Trying to understand SIPP.. I want to just cry its that hard
Discussion
This is about the fourth attempt to write this..
So I would like to retire at 60. Current pension (on average projections, using average everything) will be worth circa £520,000 at that point without factoring in government pension etc. To my mind, thats a pretty s
t pension pot. Am I wrong in thinking that?
To that end I was thinking of a SIPP, purely because of the additional money the government kicks in , esp for higher rate tax payers and also prevents me from spending it also! I have no debt other than the mortgage and that will be paid off in circa 3 years because my SAYE will mature and, assuming a straight 8% per year will cover the remaing mortage.
However for a SIPP the returns don't look awesome. For example (Sorry this is just the first one I came across and read the figures - IM) is approx 8.something percent per year. Average that out at £500 over 10=5 years its only another ~180K.
So that means when i retire at 60, i will have to make do on approx £700,000 for the rest of my life. On the flip side, I could be brown bread by 62! Who knows.
I .... just ... dont know what to do.
So I would like to retire at 60. Current pension (on average projections, using average everything) will be worth circa £520,000 at that point without factoring in government pension etc. To my mind, thats a pretty s
t pension pot. Am I wrong in thinking that?To that end I was thinking of a SIPP, purely because of the additional money the government kicks in , esp for higher rate tax payers and also prevents me from spending it also! I have no debt other than the mortgage and that will be paid off in circa 3 years because my SAYE will mature and, assuming a straight 8% per year will cover the remaing mortage.
However for a SIPP the returns don't look awesome. For example (Sorry this is just the first one I came across and read the figures - IM) is approx 8.something percent per year. Average that out at £500 over 10=5 years its only another ~180K.
So that means when i retire at 60, i will have to make do on approx £700,000 for the rest of my life. On the flip side, I could be brown bread by 62! Who knows.
I .... just ... dont know what to do.
There were be far more competent people along shortly but two things leap out to me:
A SIPPs returns are down to the investments you choose, so I wouldn't read anything into 8% etc. It depends on your attitude to risk, your knowledge and commitment.
I don't understand the part re: free government money, yes you will get 40% 'extra' on what you put in, but if the source is income you are paying it in after tax, where as an employer pension takes it pre tax. You may be better putting more into an employer scheme, particularly if they match.
A SIPPs returns are down to the investments you choose, so I wouldn't read anything into 8% etc. It depends on your attitude to risk, your knowledge and commitment.
I don't understand the part re: free government money, yes you will get 40% 'extra' on what you put in, but if the source is income you are paying it in after tax, where as an employer pension takes it pre tax. You may be better putting more into an employer scheme, particularly if they match.
ChocyLint1 said:
So I would like to retire at 60.
That's quite young - you could be looking at your pension supporting you for 30 years which is a stiff task. It can be done, but you'll need to save hard.ChocyLint1 said:
Current pension (on average projections, using average everything) will be worth circa £520,000 at that point without factoring in government pension etc. To my mind, thats a pretty st pension pot. Am I wrong in thinking that?
Well, it's more than a huge percentage of the population. You've missed out the key fact of how old you are now so we can't say what effect inflation will have on that sum. You could be looking at £18500 per year gross income from that pension pot, assuming it's not a Defined Benefit pension.t pension pot. Am I wrong in thinking that?ChocyLint1 said:
To that end I was thinking of a SIPP, purely because of the additional money the government kicks in , esp for higher rate tax payers and also prevents me from spending it also! I have no debt other than the mortgage and that will be paid off in circa 3 years because my SAYE will mature and, assuming a straight 8% per year will cover the remaining mortage.
If you do pay HRT then a SIPP is very tax effective on the way in, less so on the way out as pensions are subject to income tax. ISA contributions are made out of taxed income, but all gains are tax free so a combination is often effective. ChocyLint1 said:
However for a SIPP the returns don't look awesome. For example (Sorry this is just the first one I came across and read the figures - IM) is approx 8.something percent per year. Average that out at £500 over 10=5 years its only another ~180K.
With interest rates so low you only get better returns with higher risk. 8% compound gain is pretty good - the key is time & compounding. That's why it's important to start as soon as possible.ChocyLint1 said:
So that means when i retire at 60, i will have to make do on approx £700,000 for the rest of my life. On the flip side, I could be brown bread by 62! Who knows.
These days it's common to leave your pension fund invested so it's still (hopefuly) earning & if you withdraw 3.5 - 4% a year you shouldn't run out of money. That's about £24k to 28k a year. Is that enough? You can pull out more if you don't mind the risk of running out of moneyChocyLint1 said:
I .... just ... dont know what to do.
Start building a plan of what you want to achieve & when. Look at major changes like house moves the like.ChocyLint1 said:
So I would like to retire at 60. Current pension (on average projections, using average everything) will be worth circa £520,000 at that point without factoring in government pension etc. To my mind, thats a pretty st pension pot. Am I wrong in thinking that?
Depends upon what your expenses are, surely?t pension pot. Am I wrong in thinking that?Someone who has built a pension of £500k whilst earning £20k a year would probably find they have a very happy retirement with comparable income to when they were working.
Someone who has built a pension of £500k whilst earning £100k per year could find things very tight.
And obviously everyone in-between..
Easily doable.
As others have said, you'll draw down on your pot, some years more than others, you are not only chipping away at the capital with investment returns, etc.
The objective would be to maintain your £700k whilst drawing £25-30k pa (4% odd + inflation?), if you’ve no one to leave it he remaining pot to and state pension kicks in at 67 you’ll be able to live an extremely comfortable retirement.
As others have said, you'll draw down on your pot, some years more than others, you are not only chipping away at the capital with investment returns, etc.
The objective would be to maintain your £700k whilst drawing £25-30k pa (4% odd + inflation?), if you’ve no one to leave it he remaining pot to and state pension kicks in at 67 you’ll be able to live an extremely comfortable retirement.
I'm working mine out using the 4% rule. Which I believe is fairly conservative approach to try and ensure you don't erode away your pot before you die.
ie.- If you want £40k a year, you need a pot of £1 million, if you want £30k a year you need a pot of £750k etc. etc.
As others have said, the return you get on your pot, depends on what you invest it in, and what risk you are willing to take. Also bear in mind platform charges and fund charges can make a big difference to your returns, so I would say a low cost provider is your first priority, then choose your investment from there.
I'm no expert, but I think you could do worse than starting by looking at some of Vanguards Low cost Index funds.
A couple of years ago this was all Greek to me, but I've done a lot of research on this, and it turns out it's not really that complicated if you know what you want, and my pension pot has done very well since I started taking a more active interest. (That's not to say you need to constantly fiddle with it, just find the right investment for you, then try to leave it alone)
ie.- If you want £40k a year, you need a pot of £1 million, if you want £30k a year you need a pot of £750k etc. etc.
As others have said, the return you get on your pot, depends on what you invest it in, and what risk you are willing to take. Also bear in mind platform charges and fund charges can make a big difference to your returns, so I would say a low cost provider is your first priority, then choose your investment from there.
I'm no expert, but I think you could do worse than starting by looking at some of Vanguards Low cost Index funds.
A couple of years ago this was all Greek to me, but I've done a lot of research on this, and it turns out it's not really that complicated if you know what you want, and my pension pot has done very well since I started taking a more active interest. (That's not to say you need to constantly fiddle with it, just find the right investment for you, then try to leave it alone)
Edited by BlackG7R on Wednesday 20th January 22:00
Edited by BlackG7R on Wednesday 20th January 22:02
The inventor of the 4% drawdown rule has revised it up, as it was based on the worst possible point in time (1968), a time that hasn't been since repeated.
Op, you will be fine. One thing I would say, is pay close attention to where your money is being invested. (E.g low risk bonds vs shares/equities).
You may think that a couple of % difference won't make a huge difference, but have a play with a compound interest calculator and assumptions of your investments making say 4, 6 or 8%. The difference is staggering.
Op, you will be fine. One thing I would say, is pay close attention to where your money is being invested. (E.g low risk bonds vs shares/equities).
You may think that a couple of % difference won't make a huge difference, but have a play with a compound interest calculator and assumptions of your investments making say 4, 6 or 8%. The difference is staggering.
covmutley said:
The inventor of the 4% drawdown rule has revised it up, as it was based on the worst possible point in time (1968), a time that hasn't been since repeated.
That's quite interesting as I thought 4% was quite aggressive in a time of zero interest rates! I have structured my ISA, which is now quite large, to provide what I hope is a mix of income and growth as I approach retirement but 4% isn't easy without a fairly significant degree of risk. I have just had some ten year gilts mature which paid 3%. Now they pay about 0.3%. If you'd asked me ten years ago at retirement i'd have aimed to have about 25-35% of my fund in long dated government bonds. Now that will be zero.OP, ideally you'd share some further information such as whether you're part of a couple, if so, whether or not they have a pension scheme etc? Do you need to draw the pension from 60, or will you have savings you can live off for a few years? It's surprising the difference it makes between 60 and 65.
Do you want to retire and never work again, or would you like to ease into retirement by reducing your working week over a couple, of years? A great way to do it if you can.
Don't discount the state pension. Whilst it won't be available at 60, you'll get another £9k or so a year from 67 (£18kish if you have a partner of similar age). So you may draw more from your personal pension between 60 and 67, and then you can afford to withdraw £9k a year less (or not, you might want some more holidays at 67!)
Also, does the mortgage need to be paid off straight away? Interest rates are low, and I suspect your money would work harder invested in the pension for longer as opposed to paying it off.
I'm sure you hear it all the time, but worth asking the guys on the intelligent money thread. They're the experts!
Do you want to retire and never work again, or would you like to ease into retirement by reducing your working week over a couple, of years? A great way to do it if you can.
Don't discount the state pension. Whilst it won't be available at 60, you'll get another £9k or so a year from 67 (£18kish if you have a partner of similar age). So you may draw more from your personal pension between 60 and 67, and then you can afford to withdraw £9k a year less (or not, you might want some more holidays at 67!)
Also, does the mortgage need to be paid off straight away? Interest rates are low, and I suspect your money would work harder invested in the pension for longer as opposed to paying it off.
I'm sure you hear it all the time, but worth asking the guys on the intelligent money thread. They're the experts!
Edited by B9 on Thursday 21st January 12:40
covmutley said:
The inventor of the 4% drawdown rule has revised it up, as it was based on the worst possible point in time (1968), a time that hasn't been since repeated.
Op, you will be fine. One thing I would say, is pay close attention to where your money is being invested. (E.g low risk bonds vs shares/equities).
You may think that a couple of % difference won't make a huge difference, but have a play with a compound interest calculator and assumptions of your investments making say 4, 6 or 8%. The difference is staggering.
The media created the "rule", not the person that undertook the research. There is no such "rule".Op, you will be fine. One thing I would say, is pay close attention to where your money is being invested. (E.g low risk bonds vs shares/equities).
You may think that a couple of % difference won't make a huge difference, but have a play with a compound interest calculator and assumptions of your investments making say 4, 6 or 8%. The difference is staggering.
BarryGibb said:
covmutley said:
The inventor of the 4% drawdown rule has revised it up, as it was based on the worst possible point in time (1968), a time that hasn't been since repeated.
Op, you will be fine. One thing I would say, is pay close attention to where your money is being invested. (E.g low risk bonds vs shares/equities).
You may think that a couple of % difference won't make a huge difference, but have a play with a compound interest calculator and assumptions of your investments making say 4, 6 or 8%. The difference is staggering.
The media created the "rule", not the person that undertook the research. There is no such "rule".Op, you will be fine. One thing I would say, is pay close attention to where your money is being invested. (E.g low risk bonds vs shares/equities).
You may think that a couple of % difference won't make a huge difference, but have a play with a compound interest calculator and assumptions of your investments making say 4, 6 or 8%. The difference is staggering.
https://medium.com/datadriveninvestor/the-inventor...
Note he was only focused on the American market & there are other views that say 4% was/is possibly too high for UK investors. In addition the 4% figure was only valid for a 30 year retirement period.
ChocyLint1 said:
This is about the fourth attempt to write this..
So I would like to retire at 60. Current pension (on average projections, using average everything) will be worth circa £520,000 at that point without factoring in government pension etc. To my mind, thats a pretty st pension pot. Am I wrong in thinking that?
To that end I was thinking of a SIPP, purely because of the additional money the government kicks in , esp for higher rate tax payers and also prevents me from spending it also! I have no debt other than the mortgage and that will be paid off in circa 3 years because my SAYE will mature and, assuming a straight 8% per year will cover the remaing mortage.
However for a SIPP the returns don't look awesome. For example (Sorry this is just the first one I came across and read the figures - IM) is approx 8.something percent per year. Average that out at £500 over 10=5 years its only another ~180K.
So that means when i retire at 60, i will have to make do on approx £700,000 for the rest of my life. On the flip side, I could be brown bread by 62! Who knows.
I .... just ... dont know what to do.
Hi... As others have said, you seem to be on the right path and should be reasonably ok but, it really depends on your number, i.e. how much do you think you will want to have as income in retirement? You could give yourself a starting point by thinking how much income you need currently, how much might not be there in retirement (mortgage), and what additional or increased expenses you may have to bear (heating, eyes, teeth, etc). So I would like to retire at 60. Current pension (on average projections, using average everything) will be worth circa £520,000 at that point without factoring in government pension etc. To my mind, thats a pretty s
t pension pot. Am I wrong in thinking that?To that end I was thinking of a SIPP, purely because of the additional money the government kicks in , esp for higher rate tax payers and also prevents me from spending it also! I have no debt other than the mortgage and that will be paid off in circa 3 years because my SAYE will mature and, assuming a straight 8% per year will cover the remaing mortage.
However for a SIPP the returns don't look awesome. For example (Sorry this is just the first one I came across and read the figures - IM) is approx 8.something percent per year. Average that out at £500 over 10=5 years its only another ~180K.
So that means when i retire at 60, i will have to make do on approx £700,000 for the rest of my life. On the flip side, I could be brown bread by 62! Who knows.
I .... just ... dont know what to do.
You can use the (simplistic) rule of 25 (which is based on the 4% withdrawal guide), so an income of £26k in retirement would require £26k x 25 = £650k. This can be reduced because you can remove the state pension income from the calculation so, you end up with (£26k - £9100 SP) £169000 x 25 = £423k (roughly). You have a desire to retire at 60 so you would need to factor this in, i.e. £26k x 8 years = £208k. So adding this to £423 gives you £631k (roughly). Importantly these calculations do not include consideration for inflation etc.
With regard to what to do, the more you do now the more you will benefit in the long run but, you also need to be able to live a decent life now
Regarding your current situation, are you paid under a Salary Sacrifice arrangement (saving you NI contributions), as this may be a better option for you?
Mr Pointy said:
Well how come he's revised the rule then?
https://medium.com/datadriveninvestor/the-inventor...
Note he was only focused on the American market & there are other views that say 4% was/is possibly too high for UK investors. In addition the 4% figure was only valid for a 30 year retirement period.
Same metrics used for the U.K. gave a sustainable figure closer to 3.5% last time I looked at the research.https://medium.com/datadriveninvestor/the-inventor...
Note he was only focused on the American market & there are other views that say 4% was/is possibly too high for UK investors. In addition the 4% figure was only valid for a 30 year retirement period.
In addition, to have a 90% chance of your funds lasting through your whole retirement you need to plan on living to 100. That’s pretty clear that your retirement ago would need to be closer to if not at 70 based on that assumed draw.
Edited by ellroy on Thursday 21st January 13:31
There's a significant difference between projecting investment returns and projecting a drawdown rate.
Why?
Because the drawdown rate is intended to exhaust most/all of your "pot" over, say, 30 years.
IMO if you project the overall investment return on a fairly cautious basis then you can probably draw down at about that rate, hoping for a bit of upside to enhance the numerical value of the pot for inflation, even if it doesn't keep up with inflation. Clearly the rate of drawdown needs to be reviewed if equity investments get hit by a significant market wobble which doesn't bounce back reasonably swiftly. For instance, although there was a "20% drop" in March 2020 it clearly doesn't mean people should be cutting back their drawdown in 2021. If markets had stayed down and still looked shaky it would paint a very different picture.
Will it be a long, hot summer? Ask me in the Autumn. Until then I'll be expecting an average sort of weather pattern...
Why?
Because the drawdown rate is intended to exhaust most/all of your "pot" over, say, 30 years.
IMO if you project the overall investment return on a fairly cautious basis then you can probably draw down at about that rate, hoping for a bit of upside to enhance the numerical value of the pot for inflation, even if it doesn't keep up with inflation. Clearly the rate of drawdown needs to be reviewed if equity investments get hit by a significant market wobble which doesn't bounce back reasonably swiftly. For instance, although there was a "20% drop" in March 2020 it clearly doesn't mean people should be cutting back their drawdown in 2021. If markets had stayed down and still looked shaky it would paint a very different picture.
Will it be a long, hot summer? Ask me in the Autumn. Until then I'll be expecting an average sort of weather pattern...
Apart from the US bias, the initial 4% rule was based on a 50/50 portfolio so another a factor to consider when you are reviewing your own plan.
Decent recent article here on the 4 / 4.5 % rule:
https://www.forbes.com/advisor/investing/is-4-four...
Decent recent article here on the 4 / 4.5 % rule:
https://www.forbes.com/advisor/investing/is-4-four...
chip* said:
Apart from the US bias, the initial 4% rule was based on a 50/50 portfolio so another a factor to consider when you are reviewing your own plan.
Decent recent article here on the 4 / 4.5 % rule:
https://www.forbes.com/advisor/investing/is-4-four...
Pretty sure the FCA revised the standard pension growth rates down to 2.5% recently (Google Fu is failing and I can't find the original article). Assuming a sustainable withdrawal rate of 4% might be wishful thinking.Decent recent article here on the 4 / 4.5 % rule:
https://www.forbes.com/advisor/investing/is-4-four...
Don't press me for sources to back this up but my understanding/belief is that many people who have saved prudently for retirement tend to be over-cautious in the early years of retirement because they fret about the possibility of money running out before they die. Quite understandable. However,
So don't fret whether the right drawdown is 3.5% or 4.8%, start spending at a decent level and keep your eye on the remaining pot. You can always cut back later if you need to.
- People can be far more active at age 70 than they will ever be at age 90,
- People tend to downsize their living accommodation as they get older, take less exotic holidays, eat out less and their overall expenses reduce,
- The "final decline" of most people (i.e. time in care home) takes roughly the same number of months/years whether it starts at age 77 or age 88,
So don't fret whether the right drawdown is 3.5% or 4.8%, start spending at a decent level and keep your eye on the remaining pot. You can always cut back later if you need to.
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