Pensions, how do they work and which one?
Discussion
dingg said:
I intend to use drawdown at age 58 - should have 500K in my pensions then (3 years time) ,
I was hoping to pull out 24k ish P.A
£24k is nearly 5% p.a. It seems to me 3% to 5% withdrawal is not unreasonable but you're clearly hitting the upper end of that range and need to get from 58 to at least age 70 before there's a top-up.I was hoping to pull out 24k ish P.A
What age does your state pension come into payment? You could finesse cash flow to dovetail with that. i.e. reduce your withdrawals at that time if you want to spend some money in the early years.
It seems to me there are two big factors,
- Do you want to spend more in the early part of your retirement before you get too old and creaky to get out much?
- What level of annual investment return do you think your fund can generate?
some good points raised ozzie , wife gets her state pension at 66 I get mine 67 , both currently qualify for £155pw each.(unless the rules change)
I suppose I could hit the pot a little harder in the early years as when, as you say, we do reach older ages we won't need so much cash anyway. More things to think about and I suppose with our state pensions giving us about 300/wk we'd only need to pull about 10k pa out of the pot once we get to state pension age.
Its going to be a concerning time as to what to do for the best tbh
eta - got my state pension age wrong doh
I suppose I could hit the pot a little harder in the early years as when, as you say, we do reach older ages we won't need so much cash anyway. More things to think about and I suppose with our state pensions giving us about 300/wk we'd only need to pull about 10k pa out of the pot once we get to state pension age.
Its going to be a concerning time as to what to do for the best tbh
Edited by dingg on Tuesday 24th May 15:08
eta - got my state pension age wrong doh
Edited by dingg on Tuesday 24th May 15:09
dingg, thought you were 55??
Good calculator for State Pension Age - https://www.gov.uk/state-pension-age/y/age
Good calculator for State Pension Age - https://www.gov.uk/state-pension-age/y/age
Edited by Jockman on Tuesday 24th May 15:14
Ozzie Osmond said:
At the end of the day when you can,
Compare BTL,
Good points and all true but I guess I was looking at property as an income source not strictly a cash point on selling. Agree it all has to be considered. - get 40% tax relief going into a pension
- get compound tax free growth
- get 25% out tax free at the end, and
- only pay tax at a lower rate on the pension
Compare BTL,
- potentially Stamp Duty at enhanced rate on purchase
- significant transaction costs getting in and out
- significant costs dealing with tenants, rental deposit etc
- very limited tax relief on interest paid
- tax on income at your highest marginal rate
- Capital Gains Tax charged when you sell.
My man maths brain is trying to work out if I buy a 100k in pension vs property
Pension costs 60 odd k and gives 3k ish per year
1 bed flat costs 100k and gives 6k is per year
Or am I miles off..
bmwmike said:
Pension costs 60 odd k and gives 3k ish per year
1 bed flat costs 100k and gives 6k is per year
Given these things are in the future and unknown I'd say you're in the right sort of ball-park with those numbers.1 bed flat costs 100k and gives 6k is per year
All I would add is that with a pension,
- Don't forget the tax free lump sum compared with CGT charged on sale of property
- No difficult tenants
- No repair bills
- Good ability to pull out some cash when you want to. Property exit tends to be "all or nothing".
- If you already own and live in one house, buying another is investing lots of eggs in the same basket, i.e. UK residential property. Pension investment enables a spread of risk across countries and sectors.
Ozzie Osmond said:
6. And this is the bit you won't like - a "decent" pension is likely to cost from about 15% of your earnings. Yes, 15% every month of every year throughout your working life.
As a very rough rule of thumb, you need to pay in % terms half your age when you first started your pension. A 30 y/o just starting a pension needs to put in 15% of income for his working life, but OP is 23. 12% should be ok. TwigtheWonderkid said:
Ozzie Osmond said:
6. And this is the bit you won't like - a "decent" pension is likely to cost from about 15% of your earnings. Yes, 15% every month of every year throughout your working life.
As a very rough rule of thumb, you need to pay in % terms half your age when you first started your pension. A 30 y/o just starting a pension needs to put in 15% of income for his working life, but OP is 23. 12% should be ok. Ozzie Osmond said:
That's a bit of a strange question because the pension contributions attract full tax relief - in other words, there isn't really a net.
But I think the answer to your question is "gross".
I don't think it's a strange question at all but perhaps I worded it badly. As we're talking about the %age that should be put away into a pension the question sought to clarify if the %age guide (age/2) should be from net or gross salary. If net it obviously means the total hitting the pot is 20% higher again.But I think the answer to your question is "gross".
I can see your point though, that 20% of salary is 20% incl relief. I think most folks or a lot of folks look at their salary as the weekly or monthly cash that hits their account though. Hence the net or gross question.
Either way I think you answered my question. So if a 40yr old is on 40k they should be putting approx 8k away per year. From net pay that's about 500 ish per month.
bmwmike said:
Either way I think you answered my question. So if a 40yr old is on 40k they should be putting approx 8k away per year. From net pay that's about 500 ish per month.
Yes, a 40 y/old starting a pension at that time would need to put £8K of his £40K a year away. That's £666.66 a month. But he'd get back his tax. I think on £40K he'd still be on 20% just (may be wrong on that) so £133.33 rebate per month.
bmwmike said:
BTL looking like the better bet then
100k flat paid off would yield 5.5k pa round my way at the moment. Maybe slightly more.
I don't currently have a flat but rather than pay extra into a pension I may never see it seems to me they are a safer bet. Plus you can leave to kids etc.
I don't know if you've already taken this into account, but dont forget service charge and ground rent. This could bring the yield down to 4.5k, and then you have to pay tax on that. Under the new tax rules, this could bring your profit down to 2.7k assuming you are a higher rate tax payer.100k flat paid off would yield 5.5k pa round my way at the moment. Maybe slightly more.
I don't currently have a flat but rather than pay extra into a pension I may never see it seems to me they are a safer bet. Plus you can leave to kids etc.
On top of this, you have to deal with potentially bad tenants who don't pay, or void periods.it takes time and money to find tenants and vet them. Property is also very illiquid. If you need money at short notice, it can be difficult to release. Also, you have to deal with regular and irregular expenses. Insurance, fixing the boiler that will inevitably break down, being called out because your tenant can't work the washing machine etc.
DillonL said:
I don't know if you've already taken this into account, but dont forget service charge and ground rent. This could bring the yield down to 4.5k, and then you have to pay tax on that. Under the new tax rules, this could bring your profit down to 2.7k assuming you are a higher rate tax payer.
On top of this, you have to deal with potentially bad tenants who don't pay, or void periods.it takes time and money to find tenants and vet them. Property is also very illiquid. If you need money at short notice, it can be difficult to release. Also, you have to deal with regular and irregular expenses. Insurance, fixing the boiler that will inevitably break down, being called out because your tenant can't work the washing machine etc.
Thanks. Yep considered all that. I think as with anything it's about balance. I would like to have another property, even just a 1 or ideally 2 bed flat, paid off by the time i retire. I am 41. Have a decent wedge of equity in a large property and also have decent saving and pension. Latter could do with some tlc mind. On top of this, you have to deal with potentially bad tenants who don't pay, or void periods.it takes time and money to find tenants and vet them. Property is also very illiquid. If you need money at short notice, it can be difficult to release. Also, you have to deal with regular and irregular expenses. Insurance, fixing the boiler that will inevitably break down, being called out because your tenant can't work the washing machine etc.
Still i could be a lot worse. I cant see property going down over a 20 year window so as long as it meets inflation I see it as savings. If someone else helps (tenant) along the way, great. My disposable could easily cover the mortgage anyway.
On that basis it seems sensible. I still intend to take advantage of 40% rebate on pension contributions.
If it would be your second property - don't forget the 3% stamp duty.
your initial post sounded like you were buying outright, but now you are mentioning a mortgage. Consider the repayments if interest rates go back up to normal levels. The main thing that makes property an attractive investment, in my opinion, is leverage. If you are buying outright then typically I would expect equities to outperform. Leverage allows you to gain much bigger returns on your initial investment, but also means you can make much bigger losses. A £10k deposit on a £100k house means that a 10% fall in value leads to a 100% loss. Also. With a deposit this low, the new tax changes would mean you are probably having to contribute a couple of thousand of your own money each month to keep up the mortgage payments, and that's at the current low rates (this is just an example, I assume you would be planning to contribute a much bigger deposit).
I'm not trying to put you off BTL, but too many people just jump in before thinking about all the true costs. The government and the media seem to be changing their view from "House prices are up, this is great news!" To the more correct view of "high house prices are bad for the economy". Please consider the fact that regulations may change to make it even harder for BTL to make a profit.
your initial post sounded like you were buying outright, but now you are mentioning a mortgage. Consider the repayments if interest rates go back up to normal levels. The main thing that makes property an attractive investment, in my opinion, is leverage. If you are buying outright then typically I would expect equities to outperform. Leverage allows you to gain much bigger returns on your initial investment, but also means you can make much bigger losses. A £10k deposit on a £100k house means that a 10% fall in value leads to a 100% loss. Also. With a deposit this low, the new tax changes would mean you are probably having to contribute a couple of thousand of your own money each month to keep up the mortgage payments, and that's at the current low rates (this is just an example, I assume you would be planning to contribute a much bigger deposit).
I'm not trying to put you off BTL, but too many people just jump in before thinking about all the true costs. The government and the media seem to be changing their view from "House prices are up, this is great news!" To the more correct view of "high house prices are bad for the economy". Please consider the fact that regulations may change to make it even harder for BTL to make a profit.
DillonL said:
If it would be your second property - don't forget the 3% stamp duty.
your initial post sounded like you were buying outright, but now you are mentioning a mortgage. Consider the repayments if interest rates go back up to normal levels. The main thing that makes property an attractive investment, in my opinion, is leverage. If you are buying outright then typically I would expect equities to outperform. Leverage allows you to gain much bigger returns on your initial investment, but also means you can make much bigger losses. A £10k deposit on a £100k house means that a 10% fall in value leads to a 100% loss. Also. With a deposit this low, the new tax changes would mean you are probably having to contribute a couple of thousand of your own money each month to keep up the mortgage payments, and that's at the current low rates (this is just an example, I assume you would be planning to contribute a much bigger deposit).
I'm not trying to put you off BTL, but too many people just jump in before thinking about all the true costs. The government and the media seem to be changing their view from "House prices are up, this is great news!" To the more correct view of "high house prices are bad for the economy". Please consider the fact that regulations may change to make it even harder for BTL to make a profit.
Thanks againyour initial post sounded like you were buying outright, but now you are mentioning a mortgage. Consider the repayments if interest rates go back up to normal levels. The main thing that makes property an attractive investment, in my opinion, is leverage. If you are buying outright then typically I would expect equities to outperform. Leverage allows you to gain much bigger returns on your initial investment, but also means you can make much bigger losses. A £10k deposit on a £100k house means that a 10% fall in value leads to a 100% loss. Also. With a deposit this low, the new tax changes would mean you are probably having to contribute a couple of thousand of your own money each month to keep up the mortgage payments, and that's at the current low rates (this is just an example, I assume you would be planning to contribute a much bigger deposit).
I'm not trying to put you off BTL, but too many people just jump in before thinking about all the true costs. The government and the media seem to be changing their view from "House prices are up, this is great news!" To the more correct view of "high house prices are bad for the economy". Please consider the fact that regulations may change to make it even harder for BTL to make a profit.
I can buy outright or mortgage, haven't decided. All I meant was that if I can get someone (tenant) to contribute to the "pot" of pension + second property etc then great. Either way at point of retirement I'd like my main home paid off (small mortgage currently) and a second property to subsidise my income in retirement.
Appreciate the input. I know there are things I don't yet know or fully understand hence why haven't jumped in. But overall I think my plan is reasonably sound as part of a wider pension provision .
Hope I haven't derailed the op question too much but it's all relevant I think
bmwmike said:
I can buy outright or mortgage, haven't decided.
There's no point borrowing money you're already got unless,- You expect BTL to give you a return of "x" but can get "x+" from investing in something else.
- In which case you would invest in the something else instead of BTL.
- 20% tax relief certainly isn't enough to swing the deal.
- Bear in mind your own home is CGT free and while BTL attracts higher Stamp Duty AND higher rate CGT.
Ozzie Osmond said:
There's no point borrowing money you're already got unless,
There is definitely a reason to borrow money you already have if you believe in "House price inflation forever". Leverage. With 100k, you can either buy 1 house outright, or you can "buy" 4 equivalent houses using the bank's money. This second option should produce much bigger returns (or at least will have done over the past 10+ years).- You expect BTL to give you a return of "x" but can get "x+" from investing in something else.
- In which case you would invest in the something else instead of BTL.
- 20% tax relief certainly isn't enough to swing the deal.
- Bear in mind your own home is CGT free and while BTL attracts higher Stamp Duty AND higher rate CGT.
As you say though, the last orders bell has rung at the BTL party and it is time to leave. I'm sure there will be many "entrepreneurs" that miss the last train home. I just hope we don't have to bail them out!
To the OP
I would aim to pay at least 5% in now, it's not a huge amount but it's the habit you must get into. As your employer will increase their contribution to 3% eventually, that's going to be a decent amount to save.
As you increase your earnings, you could increase your contribution to 7% or higher. Remember it's tax efficient, and if you change employers your pensions should be portable and if the new employer has a higher contribution (many pay around 5%) then you will be slowly improving your position.
As you are young, change the default of your pension into a more high risk portfolio and see how it goes. I check on mine online every 3 months and calculate how much I have earned/lost over the period and if it's not as expected over consecutive periods, I will make some changes. Take financial advice and pick the right funds and usually you will earn the rewards. Good luck.
I would aim to pay at least 5% in now, it's not a huge amount but it's the habit you must get into. As your employer will increase their contribution to 3% eventually, that's going to be a decent amount to save.
As you increase your earnings, you could increase your contribution to 7% or higher. Remember it's tax efficient, and if you change employers your pensions should be portable and if the new employer has a higher contribution (many pay around 5%) then you will be slowly improving your position.
As you are young, change the default of your pension into a more high risk portfolio and see how it goes. I check on mine online every 3 months and calculate how much I have earned/lost over the period and if it's not as expected over consecutive periods, I will make some changes. Take financial advice and pick the right funds and usually you will earn the rewards. Good luck.
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