Pensions Pots - How much do you need?

[JohnD]

I found this article, which suggests £265k pot for an annuity, or £154k pot for income drawdown to get a pension of £26k per year:



Do those seem to be reasonable figures?

the figures don't make sense as they stand, the payments are too high for the fund values.

Perhaps they are calculated saying "if you are 42 now and your fund is today worth £256K, then by the time you are 67, it will probably have grown enough to...."

Compound growth is a wonderful thing, and in 25 years a fund would have grown a lot bigger.

 

[JohnD]

33 years for me…

I've calculated my withdrawals to be a figure that should last as long as I do.

 

[kingandy2nd]

the figures don't make sense as they stand, the payments are too high for the fund values.

Perhaps they are calculated saying "if you are 42 now and your fund is today worth £256K, then by the time you are 67, it will probably have grown enough to...."

Compound growth is a wonderful thing, and in 25 years a fund would have grown a lot bigger.

thanks for your feedback John.

those figures are generic to the article for someone at retirement age

 

[kingandy2nd]

Apologies, the link in the first post was wrong, here’s the article:

https://www.which.co.uk/money/pensi...how-much-will-you-need-to-retire-atu0z9k0lw3p

And the examples I quoted

 

[JohnD]

found it

the paragraph below says:

"If you were looking to get a comfortable post-tax income of £26,000 a year and wanted to get a guaranteed income paid to you via a joint-life annuity, you'd need a pot of £265,420, according to our calculations. This also factors in receiving annual state pension of around £16,000 as a couple, so you'd need to generate annuity income of around £10,000 per year."

so the sum appears to be, a pot that will generate £10,000 p.a. in addition to your two state pensions.

Which is less than 4% p.a.
(pretty poor rate, considering you have handed all your money over and will never see it again)
It is often said that you can take 4% p.a. from an investment account without the fund shrinking, because income plus growth can be expected to equal or exceed what you are taking out.

The returns on joint-life are lower than on single life, because the chances of one of you living to a hundred are doubled.

The Which? article is very badly worded.

IMO you would do better with income drawdown or partial encashments.

From their figures, they seem to be working on round about 6% from income drawdown, I can't get the exact figure, but very similar to my estimate.

 

[kingandy2nd]

Thanks for the clarity John.

So looks like the annuity would be the low risk and low return option.

Im thinking a £300-£400k investment pot would be a good target, and then drawdown on it as and when needed.

I’m also thinking a buy to let might be a decent revenue stream (subject to right location, right price, etc) to balance the portfolio a bit.

 

[motorbiking]

That sounds quite interesting. Can I ask where the property is, and what type it is? Presuming lettings dipped a bit during last 18 months - is it now picking up?

Cowes, IOW. Its a two bed mid terrace close to the town Centre.
I have conventional rentals too, but I prefer the Airbnb model. No ASTs, deposit schemes. You have to pay all the bills and council tax (though you can dodge that easily, I choose to pay it).

I was lucky during lockdown as I was able to do short term rents to essential workers. This year with all the restrictions on foreign travel, its been booked back to back. Because of the location, I can get 2.5k per week for certain events.

 

[motorbiking]

I did some quick sums on this. Based on JohnDs discussion.
Inflation assumed at 2%
Investment growth 6% (a bit high)

Age 42
£28,700 (excluding state pension) pension target (todays money)
Pot £200,000 today
Retire at 65/66

Pension target adjusted for inflation : £46-47k pa pot will grow to £766,500
Pot will run out at age 93.

But adjust growth to 5% and the pot runs dry at 81. If inflation is 2.5% avg, then you need to get a job at B&Q at age 78.

With inflation alone, that 28,700 pension will be sucking 75k when you are 80, from your pot.

 

[JohnD]

Thanks for the clarity John.

So looks like the annuity would be the low risk and low return option.

Im thinking a £300-£400k investment pot would be a good target, and then drawdown on it as and when needed.

I’m also thinking a buy to let might be a decent revenue stream (subject to right location, right price, etc) to balance the portfolio a bit.

For an elderly man, a BTL might need more effort and attention than some other investments. And once you take your finger off the pulse, and pay a managing agent, your costs and risk of being scalped go up.

If you already own a house, you might find that more than half your "wealth" is already in residential property, so buying more would make you more unbalanced..

 

[JohnD]

If inflation is 2.5% avg, then you need to get a job at B&Q at age 78.

With inflation alone, that 28,700 pension will be sucking 75k when you are 80, from your pot.

Depends what you're invested in.

Obv. cash, bonds, fixed interest will shrivel up, but asset-backed securities (e,g. National Grid, Marks and Spencer, Wetherspoons, Glaxo) will tend to keep pace. As you never know which will be the successful businesses, and which will collapse, a low-cost tracker is supposed to keep pace with the market even if you have no interest in investment.

Funnily enough, my late grandad invested in FW Woolworth many years ago, which you'll remember collapsed, although when he bought it, it was viewed as rock solid. However his young widow made a fortune out of Kingfisher, which was split off from Wooworths,, and spawned B&Q and Screwfix, even though she took no action. So you never know.

I am personally very much prejudiced against cash, bonds and fixed interest for long term investment, even though a bit is considered a short-term safety net against market crashes.

 

[kingandy2nd]

How long are you planning on living?No good being the richest bloke in the cemetary.
Everyone is different..Some work their tits off all their lives, scrimp and scrape and are utterly miserable sat at home with loads in the bank..Some blow every penny and are happy as pigs in sht....Etc...Where are you on the scale of things?

Hopefully I’ll live as long and healthy life!

Im not at either end of the scale…just would like to be happy and comfortable with all basic needs met without any sort of struggle when I decide to stop working

 

[motorbiking]

Tbh it’s not really about how long you live, it’s about how long you can live independently. It’s “care” that spoils the spreadsheet in the later life as I’ve had elderly relatives spending over 1000 a week in the last few years to be looked after. It’s hard to account for that in any model.

 

[Brigade77]

If you can buy me a £25kpa income with a £250k pension pot, then I have some magic beans I think you'll be interested in.

 

[kingandy2nd]

Tbh it’s not really about how long you live, it’s about how long you can live independently. It’s “care” that spoils the spreadsheet in the later life as I’ve had elderly relatives spending over 1000 a week in the last few years to be looked after. It’s hard to account for that in any model.

I’m guessing that’s a potential benefits of an annuity, in that you’ve ‘locked’ your investment into a fixed income. Although this means, as it stands, you’re then reliant on the state to care for you.

If you can buy me a £25kpa income with a £250k pension pot, then I have some magic beans I think you'll be interested in.

It didn’t seem right to me, but that’s what Which said. However, that pot would supposedly get you 26k inc your state pension

 

[JohnD]

I’m guessing that’s a potential benefits of an annuity, in that you’ve ‘locked’ your investment into a fixed income.

Or to put it another way, you're locked out of any chance of future growth.

I had an old granny who thought she was comfortable, but inflation eroded her savings and pension.