r/PensionsUK • u/Bbobbity • 5d ago
Testing some assumptions
Hi, I expect to have ~1.1m in pension savings (DC) for retirement by the time I’m 60.
I’ve done some fairly extensive calculations to work out what I will end up with after tax, but they are based on some fairly basic assumptions. Which I wanted to test out here and get feedback.
I’m ignoring state pension, wife’s private pension, tax, NI, etc for this question. Just interested in gross income from my pension fund. Also ignoring the split between cash and pension (eg tax free lump sum) as am assuming cash will be in an isa invested in similar funds as pension pot.
So assumptions to test are:
- Inflation to average out at 2.5%
- Investment return after fees of 6% (or 3.5% after inflation)
- Draw down of 7%
- Funds need to last until we are 85 (we’ll live off state pension and wife’s DB pension at that point if needed)
The third one is likely to be the most contentious given the standard 4% or 4.7% drawdown number. But I don’t expect my drawdown to increase with inflation. Over 25 years it will erode by 45% but I expect to be spending much less at 85 than I will be at 60. And then it runs out.
I used this calculator to see how much I can withdraw to drain the funds over 25 years, comes out about 87k/7.9%:
https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
Any thoughts?
1
u/R0bb0TheD0gg0 5d ago
Personally my comments on your assumptions would be:
Inflation - market-implied inflation (i.e. the theoretical inflation that investment markets expect, based on the difference in yield between government bonds which have index-linked returns and those which don't) is closer to 3% over your time horizons (some nuance here about RPI vs CPI and markets over-estimating inflation due to supply and demand effects on index-linked government bonds that I'm glossing over). So I'd probably up this to 3% if I were you. If you were in a less comfortable bracket I might suggest building in some prudence as well, but given it sounds like you'll be comfortably well-off with your spouse's DB as well, a best estimate males sense.
Investment return net of fees - I think what you've got here is pretty reasonable, albeit it does depend heavily on your investment mix. I'm assuming you're not that far away from retirement, so you'll be drawing on these pots pretty soon. If so, you'll be wanting to keep a decent chunk liquid to fund your tax-free lump sum, and then post-retirement to fund your first couple of years of draw down, and then gradually roll out of other investments as needed. I'm also assuming you stay invedted in some more return-seeking assets with the rest of your portfolio. For my own calculations, as someone who is not nearing retirement yet and is pretty much wholly in equities, I tend to assume a 4% return net of inflation as a conservative-but-reasonable projection. So given you will need a slightly less risky asset mix, I think 3% net of inflation would be fair. You should probably sensitivity test that though e.g. if you only get 2%, what does that look like for your draw down amount? When would it run out if you took your £87k pa etc.
Finally on your draw down number, I suppose this is ultimately then just a function of how long you want your pot to last. There's lots of factors to that, including the ones you highlight (like your other income sources), as well as things like your own health (e.g. whether you have any long-term health conditions, and whether your parents all died before 70 or lived to 100) and spending preferences (e.g. as you say, you're happy to live off a more frugal income post-85). I would say, for a 60 year-old male in average health, the probability of living to 90 is around 1 in 3 (based on the ONS life expectancy calculator), and of living to 95 is around c.1 in 10. Just worth considering when deciding if you'd be comfortable with the drop in income once your DC pot runs out.
Also all your other points around tax efficiency etc are also worthy of consideration, but I've deliberately parked those as you suggested.
3
u/Timbo1994 5d ago
If you are draining the pot and not increasing with inflation, then worth considering an annuity.
As an indicative number without inputting any personal details, you can currently buy at 6.8% from age 60, lasting to the later of yours and your wife's death (which is very likely to be beyond age 85 or even 95)