How much does the average retired person need to live off.

[Broucek]

Feel a bit on the high side compared with the £4-£5k figure referenced in https://www.thetimes.co.uk/money-mentor/article/100k-pension-pot/#:~:text=Or if you're wondering,for an annuity or drawdown?

It slightly surprises me in simple terms if I've understood correctly that the maximum income anyone can have from a pension (using an annuity) given the effective £1m pot limit is around £40-60k (on which tax is still payable). Sure for the vast majority of us that would be absolutely fine, and we wouldn't have that much saved up anyway, but it does feel a bit of a constraint for the very top earners - including those within the railway industry. Hence driving investments in property simply as an alternative place to put savings once pension fund contributions have maxed out. Or premature retirement as per comment on GPs earlier.

Don't start me. Successive governments have not been able to resist monkeying about with the "once-in-a-generation" reforms to pension limits introduced by Gordon Brown. Based on an annuity rate of 25, £1m is £40k pa or £3,333 per month. More than enough for most people to live on and more than most will receive, but hardly "super rich". Quite a lot of nurses, teachers and railway workers will be above that level... And that's in today's money. It's been frozen for multiple years so in real terms that £40k will become £35k or even £30k...

Some will say "you only lose if your plan does well" but it's not that simple. If you're in a DC scheme where investment values fluctuate you end up with penal tax on the upside but full exposure on the downside!

 

[Dai Corner]

Don't start me. Successive governments have not been able to resist monkeying about with the "once-in-a-generation" reforms to pension limits introduced by Gordon Brown. Based on an annuity rate of 25, £1m is £40k pa or £3,333 per month. More than enough for most people to live on and more than most will receive, but hardly "super rich". Quite a lot of nurses, teachers and railway workers will be above that level... And that's in today's money. It's been frozen for multiple years so in real terms that £40k will become £35k or even £30k...

Some will say "you only lose if your plan does well" but it's not that simple. If you're in a DC scheme where investment values fluctuate you end up with penal tax on the upside but full exposure on the downside!

The question, I suppose, is should the nurses, teachers and railway workers with 'more than enough' give up some of the excess to fund Pension Credit for those who have what's deemed to be less than enough?

 

[Haywain]

Quite a lot of nurses, teachers and railway workers will be above that level.

They will mostly be in defined benefit schemes so annuity rates are largely irrelevant.

 

[Dr Day]

They will mostly be in defined benefit schemes so annuity rates are largely irrelevant.

Yes, but isn't there some calculation for defined benefit scheme members which still means they can hit the £1m 'maximum'?

 

[Broucek]

They will mostly be in defined benefit schemes so annuity rates are largely irrelevant.

Not irrelevant at all. 25:1 calculation plus the tax free lump sum

 

[jfollows]

Yes, but isn't there some calculation for defined benefit scheme members which still means they can hit the £1m 'maximum'?

20xDB annual pension + tax-free lump sum (if any) I think.
So if you have both DB and DC pensions (I do) then you need to add this value to the DC value to check that it doesn't exceed the lifetime allowance.

 

[Broucek]

The question, I suppose, is should the nurses, teachers and railway workers with 'more than enough' give up some of the excess to fund Pension Credit for those who have what's deemed to be less than enough?

That's what the tax system is for. But the tax system needs to be fair and logical which the lifetime allowance is not

20xDB annual pension + tax-free lump sum (if any) I think.
So if you have both DB and DC pensions (I do) then you need to add this value to the DC value to check that it doesn't exceed the lifetime allowance.

25x. The 20x is for the annual allowance

 

[LSWR Cavalier]

Average: mean, median or mode?
..
We were advised to start financial planning for retirement in our twenties, but how many did? I paid into a private pension, it should yield less than a tenner a week. But in all my pension should be quite good, I am wondering what to do with the money, and it is assured, should not fluctuate much until I die (in 20-30 years). Quite different from when I was working, I had a lot of uncertainty, changed jobs, earned more, then less, had periods of unemployment.

I am gradually realising that retirement is the best part of life, not only for financial reasons.

 

[Wynd]

It used to be that the 40% rate was a rare thing to be hit with. Not anymore.

The £1m pensions savings allowance is going to be easily breached by many young professionals who invest wisely over the next 20-30 years.

When its £20 a pint, and £5 for a can of beans, £10 for a block of butter and £6 for a loaf of bread, a milli just isn't going to feel like much, nor is £3k a month.

For those thinking im insane, butter in 2008 was 50p. Bread could be got for 10-15p, pints were £2, and beans could be had for 12p a tin.

 

[Bald Rick]

The £1m pensions savings allowance is going to be easily breached by many young professionals who invest wisely over the next 20-30 years.

It’s £1.073m, and is expected to start rising with inflation when the current freeze ends in 2025/26 (which is just over 2 years away). Of course, being after the next election, that policy may change.

Bread could be got for 10-15p

Not bread that you’d actually want to eat, though.

pints were £2

I first paid £2/pint in a pub (outside London) in 1993. There are pubs around where you can still pay £2/pint now if you are willing to lower your standards. Back in 2008, it was more normally £3ish.

 

[Broucek]

It’s £1.073m, and is expected to start rising with inflation when the current freeze ends in 2025/26 (which is just over 2 years away). Of course, being after the next election, that policy may change.

Well, I hope that it does start rising. But successive governments have meddled with it and getting people to save taxed income via ISAs rather than for a pension where tax is deferred (and often at a lower rate) is just too tempting when actual transparent tax rises are deemed too difficult.

 

[Bald Rick]

Well, I hope that it does start rising.

So do I!

 

[david1212]

https://www.retirementlivingstandards.org.uk/ gives some figures for annual pension amounts:
Minimum standard of living: £12,800 single, £19,900 couple
Moderate standard of living: £23,300 single, £34,000 couple
Comfortable standard of living: £37,300 single, £54,500 couple
Noting that full state pension for 2023-24 is £10,600

Perhaps the biggest difference is if you own your house outright or are renting. Also significant is if you have other funds to cover essential spending e.g. major appliances, new house windows, heating replacement, roof re-felted and optional things like carpets. Also the capital cost of a car.
Going back just 18 months if living in owned property the state pension would cover all the essentials and leave a bit for things like gifts, a few days out, cinema trips etc and a few days out of season holiday. Now that without subsidy at Ofgem prices the average energy bill is ~£4000 instead of £1000 even in a small property with a lower energy cost it would be a real struggle.

I have never had a company / occupational pension but have paid into a personal pension for over 30 years although not much in the early days and in absolute terms the most for around 12 years.
Back 18 months ago after taking the 25% tax free lump sum ( most of which needs to be spent on the house heating and plumbing system, bathroom and windows as a minimum plus ideally kitchen ) the fund value should conservatively have paid £12,500 for 5 - 6 years early retirement then £3000 per year from age 67 to 90. The £3000 was planned as holidays and days out. All would be tax free as combined just below the threshold. I also have investments that would cover car capital cost at £1500pa ( which was reasonable at pre-2020 prices to buy at most 3 years old and keep until 10 years old ), appliances, carpets, chairs, bed and given the house would be in good order any further work required after several years. Hence averaged £15,000 - £16,000 per year.

Blimey i live pretty comfortable on a lot less than that figure above!

Of course it depends on what to each is comfortable but to me the above would have been. Following on rather than minimum, moderate and comfortable I would have for the quoted figures minimum, very comfortable and lavish.

Now very different as most if not all of £12,500 pa needed for the essentials. Further given inflation the state pension is likely to be not far below the tax threshold by 2026/7. Hence the £3000 from the pension would only be £2400.
Now I see early retirement as at best 3 years and in retirement less each year for holidays and days out.

 

[Wynd]

It’s £1.073m, and is expected to start rising with inflation when the current freeze ends in 2025/26 (which is just over 2 years away). Of course, being after the next election, that policy may change.



Not bread that you’d actually want to eat, though.



I first paid £2/pint in a pub (outside London) in 1993. There are pubs around where you can still pay £2/pint now if you are willing to lower your standards. Back in 2008, it was more normally £3ish.

You don't genuinely think they will raise that allowance with inflation, do you?

I happen to like cheap bread, sometimes.

I'm glad to see you are largely agreeing with the general argument. A milli wont be much in 20-30 years time.

 

[swt_passenger]

It’s interesting to read about “maximum pension pots”. I’ve had a widower‘s pension in payment since 2000. Would a pension like that have to be taken into account if calculating a notional pension pot for someone?

 

[jfollows]

It’s interesting to read about “maximum pension pots”. I’ve had a widower‘s pension in payment since 2000. Would a pension like that have to be taken into account if calculating a notional pension pot for someone?

The "lifetime allowance" was introduced in 2006 but I have no clue whether or not it's applicable to an existing pension in payment on that date - if you're looking to calculate how much you can put in other pensions I mean.

 

[swt_passenger]

The "lifetime allowance" was introduced in 2006 but I have no clue whether or not it's applicable to an existing pension in payment on that date - if you're looking to calculate how much you can put in other pensions I mean.

It’s just a thought that occurred.

I’m now well retired and drawing 3 pensions. I won’t say here exactly what they add up to, but I’m supposed to be just about a “comfortable single” in terms of yesterday’s discussions that followed your linked article.

Both my widower‘s and employment pensions are DB, so I was trying to estimate what size of private pension pot I would have needed to get the same amount, IYSWIM.

 

[Bald Rick]

You don't genuinely think they will raise that allowance with inflation, do you?

I do, as it happens. Not least because once the LTA was set at £1m it was increased by (roughly) CPI in each of the three years before Covid hit.

The uncertainty is about when it happens, not if.

It’s interesting to read about “maximum pension pots”. I’ve had a widower‘s pension in payment since 2000. Would a pension like that have to be taken into account if calculating a notional pension pot for someone?

No, on two counts:

1) The Lifetime allowance only came into being in 2006, and applies only to those contributing into a pension after that date.

2) Your widower’s pension is from the pension ‘pot’ of your late wife, not yours, so is Not taken into account for your pension lifetime allowance (if you were still making pension contributions)

 

[swt_passenger]

No, on two counts:

1) The Lifetime allowance only came into being in 2006, and applies only to those contributing into a pension after that date.

2) Your widower’s pension is from the pension ‘pot’ of your late wife, not yours, so is Not taken into account for your pension lifetime allowance (if you were still making pension contributions)

That makes sense, thanks.

 

[Wynd]

I do, as it happens. Not least because once the LTA was set at £1m it was increased by (roughly) CPI in each of the three years before Covid hit.

The uncertainty is about when it happens, not if.

Does this theory stand up?

Stamp Duty.
Inheritance Tax.
40% Tax thresholds.
Dividend taxes.
Capital Gains taxes.

All of these have been subject to fiscal drag, it seems more than a wee bit ambitious to think the lifetime allowance wont go the same way.

 

[Broucek]

Does this theory stand up?

Stamp Duty.
Inheritance Tax.
40% Tax thresholds.
Dividend taxes.
Capital Gains taxes.

All of these have been subject to fiscal drag, it seems more than a wee bit ambitious to think the lifetime allowance wont go the same way.

Also the "higher rate" threshold which was frozen at £150k since introduction in 2010 and has just been reduced and the level at which the personal allowance starts to be taken away (£100k) which hasn't moved since it was introduced.

Lest we forget, the LTA was originally £1.5m in 2006/07 and went as high as £1.8m before being cut back in three stages to £1m after which there was some modest indexation which has now stopped.

I agree that it's wishful thinking to assume this or any other government will suddenly behave sensibly about this.

 

[Bald Rick]

I agree that it's wishful thinking to assume this or any other government will suddenly behave sensibly about this

I didn’t suggest it would be sudden!

 

[Wynd]

I didn’t suggest it would be sudden!

But Rick, all the evidence suggests it wont happen at all.

It could well become the case that the LTA falls further, so that pensions are taxed on the way in as well as on the way out.

This is not beyond the realms of possible for Whitehall, its been discussed on and off for some years now.

 

[Broucek]

But Rick, all the evidence suggests it wont happen at all.

It could well become the case that the LTA falls further, so that pensions are taxed on the way in as well as on the way out.

This is not beyond the realms of possible for Whitehall, its been discussed on and off for some years now.

Followed by a wealth tax to ensure that anyone seeking to dodge such double taxation is also suitably punished.

They would love to seek to reduce 40%/45% tax relief on employee/employer pension contributions, I'm sure. That's easy to do for DC schemes but MUCH more complex in the DB world which is perhaps why it's not happened yet.

 

[Bald Rick]

But Rick, all the evidence suggests it wont happen at all.

It could well become the case that the LTA falls further, so that pensions are taxed on the way in as well as on the way out.

This is not beyond the realms of possible for Whitehall, its been discussed on and off for some years now.

Well, I was wrong. The Pensions Lifetime Allowance isn‘t riding by inflation, it’s been abolished altogether.

I must say I didn‘t see that coming!

 

[DarloRich]

Well, I was wrong. The Pensions Lifetime Allowance isn‘t riding by inflation, it’s been abolished altogether.

what does that mean though?

 

[Dai Corner]

what does that mean though?

Basically, people will be able to accumulate as much as they want in their pension funds without paying additional tax.

Mainly affects the higher paid, obviously. Hospital Consultants were complaining about it, for example.

 

[DarloRich]

Basically, people will be able to accumulate as much as they want in their pension funds without paying additional tax.

Mainly affects the higher paid, obviously. Hospital Consultants were complaining about it, for example.

thanks - that seems rather generous to high rollers!

 

[Bald Rick]

what does that mean though?

It means that a certain category of people are not now going to be liable to additional tax when they take their pension. This has been an incentive for many people to stop working and retire, rather than do an extra couple of years. NHS Doctors are the example often quoted, but the category concerned is essentially anyone whose annual pension would be more than about £50k (very approximately).

Thats clearly a lot of money, and will benefit relatively few people, but it will keep some experienced people in work for longer.

The annual pension contributions limits are lifted too, but they still stay as a principle. So those on very high incomes, especially those with big bonuses, will not benefit as much.

 

[DarloRich]

It means that a certain category of people are not now going to be liable to additional tax when they take their pension. This has been an incentive for many people to stop working and retire, rather than do an extra couple of years. NHS Doctors are the example often quoted, but the category concerned is essentially anyone whose annual pension would be more than about £50k (very approximately).

Thats clearly a lot of money, and will benefit relatively few people, but it will keep some experienced people in work for longer.

Little impact for normal people then?