effect my lifetime allowance? I am aware that you could get a CETV valuation for divorce reasons and there is a form for that (not sure if it can be done once its in payment), but I’m not aware of such a form for lifetime allowance calculations? For reference I’m 54, it’s been in payment for 14.5yrs, therefore it will finally be indexed linked later this year.
Thank you in advance
You were The Green Cross Code Man?!
If it is in payment the calculation for the lifetime allowance is 20x your annual pension.
You are right in that a final salary pension doesn’t have a pot of cash and once in payment a CETV is no longer applicable.
I am in a similar situation - 10 years of AFPS 75 ticking along in the background. You can get a pension forecast and LTA value from here https://assets.publishing.service.go...PS_Form_14.pdf
Only you can know the answer to "Am I there".If your present lifestyle requires a certain amount of cash and @ that time you stop working want to continue the exact same lifestyle,you will obviously need the same cash too.So will you want to?,and/or will you be able to?.
Its all about what You/We/I have become used to whilst working,and when not,for many somethings can't and won't be the same,but for some it won't actually have any financial burden or worry whatsoever,infact for those it will be a lot more of what they've always done perhaps with no regard of cost!.
We ALL do the same stuff,we just might do the stuff in different places.......
Thank you sir
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Much appreciated
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I don’t really understand this comment. Most pension funds are invested and diversified in the same way as any other funds like ISA’S. There could be changes to the government pension but that won’t affect what you put into your own pension. As for ‘haircuts’ the only real negative of late is that they increased the age you could draw on from 50 to 55 (though that affects very few people in reality), everything else since the so called ‘pensions freedom’ has been very positive. More and more people are putting money in because of this, one big reason being the reality that your children are more likely to inherit it. That was always an annoyance for many due to the restrictions of a maximum 10 years on annuities or the extortionate rate of tax on death in drawdown (technically as could have been as high as 83ish% at one stage if I recall correctly). Now annuities and drawdown have much better terms.
You appear to have a fairly good spread which I think is key. Only suggestion I’d make is to put as much as you can in your pension for even more diversification (even from your ISA’s if need be) as the tax, flexibility and inheritance benefits are great. You can tailor the risk and funds to whatever you are comfortable with.
As for the willy waving comment from another poster - I don’t get it. I’d rather see people’s watch collections on a watch forum even if they had a 50k watch. It’s my hobby and I find SOTC’s interesting. Same goes for this thread, I’m sure people enjoy reading about the different views, opinions, schemes and even amounts from different members out of interest.
One note - the U.K. stock market has halved twice in less than 20 years. That’s like you owning a house worth £250,000 and then all of a sudden it’s worth £125,000! Yes it’s recovered both times and gone even higher but that’s not the point. There is risk and if you happen to commence a drawdown pension or are about to retire and it happens you could be in trouble. That’s why a good mix of asset classes is so vital, as is understanding risk and reward. I’ve come across people with silly amounts all in a single fund. I recall a couple of funds around the turn of the century ridiculously outperforming everything else and people piling in because of this. They both tanked around 90% because they were so heavily geared to start up technology funds that went bust, but no one really seemed to understand it at the time.
Continued great reading on this thread.
Another novice question. Trying to convince myself about pensions...
Somebody piles into pension their working life. Builds a nice pot let's say 200k.
At 55 they take the 25% tax free. The remaining 150k provides monthly income. They then die at let's say 58. What typically happens in terms of pot value and inheritance?
Guessing not a simple answer. Could well depend on the scheme conditions?
What I am getting at...is there any chance of the still large pot being 'lost' in some way.
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My comments on haircuts relate to DB company schemes that seem massively underfunded and the state pension that I think will be eroded by inflation in years to come. The population is aging.
The government is massively in debt and I would not put it past future governments to raid pension pots. Generous civil service pensions would be the first port of call perhaps; but maybe last.
I’m curious why you’d recommend transferring assets from an ISA into a pension, I’m not a high rate tax payer so I see no benefit, I only see restrictions and costs.
Diversification is key, my equity mix is highly diversified but I hold too much equitys and not enough cash, bonds and commodities. Probably to high on the property mix also. One BTL is going to be sold soon as I feel the party is over on being a Landlord.
Last edited by Montello; 2nd February 2020 at 15:10.
Speaking from personal experience, my pension investment, and that of my wife, will pass to our children - no inheritance tax due, they simply pay marginal rate of income tax on any sums they choose to remove from the investments, as and when they do so. Those are the “current” rules. Edited to add that we are both 55, and in flexi-access drawdown. And forget the point below re position pre and post age 75!
Last edited by Skyman; 2nd February 2020 at 15:44.
Assuming you’ve not gone down the annuity route (then it’s based on the terms you opt for) and are looking at drawdown for example. 100% of your pension fund can be inherited by a husband or wife or children for example up until age 75. After 75 there will be tax depending on the beneficiaries tax band and what they draw etc.
As an aside (depending on other assets) historically people tended to take the 25% TFC straight away. Less people are doing this now. Consider part crystallisation if you don’t need the cash. You’d need to take advice on this as it depends on your overall assets and needs, but generally nowadays the wealthier people are, the pension is often the last asset to use. I’m looking at this partly from an IHT perspective, but someone with say a million pound fund taking 250k in cash straight away ‘could’ be a very poor decision. As I said you’d need to take advice on your overall position.
If your basic rate it’s marginal, but higher rate for sure. I was thinking with your property, BTL’S and portfolio of ISA’s there could be IHT liabilities and moving that money across to pensions would be very efficient planning.
Interesting point. I have been so focused on building the pot I have not given IHT planning any consideration as we have no kids. That said I know we are creating a problem. How does the pension help here?
I think the lack of legislation makes the ISA option advantages.
Effectively your pension is out of your estate for inheritance tax purposes and can be paid out tax free. This is up to 75. Even after 75 it’s still more preferential.
For this reason, people now touch their pensions last and exhaust their other assets first. Also as an example moving say 100k from deposit based savings or ISA’s into pensions over a number of years could save 40k in IHT.
That said with the new IHT rules around owning your own property I wouldn’t be concerned if total assets between a married couple weren’t over £1 million. Also, not trying to be flippant, but as you haven’t got children you may not be concerned about any IHT payable on your estate. If you are though and have substantial assets it may be worth speaking to your adviser.
Hope that clarifies it? It’s quite hard to explain something quite in depth in a thread.
Last edited by Devonian; 2nd February 2020 at 16:51.
Completely understood.
Thanks, I wasn’t aware of that but as I say IHT planning has been low, if not ignored, factor until you have highlighted it as we have no kids.
That said we like our nieces and nephews so I’m not really keen on them paying a load of IHT on our estate.
I will give the matter some consideration. We don’t have an IFA so I do all this stuff myself, which is why these types of topics are most interesting.
/\ this. I take £12500 of taxable drawdown and the rest TFC so pay no tax and should be able to do so fir a number of years.
My secret is out.
Assume you mean non-taxable due to your annual personal allowance?
I have no pension as I have mostly been self employed/run my own businesses for the last 15 years. I do however enjoy investments in property and have recently bought 20 garages in a prime residential hi net worth area of south east London which will each rent for £100/120 pcm bringing in an annual rent of £24/28k per annum. I’d probably like 50 garages in my portfolio eventually which would give me a minimum of £5k a month for the rest of my life. I’m hoping this and other property investments will be enough to provide a decent income for myself and partner..
Very good point about diversification and I always try to ensure clients have a mix of asset classes and a reasonable amount of cash; the latter mainly for emergency funds and also to step in for income if the market nosedives so that they can 'switch off' drawdown whilst the market sorts itself out, rather than compound the problem.
The other example is people with shares from work as they often keep them and don't diversify, these are often low/cautious risk clients and then may have 15% of holdings in a single share, which is way outside of their comfort zone without realising. Even using their CGT allowance and reinvesting in a tracker or similar takes away the absurd potential volatility of single company shares.
If any of you are 60ish and doubting if you can afford to go the example Devonian gave is a very good model for dipping in with the state pension as back up; particularly for a couple with similar size funds. £32,000 per year tax free for a couple is a pretty healthy starting place.
I'm also an IFA and at 51 would have been close to packing in, but 'another' divorce has put a spanner in the works & the change of BTL tax won't help going forwards. With no kids I can plan to erode capital throughout my retirement. I've a mix of pension (depleted by divorce share) of approx £300k, BTL properties with a reasonable amount of equity & a reasonable amount of cash in the business. I can downsize from my current excessive main residence and be mortgage free (bought ex out & mortgaged to speed up process), and might be able to sell the business..... so a pretty diverse range of assets.
I might go in a couple of years time and use the cash in the business for a few years and then sell off property gradually trying to minimise or at least phase the CGT. If I had an unencumbered property & £800,000 I am comfortable that I could manage comfortably
For those without generational planning concerns you also have the possible fall back of equity release in later life; its a much friendlier product than it was a few years ago.
Last edited by westberks; 3rd February 2020 at 10:00.
I guess terminology- it is taxable but, I don’t get taxed on it due to my personal allowance
Question for the IFA guys. As I outlined earlier I work for a tech start up (albeit owned by a big VC firm). I've forgone a decent pension contribution (although I still put in around £15k myself) in return for stock that vests once the VC firm sells the business and depending on the multiple the sale realises against the initial.purchase price of the business is worth up to £150k per year (prob about £50k). I'll be livid if HMRC want to take tax of 45% (which I already pay on basic salary and commission) so how do I avoid this. I don't yet know what the value of the stock will be as that only materialises when the company is sold and we know at what price. Can this stock be put into a pension wrapper or something like that?
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Indeed.
Sounds like a plan, I assume the £800k would be in a mix of assets.
When you draw down I assume you will have to go to your liquid assets first so any property will linger.
What would you consider a safe draw down % to be?
No consolation to the OP but the reason they many have built up serious pensions is their age. I number among the baby boomers (I’’m 69) and have done pretty well - not through any talent but simply right time / right place.
I bought my first house in the early seventies (£11,500!) with an endowment linked mortgage. You probably wouldn’t do that now but mine paid out 5x the sum assured. So despite moving up through the housing market several times I have been mortgage free for 20 years
Throw into the mix an Armed Forces Pension, 20 years of a company final salary scheme and I’m pretty comfortable. I have built up some investments but don’t draw on them at present- that would attract 40% tax.
Not smug, not willy waving - just feel very fortunate. I feel sorry for my kids who will struggle to do the same despite being highly qualified and having good jobs.
As I'd still be invested I would be happy around 4-5%, having done a quick calc the number is likely to be nearer £1m, depending on a post brexit property collapse &/or tax increases
The monies would be split across pension, property, cash in business. I've not relied on any money from the sale of the business as its an odd asset to value & can be tricky to sell; but may realise a reasonable sum to add to the pot.
Although I usually suggest 4% for client's planning, but I'm single with no children and can erode capital if it suits me to do so.
Last edited by westberks; 3rd February 2020 at 10:02.
for anyone wandering how some of the others have built up larger funds; quite often it is just down to the good luck of being in a final salary pension from a young age, rather than any piece of genius planning. The level of funding for these schemes and the current transfer values are ridiculously high due to other circumstances.
I stumbled into property just by being unable to sell a former marital home many years ago and switching it to a buy to let, then ended up with a couple of others as the first had done so well.
If you are a higher rate tax payer then pensions are still the obvious choice whilst the current tax breaks for money going in & taking benefits are in place. Within pensions you can spread your assets across a wide selection.
for those above the higher rate & restricted on contribution to £10,000 or certainly below the £40,000 max then possibly consider VCT for a 30% relief; equally starting pensions for spouse using the annual allowance or children as previously suggested.
4% seems to be the much quoted figure; would this be 4% of your total pot INCLUDING your home or excluding?
Not sure why you would include your home? Investment properties maybe, but not your main residence, unless it is funds which you release through downsizing.
Hiya what is VCT please? I am restricted to £10k P/A contribution currently.
If you have no kids you can consider equity release in the long term so if you include your own home that gives the potential for earlier retirement.
Even if you have kids you can do the same depending on your thoughts on inheritance.
Interesting thread, which has prompted a couple of questions in my mind:
- How much (as a percentage) of one's portfolio do you hold as cash? I'm at about 20% after taking some profits last year when I started to get nervous about the global markets (US - China trade war and Brexit amongst others). This is the highest percentage I've held as cash for a long time, which does go against my natural instinct somewhat. The "fear of missing out" factor is strong, but there's not been any correction yet and I'm so far resisting the temptation to put any more into equities.
- Is there a "halfway house" between cash and equities? That is, a slightly better return than cash (and accepting some risk) but without the volatility of equities (and accepting that returns will be much less). I'm currently using the "PruFund" (from the Pru obvs) which after charges returns just under 4%. It has a smoothing feature which aims to reduce the rollercoaster ride somewhat. I think a "steady Eddie" type investment such as this has a useful place in a balanced portfolio, just wondering if there are other options.
For context, I sold my business 3 years ago which enabled me to retire at 51, but I've subsequently taken on some part-time consultancy work and I'm not drawing down anything from my investments.
0% in Cash here ... this is about to change as I am selling a BTL and will retain a proportion of the cash to balance things up a bit.
Trying to time the market is hard and I tend to buy and hold ... I did sell off some USA equities when Trump won the election expecting things to go south ... didn't work out that way ... so I try to take a very long term view and hold.
% of cash depends on what other defensive assets you hold ... most people in the UK hold too much property ... followed by too many equities ...
Note: "slightly better return than cash" ... bad news for you but cash offers no return; in fact cash is devaluing due to inflation.
Maybe you want to consider bonds; but to me at present these look only marginally better than cash.
Last edited by Montello; 3rd February 2020 at 12:21.
I aim to hold cash and highly liquid assets to allow 7-10 years financial security should equity and property assets go down the proverbial. This equates to around £470k, which in turn is about 25% of our total pot excluding real estate. Best return on cash is c. 1.5%, so below inflation.
Last edited by Skyman; 3rd February 2020 at 12:37.
Why do you say that? What would be too much property? It gives you (pretty much) guaranteed returns each month and there is strong possibility of capital gain too.
Not trying to be argumentative, just interested to know what the disadvantages are? (I am guessing tax!)
If 25% of your pot is £470k you have no worries even during a recession, no Brexit deal etc etc.
At the last firm I worked for only 1 or 2 of the old farts had that much.
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Because is skews peoples investment to be in the UK and the GBP.
Example: Say you bought a property in London for £1.2m in 2007 ... that was worth $2m. If that property today is worth say £1.4m you think you have done OK; but that is only $1.8m ... you have lost $200k.
We live in a global economy now; virtually nothing we buy is made in the UK now so we are consuming on a global level and having too high a proportion of your investments in the UK isn't being properly diversified.
Most people in the UK will have too much % of their assets in the UK / GBP. (Note: If I was holding large cash figures I would hold a spread of currencies)
Edit: Also any investment property will attract CGT; equities and pensions can be put into tax free wrappers; as can commercial property in SIPPs I believe ....
Last edited by Montello; 3rd February 2020 at 12:59. Reason: Additional info.
I have cash on deposit with interest rates of 1.35% to 2%, so yes, I am only too aware that these are essentially losing money when factoring inflation into the picture! However, as pointed out above, having a cash buffer does mean that in the event of a downturn I won't need to sell assets when their price is low, which is the nightmare scenario. Knowing how much of a buffer to keep is tricky, oh for a crystal ball!
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