Are Pensions Worth It?

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  • Are Pensions Worth It?
  • Torminalis
    Member

    I have been getting increasingly skeptical over the last few years about the value of Pensions.

    I have a pension and it seems to change very little in value each year despite putting money into it and I am seriously thinking about stopping contributions and developing an alternative plan of some sort (god knows what).

    The reason for this is to do with several factors and experiences over the last few years:

    My Mothers pension has been reduced to a pittance by recent events, despite putting away a lot of money over the years. Eaten up by fees, instability in the markets and mismanagement she is now looking at a pension of less that £6k per year.
    Working for a large pension provider for the second half of last year, it was widely agreed throughout the staff that pensions were the largest ponzy scheme ever devised and by the time we came to get a state pension, there would be nothing.
    How long will it be before our government has to do something similar to the Spanish who have now spent over 90% of their pension funds buying up their own bonds in a bid to stave off financial ruin and going cap in hand to the ECB.
    We have an aging population and it doesn’t look like a trend that is going to reverse

    So, should I keep paying into my pension?
    How many who have retired consider their pensions to have be a good investment? (and when did you retire, how much did you pay etc…)
    Has anyone formulated an alternative plan to a pension and acted upon it?
    Does anyone have a good reason to be optimistic about their pension?

    Very interested to find out what the collective thinks on this as you have never failed me thus far.

    surfer
    Member

    Its not a yes/no answer. If your company is matching your contributions then given the tax free nature even with charges you are unlikely to get a better deal.
    Those on final salary schemes would be mad not to put into them.
    Its a bit different once your pension pot becomes larger as using your ISA allowance can give you some flexibility when you retires as that income is not taxed.

    Depends on several factors really.

    Torminalis
    Member

    Well I am a freelancer so I am not going to get anything from a company other than what I put in.

    surfer
    Member

    Then you may want to think about something that gives you a tax free income later however contributions into ISA’s are taxed unlike pension contributions.

    Torminalis
    Member

    I think the broader question I am getting at is whether people actually expect all of these pension pots to still exist in 20, 30 or 40 years?

    Might the world have changed so dramatically, as it appears to have done for the Spanish, that we could end up paying into pensions for our whole lives that we never get to redeem?

    Premier Icon Kryton57
    Subscriber

    Then you may want to think about something that gives you a tax free income later however contributions into ISA’s are taxed unlike pension contributions.

    isa’s are not taxed.

    Premier Icon miketually
    Subscriber

    isa’s are not taxed.

    The cash you put in is subject to Income Tax and National Insurance, unlike pension contributions. The interest earned on the ISA isn’t taxed.

    IHN
    Member

    isa’s are not taxed.

    The income you’ve earned before you can put it in the ISA has. Pensions contributions come out of gross income, ISA contributions out of net.

    As a freelancer you can pay the pension contributions straight from your company, reducing your Corporation Tax liability.

    My parents fell into the ‘insufficient’ savings for the future trap so encouraged me to invest in a pension before I was legally allowed to.

    Based on stock market fluctuations to date and two lots of bad advice I now expect to get less than £6,000 per Annum (in todays’ money)

    My plan B is to continue working until I am no longer able to. At that stage I will either no longer care or I may have to consider something drastic such as Dignitas

    Premier Icon Kryton57
    Subscriber

    I get a matching contribution from work, so my pension will be worth double what I put in – worth having. I also take childcare vouchers and health insurance as these are salary sacriice so I save the tax on those.

    I also invest in ISA’s (tax free and a decent rate of interest over an initial period) for next years family holiday and stick a bit in Premium Bonds (you never know, its tax ree and I may win something)

    After my regular savings are distributed, anything left / work bonuses goes into additional mortgage payments.

    Premier Icon Kryton57
    Subscriber

    The income you’ve earned before you can put it in the ISA has. Pensions contributions come out of gross income, ISA contributions out of net.

    yes correct – but isa’s are not taxed. 🙂

    surfer
    Member

    isa’s are not taxed.

    I didnt say they where!

    I said

    contributions into ISA’s are taxed unlike pension contributions

    Premier Icon crispo
    Subscriber

    Im 25 and have been putting into one for the last couple of years since I started working.

    At the minute I put in 5% and company puts in 5% and I don’t pay tax on my contributions. Wether it’s worth it in 40 years time when I come to retire – I don’t know! I’m just looking at it as being a long term savings plan! If I didn’t put it away before it came in my pay cheque I think I would waste it!

    surfer
    Member

    [/quote]I put in 5% and company puts in 5%

    Ditto and it may be that the investment is not managed as well as it could be but given out of every £100 invested I am only contributing about £35 then they would have to be absolutely incompetent for it not to benefit me!

    Premier Icon Kryton57
    Subscriber

    Try this if you want some realism (and a scare)

    http://finance.yahoo.com/calculator/retirement/ret02/

    @ Surfer

    That’s what I thought. As it stands I would have been better off putting my share under the mattress.

    Despite my negativity, everyone should do something. Just remember you can’t foretell the future.

    surfer
    Member

    You could always invest in a SIPP even if you have a company pension. I have reduced the contribution in my company pension to maximise the company matching then I use the rest fro other investments.

    invest in becoming as self sufficient as possible, its the only relatively future proof thing i can think of.

    Premier Icon mikejd
    Subscriber

    I am nearly at pensionable age and am considering my options. I have a personal pension which was transferred from a company scheme many years ago and is currently worth about £100k., This would apparently produce a pension of less than £4k/yr from an annuity which I have to purchase by law.

    A quick spreadsheet showing £100k invested earning 2%/yr and £4k removed each year would last about 37 years by which time I would be 102. If I die before that there would be balance available to my estate. This wouldn’t happen with the annuity. So the annuity doesn’t look too good but I am forced by law to purchase one.

    anjs
    Member

    Well I will be retiring on 2/3 of my final salary at 60

    jota180
    Member

    A lot of benefits are currently means tested, an awful lot of people will never accrue enough of a pension to have more than they would have got anyway, it’s just an extra bonus for the gov.

    surfer
    Member

    This would apparently produce a pension of less than £4k/yr from an annuity which I have to purchase by law.

    You can delay (may not be helpful advice!) but you are not obliged to purchase an annuity from your pension provider AFAIK so you should be able to increase the annual amount to around £5,700 pa by shopping around.

    Annuities explained

    freeagent
    Member

    currently putting away 5% – and my employer matches it.
    I’ve only been doing it 5 years, I’m 40 now.
    Last projection I got from the pension people suggested i’d end up with around 7k pa if I carried on with the same job/grade until I retire.
    I’ve got plans for promotion and on the next level up the company puts in 8%.
    my contributions are ‘salary sacrifice’ so don’t pay NI contributions on them
    We are currently pretty hard-up as have 2 little kids, with one in full time childcare, and a pretty huge mortgage.
    As time goes on, and the mortgage shrinks as part of our income we’ll start overpaying it, and hopefully knock some years off.
    I’d like to purchase a second property to help provide a second income in later life, but not sure i’ll be able to pull the deposit together.

    So in short – I reckon mine is worth it, as what ever the final value, i’ll have put in a lot less than 50% of it.

    jota180
    Member

    As time goes on, and the mortgage shrinks as part of our income we’ll start overpaying it

    The way wage inflation is going, that process is in reverse for a lot of people.

    This would apparently produce a pension of less than £4k/yr from an annuity which I have to purchase by law.

    What he said above, you can effectively leave it in an account and pay income tax as you withdraw it. A good idea if you intend to go out in a blaze of glory the day after your retirement as it leaves the ballance for your kids or the donkey sanctuary. Not so good if you live longer than you budget for.

    I thought most of the means tested benifits were allong the lines of for every £x you earn they took £y off the benefit (usualy arround £1 in £9), so you’d need to earn arround 10x more then the value of the benefit to get nothing?

    jota180
    Member

    I thought most of the means tested benifits were allong the lines of for every £x you earn they took £y off the benefit (usualy arround £1 in £9), so you’d need to earn arround 10x more then the value of the benefit to get nothing?

    Not really looked at the specifics but there are certainly benefits that kick in if income is below a certain level, a pound the wrong side of it and you’re out.
    Who knows how things may be in the future but people that are paid small pensions now are no better off than those without a pension [other things being equal]

    Premier Icon mikejd
    Subscriber

    frazered – thanks for the link to draw-down. I had heard of this and wanted to investigate further. I am presently waiting for an IFA to provide me with a review of my options.

    oldbloke
    Member

    Having received a letter from one pension provider saying that a pot of £25k would give me a £264 annual pension, even my gross salary until the day I retire won’t be enough to provide a decent pension.

    Premier Icon cardo
    Subscriber

    Tricky one this, I’m sceptical too and really want to be proved that it is worth while doing, I re-invested an old defunct company and private pension into a personal pension a few years back and although it costs me a fair amount in contributions every month it is making money (slowly), and you get tax relief on your contributions at 20%…. It’s a gamble but no investments are super safe and savings accounts aren’t doing anything that good either… crystal ball anyone?

    mudshark
    Member

    Higher rate tax payers should definitely be putting money into a pension, others too unless expect to be a higher rate earner later; I have a SIPP with Hargreaves Lansdown who are great. Company schemes with high costs are not very appealing though some are fine these days – my company scheme is with Aviva which isn’t quite as good as my HL SIPP but not far off.

    Torminalis
    Member

    Having received a letter from one pension provider saying that a pot of £25k would give me a £264

    25000/264 = 94.7

    How does that work? Are they expecting you to survive for another 95 years after retirement?

    mudshark
    Member

    saying that a pot of £25k would give me a £264 annual pension

    That’s a tiny pot but £264 isn’t right – maybe a month?

    Premier Icon nickjb
    Subscriber

    I’m a freelancer, too, so no final salary or company contribution options. I’m not a big earner so I just put any spare cash into an ISA. The way I see it, the money is there if really need it for something else, or if I get enough of a pot I can invest in something tangible like property. Contributions come from my taxed income so I’m losing a chunk there but the interest is tax free, there’s no fees and I can do what I like with it. Just have to keep moving every year to get some interest. No idea if it is a good plan.

    lodious
    Member

    Nickjb – It might be worth looking at putting the money in Share ISA’s. The banks are cutting ISA interest rates going forward, so putting money in cash ISA’s is slowly wasting away. If you invest with a tiny bit of sense, you should easily outperform the banks interest rates. Banks are taking the piss at the moment.

    Premier Icon convert
    Subscriber

    The other aspect to consider if you are married is the ability of both partners to benefit. For reasons I don’t entirely understand my father had a pretty generous pension but my mother has a tiny one. Sadly he died at 66 so didn’t get to benefit hugely and she now only gets half as a widow’s pension. She is now having to sell the house as she can’t afford the bills on the new income. The life lesson I learnt was that although investing in my pension is more favourable than my wife’s I don’t want her to be knackered if I go first and early so will be investing either more in her pension or in something like property in the future if that makes more sense when we do the sums.

    hurbum
    Member

    I’m 24, I pay 5.5% of salary and my employer contributes 6% and I bloody hope it’ll be worthwhile! To be honest, if I wasn’t paying that money each month it would only be spent on beer. At least it reduces my taxable income.

    oldbloke
    Member

    saying that a pot of £25k would give me a £264 annual pension

    That’s a tiny pot but £264 isn’t right – maybe a month?

    No – that’s what the letter said – the small print revealed they’d assumed a negative interest rate. I’m still waiting for a response to my query to them on their assumptions.

    mudshark
    Member

    Negative interest rate? Interesting! No point contributing if that was the case.

    You can find online calculators to do the check yourself, looking at my personal one it suggests you’d have about £1k annual income with a fund of £25k at retirement – but in reality you’ll have a lot more than that assuming in your pot by then. If you want to put down some figures we can see – how much you got now, how old are you, how much do you contribute?

    TurnerGuy
    Member

    The life lesson I learnt was that although investing in my pension is more favourable than my wife’s I don’t want her to be knackered if I go first

    that’s a very good point…

    oldbloke
    Member

    Negative interest rate? Interesting! No point contributing if that was the case.

    You can find online calculators to do the check yourself, looking at my personal one it suggests you’d have about £1k annual income with a fund of £25k at retirement – but in reality you’ll have a lot more than that assuming in your pot by then. If you want to put down some figures we can see – how much you got now, how old are you, how much do you contribute?

    I used to be a pension trustee so I know the subject well enough. I saw this as a remarkable piece of poor quality work by a pension provider. I am concerned that people will make incorrect investment decisions in such a case, which is why I’m looking for answers from the company concerned.

    Premier Icon Blackhound
    Subscriber

    I managed to retire at 51 on approximately half pay. I started paying into a final salary pension at 17 and when AVC’s were introduced when in late 20’s I started these as well. Each £1 was matched and I got 20% tax relief on it. I also bought a second house with Mrs B when I was 40 which I got paid off when I was 50.

    My best advice is:
    * Its all about risk. How much do you want to take.
    * Don’t put all your eggs in one basket (I lost some money this way)
    * If your pension includes contributed by your employer tahn this is good.
    * Look at charges. A cash ISA is not necessarily great onterest but it is 100% safe (if less than £85k in one bank)and there are no charges. Look at effect of charges on other products.
    * Look at a share ISA with someone like BestInvest where charges are lower. Where will growth be over next 20-30 years. India? Maybe South America. Get your ISA invested there. I heard China would be the next big thing some years ago and invested there for a few years. I was getting 25 to 32% annual returns for a few years.
    On the last one I had a final salary pension, AVC’s, property and cash savings, the share ISA was a small risk.
    * You can invest in wine, art etc if you know something about it learn about it or get good advice. Not for me though.

    My own view(and unsurprisingly I’m not authorised by the FSA 😀 ) is that unless your employer is also contributing or you’re a higher rate tax payer then you’d have to seriously consider whether a traditional money purchase scheme is worthwhile, the fees, which compound over the life of the pension can be eye watering (10s of thousands).

    I’d be looking at a SIPP or a conventional stocks ISA if I wasn’t a higher rate tax payer or benefitting from employer contributions (unfortunately I only benefit from the latter…)

    It’s worth noting that for an ordinary rate tax payer the ‘advantage’ of tax free contributions is a bit of a gimmick (that keeps the pension industry alive!) as you pay tax on the income, so think of it as deferred tax.
    Dividends from an ISA are tax free, as you’ve already paid tax on the money put in.

    Doing some quick sums, 100k in an ISA (not unreasonable to amass over 30 years) specialising in high dividend stocks would give a tax free income. FTSE100 dividend was 3.75% last year, so that’s £3750 tax free income, plus you’ve still got the 100k worth of equities to leave to your kids, which you don’t get when you buy a traditional annuity.

    Also as others have said, for the guy thinking he must purchase an annuity by law, look at some of the other options like income drawdown etc. you don’t have to by an income, per se.

    Premier Icon binners
    Subscriber

    I was in your situation. Freelance/self employed and paying a serious chunk in pension contributions for years. About 3 years ago, I looked at the statements and concluded that it was a completely pointless exercise paying anything more into it in the present climate. Or for the forseeble future

    Just to repeat what I said on the other thread….

    Does anyone under the age of 50 seriously believe they’re going to have what is presently taken for granted as ‘a retirement’? Then I think you’re living in cloud cuckoo-land TBH

    By the time we reach what is now pension age, the whole concept is going to be regarded as a quaint little late-20th-century anachronism, that was simply mental in its lack of affordability.

    There will be no state pension until you’re 86 or so. Then a subsistence level, possibly involving a blanket and some vouchers for soup.

    And private pensions? Ha ha ha. I’m just waiting for the biblical scale mis-selling by the banks etc to be exposed, as they collectively shrug and explain that having taken all your money for 40 years, things didn’t quite work out as planned, and there’s not much left. And what was left, we paid ourselves in fees. Then a bit more.

    How much return do you think they’re presently getting on ‘our’ investments? Compared to the predictions the private pensions were sold on? Reckon they’ll have stopped taking their fees and bonuses?

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