Can anyone offer me pension advice?

First things first, I don’t really understand how pensions work or all of the terminology. I can get my head around saving, stocks and shares but not pensions.

I had a workplace pension at my last place that I paid something like 4% and my employer paid 3% into a month (or something like that anyway). When I left 2 years ago, my new place didn’t offer a pension scheme so I just transferred the existing pension into a personal Stakeholder Pension and paid £150 a month into. I get tax relief on this so the total going into the pension is £187.50 a month (£2250 per year).

Now my employer has to set up a workplace pension from January 2017. They have agreed to pay into my existing pension so that I only have one fund which from my point of view is nice and tidy but I want to make sure the one fund I have works well for me. I dug out my statements the other day and found that when I retire in 2047 having paid in for 40 years the fund will only be worth £2720 a year.

Obviously the fund will increase slightly because of the extra that will be going into it because of the new workplace pension but I’d have thought that I would be able to get a better return. But I could be wrong on that.

On a year to year (ie pay in for 40 years and take out for 40 years) comparison the return is something like 20% but the return won’t be worked out on a year to year will it as the pot will run dry at some point and I’m not going to live to be 105 years old.

Basically I’ve got 2 questions!
– is this pension working well from the figures I’ve given you?
– should I be moving it to another one and if so what type of pension?

with this sort of pension (rater than final salary etc), there’s 2 parts to consider.

1 : how to save the money
2 : how to spend the money

The two are not linked at all, unless you just follow the defaults your provider gives you.

I think you’ve probably got 3 issues at the moment :

1 : you’re not putting a huge amount into your pension, and that means the ‘pot’ on retirement won’t be huge (limiting income)
2 : annuity rates (an annuity is a fund you can buy that gives you the same amount (or an inflation linked amount) every year, as long as you live. you die early, they keep the rest of the money, you live a long time, you win), are very low at the moment, due to the bonds market. This means that to get an income of £3000 a year or so, you need a fund of £100,000. Historically this figure has been much lower (if you only needed £50k to buy £3k a year, your illustration would show that).
3: your illustration assumes a rate of growth for your fund (the illustration of which is limited to around 7% from memory. It could be higher or lower in real life), It also assumes you’ll buy an annuity when you retire, at todays market rates. Now, you could be on a fund that does well, and annuity rates drop, and you end up with 4x as much as illustrated, or you could find the opposite and you end up with half as much. An illustration isn’t really much help

so – your pension fund (your pension provider can probably put your cash in one of several) might or might not be good. Its worth finding out, but this letter doesn’t say either way. A high risk/high growth fund is normally considered sensible for an investment with this long a life span. You probably also need to pay more in. fwiw I started my pension at 25, pay 18% of my pre-tax salary in (some me, some my employer) and still think I’ll be a bit short when the time comes – fortunately my wife works in the public sector so that’ll make up some of the shortfall

http://www.pensionsadvisoryservice.org.uk

My own pension advise was you should have paid in more earlier and have you considered working till you die ?
On the other hand I was able to get a free overview from an independent financial advisor as I had previously used a firm his took over. It would have been worth paying For the information advise and illustrations he provided.

You will have been worked to death before you reach your pension age.

Invest it in coke and hookers instead

Not an expert but echo what others have said about not paying a lot in. Sadly, many / most of us prefer jam today and the prospect of paying in vast sums when you could be spending it on bikes and girls and booze when we were in our early 20’s is not that attractive.

Rule of thumb is that you should be aiming to put in half your age, in order to manitain a roughly equivalent standard of living after retirement. So at age 20, put in 10%, etc. (combined from you plus employer, and as most do matched or near that would mean about 5% of your money)

If you are going to retire in 2047, I guess that makes you mid 30’s now. So should be paying in 15-20% of income. The £187.50 (gross) you put in would make your salary about £13K; sound right? I suspect not……

Of course, you may decide that you don’t need the same standard of living once you retire, and will have to give up some of it to enjoy it while you can, but that’s really where you need an expert to talk you through illustrations.

IMO focus on mortgage in earlier years then get more interested in a pension once a higher rate tax payer. Use ISAs as long-term planning as well as pensions.

The pension calculators I’ve seen annoy me as assume you want to earn so much % of your salary rather than what you’d need to be OK – and also don’t consider state pension which we might still get one day….

Rule of thumb is that you should be aiming to put in half your age, in order to manitain a roughly equivalent standard of living after retirement. So at age 20, put in 10%, etc. (combined from you plus employer, and as most do matched or near that would mean about 5% of your money)

If you are going to retire in 2047, I guess that makes you mid 30’s now. So should be paying in 15-20% of income. The £187.50 (gross) you put in would make your salary about £13K; sound right? I suspect not……

Never come across that rule of thumb before but I like it. Very easy to understand. Does that total include the state pension i’m paying to via NI contributions?

You are right, I’m 34 now but not on £13k. More like £35k after non-contractual bonuses, maybe more. But I do have 2 small kids, one still in nursery 3 days a week. My wife only works 2 days a week so her income isn’t what it used to be. i.e. my income currently has to work hard. I could probably afford more into my pension but maybe only up to £300 per month.

As above. You are saving very little. You should save more if you can but we appreciate your life situation makes that hard. Also don’t forget you will have a state pension too.

A very simple and crude calculation is to assume zero growth and zero inflation and just calculate how much in total you will put in plus tax relief and thats your pension pot. So 30yrs of paying in £300 a month (including employers contribution) you might expect to get the same back per month in pension, maybe a bit more. As you can see from your original calculation thats roughly about how things stand.

As for investment choices within the pension as you don’t have a great deal of experience it would be best to opt for a broad range of investment whuch I imagine your povider is doing already. Having one scheme in your case makes sense.

Other classic retirement option is to sell your family home and buy something smaller and cheaper when the time comes.

@mud’s comment is a good one, as you are a lower rate tax payer getting mortgage down is probably better than pension

The pensions world is a complicated one in a lot of respects.

With regard to workplace pensions a good rule is to put in the absolute minimum needed to get the company to put in as much as it will. Any money the company puts in is immediate growth and a no brainer.

Putting in more than the minimum is generally not a good idea. Workplaces like yours don’t do it because they want to, they will be doing it because they have to, by law. They aren’t motivated to choose one that will get you the best return, only one that is cheap to put in place. It’s likely you can invest in a better provider outside of work – advice needed.

If you are a high rate tax payer, pensions can be very good as you get full tax relief. If you are only just a high rate tax payer then even better as you get taxed a very small amount extra but all your pension contributions get 40% relief.

How much to save is usually as much as you can afford, which for most people isn’t a lot.

These days you need to bear in mind that when you retire you will have a lot less money to live on, but then you need a lot less money. You, hopefully, won’t have a mortgage and you will have more time to source better deals of food and other things.

You also don’t need as much in a personal pension as you used to need. You don’t have to buy an annuity and you can withdraw the capital which will also gain interest, 25% is tax free, to make it last longer. You may have capital from downsizing and you should get the state pension.

In reality you need proper advice, I’ve just been through all this recently and it’s a lot rosier than I assumed.

I’ve done a very rough calculation now of my salary etc.

If I want to put a total of 15% of my salary into my pension pot I need to make an 11% salary contribution, my employer will make 2% contribution and the rest will be sorted by the tax benefits. This will give me a net contribution of 15.1% of my salary.

Going back to the half your age rule of thumb thing, Martin Lewis has this on his pension information pages: “Take the age you start your pension and halve it. Put this % of your pre-tax salary aside each year until you retire.” Essentially meaning, the earlier you start, the less you have to pay in. I started my pension at 25 so I need to pay in 12.5% but obviously I’m a bit behind where I should be so 15% seems reasonable. Doesn’t it?

Basically, what I’ve learnt today is that I need to pay more into my pension to have a decent standard of living when I retire. If the state pension stays the same when I retire (and I keep paying into it for another 25 years or more) I’ll also be getting £155 per week from the age of 68 too.

Going back to the half your age rule of thumb thing,

I was always told it was pay in half your age as a %age, so as you get older you pay a higher percentage in.

Having said that, I’m 45 and putting more than 50% of my salary into my pension & ISAs and still worried it won’t be enough!

If you are only just a high rate tax payer then even better as you get taxed a very small amount extra but all your pension contributions get 40% relief.

That needs a reference surely?!

I’m 51 and I am spending a lot of time thinking about this at the moment. With only around 10 years left of working (I may continue but I would like the choice) left then I need to ensure I am making the right decisions. My thoughts may or may not be useful.

I have a handful of pensions with previous employers all of which are increasing each year over inflation in spite of me not contributing anymore. I have an estimate of how much they will provide me with at certain retirement age calculations. One is a final salary scheme which makes it valuable.

From my last employment i removed 8 years of contributions which amounted to a good amount which I manage via a SIPP. This allows me to invest as I wish. I dont contribute to this at the moment although it has grown over 20% in the last 8 months. There are risks involved but I monitor this carefully and it is only part of my retirement fund.

I am employed currently in an organisation that offers a very good pension plan and if I stay until I retire then the predicted payout will be quite good. I pay into this as my employer contributes and the benefits far outweigh the post retirement tax implications.

Importantly (and I think a lot of people overlook this) my pensions will provide me with an annual income that will mean I pay income tax I am reluctant invest any more that doesnt outweigh this (see point above about current employer) To reduce this tax liability all my savings go into my ISA fund. This is all invested in Stocks and Shares and also managed (with my SIPP) using III. Any income from this will be tax free and I expect this to provide roughly up to 1/3 of my income.

I also have a “large” house which I will likely sell once my children leave home to free up some equity and that will be used to partly fund my retirement. I wont be mortgage free until I am 55 but post 55 to retirement I will invest my “mortgage” payment to my ISA increasing this significantly in the final 7-10 years.

Bear in mind that post retirement living costs reduce significantly and as much as I would like to cycle/run/travel the likelihood is that you will be less able to do these things or at least do them at a reduced level. Household bills will reduce and if you have 2 cars you will likely only need one etc.

Dont sacrifice too much now to be a rich pensioner. Its about finding a balance.

Just my thoughts.

If you are only just a high rate tax payer then even better as you get taxed a very small amount extra but all your pension contributions get 40% relief.

Nope, only the pay liable for 40% gets tax relief at 40%, the rest just at 20%.

Exactly, some people do have some odd ideas

If you are only just a high rate tax payer then even better as you get taxed a very small amount extra but all your pension contributions get 40% relief.

That needs a reference surely?!

It’s not true. If you pay out of gross salary then it takes care of itself and if you pay out of net salary then you have to do a tax return and that sorts it out.

surfer – thanks for posting that.

Also don’t forget you will have a state pension too.

I would suggest that anyone who has sufficient money to save for a private pension assumes that the state pension will not exist in its current form in thirty to forty years.

I am the same age as surfer and some very good points made. I would just add the following

Diversification – my pension pot is made up of property, dB from old jobs, direct investm3nt in stocks, state pension which I still voluntarily pay into but doubt I will ever see it. I aim for property income to be 50% of the income by 60, so years to gour.

Expected longevity – if both yr parents died in their 60s (obviously not in an accident) then you would have a much different investment strategy than say if they are still in their 80s. I think the avg male now lives to 84 and it is creeping up.

Tax – surfers nailed it. Pointless getting tax relief on contributions only to pay it back when the investment matures. You can get 11k tax free income, 5k dividends outside the Isa, and 11k capital gains free of tax. That’s 27k gbp tax free every year which coincidentally is the same as the avg UK salary. Sorry I may be a bit out on the numbers.

IANAIFA BTW – there’s some brilliant help out there, moneybox, mse, investors chronicle.

Pointless getting tax relief on contributions only to pay it back when the investment matures

Not really as you will be getting growth on the tax relief too so whilst you will pay more in tax, it’s because you’ll also be earning more.

Good point, also a few posts above someone thought they would get the full state pension as well as a private one. I understand the full state pension is discounted by the number of years contracted out. Again I may be wrong which is highly likely

Not really as you will be getting growth on the tax relief too so whilst you will pay more in tax, it’s because you’ll also be earning more.

Plus you may be getting tax relief at 40% but paying marginal tax at 20.

WRT the tax rate, yes you can only get relief for tax that was paid but it is taken off the top so if you “only” pay 40% on the last 400 quid (say) you can still put all that into the pension and get full 40% relief on that, even though your effective tax rate as a proportion of total income is much lower. Which may have been what the original poster meant…the bottom line is that pensions are very tax-efficient for a higher rate payer but not so much for the rest of us.

Actually another tip I heard was if you are a non tax payer you still get the 20% tax relief on pension contributions but capped at c 3k of contribution. It would be a c 600 gbp gift from the government.

Logically not paying tax on pension contributions is fair as its like deferring your income – you’ll get it as income later in life and pay tax on it then. Gov’t likes this as an incentive to defer income from when we have more than we need(?!) to when we’ll have less.

Logically not paying tax on pension contributions is fair as its like deferring your income – you’ll get it as income later in life and pay tax on it then. Gov’t likes this as an incentive to defer income from when we have more than we need(?!) to when we’ll have less.

yes and no, most higher tax rate payers won’t have a pension which is high enough to be liable for 40%, so they’re deferring 40% tax to then pay 20% down the line….

Not that I’m complaining.

Don’t forget you can withdraw 25% of your pension fund tax free also, making it even more attractive.

Anyone else 35 ish and have no pension in place whatsoever??

Anyone else 35 ish and have no pension in place whatsoever??

1 in 7 retire with no private pension provision in 2016….

http://www.cityam.com/239730/this-is-how-many-people-there-are-retiring-this-year-who-have-no-pension-savings

Always told myself I’d start one when I turn 30… 5 yes later still not got round to it!

The only difference between savings and pensions now is that for pensions, the government allows you to save your income in a pension scheme without taxing it, and then you pay tax when you take it out. Assuming your income while working is more then your pension, you’ll pay less tax as a result. You also get 25% of it tax free. In return, you have to lock the money up until you’re a certain age (currently 55, but due to rise to 57 in 2028 and will continue to rise).

There are various ways to invest pension savings, and various ways to take the money (eg, lump, drawdown, annuity..) and lots of companies out there who are determined to take as much as they can from you while pretending to offer a service. The aim is to minimise what you give them.

Firstly, sorry for opening up an old thread but I thought it better this than repeat myself loads.

I’ve just had my yearly statement through which tells me my ‘estimated’ annual taxable pension pot. This year it’s £2540, last year it was £2720 and the year before it was £3239.

Why is it going down? Am I not paying enough into the pension?

Very trivial reality check – if you want to work for 40y and then live another 30 you need to only spend 4/7 of your salary while working and save 3/7 of it to spend later! Ok that ignores the housing cost, you’ll probably have paid off the mortgage.

Two working adults with no children should have no problems. One working adult with a family to support is a whole other kettle of fish.

if you want to work for 40y and then live another 30 you need to only spend 4/7 of your salary while working and save 3/7 of it to spend later!

So my take home pay is about £2000 a month, so I should be putting £850 into a pension per month? Ouch.

Well it depends how much you may expect your investment to grow, and how much less you think you can get by on when older (no mortgage, children left home). But all that “free” money from age 65 onwards has to come from somewhere.

Alternative way of looking at it, with annuity rates round about 4% you need to save up 25x whatever you want your annual income to be.

Just to add my two penn’orth. I’m not a pensions expert but did retire early six years ago at 55. If I could go back 20-30 years knowing what I know now, this is what I would do.

Contribute as much as I could afford each year to an ISA. This is currently £15,240 going up in April 2017 to £20K. If you are married and can afford it do the same for the wife or split whatever you can afford between the two ISA accounts. With that money buy a range of growth and income investment trusts and obviously reinvest any dividends as well.

Eventually when the time comes to retire you will have total control over what you do with the capital and can invest it in high yielding investments to provide a steady income which should grow at or above inflation in perpetuity. It will all be tax free as well on both the capital and income front.

I’m 37 and started a works pension at 30. From snippets I’ve picked up from on here it’s probably not great. Like the poster above, the projected figures for what I could get each year upon retirement has been going down steadily year on year from approx £12.6k down to £6.9k.

Over the 7 years I have had it the plan doesn’t seem to be growing by any amount other than by the amount of the contributions made to it. This despite the projection figures being based around investments growing 6.5% per year.

Starting to get concerned now that I have a useless pension and maybe I should be doing something else instead. I pay in 4% and work pays in 8% but they want to change this so that I pay in 6% and they pay in 6%. I need to go and get advice from somewhere as I am clueless about investments and pensions and the option that exist. The more I read up on them, the more clueless I seem to get!

The thing is who to trust to give you good honest advice?

Never been clear to me that an ISA is really worth bothering with. The annual charge is likely larger than the tax saving for most people, isn’t it?

km79

Your story highlights one of the biggest problems with workplace pensions in that the goalposts are shifting all the time and never usually to your advantage. Unfortunately, that situation is only going to get worse so my advice is to take charge of your own pension arrangements.

I too had what seemed on paper, to be a very good pension scheme from my employer but in hindsight I actually ended up with a pot which was less than my total contributions. Much of what you lose is taken up with management fees of the company running the pension scheme and transfer fees if you (dare to) want to get the money out.

See my previous post about creating your own pension scheme around a stocks and shares ISA. You don’t even have to be a finacial whizz-kid and know what investments to go for as there are loads of good portfolio suggestions on the web. Having said that over twenty years with a bit of reading you should be able to get a good feeling for what works and the beauty of the system is you don’t have to invest your cash until your are ready to.

I just pumped some figures into a spreadsheet and if you can tuck away £10k per year and assuming only a 4% growth rate (v. conservative) then after 20 years you will end up with narly £298k. If you then invest that in income investments yielding 4% you will get almost £12k per annum or £1000 pcm. Over 2 years usually the yearly contributions will go up and you can input your own figures as to what potential pot you might want to end up with.

It’s not rocket science and you don’t need to be a financial genius because compound interest does all the hard work for you for nothing.

Loads of good advice on The Motley Fool forums especially Investing For Income, Investment Trusts & Unit Trusts, High Yield HYP Practical etc.