The night’s are fair drawing in, and so is the year. Only fifty sleeps to Christmas, or something like that. As the year draws to a close, I start looking at my financial position more closely and comparing with the previous year. I like putting things “in order” and in comparison.
This year, because I have time, I decided to have a look at our pensions. I have three – one defined benefit, one defined contribution, one SIPP. My wife, having moved across several NHS and Council authorities, has five. Five! Of mine, two are online and can be checked daily, if you’re so inclined, telling you what’s in your pot. The other, I have to write away for a projection. My wife has two online and three that I’ve had to write for a projection on.
So far, so straightforward. Oh I wish. When do we want to take them? All three of mine I can take at 55. My wife has four she can take at 60 and the fifth at 65 (although I have still to confirm this, it might be 60 too.) On my defined benefit, and on the others, I can take the tax free lump sum and a reduced monthly payment. Or not. My wife also has this option. That’s quite a few permutations to juggle and calculate.
Of course the figures jump around too. One of my pension pots is currently about ten percent under where it was eight months ago, making an almost fifty grand difference. What will it be worth three years from now when I’m planning to take it? How long is a piece of string? Do I project forward at 4%, 6% or 8%. Or do I assume it will not increase at all in real terms from where it is today?
As for my wife’s pensions, I need the projections as I’ve no idea, on all five, what the numbers might look like five years down the road from when I last checked. Never mind a further eight years from today when we might actually take them. What margin of error should I use when I receive the quotes? If a defined contribution pension says it looks like it might pay out £5,000 a year, should I assume £4,500 as gloomy downside or £5,500 as a sunnier alternative? Probably best to stick with their number, whatever that is.
So, by the end of next week, hopefully, I’ll maybe have eight pension projections across various age “scenarios” of 55, 60 and 65 and two combinations on each with lump sums or not. My mind boggles to think how many models I could make out of this bunch of options. And this is before I start to think about drawdown versus annuity on some, none, or all of them.
Okay, keep it simple. I think the first filter to apply is straightforward – do I take the tax free lump sums? “Yes”, is the quick answer on that, because anything tax free is worth having. I can take them as initial income and shovel the remainder into ISA’s over the years that the cash lasts. Or, could I give to my wife to put in a SIPP that she can claim tax back on when she reaches 60? Whatever, I take the tax free cash.
Tax. If there is one financial subject that defies simplicity surely this is it? One simple fact, however, is that in my humble opinion I have paid enough over the years. For almost thirty years I was chipping in over forty percent of my salary to the Treasury, so I really don’t want to put in much more. As far as I can see, that means I have to be taking out an income of about ten grand in pensions (as can my wife) before we hit the basic tax rate. Is there a way I can increase that income on a tax free basis? Probably, I hope, but that’s going to take some further research on Monevator on my behalf to try and find out. Nevertheless, please feel free to give me some pointers in the comments if you have any ideas about minimising tax payments on pensions! At this stage, as far as I can see, paying some tax looks like an inevitability.
All of these are my First World Problems, and I’d be first to admit I’m lucky to have them. Or is it “luck”? At twenty two years old, I signed up on my first day at work to the company Defined Benefit scheme because my boss basically told me it would be really stupid not to. That was possibly “lucky” and I owe him a big thanks for that. If he’d told me it would cost £200 a month off my salary, I think there’s no way at that age I would have done it. About three years later, at a pensions seminar arranged by my work, I realised the importance of what I’d done and resolved to keep salting the cash away at the maximum contribution rate in any job I took. So that was more “knowledge” than “luck”. My wife is similar, although she can’t explain why she took pensions from the day she started working in the NHS at seventeen year old. She just knew it made sense and did it.
Building pensions aren’t, and often can’t be, for everyone. I like the old Chinese saying, “The best time to plant a tree was twenty years ago. The second best time is now”, but when it comes to pensions, “The best time to plant a tree was twenty years ago, the second best time was nineteen years and fifty one weeks ago.” These days you have more choices and much more information. Company pensions have seen better days and property often feels like a better bet. If only the Government would stop piddling around with ISA’s we might put more trust and money in them – we would if we could, no doubt.
In the end (which I’m nearing) when it comes to money, we just need to save what we can, when we can and in whatever we can. It’s difficult to go wrong with that.