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Hi Heather I’m really enjoying your podcasts and have already given a 5 star rating. I am 57 and plan to retire at 60 so love your retirement items. When talking about 4% draw down or retirement income, it’s never clear if the figures are before or after tax. For example 4% of £1m is £40k, but after tax this could be nearer £30k. If you then get a state pension of say £9k, the figure before tax is £49k, byt after tax it is nearer £35k. So when you talk about money needed in retirement, do you mean before or after tax? Thanks, David  David, thanks so much for the review! I definitely appreciate it.
First things first, David I am sorry that it’s taken me ages to get a blog post done on this, however, I did respond to your question directly within 24 hours of you asking it so I hope that will make up for the late blog post response to your question which you asked me roughly 3 months ago and 4 months ago by the time this airs on The Money Spot podcast. Turning to the 4% rule… For those that have not ever heard of it, the 4% rule states that if you don’t want your pot of invested retirement funds to run out before you die, the maximum you can take from that pot each year is 4%. This means that if you want an annual income of 40,000 from your retirement pot, you need to save one million (GBP, USD, EUR) – I believe the study was done using American stock market performance but if you invest in a global portfolio it will be heavily weighted towards the US so you can use the 4% rule as the best proxy we have on what a reasonable withdrawal rate is. To answer, David’s question, the 4% drawdown is gross and you would have to pay tax after that. So, if you have £1,000,000 (for simplicity) in your pension pot in a given year, you would draw £40,000 and pay the tax on that. If you are based in the UK, you cannot throw the gross amount drawn from your SIPP or other taxable investment account into listentotaxman.com to get a calculation of your after-tax income because your drawings from your investments are chargeable to capital gains tax so you don’t pay income tax on them but capital gains tax. Capital gains tax rates are different. In 2020, assuming 50% of the £40,000 you draw is capital gains, then your net income after tax would be calculated as follows: Not taxable: £20,000 (this is the portion you actually saved) Taxable: £20,000 (the capital gain) Deduct capital gains tax allowance: (12,300) Taxable: £7,700 This taxable amount all falls into the basic rate band for 2020/21 so you’d pay tax of 10% on it, i.e. £770. If you had a portion in the higher rate tax band even that is only taxable at a rate of 20%. So, out of the £40,000 the net amount received would be £39,230. This is a huge different to what you would have paid if this was income of £40,000 as the net income would have amounted to £30,841. That’s a difference of £8,389 – wow! People on work place pension will be taxed in that way because the DB pension counts as income, you can’t separate it into capital and capital gain. If you are UK based and have reached your state retirement age then you would have an annual state pension. This is taxable to income tax and you can throw the total annual state pension amount that you receive into listentotaxman.com to figure out how much you will receive after tax. State pension is taxable if all your sources of income sum exceed the threshold needed to pay tax. That annual state pension is just over £9,000 so if that’s your only source of retirement income you wouldn’t pay any tax because it’s below the personal allowance of £12,500 – however, if this is you, you probably wouldn’t be the type of person that listens to personal finance podcasts - #JustSaying. A few BIG things to remember though: ISAs If your retirement income is all in your ISA then it is all tax free; not tax needs to be paid. Capital gains tax allowance Current tax rules allow you to have a tax free allowance on capital gains in addition to the tax-free personal allowance SO your tax bill may be much less than you think because your state pension and any other pension income may fall into the regular income bucket and this enjoy a separate tax free allowance. For 2020 the Capital Gains tax-free allowance is £12,300.I don’t know if this will be available when I retire, there’s talk of eradicating it to raise more tax… Early retirement Those that retire very early, and I’d classify anything before 55 as early may be overdrawing if they draw 4% because the study of the 4% rule was based on a 30-year retirement. David, you’re probably okay given you’re 57. Sequence of returns risk Sequence of returns risk analyses the order in which your investment returns occur. If a high proportion of negative returns occur in the beginning years of your retirement, these negative returns will have a lasting negative effect on the balance of your investment portfolio and the amount of income you can withdraw over your lifetime is reduced. This is sequence of returns risk. However, if you have a few years of good returns when you retire and negative returns only occur later, say in the middle of retirement, then there’s a lasting positive impact. If this happened to me, I would probably stop drawing income from my retirement pot for 2 or 3 years and live off non-stock market income, e.g. if you have cash pot set aside, I’d deplete that first; or I’d consider getting a part-time job; or for those fortunate enough to have rental income, you can live on that and give your investment portfolio time to recover. I think that’s all the main stuff. To summarise:
I hope this answers all your questions and I additionally hope that I threw in a few thoughts that you hadn’t considered. Heather p.s. subscribe to my podcast and ask me any money question, HERE - do it now!
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Hi Heather
When is a good time to draw equity from your house: when I retire which is in about 5 years or before? Mary 
Hi Mary
Thanks for this question because it really got me scratching my head. I was initially quite flummoxed when I received the question because as a proponent of the FIRE movement (Financial Independence Retire Early) the whole premise of my money management toolkit is to get out of debt including mortgage debt completely and NEVER go back. However, I am going to park this way of thinking and answer your question in the most unbiased fashion that I can and I will also ask you a few probing questions so you can figure out whether this is what you want to do. FIRSTLY, what do you plan to do with the money? Do you want to use the money for general living or to make a significant purchase or investment? Generally, I think in most cases it is not a good idea to get into debt during retirement as it may cause undue stress if you run into any unexpected financial problems. OPTION 1: Take equity out and pay off the debt or interest during retirement I don’t know the value of your home or any other numbers, however, if you take equity out of your house that money will be charged interest and if you enter into a standard mortgage contract, you will have to pay the interest and possibly repayments from the month after you take that equity out. From my follow up email to you I gathered you have a pension that will come in when you retire. I am assuming this is a “defined benefit” pension so it’ll be paid to you from retirement until you die. By taking on debt you will have a reduced income. So, if your pension is income amount to 2,500 per month and if you take out equity requiring 500 in monthly payments you will lose 20% of your pension straight off the bat to debt payments. How will this affect your standard of living? OPTION 2: Take equity out and pay all the interest off when you die If you are over 55, which I assume you are, you can also get a mortgage that doesn’t require interest payments to be made until you died.
Depending on the terms you may be allowed to repay some or all of the amount borrowed. Otherwise, with a lifetime mortgage all the interest would be accumulated and paid on your death.
So if your home is worth 100,000 you might sell a 40% stake to the bank for a 20,000 lump sum. When you die, the bank gets 40% of whatever the house is worth at the point. So if you die 20 years later and your home is worth 300,000 the bank get 40% of 300,000 which is 120,000 for the 20,000 that they lent to you. If you died the very next year and your house has stayed the same in value then the bank gets 40,000 for the 20,000 that they lent to you. Even if your house falls in value the bank is still likely to come out ahead because they take a huge hair cut off the value of the house. The reason these mortgages are only offered to people over a given age is to minimise the chance of the bank losing its money, for example, because accumulated interest exceeds the value of the house on a lifetime mortgage. To safeguard the bank further, they keep the amount of equity that can be released quite low; the younger you are, the lower the allowed equity release. So, a 55 year old might be restricted to releasing no more than 20% but a 75 year old might be allowed to release 30-40%. I am making numbers up here because the reality is that more conservative banks will have lower limits and banks that are more risk tolerant allow a bigger release of equity. It all sounds great on first inspection but banks have received a lot of bad press regarding equity release schemes because in the fine print they have stuff like, you don’t need to repay the interest PROVIDED you live in the house so if you need to move home, even into a care home or to a more accessible home because you develop mobility issues, all that money comes due and you would be forced to sell your house and pay the bank. There are likely to be other catches too because banks are in this to make money so if you go for an equity release scheme of any nature you should have a lawyer or financial advisor look at the terms and conditions diligently for you so you know exactly what you are getting yourself into. The bank might get a guarantee that you will never owe more than the value of your home but this means that you could owe the full value of your home to the bank. If you release equity at age 55 and live until 95 there is every chance that interest can accumulate to the point of exceeding the home value. It’s nice to get a tax free lump sum via an equity release but in doing so you may reduce your entitlement to means-tested state benefits, now or in the future so you need to think about this angle too. I don’t know how well I am doing with the unbiased view thing here as you can probably tell that I think releasing equity is a high risk game and it frankly, freaks me out. If you don’t have any kids or charities/causes that you’d like to leave an inheritance to and you’re certain you will be physically fit enough to live in your home until the day you die then perhaps the risk of releasing equity could be worth it. Another form of equity release is to downsize your home, i.e. you sell an expensive home and buy a cheaper home and live off the difference, this way you release equity but don’t incur any debt in the process. COST OF EQUITY RELEASE According to moneysaving expert.com, a lifetime mortgage equity release typically has an interest rate of c.5%, but some rates are under 3%. This is a lot higher than rates on regular mortgages. E.g. With a 40% deposit you can now get a 5 year fixed rate mortgage of just under 1.4%, just to give you an idea. If you release equity at a rate of 5% then the amount you owe would double every 14 years (see my article on the rule of 72); so if, say, you borrow 20,000 on a 120,000 home, if you live until 74 you’d owe around £40,000, live until 88 and you’d owe £80,000 and live until 102 and you’d owe 160,000. As well as the cost of the interest, don’t forget that you'll have to pay arrangement fees when you take out the mortgage and in the UK these range from £1,500-£3,000 depending on the mortgage deal and including things like solicitors and surveys. ALTERNATIVE As you have 5 years until retirement, you could try to boost your savings over the five years so that rather than borrow money you’ve saved for it. If you don’t feel you earn enough to save the amount you want you can look at things like renting rooms in your home via AirBnB or by getting a more full time lodger. I would personally find it very scary to go into retirement with debt because the need to keep with payments or even the knowledge that I don’t actually own my home but if you are more comfortable with the idea then this won’t be a consideration for you. My biggest advice would be get professional advice before you take this massive step and do whatever you can to avoid having to do it. A debt-free retirement is a peaceful retirement. Much love and thanks for being a long-time follower. See the linked article on equity release on the moneysavingexpert.com website. Heather x p.s. subscribe to my podcast and ask me any money question, HERE - do it now!
Hi Heather, just discovered your podcast and blog. Really inspiring. Could I ask a question?
I have about £10k to invest and I’m considering three options. I’d really appreciate your help in deciding what to do.
Any advice would be hugely appreciated. Many thanks Nik M 
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:
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:
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.
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. 
HORIZON / FLEXIBILITY
With a SIPP you have access to the money from age 55. Unless you are 100% sure you don’t want to retire before age 67 or even to part-retire then you don’t need earlier access to the money. With the money in a taxable brokerage account you can draw the full gross amount invested in one go, if you like. There would be tax to be paid but you would still have the full amount if you wanted it. You can reduce the tax amount due from a full drawdown if you put half i.e. £5k into your own investment account and half into a spouse’s investment account. You can avoid tax completely by putting the full £10k into an ISA (the annual limit is £20k so you would be within that). INHERITANCE If you have all your assets in a defined benefit pension plan then your dependents don’t have access to those assets except to the extent defined by the plan. For Alpha, if you die before your spouse then I believe your spouse continues to get 37.5% of what you would have got and children only get a benefit if they are under 18 or under 23 and in full time education. With a SIPP your family gets everything invested and under current tax law money sitting in a pension is protected from inheritance tax if you die before the age of 75 (this could change given the tax rules are constantly changing). So, as basic example, if you died at the age of 67– in 24 years just before you could claim any pension, if your 10k had been invested in:
I apologise that this response is so full of numbers but this is essentially all the things you need to think about and the numbers are pretty important when we are thinking about pension and retirement options. IN SUMMARY If having access to a few pots of money before the age of 67 is important to you or if passing on some cash to dependents matters, then Alpha is not attractive. If you are risk averse and want to ensure you have a comfortable, guaranteed inflation-linked pension pot then plough the £10k into the Alpha pension plan as this would suit your risk tolerance better. I hope this helps! Heather Have a money question for me?
If you have any personal finance questions send them to [ME] – I respond to all emails but there can be a lag of a few weeks between me getting a question and responding to it as I try to give very comprehensive responses.
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:
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:
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:
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:
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
Hargreaves Lansdown
iWeb
Vanguard
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 Have a money question for me?
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
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:
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:
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:
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?
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?! If you are enjoying listening to my podcast, please give me a 5* rating wherever you listen to podcasts. If I don’t yet deserve your 5*, please let me know how I can earn it. I hope this helps! Heather Have a money question for me?
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.
 What's the point of saving?
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:
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 Have a money question?
 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. One factor that fascinates me is that the US doesn't have a national state pension system. This means old people have to claim social security benefits to get by. This is important because in the UK and other developed economies you get the state pension based on your tax contribution history, it's essentially a prize for working hard during your life and whether you've got millions in the bank or not, you're entitled. You can even claim your state pension if you are still working when you reach retirement age. In the US, you have to claim social security in old age in the same way you would if you were unemployed. There is no State reward for having been a long-standing tax payer when you reach retirement age in the US. RETIREMENT STATISTICS FOR THE US OVERALLWhilst the graphic below shows that the US is one of the best places for social connections and mental well being in old age, it is the third worst country in the list for old age poverty. Only Australia and Japan are worse, even India a country far behind the US in development has better relative poverty in old age.  
What proportion of an old person's income does this form?
RETIREMENT AND WEALTH FOR AFRICAN AMERICANS"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. Wealth by Race 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 SavingsLiquid 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.  HomeownershipHomeownership 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).  Student DebtDebts 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?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:
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 What’s The Amount of The UK State Pension?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:
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. How Much Does The Average Pensioner Actually Have In The UK?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:  What Do The Pension Savings of Workers In The UK Look Like?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.  What Proportion Of Pensioners Own Their Home Outright? 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:
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. Have a business or life question you want me to answer? Please email it to me with the subject “Question”. Note that all such questions will be answered as a blog post and will be sent to my full email list.
Want to start a business? Check out The Money Spot Program. 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 |
Heather on WealthI enjoy helping people think through their personal finances and blog about that here. Join my personal finance community at The Money Spot™. Categories
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Heather Katsonga-Woodward, a massive personal finance fanatic.
** All views expressed are my own and not those of my employer ** Please get professional advice before re-arranging your personal finances.