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Older Families and Pre Retirement
You will have reached the stage where you feel that you have achieved a level of financial security. Although retirement is significantly more than ten years in the future it is becoming the focus of your financial planning.
All the things that apply to the younger family also apply to the more mature family but hopefully the mortgage has become more manageable and some liquid savings have been built up to deal with emergencies.
Pension Planning is the big one. If you retire at age 65 you then can expect to be retired for getting on for 25 years. Yes that is what recent mortality improvements will mean if the trend continues. Many if not most people retiring at 65 will live to age 90 and beyond.
How much will you need?
In practice a level of income is the target rather than a capital sum. What you need is a conversion factor to get from one to the other. This is provided by annuity rates. The right annuity factor depends on what age you are when you retire whether you are male or female, whether you need to make provision for your spouse or partner and crucially it depends on what the level of interest rates is when you retire.
In practice the key factor, if inflation protection is taken into account, is the yield on Index-Linked Gilts. Currently this rate is depressed due to pressure from the Pensions Regulator for pension schemes to invest in these stocks. This means that a factor of about 25 provides a rough estimate, assuming inflation protection and a spouses pension.
If you want to live on a pension of two thirds your salary that means that when you retire you will ideally need savings equal to about say 16 years earnings, if that money is in some pension arrangement and there are no other sources of income.
Assuming you have income of £50,000 a year you would be aiming for an income of £33,333 in retirement.
What does that mean as a target cash sum?
Total Pension Cost/Value
Capital value of pension =33,333 x 25
=£833,000
However other sources of income need to be allowed for
Basic State Pension
The basic state pension is £4716.40 per annum
BSP it is worth in these terms =4716.4*25
=£118,000
This leaves £715,000 to find
Other Pensions
Assuming you have pensions from other sources such as SERPS and previous schemes of £10,000 this is worth £250,000
This leaves £465,000 to find.
Other Savings
By this stage you should have other savings which I will assume amount to half a year’s salary at £25,000
As these are savings from taxed income they are tax paid but you will be a basic rate taxpayer in retirement and so it needs to be grossed up for this rate of tax.
Value Adjusted for tax = 25000 x100/80
= £31,000
This leaves £434,000 to find.
Assuming you are saving with this target in mind and assuming that you will earn an investment return of 2% over inflation, you need to divide this by the following factors to arrive at an annual rate of premium/contribution which should increase in line with RPI or your salary.
All the things that apply to the younger family also apply to the more mature family but hopefully the mortgage has become more manageable and some liquid savings have been built up to deal with emergencies.
Pension Planning is the big one. If you retire at age 65 you then can expect to be retired for getting on for 25 years. Yes that is what recent mortality improvements will mean if the trend continues. Many if not most people retiring at 65 will live to age 90 and beyond.
How much will you need?
In practice a level of income is the target rather than a capital sum. What you need is a conversion factor to get from one to the other. This is provided by annuity rates. The right annuity factor depends on what age you are when you retire whether you are male or female, whether you need to make provision for your spouse or partner and crucially it depends on what the level of interest rates is when you retire.
In practice the key factor, if inflation protection is taken into account, is the yield on Index-Linked Gilts. Currently this rate is depressed due to pressure from the Pensions Regulator for pension schemes to invest in these stocks. This means that a factor of about 25 provides a rough estimate, assuming inflation protection and a spouses pension.
If you want to live on a pension of two thirds your salary that means that when you retire you will ideally need savings equal to about say 16 years earnings, if that money is in some pension arrangement and there are no other sources of income.
Assuming you have income of £50,000 a year you would be aiming for an income of £33,333 in retirement.
What does that mean as a target cash sum?
Total Pension Cost/Value
Capital value of pension =33,333 x 25
=£833,000
However other sources of income need to be allowed for
Basic State Pension
The basic state pension is £4716.40 per annum
BSP it is worth in these terms =4716.4*25
=£118,000
This leaves £715,000 to find
Other Pensions
Assuming you have pensions from other sources such as SERPS and previous schemes of £10,000 this is worth £250,000
This leaves £465,000 to find.
Other Savings
By this stage you should have other savings which I will assume amount to half a year’s salary at £25,000
As these are savings from taxed income they are tax paid but you will be a basic rate taxpayer in retirement and so it needs to be grossed up for this rate of tax.
Value Adjusted for tax = 25000 x100/80
= £31,000
This leaves £434,000 to find.
Assuming you are saving with this target in mind and assuming that you will earn an investment return of 2% over inflation, you need to divide this by the following factors to arrive at an annual rate of premium/contribution which should increase in line with RPI or your salary.
| Years to Retirement | Factor | Annual Contribution |
| 10 | 11.05886 | £39,250 |
| 15 | 17.46578 | £24,750 |
| 20 | 24.53954 | £17,750 |
| 25 | 32.34955 | £13,500 |
| 30 | 40.97242 | £10500 |
These figures may be depressing but we are talking about providing an income that keeps pace with inflation for the rest of your life. Investment returns might be a lot higher assuming a degree of risk is taken. However, taking risks means that investment returns may be negative in some years. A 2% real rate of return is not an unreasonable assumption but even so your actual investment return will depend on market conditions when you retire and how defensive or risky your portfolio is in the years immediately beforehand.
The important thing is that some sort of idea of the size of the investment required is needed even if the figures are not absolutely accurate.
If you want to minimise risks all the money should be invested in long Index-Linked Gilts. The investment return will not be all that great, maybe 1% over inflation or less but you can calculate the amount you reed to save by dividing the amount by the period to retirement in years ignoring investment return. However you should end up with pretty well the pension you expect, and short of the government defaulting on its debt there will be no big surprises.
The other point is that these are gross investment contributions into a pension arrangement. They attract full tax relief and if you are a high rate taxpayer the net cost will only be 60% of the above figures. The figures are also useful for another purpose. You will note that the table above would indicate that for someone with only ten years to go to retirement, they need to save two-thirds of their gross income into a pension arrangement. If they do that they will be considerably better off after retirement than they would have been while they were working. The figures are also still not good for someone with 15 years to go to retirement.
Someone near retirement who has made limited provision might have to consider three options, none of which are particularly attractive.
1 Lower the target pension
2 Increase their joint income by making sure that both partners are working.
3 Plan to retire later
The important thing is that some sort of idea of the size of the investment required is needed even if the figures are not absolutely accurate.
If you want to minimise risks all the money should be invested in long Index-Linked Gilts. The investment return will not be all that great, maybe 1% over inflation or less but you can calculate the amount you reed to save by dividing the amount by the period to retirement in years ignoring investment return. However you should end up with pretty well the pension you expect, and short of the government defaulting on its debt there will be no big surprises.
The other point is that these are gross investment contributions into a pension arrangement. They attract full tax relief and if you are a high rate taxpayer the net cost will only be 60% of the above figures. The figures are also useful for another purpose. You will note that the table above would indicate that for someone with only ten years to go to retirement, they need to save two-thirds of their gross income into a pension arrangement. If they do that they will be considerably better off after retirement than they would have been while they were working. The figures are also still not good for someone with 15 years to go to retirement.
Someone near retirement who has made limited provision might have to consider three options, none of which are particularly attractive.
1 Lower the target pension
2 Increase their joint income by making sure that both partners are working.
3 Plan to retire later
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