I am trying to ensure I am paying enough into my pension scheme. It is pretty easy to make some forecasts in a spreadsheet to see what my pension fund will be worth at various ages but I want to know what monthly income I will be able to achieve for the money.
All I have seen in an article is that every GBP 100 000 in the fund will buy an income of GBP 7000 a year for life. Is this a reasonable estimate?
I expect I would want an income that would keep pace with inflation.
I realise of course that GBP 7000 or whatever when I retire will be worth a lot less than GBP 7000 now.
Whatever you put in will be swallowed up by the time you come to draw it - by fees, mis-management, unexpected events such as the inexplicable collapse of the dot.com bubble, and a thousand other "who could possibly have imagined *that* would happen" events.
When things go well for your pension fund it is no longer within the rules. When things go badly you couldn't be in a worse place.
Keep your money under control where you can make it work for you - maybe not BTL at the moment. The Nationwide or somewhere safe like that (we are talking pensions, and "safe" is good) until after 2012.
There are short term tax advantages in pensions but they defer the tax to a time when there isn't any money left to pay tax on :(
Heathrow third runway announced by Ken Livingstone just before his re- election this summer, coupled with a net "green" tram system for West London, financed by congestion charging for the whole of Greater London, and also tolls at strategic "gateways" so that everyone pays if they trade in London.
(I know this is very important to you in Scotland but bear with me).
Beijing Olympics this July, then a surge of optimism and building forces the housing market over one last crest before the wave crashes down in 2012 when the world goes home.
There are lots of variables you can choose from that affect the annuity rate:
- flat rate, index-linked or fixed rate increase
- guaranteed for a certain number of years, or no guarantee
- spouse gets 100%, 50% or nothing on your death
- "impaired life" enhancements
The last one is a real con. The providers load your life insurance premium for many health conditions, but the same health conditions don't count for "impaired life" enhancements to their annuity rates.
Annuity rates for inflation-linked pensions will obviously be much lower than for level pensions. Each 100k in the pot might buy you a 7k level pension or a 4k or 5k index-linked one. However, the trick is to plan for a short retirement. In that case you might be better off with 7k level than 4.5k index-linked. Don't forget that it will take quite some time for inflation to jack 4.5k up to 7k.
It's also worth asking yourself whether you really need your pension to be index-linked. Once you get past 85 you'll probably want to cut down a bit on the number of scuba-diving and hang-gliding holidays you take each year, and opt for something a little less strenuous, like fishing and canal-cruising, and optimising use of your resources by doing the fishing *at the same time* as the cruising.
You also realise of course that that realisation is utterly irrelevant.
All the above means is that the annuity rate is 7%. It doesn't matter what £7k will be worth when you retire. The question is whether when you retire (if the annuity rate will still be 7%) whether you can make arrangements now which will make sure your pension pot then will be worth 14.3 times the annual pension you hope to draw then.
To be honest that didn't occur to me but of course it is obvious now you mention it. It doesn't look so bad now. Looking forward to the hang- gliding and scuba diving. ;-) Actually I have tried scuba diving in the past and would recommend it to anyone.
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