# What kind of retirement would a fully funded pension pot provide?



## Blackrock1 (6 Dec 2021)

Say you had a employer scheme with €2m in it, how does that shake out at retirement, you can take 200k tax free, another 300k at 20% which you would do,

what kind of monthly income with the remaining 1.5m provide?


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## Laughahalla (6 Dec 2021)

Some use the rule of thumb of dividing by 300 to get gross monthly


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## Sarenco (6 Dec 2021)

€1.5m would buy a 65 year-old male an annuity of around €52,000 pa, with no escalation.


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## Blackrock1 (6 Dec 2021)

Sarenco said:


> €1.5m would buy a 65 year-old male an annuity of around €52,000 pa, with no escalation.


thanks

and assuming state pension is still a factor that adds another 11.5k so circa 63.5k annually.


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## Conan (6 Dec 2021)

Or if you invested €1.5m into an ARF, you would have to drawdown a minimum of 4% (so €60,000 initially) from age 61 to 71 and a minimum of 5% thereafter. But obviously the exact amount of drawdown would depend of the ongoing value of the ARF over the years in retirement.


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## ryaner (6 Dec 2021)

Sarenco said:


> €1.5m would buy a 65 year-old male an annuity of around €52,000 pa, with no escalation.


Is it really that low? 1.5m would last a little over 28 years taking out 52k a year assuming zero interest bonds to hold the balance. That'd bring the person to age 93.


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## Sarenco (7 Dec 2021)

ryaner said:


> Is it really that low?


I’m afraid so.

No obligation to buy an annuity, obviously, if you want to take on the longevity and investment risk.


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## Freelance (7 Dec 2021)

ryaner said:


> Is it really that low?


You might do a little better if you can get what's euphemistically called an Enhanced Annuity (in simple terms if you have a serious medical condition, are a chain smoker etc and you are unlikely to last as long as the average wo/man of your age, you will get a better return - based on the underwriter possibly not paying out for so many years). The difference will be modest but better than nothing.  

On the down side the words "with no escalation" in Sarenco's first post hide a multitude. In simple terms, this means €52k in year 1, the same in year 2, and in fact the same every year until then end. €52k in 2042 or 2052 will almost certainly be worth an awful lot less than €52k in 2022.


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## NoRegretsCoyote (7 Dec 2021)

ryaner said:


> assuming zero interest bonds


The issue is that risk-free bonds have a negative coupon at the moment so you are running to stand still.

An average 65-year-old Irish man only has a 6% chance of living beyond 93 anyway, 50% chance of only living to 83.

Annuities are very expensive insurance against a long life.

I think annuities should be a small part of a retirement portfolio (like 10% to 20%) but for most people equities should be the main component of their ARF. Particularly if they have a house without mortgage and a full state pension.

This has been discussed at length on other threads.


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## Steven Barrett (7 Dec 2021)

If you got a 4% return and lived for 35 years in retirement, you'd get €80,365 before it ran out. 

Of course, the fund won't return exactly 4% each year but you would also have €440,000 from your lump sum to tide you over during those lean times. 


Unless purchasing an annuity (which no one does), your spending if going to be variable through retirement. Of course, household bills will remain the same but you will spend more in early retirement than in later retirement. Most of this is based on health and what you like doing and the cost of that. But the human mind doesn't think like that and people like to think of a fixed amount every year...just like a salary. But you are in the decumulation stage of life now and it is time to spend your savings. People who have accumulated €2m in a pension fund tend not to go mad with spending once the can access it either.  


Steven
www.bluewaterfp.ie


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## AJAM (7 Dec 2021)

I know there are some penalties for having a pension pot greater than 2 million.
But If your pension pot is ~1.99 Million, and you stop contributing, but growth takes it above the 2 Million mark (before you retire) are you still penalized?

Also if you retire and start to draw down your pension pot but your pot grows (after retirement) to above 2 million are you still penalized?


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## aristotle (7 Dec 2021)

I would guess there is a fair chance the 2m threshold will be increased over the next 20 years? So for those at least that far from retirement they shouldn't be worried about exceeding that threshold?


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## Conan (7 Dec 2021)

AJAM said:


> I know there are some penalties for having a pension pot greater than 2 million.
> But If your pension pot is ~1.99 Million, and you stop contributing, but growth takes it above the 2 Million mark (before you retire) are you still penalized?
> 
> Also if you retire and start to draw down your pension pot but your pot grows (after retirement) to above 2 million are you still penalized?


In reality, the fund cap is c€2,150,000 (since the 20% tax on the €300,000 element on the €500,000 lump sum can be offset against the 40% excess of fund tax). It‘s the fund value at the time of retirement that counts (even if you stop contributions earlier). If your fund exceeds €2.15m, then the excess of fund tax is calculated at that stage.
Once you retire, and presumably take the maximum lump sum, any growth in fund value in retirement is irrelevant for the “excess of fund tax”.


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## Sarenco (7 Dec 2021)

AJAM said:


> But If your pension pot is ~1.99 Million, and you stop contributing, but growth takes it above the 2 Million mark (before you retire) are you still penalized?
> 
> Also if you retire and start to draw down your pension pot but your pot grows (after retirement) to above 2 million are you still penalized?


The threshold is effectively €2.15m before the penalties kick in.  It doesn’t matter whether you exceed the threshold due to contributions or investment returns.

The threshold doesn’t apply to ARFs.  So one way to manage this “problem” is to retire the pension early.


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## Sarenco (7 Dec 2021)

aristotle said:


> I would guess there is a fair chance the 2m threshold will be increased over the next 20 years? So for those at least that far from retirement they shouldn't be worried about exceeding that threshold?


I wouldn’t be so sure about that - Sinn Fein are proposing to lower the SFT.


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## Steven Barrett (7 Dec 2021)

aristotle said:


> I would guess there is a fair chance the 2m threshold will be increased over the next 20 years? So for those at least that far from retirement they shouldn't be worried about exceeding that threshold?


It hasn't been increased in line with inflation at all and the threshold has only come down.


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## David_Dublin (7 Dec 2021)

Is it total value of all pension pots? Assuming it is, one might need to get quite strategic about planning if one pot is in a PRB for example, and is 1.2m. And current/active was about 100k but 15 years left of working life. One might want to think about when to retire the PRB to lock in its value for SFT purposes, in order to allow continued tax benefits of funding the active pension without risk of hitting 2.15m.


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## Conan (7 Dec 2021)

NoRegretsCoyote said:


> The issue is that risk-free bonds have a negative coupon at the moment so you are running to stand still.
> 
> An average 65-year-old Irish man only has a 6% chance of living beyond 93 anyway, 50% chance of only living to 83.
> 
> ...


I think the life expectancy rates are a little better than this. The average life expectancy for a male retiring at age 65 is now c20 years (about 24 years for females). The odds of living to age 90 is c45%. So apart from Bond rates, life expectancy numbers mean that Annuity rates are looking increasingly poor value.


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## NoRegretsCoyote (7 Dec 2021)

Conan said:


> The average life expectancy for a male retiring at age 65 is now c20 years


CSO says it's 18.3! I know this is for 2016 and the trend is positive but I doubt it's quite at 20 yet.



Conan said:


> The odds of living to age 90 is c45%.


From these life tables I worked out probability of living to 90 of only 20%.

I'm not an actuary so if I'm doing this wrong please let me know. But intuitively nearly half of 65YO males expected to live beyond 90 doesn't smell right.



Conan said:


> life expectancy numbers mean that Annuity rates are looking increasingly poor value.


I don't think you can really make that inference. Prices are rising because all of us (including you!) are expected to live longer.


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## Conan (7 Dec 2021)

Based on an OECD study in 2021, the average life expectancy for a 65 year old in Ireland is now 22 years (mix of male and female). The male figure was almost 20 years with the female number at c 24.
When I say that Annuity rates are “looking increasingly poor value”, that is borne out by the fact that very few D.C. members now buy Annuities. The current Annuity rate for a male at 65 is under 4%, so in lay mans terms it suggests a longevity period of 25 years ( I know the calculation is not that simple).


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