Saving enough to stop work

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Registered address: First Actuarial LLP, Mayesbrook House, Lawnswood Business Park, Leeds, LS16 6QY
Saving enough to stop work
Delivered to CIPP tutors, 9 July 2016
David Joy
Founder, First Actuarial LLP
david.joy@firstactuarial.co.uk
0780 389 2266
www.firstactuarial.co.uk

This presentation belongs to First Actuarial LLP.
Our mission to is to help improve financial literacy and we think a
really good way to do this is through the workplace.
If your company is interested in financial education please do get in
contact with us to find out how we can help you to help your
colleagues.
We want to spread our message. But it takes time to come up with
good ideas for delivering effective financial education. So if you do
wish to use the slides or ideas in this presentation, that’s fine too, all
we ask is that you always acknowledge First Actuarial LLP as the
original source.
Thank you, and enjoy the presentation.
David Joy
Founder, First Actuarial LLP
david.joy@firstactuarial.co.uk
0780 389 2266

3
Who am I?
Help you think about your
pensions and savings
Not a salesperson
Independent

Tax doesn’t need to be taxing…
Warm up1

£25,000 Salary
NI 12%
Tax 20%
NI 12%
Tax 20%
Tax at 0%
Tax at 0%
Salary
£25,000 Salary
Salary
£25,000 Salary
Salary
Tax 20%Tax at 0%
£0 £8,060 £11,000 £43,000
Nat’l Ins 2%
Tax 40%
What you
take home
Salary
£25,000
Tax of
£2,800
NI of
£2,033
Nat’l Ins 12%
Take-home of £20,167
Nat’l Ins 0%
How tax works on your salary…
Income tax
Nat Ins

£25,000 Salary
Tax at 0%
Nat’l Ins 2%
Tax 40%
What you
take home
NI £6
£50
£50£50
NI £6
Tax £10
NI £6
Tax £10
NI £6
£34
Nat’l Ins 12%
Tax 20%
Nat’l Ins 0%
How tax works on £50 of your salary…
£0 £8,060 £11,000 £43,000
Salary
£25,000
Income tax
Nat Ins

£25,000 Pension
Tax 20%
Tax 20%Tax at 0%
Tax at 0%
Pension
£25,000 Pension
£25,000 Pension
Tax 20%Tax at 0%
£0 £8,060 £11,000 £43,000
Nat’l Ins 2%
Tax 40%
What you
take home
Pension
£25,000
Tax of
£2,800
Nat’l Ins 12%
Nat’l Ins 0%
Income tax
Nat Ins
How tax works on your salary…pension…

Do I need to worry about inflation…?
Warm up2

What am I saving for?

Why we save
Do I need to worry about inflation?
Need to worry? No Probably Definitely
Price of pizza from
leading take away
Today? 1 year? 5 years? 15 years?

What are we going to talk about?
Closing the gap
Having enough money to stop work
What money are you building up?
Action plan

• Lots of research
– 50% to 75% of your current salary
– This is a large range
– What is right for you?
– Think this through with your partner
12
How much money will
I need to stop work?

13
Holidays
Long term care
(you or parents)
Leisure
Heating
No mortgage
Children finally
left home
No National
Insurance to pay
Don’t have to save
for retirement
Spending might reduce Spending might increase
Having enough money to stop working

Hello, my name is Danni
I am 45 (1970) and have been in the
CIPP NEST DC scheme for 2 years
My salary is £25,000
I’ll show you how I’m going to work out
how much I need to stop work.
This will help you do the same…

Extra 2 holidays
£3,000 pa
Use house for care
£0
Extra Leisure
£1,000 pa
Extra heating
£1,000 pa
Save mortgage
£6,000 pa
1 Child
£5,000 pa
No NI
£2,000 pa
Save pension conts
£1,000 pa
Spending might reduce Spending might increase
Danni - £25,000 pa
TOTAL
£14,000
TOTAL
£5,000
TOTAL REDUCTION = £9,000
TARGET INCOME = £16,000

How much for Danni - £16,000

Other savings Cash, shares
ISAs
Other sources Inheritance, buy-to-let, own home
CIPP NEST pension
State pension
CIPP contribution plus what you pay
Other pensions
Basic State Pension
New State Pension
From other employments

State Pension

Background to State Pensions
2015 position New from 2016
Basic State Pension - £6,029 a year
30 qualifying years
- NI contributions
- Child benefit years to age 12
Better of own and 60% spouse’s
State Second Pension (S2P)
Complicated formula “New State Pension”- £8,000 a year
35 qualifying years
No use of spouse’s
Need at least 10 years to get any
BR19 form can be useful if you have complicated employment history

State Pension – what has Danni built up
Built up to date
State pension date
Forecast at SPA

22
Going forward, SPA linked with studies of life expectancy
State Pension - when you might get it
Danni born 1970 so
SPA 67 but will be 68

How Danni is working to her target

Your CIPP Pension

CIPP NEST Scheme
Individual pot that builds up
You pay 1% plus whatever
you can afford
You can choose
how it is invested
CIPP pays 1% of salary
There is a default fund in
case you cannot decide

CIPP Scheme- what Danni will build up
26
= £1,000 a
year in today’s
terms, payable
from age 65
£1,000
per year

What income will you build up?
Other Pensions

Other pensions - defined benefit
1. An up to date deferred benefit statement
showing the accrued pension including
revaluation from my date of leaving to now.
2. Confirmation that the accrued revalued pension
calculated above will continue to be revalued
between now and my retirement age.
3. The earliest age at which all of my pension can be
taken without reduction.
Example:

Sample letter for defined contribution pension
To: the Trustees of the XYZ Pension Scheme
<<Date>>
Dear Sirs
Name: John Smith
National Insurance Number: AB123456C
Date of Birth: 1 January 1960
Please can you send me the following information about my deferred pension in the scheme:
1. An up to date pension statement showing the most recent fund value.
2. A projection of what this might be worth at age 65, in today’s terms based on standard
assumptions.
3. Details of the funds in which it is invested
4. The annual management charge being applied
5. Any other charges being applied
Yours faithfully
Other pensions - defined contribution
1. An up to date benefit statement showing the most recent fund
value.
2. A projection of what this might be worth as a pension at age
65, in today’s terms assuming standard assumptions.
3. A summary of the investment funds being used.
4. Confirmation of the annual management charge that applies
to each of the funds.
5. Any other charges that apply.
Example

• So, you have saved incredibly hard and have £200,000
in your all your pension pots after taking your tax free
lump sum
• You’ve decided not to buy an annuity
• You’ve even heard you can take it all in one go…
• So should you…?
A word of warning…

Don’t let the freedoms free you from your cash
First Actuarial’s Tax muppetometer

The small print
We have used 2015/2016 tax allowances, ignored investment returns and inflation and not tried to predict how
HMRC might bend the rules in the future, which they undoubtedly will. Allowing for these might change the
numbers a bit, but would also make the model less user friendly although we doubt the underlying messages
would change. Namely, spreading your DC pot over a number years will, for most people, mean paying less tax.
Don’t let the freedoms free you from your cash
First Actuarial’s Tax muppetometer

Other savings

Other savings:
38
Unilever share schemes
Stocks and Shares ISA
Cash ISA
Shares held personally
Cash
Other savings
Total current value of long-term savings
Current value of other savings
You Your Partner

Other savings: income?
What income might this
produce when you want
to stop work?
Assume a retirement of 25 years from age 65.
So divide your total assets by say 25.
Danni has £50,000 from all sources, so around £2,000 a year.

How Danni is working to her target
Gap

Closing the gap
• Options
1. Pay more
2. Work longer/retire later
3. Accept lower standard of living in retirement

Putting £34 of net pay
into CIPP NEST DC
Scheme
Basic rate taxpayer
Net cost to
you
Tax and NI
Saving
Total amount
to be
invested
Get back
after tax
(basic rate
taxpayer in
retirement)
Ordinary
contributions £34 £8 £42 £36
Salary sacrifice
contributions £34 £16 £50 £42
Closing the gap: Paying more
How tax works on different forms of savings: the figures
So, ISA or Pension?
ISA £34 - £34 £34
55
LISA £34 £8 £42 £42

But what about debt…?
Nearly there…

Type of borrowing Typical long term APR
Mortgage 2% - 5%
Student loan 1.5% - 7%
Personal loan 3% - 10%
Agreed bank overdraft 20%
Credit card/Store card 20% - 30%
Spreading insurance 35%
Bloke with a big dog An arm and a leg
Payday loans 1500%*
Closing the gap
What if I also have debts?
Borrow £5,000 over 5 years Per month Total paid Interest paid
5% APR £94 £5,640 £640
20% APR £128 £7,680 £2,680
Payday loan 1500% APR £1,300 £78,000 £73,780
£2,000
more
£73,000
more vs
5% APR
0% deals?

0-4 months of salary/
in control/low interest
Consider best savings options
5-8 months of salary/
interest increasing
Avoid building up further debt
Focus on reducing debts with highest APR
9+ months of salary and
in arrears/out of control
Pay priority debts (rent/mortgage)
Seek advice from Citizens Advice or Step Change
Amount of debt Action
Closing the gap
What if I also have debts?

Closing the gap: retiring later
Other pensions- what Danni will build up
= £1,000 a
year in today’s
terms, payable
from age 65
= £?,??? a
year in today’s
terms, payable
from age 68
£1,150 a
Rule of thumb:
If not paying in anymore,
each year earlier/later changes
amount by 5%
Earlier: -5% a year
Later: +5% a year
So in Danni’s case – 65 to 68
means 3 years later:
So 3 x +5% = +15%
So £1,000 x 1.15% = £1,150 pa
£1,000
per year at 65

Closing the gap
• Options
1. Pay more
2. Work longer/retire later
3. Accept lower standard of living in retirement
• Reality
1. Do a bit of all 3 options…?

Action Plan
• Work out some broad figures
– What income you might need
– What you’re already building up
– Involve your partner
• How can you close the gap?
– Make sure expensive debt is addressed
– Consider features of different savings areas
• Review on regular basis
• Take some action

Disclaimers and warnings
• This material has been prepared by First Actuarial LLP (FA) who take full responsibility for it
• FA are not financial advisers but are regulated by the Institute and Faculty of Actuaries in
respect of a range of investment business activities.
• Any figures in this presentation are illustrations only and are designed to explain how various
investments including pensions and shares schemes operate.
• The content of this presentation is designed to provide you with helpful information
regarding retirement planning issues and nothing in it should be regarded as providing you
with any specific advice or recommendations.
• The CIPP NEST DC Scheme is governed by its Trust Deed and Rules and relevant legislation.
More detailed information about the scheme is available on request.
• If you require specific advice or help regarding your financial planning, please contact an
Appropriately Qualified Financial Adviser.
54

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Saving enough to stop work

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