This client came to see me to seek advice on how much she needed to contribute to her pension. Her company were making employer contributions into a company pension. She wanted to know whether she should and how much she should be contributing in order to achieve her desired income in retirement. She had one other pension with a previous employer. She was married with two young children.
Work I Carried Out
The first thing I did was to project forward the couple’s expenditure to retirement age and adjust for items such as mortgage payments, life assurance and school fees that would no longer need to be paid. This gave an idea of the level of pension income that would be needed to cover the likely outgoings. I then projected forward the potential pension pot she might have by the time she retired based on employer contributions continuing at their current level and a small amount of growth in the pension fund investments.
This gave a projected ‘pot’ at retirement age. I then used current annuity rates to give an idea of the sort of pension income that this size ‘pot’ might generate if she were to buy an annuity. (An annuity gives a guaranteed income for the rest of your life. It may not be the choice you make at retirement but is easy to ‘model’). It was then possible to compare the projected income with the projected outgoings to see what the size of the ‘gap’ was likely to be. This could then be translated back to assess how much her employee contributions needed to be.
The next step was to see if this was affordable given the couple’s current income and expenditure and to look at other considerations such as tax planning. Tax considerations also needed to be taken into account when looking at how she would draw her retirement income. As a result of this analysis I concluded that they should also start to build up her spouse’s pension. This would mean that he could build up a retirement fund and take retirement income that would be taxed separately and probably at a lower rate.
Value to the Client
The client now has peace of mind that she will be saving sufficient to provide her a comfortable income in retirement. This is being done in the most tax efficient way when considering both pension contributions and retirement income.