Hi Nik
 
I apologise for the delayed response as I realise your question was time-sensitive but I was in project execution mode over the last two weeks.
 
I think this is an awesome question and I’ll tell you how I would go about thinking about this. Firstly, did you know that I too am a civil servant with access to the Alpha pension scheme? Let me know via the comments box if you did know. I have never mentioned it in any blog or podcast before but it is on my LinkedIn.
 
Given what you have said about when you could access your SIPP, I am guessing you are about 43 years old, i.e. you have 12 years to reach age 55 when you can access the SIPP and if your retirement age is 67 then you have 24 years until you can access your Alpha pension savings.
 
There are 4 keys things you might want to consider:

1. Portfolio effect;
2. The return;
3. When you might want to access the money, i.e. horizon/flexibility; and
4. Inheritance.

Anyone reading this that has a 'defined benefit' workplace pension (e.g. NHS workers) can apply the principles that I outline here to evaluate their own options for investing a lump sum of money.
 
PORTFOLIO EFFECT
 
By portfolio effect I mean you should consider how the lump-sum is invested in the context of other sources of income you expect to have in retirement.
 
Firstly, I opted out of the Alpha pension scheme because my husband works for the NHS and has access to their defined benefit scheme and because we manage our household finances as a single unit, I felt we could take more risk. His NHS pension gives us a safety cushion and I went for the civil service partnership pension which works exactly like a SIPP in that what I get at retirement depends on the return. An added benefit is that I can access the money at age 55 rather than 67 if I want to although I doubt I would do that as I’d rather use up my ISA savings first.
 
THE RETURNS
 
Average stock market returns have historically been about 10%. This could be the same in the future or it could be different. There are no guarantees.
 
I am not sure what your passive investment portfolio is specifically invested in but I will assume it is a passive global fund and as you haven’t said it is in an ISA, I will assume it’s in a taxable investment account. The last time I looked for a reasonable return to use to model my future returns I found an article that suggested 9% gross and 6% net of inflation was reasonable. I prefer to use 7% gross and 4% net of inflation.
 
If we go for the 7% return in taxable brokerage account – i.e. ignore the SIPP option to begin with:

• then when you are 55, £10k could be worth £22,500 (10k x 1.07^(12 years)) or about £16,000 after inflation; and
• when you are 67, £10k could be worth 50,700 or about £25,600 after inflation.

 
If you drew the money down according to the 4% rule which says that you should draw no more than 4% of an invested portfolio so that it doesn’t run out, then if you start to draw on this money from age 67 (same as when you would have access to your Alpha pension money) you would draw £2,028 in the first year of retirement (50,700 x 4%).
 
The following year when you are 68, you would draw £2,083 i.e. (50,700-2,028) x 1.07 x 4% - you draw slightly more because although the money has been drawn it is still invested and continues to grow at the average rate of 7%.
 
These are gross numbers – what about after inflation?
 
If you wanted to look at what you would be drawing after inflation, then in the equivalent of today’s money you would draw £1,024 (25,600 x 4%) and you would draw slightly more in real terms the following year.
 
You need to compare what this looks like against Alpha.
 
I know Alpha is inflation protected but I am not clear whether the £1k increase in Alpha payments that you mention is from today or whether it’s £1k from the age of 67 and growing from inflation at that point.
 
If it’s £1k and growing with inflation from today then at the age of 67 you would be getting £2,030 in real terms (1,000 x 1.03^24) whereas with the stock market investment you were getting only £1,024 in real terms – from this perspective Alpha is a no-brainer as it’s a guaranteed £2k per year until death rather than a probabilistic gross drawdown of £2k per annum.
 
I see the stock market as broadly providing some inflation protection given all companies increase the prices of their products over time.
 
If it’s the case that the increase in the Alpha pension is £1k at age 67 then growing by inflation from that point then the additional gross £1k in real terms after 24 years is only £490 (1,000) / (1.03^24) – in this case the stock market investment looks much more attractive.
 
If you go for Alpha with self and dependents then multiply the Alpha benefit by 90% to evaluate the impact.
 
If we go for the 7% in a SIPP account – then you get an immediate uplift because there is an immediate tax saving.
 
As a higher rate tax payer note that the SIPP provider would only claim tax relief at the basic rate of tax and you would need to claim additional tax relief via your self-assessment tax return or if you don’t do a tax return you would need to call HMRC to see if you could just do it by changing your tax code.
 
With the full tax relief £10k translates to £16,667 in your SIPP.

• then when you are 55, £16.7k could be worth £37,530 (16.7k x 1.07^(12 years)) or about £26,680 after inflation; and
• when you are 67, £16.7k could be worth £84,530 or about £42,720 after inflation.

 
If you drew the money down according to the 4% rule, then if you start to draw on this money from age 67, you would draw £3,380 gross (84,530 x 4%) or about £1,700 in inflation adjusted terms and steadily growing.
 
From a returns perspective putting the money into a SIPP begins to look very attractive indeed. This brings us to the next consideration, horizon/flexibility.

Hi Heather!
 
I'm 22 years old and I've been trying to get a good control of my finances. I'm still a student so I don't have a regular income. I've set up a LISA account to save for a house but I'd also like to begin saving for retirement. I've looked everywhere online but nothing seems to explain what different kinds of pensions there are, how to open them and how they work. Please help!
 
Alex

​Alex, this is an amazing question to be coming from a 22 year old! Well done for setting up a Lifetime ISA, that's a good move especially as they are considering phasing that scheme out.

​I have been meaning to write a post on personal pensions this since Christmas because another person asked a few specific questions so I’ll tick their questions off in this post too as they could apply to you as well at some point in the future.
 
PENSIONS!
 
Pensions are one of my favourite topics. If you were in a job you would have access to either:

1. a defined benefit pension plan; or
2. a defined contribution plan

but I won’t cover either of these here as you are not currently working. I will cover DB and DC pension schemes in a future post and in podcast episode 24 (links to my podcast are here).
 
What you need to open is a self-invested pension plan or SIPP.
 
When you do have a work place pension, you can also have a SIPP in addition to it; there are no penalties for doing so unless you’ve reached the annual limit for investing in a pension but this isn’t something most people need to worry about.
 
Once you open a pension account, you need to decide how you want ​your money to be invested. This is your decision unless you hire a financial adviser. However, even if you do get financial advice I always strongly advise getting some financial knowledge so that you can judge whether you agree with the advice you are getting or not. Every financial adviser has her own beliefs and biases about investing, that's human, the question is whether you agree with her.
 
Most people don’t know a lot about investing (including me when I started working) so some investment sites might ask you to answer a few questions on how you feel about risk-taking and then they suggest “ready made portfolios” to you to invest in which would be aligned with what you say your risk tolerance is, your “stated” tolerance for risk.
 
On some sites you might have access to “target retirement funds” this means you state when you want to retire and they adjust the risk of your investments based on that. For example, if you want to retire at the age of 62 which is 40 years from now, in your case, you would select a 2060 target retirement portfolio. The fund manager would then manage the risk by investing in more risky stuff now when you are far away from retirement and as you approach retirement the balance of investments would be adjusted away from higher risk, higher return investments towards lower risk, lower return investments.
 
The risk-return relationship is very important here. If you say you have a lower tolerance for risk then the options you will be given will have a lower associated risk but also a lower return on your money.
 
If you have a long time until retirement, and being 22 Alex, you have a very very long time until you need to retire then you can afford to take more risk. Personally, 100% of my stock investments are in equities (that is, they’re invested in company shares) because I get a fixed bond-like return from property investing so that balances it out.
 
By comparison, the average investor will usually have a portion invested in bonds and a portion in equities. By buying bonds you lend money to companies or a government and they pay you a fixed amount for that loan. As a lender, you are not a part-owner of the company and as such you don’t get a share of the company’s profits as you would if you invested in the shares. By the way: shares, stocks, equities are usually used interchangeably – they mean the same thing in most cases.
 
Equities vs. bonds
 
I won’t go into too much detail on equities vs. bonds but here are some important differences:

Why am I telling you all this? Because you need this sort of high level knowledge to decide how your money will be invested. What portion of your investments will you put into equities and what portion into bonds?
 
If you’re investing in ready-made portfolios and they give you an indication of risk, the higher risk portfolios have more equities and the lower risk portfolios have less equity investments.
 
Single stocks or index funds
 
You can manage your risk by only investing in funds or portfolios that invest in a wide variety of companies.
 
Some people find it more exciting to buy a single company's shares (single stocks) but that is much more risky than investing in funds because a fund is a diverse portfolio of lots of companies. As Index funds include a large number of companies, the complete failure of any one of those companies would have a much more limited impact on your return. I have dabbled in buying single stocks myself and I can tell you that it’s very difficult to choose winning stocks – to maximise your chance of winning “buy a whole stock market”, either by buying index funds that track a whole country or by buying index funds that track a whole industry.
 
If you do want to dabble in single stock investing, don’t put any more than 10% of your portfolio into them and as your portfolio gets larger I would reduce that to 5%. So, for every £1,000 invested don’t put more than £100 into single companies and as you move towards a portfolio worth £100,000 I would personally reduce single stocks to no more than 5% of my investments. These are arbitrary percentages and as you gain experience you will decide what feels more appropriate for you.
 
Actively managed vs. passively managed funds
 
There are two main types of fund to choose between, actively managed funds and passively managed funds.
 
Passively managed funds track a whole market such as the S&P500 which tracks the 500 largest, listed companies in the US or the FTSE100 which tracks the 100 largest listed companies in the UK - I emphasise listed because there may be companies that are just as large as those listed on the stock market but because they are privately owned you wouldn’t have access to buy their shares.
 
Alternatively, instead of tracking the whole market in a given country you can choose to invest in a specific sector such as utilities or technology or consumer goods.
 
Actively managed funds have an actual person choosing which shares are likely to outperform the market and investing in such undervalued shares or choosing companies that are likely to grow rapidly and enjoy a rapid increase in value. The objective of an active manager is to beat the market index, while the objective of a passive fund is to match the return on an index.
 
Now, you would think active funds, managed by "clever" fund managers are likely to beat the average market return from passive funds, right? Unfortunately, history has taught us that this very simply isn’t so: over 95% of the time fund managers do not beat index trackers. Not only that, the fees on actively managed funds are higher so even if you observe that an actively managed fund has achieved the same gross return as a market tracker you would be earning less from the active fund after fees have been deducted.
 
Where to start? Where to start?
 
I realise that this is all very technical stuff especially if you are beginner so here are links to a few indices to get you researching and investing. These are all funds I am invested in but I am not recommending you invest in them, only that you look at them to see what is included in each fund, what countries are represented, which companies are invested in, what the fees are and what returns have looked like over the last 5 years.
 
I have put the fees each fund charges in brackets as the fees charged is one of the primary reasons I choose whether or not to invest in a fund. Fees can dramatically erode your return so you should always consider what the fees are before you invest in anything:

• L&G Global technology index (annual cost: 0.32%, passively managed)
• Vanguard US Equity Index (annual cost: 0.10%, passively managed)
• L&G US Index (annual cost: 0.10%, passively managed)
• Fidelity Index US (annual cost: 0.06%, passively managed)
• Fundsmith Equity I (annual cost: 0.95%, actively managed)

 
Even from the above you can see the large difference in fees between my actively managed fund and the passively managed ones. However, I am personally convinced by the management of Fundsmith. Their investment philosophies are aligned with mine and I think they have the potential to beat the market over time but I don’t put all my eggs into the Fundsmith basket despite my confidence in them.
 
In summary, if you invest in a self-invested pension plan there is no commitment to a fixed pension income at the point of retirement. You therefore need to carefully decide how the money is invested. In doing this you need to consider:

1. How much of your portfolio do you wanted allocate to equities vs. bonds?
2. Will you dabble in single stock investing or will you stick to diversified funds that track a whole country or industry?
3. What markets and industries do you want to invest in? e.g. I don’t have any UK-focused index funds  because I started investing in equities more intentionally after Brexit and I don’t think the UK’s prospects are certain enough for me to put any of my hard earned pension investments into the UK stock-market.
4. Will you invest in actively managed funds given their atrocious historic performance or will you stick to passively managed index funds?

 
Where can you open a SIPP?
 
The biggest difference between the various platforms where you can open a SIPP is the user interface, customer service and the FEES.
 
In a nutshell you might be charged any and all of the following fees:

• An account opening fee;
• An annual management charge (AMC) for the platform;
• A dealing charge for buying index funds;
• Usually a different dealing charge for buying shares;
• If you buy index funds, each fund has a different annual on-going charge;
• There are other fees but I’ll just give you the first four listed here.

 
Here are a few places you can open a SIPP account including the fees. The money to the masses website has a table showing what the fees look like depending on the amount invested. I recommend you have a look at that but below I share four that I consider to be popular and cost effective.
 
Halifax share dealing

• No account opening charge.
• SIPP administration charges: £22.50 per quarter (values less than or equal to £50,000) and £45.00 per quarter (values more than £50,000). Other charges may apply.
• Dealing charge: £12.50 per trade; £2 per trade if you schedule automated regular investments

 
Hargreaves Lansdown

• No account opening fee
• 0.45% AMC
• Dealing charge for shares: starts at £12 but falls as you buy more shares;
• There’s no dealing charge for buying or selling funds.

 
iWeb

• No account opening charge.
• SIPP administration charges: £22.50 per quarter (values less than or equal to £50,000) and £45.00 per quarter (values more than £50,000). Other charges may apply.
• Dealing charge: £5 per trade.
• Big note: you can’t automate investing, you have to manually make your trades every time.

 
Vanguard

• No account opening fee
• Annual account fee 0.15% capped at £375

The big difference between the Vanguard platform and the others above is that you can only invest in Vanguard’s own funds, they don’t offer products from other fund managers. However, the other platforms I have listed will give you access to Vanguard funds and a plethora of other fund managers.
 
Having only Vanguard’s funds is not necessarily a bad thing, they are cost effective and if you have an ISA elsewhere in addition to the SIPP at Vanguard, you can use that to invest in funds run by other institutions, e.g. Legal and General and Fidelity to name a few. Vanguard are very well rated in terms of performance and customer service in addition to having good fees. That said, you could save money on the account fee by investing in Vanguard funds via Halifax share dealing or iWeb and those two platforms would give you access to a wider variety of funds as well.
 
Also, Vanguard’s minimum investment is £100/month or £500 lump sum. If you want to start out with £25/month which at your age is absolutely fine, then you need a platform that will allow lower monthly contributions.
 
Where do I invest?
 
I have a SIPP for my son at Hargreaves Lansdowne and I have a SIPP for myself at iWeb. The fees at iWeb were the cheapest for my ISA and I decided to have my SIPP there too as the fees were reasonable although not the cheapest at the time I opened it. It didn’t make sense to have a SIPP elsewhere to save not very much money.
 
iWeb don’t offer junior ISAs and I wanted to keep my son’s SIPP with his ISA as well so I added it to his Hargreaves Lansdowne account. Based on the small amounts being added to his SIPP (£100 per month) the SIPP fees were actually cheaper at HL but they would have been more expensive for me because my SIPP account has much more invested than my son’s.
 
To cut a long story short, where you choose to open a SIPP can also be influenced by where you have an ISA and whether you want these to be kept together. It’s not necessary to have your investments all in one place, I certainly have several investment accounts for various reasons. Before you decide speak to a few people including family members so you have a flavour for where your social circle seem to be investing, if at all.
 
How much can you put into the SIPP each year?
 
You can have a SIPP if you're resident in the UK whether or not you pay tax but your earnings impact the maximum amount you can put in each year.
 
If you are not employed via the PAYE system, the maximum is £2,880 if you are not employed which becomes £3,600 including  the government top-up which is equal to what you putting times 100/80.
 
When you are employed you can put the equivalent of your full salary into your pension up to a maximum of £40,000 per year.
 
I won’t go into lifetime limits for you as you are so young and will discuss those in my general post on pensions.
 
Can you have a SIPP if you are a British citizen living abroad?
 
You cannot make contributions to a SIPP if you are not a UK resident even if you have a British passport. You have to be a UK resident. If you have spent some of the year abroad and some of the year working in the UK, HMRC counts the number of days spent in the UK to confirm if you are UK resident. I won’t go into detail here because the actual number you need to qualify as a UK resident depends on whether you were a UK resident in the previous few years.
 
You can, however, set up a SIPP if you're resident overseas and want to transfer a UK pension from a previous job to the SIPP (but you cannot make further contributions to it). So, for example, if you have a pension with a UK employer and want to transfer that to a SIPP while you are abroad, you can do that.
 
If you’re resident abroad but paid in the UK and pay tax here you can also have a SIPP. So, for example, some British expats work abroad but are paid in the UK and pay a portion of their tax in the UK and are likely to qualify, however, speak to an accountant or financial planner to make sure you don’t fall foul of any rules if you’re ever in this complex domicile situation.
 
What happens if the company you have your SIPP with goes bust?
 
If your SIPP provider becomes bankrupt, your money should remain unaffected. Your money is not invested in the SIPP provider themselves; they either simply manage your investment or act as a platform for you to manage your own investments.
 
I hope this helps!
Heather
 
References:
What happens if my SIPP provider goes bust? 
Build a low-cost DIY pension

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Hi Heather,
 
My name’s Linda. I would like to have a comfortable retirement but I am not sure how much money I need to have saved up in order to achieve this goal. I am not particularly extravagant but I do want to be able to afford at least two holidays a year. I additionally don’t have access to a fixed workplace pension so I need to live within the means of my own investments and the state pension. How should I go about working this out?
 
Thanks

Thanks for this question Linda.
 
There are a few ways to think about this.
 
Firstly, when do you want to retire? The reason that this matters is that your state pension will only kick in at the state retirement age so if you retire earlier than this you will need to make up the difference from your own investments.
 
You also need to consider your living situation during retirement. If you are likely to be married or in a relationship then you would have two state pensions coming into the household but not double the costs – for instance, utility bills don’t double with double the number of occupants in a home.
 
You would also need to factor in that, even if you are in a relationship, one person will probably outlive the other and at that point one source of pension income may be lost.
 
TWO WAYS TO GET AN INCOME IN RETIREMENT FROM A SAVED LUMP SUM
 
There are two ways that your savings and investments can be used to secure your income in retirement:
 
The first way is to buy what is called an annuity. The second way is to just draw down your income slowly over time.
 
ANNUITY
 
An annuity is a financial product that provides a guaranteed income for life. Essentially, you take a lump sum of money, give it to a financial provider and they tell you how much they can pay you for life depending on the features you want. For example they can give you a fixed amount every month for life, or they can increase that amount every year by inflation, if you want an annuity that grows with inflation the starting amount will be smaller than if you go for the fixed amount. You can also buy an annuity that covers one person’s life or two people’s lives, that is, once the first person dies the annuity continues to pay out until the second person named on the annuity also dies.
 
Annuities used to be popular in the past but because interest rates have fallen drastically since the 2008 financial crisis they have not been so attractive.
 
How much would you need if you were planning on retiring today, were getting a state pension and were planning on buying an annuity?
 
According to this is money who in turn source a report by Royal London, you would need £260,000.
 
“Royal London’s sums were based on the amount needed to bridge the gap between an £8,500 state pension and two-thirds of the £26,700 average salary.”
 
Two-thirds of £26,700 is £17,800. This means Royal London are assuming that you would live on £17,800 every year: £8,500 of this would be coming from the state pension and £9,300 would be coming from the purchase of the annuity. These figures suggest the annuity is giving a return of just 3.6%.
 
In my opinion, that’s a very poor return and not even worth getting the annuity.
 
This is money also confirm in their article that if you plan to retire in 30 years’ time rather than today, this £260,000 becomes £400,000 and this further assumes that annuity rates improve by then.
 
If interest rates are just as low in 30 years’ time as they are now and if we assume average inflation of 3% per year (which is what it has been historically), then instead of £260,000 you would need £630,000.
 
Personally, I do not recommend the annuity route AT ALL. If you are happy to take a little risk then you would be FAR better off just drawing on the invested money.
 
DRAWDOWN
 
The most popularized rule for drawing down on your invested pot is the 4% rule. The 4% rule essentially says that if you drawdown 4% of an invested pot every year, you are unlikely to run out of money over a 30 year period. While the study that came up with the 4% rule used 30 years as the period during which a person would be retired, the general conclusion is that even at the end of that 30 years the money invested will have grown because the average drawdown rate of 4% is lower than the average growth rate of your investments.
 
So, for example, if your investments grew by 7% in the last year then taking 4% means you are still ahead.
 
The beauty of drawing down rather than buying an annuity is that whatever is left when you die can be passed on to children, charities or whatever you choose. With an annuity, the payments die with you. For example, if you bought the annuity of £9,300/year today and died next month, tata £260,000 – that’s it. The full benefit of your early demise goes to the financial institution that sold you the annuity in the first place. Rubbish, right, well that’s what you get for playing it too safe!
 
If we take the £260,000 lump sum we have been using and continue with it for example purposes, then a 4% drawdown would produce £10,400/year in the first year which is better than the £9,300 you were getting from the annuity that ‘this is money’ talked about. Not only that, in the following year it could be that you will base the drawdown on a bigger number than £260,000 because the investments will have grown in value. The average growth rate of the stock market over the last few decades has been 10% before accounting for inflation. Of course, this says nothing about the future as stock market returns in the future could be better than or worse than this.
 
Rather than working backward from what income a given lump sum will give you? Let’s figure out how much you will probably need to spend in retirement, that is, let’s work out your desired retirement income.
 
Once we have your desired income we will subtract income from your state pension and any other pensions.
 
We will then divide the gap by 4% and this will give you the value of investment assets that you need.
 
SPENDING
 
I’ll share two sources that I have found for trying to work out how much money you will need each year in retirement.
 
SOURCE 1 – on how much money you need for retirement
 
“According to research carried out by Loughborough University and the Pensions and Lifetime Savings Association (PLSA), workers who only manage to save enough for a retirement income that provides them with £10,200 a year (£15,700 for couples) will achieve a minimum living standard, those who managed to save enough for £20,200 a year (£29,100 for couples) will be able to live a moderate lifestyle during retirement and those who are able to save enough for £33,000 a year (£47,500 for couples) will be able to enjoy a comfortable retirement.” (source: moneyfacts.co.uk)
 
This £33,000 a year (£47,500 for couples) includes holidays abroad, a generous clothing allowance and a car.
 
These are the lifestyles that the Loughborough University and PLSA study creates:

• A minimum living standard assumes a single retiree spends £38 per week on a food shop, has a one week holiday and a long weekend in the UK each year, will not be able to afford a car and will have £460 per year for clothing and footwear.
• A single person able to afford a moderate retirement will be able to spend £46 on a food shop each week, enjoy two weeks in Europe and a long weekend in the UK each year, and will have £750 to spend on clothing and footwear each year.
• A single person enjoying a comfortable retirement will be able to spend £56 per week on their food shop, enjoy three weeks in Europe every year and spend £1,000-£1,500 on clothing and footwear each year.

 
I don’t know about you but I would like to target the comfortable lifestyle or better!
 
Using the 4% rule, if you are targeting a comfortable lifestyle then:

• You need £825,000 if you are single before accounting for state and other pension income; (33,000/4%=825,000).
• If you are getting £8,500/year in state pension income, this falls to £612,500 if you are single; ((33,000-8,500)/4%=612,500).
• A couple without any other pension income needs £1.2m in investment assets; ((47500)/4%=1,200,000)
• A couple with two state pensions that sum to £17,000 needs 762,500 in investment assets to achieve a comfortable retirement; ((47500-17000)/4%=762,500)

 
Before you give up before you’ve even started because these numbers sound too hard to achieve, keep listening, I’ll give you an example at the end of how much you need to save now and it will sound much more achievable.
 
If you are targeting a moderate or minimum living standard, you can calculate the equivalent numbers by following this formula:

• For the amount of investment assets you need before accounting for pension income, just divide the income you want by 4%, e.g. £30,000/4% = £750k.

 

• To account for pension and other income, subtract amount of state pension and other income you expect to get when you’re retired from your ideal retirement income then divide by 4% e.g. (£30,000-20,000)/4% = £250k.

 
As a reminder, the full state pension is currently £8,767.20 per year but I used £8,500 in my examples for simplicity.
 
If you plan to retire based on the minimum standard of living at say 60, then when you start getting the state pension as well if you are a single person, you would be boosted to close the moderate living standard; and if you are in a couple, you would be boosted just beyond the moderate living standard by receiving two state pensions – assuming both people are entitled to the full state pension or close.
 
SOURCE 2 – on how much money you need for retirement
 
Using a report from the Joseph Rowntree Foundation, a respected charity, Fidelity.co.uk allows you to start of with a basic standard of living which costs £16,300 and allows you to add annual costs to this depending on the lifestyle you want.
 
This £16,300 accommodates basic rental accommodation, basic costs for food, alcohol, clothing, water, gas, electricity, council tax, household insurances and other housing costs, public transport costs and an occasional visit to the cinema.
 
The basic £16,300 cost of living assumes a single person not a couple. Within this figure you don’t run a car, you don’t eat out much at all, you don’t smoke and you don’t have internet access or paid-for film channels (I guess you would watch only free channels and have to go to the local library for the internet).
 
Note that this £16,300 is higher than the £10,200 suggested by the Loughborough University study for a basic standard of living but lower than the £20,200 suggested for a moderate standard of living so we can call it basic Plus.
 
I would guess the Loughborough study assumes you have paid your home off in their basic living assumption which could explain the difference.
 
So, how do we boost the £16,300 basic income to improve our life style?

• For 4 weeks in the sun each winter, add £3,500;
• For another 2 weeks of holiday each year, add £1,600;
• For dining out with friends every two weeks, add £2,200;
• For home improvements each year, add £3,600 – this sounds like a lot to me but anyhow, this is what is suggested;
• For a new car every 5 years worth £16,500, add £5,500 – this could also get you a higher spec second hand car;
• For health club membership, add £500;
• For shopping trips, add £1,600;
• For theatre, concerts etc., add £1,700

 
If you added on every single one of these extras, you’ll be at a very comfortable £37,500/year which is not too far off the £33,000 suggested by the Loughborough University study for a comfortable retirement.
 
This would be equivalent to £54,000 for couple if we increase in direct proportion to the Loughborough study (37,500 * (47.5/33)).
 
What level of investment assets do you need to achieve this?
 
You need c.£940k if you are a single person or £1.35m if you are a couple before the benefit of a state pension. This £1.35m is very aligned with the £1.2m we got using the Loughborough University study. State pension income reduces your need to save and invest by about £200,000.
 
If you keep a budget it might be easy to calculate what your monthly spending in retirement will be; just remove all the things you spend on now that you won’t need to spend on in retirement, like travel to work or rent or a mortgage payment if you plan to own your home outright at the point of retiring.
 
There are a lot of numbers here but it’s more or less pretty straight forward once you have worked through it systematically. How much do you need to save now to live your ideal lifestyle and to hit your goal by retirement? You’ll need to take the next step and figure that out. If you want me to help you do this, request a call.
 
As an example, if you are a 22-year old couple now and plan to retire at 67, you only need to be saving £285/month in total into pensions (that’s only £140/each). This has to be into pensions and not into an ISA as I am assuming you get the tax benefit of saving into a pension. My calculation assumes you get an average market return over those 45 years of 7%. If returns average 10% as they have in the last 45 years, you would completely overshoot and end up with a retirement pot of £3.7m – how’s that for compound interest?!
 
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I hope this helps!
Heather

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Hi Heather,
 
Based on the things you told us about investing, my husband and I started putting £125 per month each into our SIPP pension. I hope this isn’t a silly question but what are these savings for? When can we expect to start spending that money and should we try to spend it in specific ways or on specific things? Both my husband and I are 30, we don’t plan on having children and our jobs have fixed pension benefits.

​Thanks 
Flora
 
Hey Flora,
 
That’s a great question. While everyone has a different value system, there are two main reasons that I strongly recommend that people put money into a self-invested pension plan or SIPP a) flexibility and b) security including funds to help pay a mortgage off early.
 
A SIPP can be better than a stocks and shares ISA, in some cases, because you effectively pay less tax and because you can’t use the money until you are about 58 so it forces you to save.
 
Let’s talk about each reason in turn:
 
The first reason: is flexibility over when to retire
 
In the past, a lot of work-based pensions (aka defined benefit pension plans) used to allow early retirement from between the ages of 55 and 60, most of these type of scheme are being completely phased out and are instead being linked to the state retirement age which for you is currently expected to be 68. There is talk of moving this to age 70, so this is a future possibility.
 
Whatever happens, the funds that you build up in your SIPP can be taken from 10 years before the state retirement age. This means if the state retirement age moves to 70 you will still be able to use money that’s sitting in your SIPP from the age of 60.
 
If you and your husband are putting £125 each into a SIPP then when you are 55 years old, you and your husband’s combined pot of savings would be worth £135,000 if the pot of money only grows fast enough to keep up with inflation of about 3%; if you get growth equivalent to the average stock market return of 7% then you would have £250,000 at the age of 55 and if you get an average stock market return of 10% you would have £410,000 saved up.
 
At age 60 the figures would be £180,000 @ 3%, £375,000 @ 7% and £700,000 @ 10%.
 
These sort of returns aren’t cuckoo. According thebalance.com, “the S&P 500 Index, delivered its worst twenty-year return of 6.4% a year over the twenty years ending in May 1979. The best twenty-year return of 18% a year occurred over the twenty years ending in March 2000.”
 
Various sources suggest the S&P 500 has returned 10% before inflation if you buy and hold the money you invest into it. But of course, it’s useful to remember that this past success doesn’t guarantee that future returns will be as good.
 
Right now you would struggle to find a bank account that gives you an interest rate of 1.5%.
 
Back to flexibility on when you retire, however, unless you believe the US has no room for growth, then this total of £250/month you are saving could amount to a lot of money over a 25 to 30 year period and this would allow you to retire with a decent income well before the state retirement age.
 
If your mortgage is fully paid off by the time you retire then your cost of living could be low enough that even a modest growth in the SIPP would provide a comfortable income before your state pensions and work-place pensions kick in.
 
 
The second reason: to save the money is the added security from having extra retirement income
 
Having money in a SIPP means you can top up your retirement income.
 
Having the SIPP would mean you have 5 sources of income:

• two state pensions – yours and your husand’s – (keep in mind that we have no idea how the level of state pensions could change over time);
• your workplace pension;
• your husband’s workplace pension; AND
• the SIPP.

 
If the pension income from your jobs is lower than your final salary having access to extra funds will mean you can more or less maintain your lifestyle. This will be especially important if one person lives a lot longer than the other.
 
There is one special feature that the SIPP has but all the other 4 pensions do not: and that’s the fact that if you or your husband dies the state pension stops coming through and the work-place pension either stops completely or is massively reduced. However, whatever money is outstanding in the SIPP would fully transfer to the spouse without penalty.
 
Just to be clear, I will make that point twice: a work-place pension either dies with the person and at that point the spouse receives nothing or, from that point, the spouse gets a heavily reduced benefit – usually 50% or one-third of the amount that was being received before their spouse died.
 
A LOT OF PEOPLE forget this about SIPPs and other defined contribution pensions. I won’t go into the differences between defined benefit and defined contribution pension plans here but if someone is interested go to themoneyspot.co.uk and leave me a voicemail with your request.
 
Finally, when can you expect to start spending that money and should you try to spend it in specific ways or on specific things?
 
Technically, the plan is that you will never have to spend the capital but can just spend the growth.
 
If the fund is worth £250,000 when you start drawing from it and you are earning a 10% return per year at that point, then you could just withdraw the 10% (i.e. £25,000) or less and spend that.
 
If your withdrawal rate is lower than the growth rate of the fund then your retirement would continue to grow even as you take money out.
 
Note that some research suggests that the ideal withdrawal rate to maximise the likelihood that the money will never run out is 4%. But given you have pension income from your jobs in addition to the state retirement and you’re not worried about passing wealth on to children you could be more aggressive than this.
 
As for how you spend that money, well that is up to you and is a great problem to have. Having more money doesn’t only mean more holidays, it also means you can buy private health insurance which might be a necessity to avoid NHS waiting lists at a time when health problems are more likely. This would give you a lot of peace of mind.
 
Ability to pay mortgage off early
 
One thing worth adding, is a note that once you can withdraw money from your SIPP you are allowed to take 25% out as a tax-free lump sum. If your household had £250,000 saved up, you could take £62,500 out in one go which could be used to clear all or most of your mortgage.
 
You would then be allowed to take the rest out as an income or you could buy an annuity – with an annuity you essentially buy a fixed income which keeps being paid to you for the rest of your life.
 
I wouldn’t recommend an annuity for you given you have two fixed pensions coming in already, you don’t need the extra security and annuities don’t tend to be worth the money now that interest rates are so low. What you could do instead of buying an annuity is withdraw what you need from the SIPP every year. You would pay taxes based only on what you take out and could manage the withdrawals to minimise the tax bill.
 
I hope this helps.
 
Heather

This article looks into what retirement & pensions look like for the USA and for black people in particular. Skip half way down if you just want the race-based statistics but not the overall picture. 

Jim Crow laws and US-style racial segregation mean black people in America as a whole are still catching up with wealth accumulation.

This article brings together data and charts from various sources; references to all sources are listed at the bottom.

Overall, retirement statistics show a dim picture for everyone except the very affluent in America and the situation is worse for black and hispanic populations. 

• An estimated 9m older Americans are at risk of hunger and the number of hungry people over 50 has risen by 80% in a decade (Guardian, March-2015)​
• Of the 44.7 million Americans over the age of 65 in 2013, half had a total annual income of less than $20,380 (£13,271) – from all sources
• In 2013, 85% of older Americans received monthly social security benefits.
• The average annual benefit from social security for retired workers in 2013 was $15,132 (£9,852).
• According to the Social Security Administration, the national average wage in the same year was $44,888.

What proportion of an old person's income does this form?

• In 2012, 25% of people over the age of 65 received all of their income from social security
• For 60% of people over 65 who receive social security benefits it accounts for half of their total annual retirement income

"In 1983, the median white family had more than $100,000 in wealth, compared to less than $13,000 for African-American families—an eight-fold difference." (newrepublic.com) By 2013, 30 years later whites were 34% wealthier with $134k whilst black people were poorer with only $11k in wealth. 

​Hispanics were in exactly the same situation as the graph on the right shows.

White Americans earn a lot more, on average, than black Americans such that by age 61 the average white person had earned $2 million over their life and the average black person $1.5 million, Hispanics were worse off with $1 million in earnings by age 61.

​Obviously, the more you earn the more you can save, earn interest and invest.

Liquid retirement savings are cash saved for retirement e.g. as a 401k.

In 2013, the average white family had $130k in liquid retirement savings, for blacks this was $19k and only $13k for hispanics.

BUT - the situation is actually worse than that, a few very rich people skew up the average number especially for whites. If you use the median, i.e. the middle person, whites only have $5k in retirement savings, blacks and Hispanics have zero.

Homeownership is one of the key ways people around the world build wealth. 

The homeownership rate amongst black Americans (43%) is 60% lower than amongst whites (69%). For a very long time black Americans were locked out of property ownership because of discriminatory laws and even now, property prices are lower in black areas than in white areas and price growth is slower (Forbes).

Debts reduce people's ability to save. 

Black Americans have higher levels of student debt, 42%, compared to 28% for whites and 16% for Hispanics. Ultimately this would be a good thing if it was leading to higher future incomes but black people also have lower graduation rates. 

This means some people get saddled with debt and don't get a degree at the end of it to boost future income.

The lower student debt amongst whites could be because more of them have parental support in paying for tuition and living costs.

Keep in mind as you read the above that not all minorities are reflected in the statistics. The Jewish community and Asians tend to have better rates of saving, wealth accumulation and lower overall poverty than whites, blacks and Hispanics.

Closing the gap in property ownership will definitely be one of the key ways black people in America will boost the retirement asset base and wealth in general. Please take a look at my property toolkit for information on how to grow a portfolio.

You might also like:
Old Age Life, Pensions And Poverty In The UK

References 
Which are the best countries in the world to grow old in? (The Guardian)
How Home Ownership Keeps Blacks Poorer Than Whites (Forbes)
The Alarming Retirement Crisis Facing Minorities in America (newrepublic.com)
Why you may retire in poverty (reuters)

Lots of scary statistics get thrown around regarding the negative retirement prospects for current 30-somethings (and even worse for those younger than us), so this week I’ve decided to dig deep. I’ll write a series of 3 articles on retirement: what do that the stats look like in the UK and the US and ultimately, what will it cost you to retire?

I will not do an article on retirement stats in Africa because for the most part those statistics are VERY hard to come by. However, I found a fantastical article by the OECD that looks at Pensions In Africa.
 
This is what I assume we all want to know:

• When Do You Get A UK State Pension?
• What’s The Amount of The UK State Pension?
• How Much Does The Average Pensioner Actually Have In The UK?
• What Do The Pension Savings of Workers In The UK Look Like?
• What Proportion Of Pensioners Own Their Home Outright?

​The retirement age used to be 60 for men and 65 for women. It’s now been equalized to 65 for both. It’s moving up to 66 by 2020, 67 by 2028 and 68 by 2046.
 
I’ll qualify to get a UK state pension at the age 68 in 2051 provided I’ve paid national insurance (NI) taxes or have NI Credits. You can calculate your own pension age here.
 
What does this mean?
 
Those of us that reach retirement age after 6 April 2010 need to have 30 “qualifying years” to get the maximum state pension and at least 10 qualifying years to get anything at all.
 
If you don’t have a National Insurance record before 6 April 2016 you’ll need 35 qualifying years.  Qualifying years are years in which:

• you were working and paid National Insurance or
• you were getting National Insurance Credits, e.g. for unemployment, sickness or as a parent or carer or
• you were paying voluntary National Insurance contributions –

 
For instance, if you work abroad or aren’t working for any reason you can pay voluntary contributions to ensure you qualify for a full state pension. I see this as a sort of backup insurance policy and I would definitely do it if I was working abroad.
 
“If you reached the pension age before April 2010, then a woman normally needed 39 qualifying years, and a man needed 44 qualifying years during a regular working life to get the full state pension.” BBC

​If you are retiring on or after 6 April 2016 the full state pension you can get is £155.65/week, this is £8,094/year or £675/month.
 
This amount is guaranteed by the government to rise by the higher of:

• earnings - the average % growth in wages (in Great Britain) or
• prices - the % growth in prices in the UK as measured by the Consumer Prices Index (CPI) or
• 2.5%

 
But, of course, government plans do change and this guarantee could fall away if the UK hits problems. There is a lot of press surrounding this possibility right now. 

​People retiring in 2016 expected income of £17,700 per annum according to a Prudential survey. They carry out this survey annually and the table below shows the results.
 
This number is actually £1,000 lower than in 2008 but it’s been making a steady recovery:

According to Partnership the average UK pension pot stood at £87,724 in 2015. There is a lot of variance within the UK, with Essex having the highest pension pots, £125,478, and Shropshire the lowest, £44,336. Check out where your region stands using the image below.
 
With compulsory workplace pensions now in effect pension savings should hopefully rise for a good majority of people.

Property ownership is one of the key determinants of financial independence in old age.

​Here are stats from the 2011 census carried out by the Office of National Statistics:

• There are 23.4 million households in the UK.
  • Out of these 7.2m were retired households (The FT, quoting the same census)
• 15 million are homeowners (64%) and 8.3 million are renters (36%)
• Of the 15 million homeowners, 7.2m homes were owned outright while the remaining 7.8m were mortgaged
• 31% of owner occupied homes were documented as being inactive, i.e. not looking for work and of these 92% were retired
  • We can therefore extrapolate that 2.05 million (7.2 x 0.31 x 0.92) retired households own their home outright and 2.22 million retirees have a mortgage.
• 36% of renters were documented as being inactive and around 50% of these were retired
  • We can therefore extrapolate that 1.5 million (8.3 x 0.36 x 0.5) retired household rent their home
• These extrapolated figures are very back of the envelope but we can assume based on these that 35% of retired people in the UK own their homes outright { 2.05 / (2.05+2.22+1.5) }, 25% rent and 40% have a mortgage, possibly a small one.

 
The obvious advantage of outright home ownership when you are retired is that you save yourself what is usually a household’s biggest expense.
 
Home ownership is almost necessary to guarantee a comfortable retirement because state pensions rules are changing all the time.
 
Personally, I hope for the best when it comes to state pensions but I certainly won’t depend on the government to look after me in old age.

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References
Basic State Pension Overview (gov.uk)
State Pension Eligibility (gov.uk)
State pension: The overhaul and you
The pension pot map of the UK revealed
Retirees in 2016 expect income of nearly £18k a year
Home ownership and renting in England and Wales
Number of UK working-age households drops for first time
​Pensions In Africa