Pensions - Are we paying in enough? Should we be doing more?
Discussion
A little background, I'm 29, wife is 27, we earn £48k pa between us. I've been paying in to my pension since around 19, I pay around 3% and so does my employer, so around £220 a month paid in to the pension. My wife has only just started a private pension, no company scheme, just set up by us, paying in £80 a month. £300 a month between us total.
Our only other form of saving is £100 a month each in to the company share scheme (after 3 years company matches amount, and after 5 years tax free withdrawal), effectively +-£250 each a month after 5 years. I have around £9k in so far, just over 3 years 3 months since starting, and my wife has just started.
I've just been reviewing our financial situation a bit and realised after reading up on pensions on MSE etc, and it doesn't seem like we're paying in anywhere near enough to our pensions! Using MSE's spreadsheet I've calculated our spending and after going out, fuel, food, clothes, everything basically, we seem to have around £900 a month spare cash which is currently spent in fits and spurts on home improvements, holidays, gadgets etc. It looks like some of this would be more wisely spent saving for retirement.
Should I increase our pension input? Should we save into an ISA instead and leave it until retirement? (We don't have any ISAs). Should we not touch the shares until retirement? (This was going to be my Porsche fund in a few years!)
Any input or advice greatly appreciated.
Our only other form of saving is £100 a month each in to the company share scheme (after 3 years company matches amount, and after 5 years tax free withdrawal), effectively +-£250 each a month after 5 years. I have around £9k in so far, just over 3 years 3 months since starting, and my wife has just started.
I've just been reviewing our financial situation a bit and realised after reading up on pensions on MSE etc, and it doesn't seem like we're paying in anywhere near enough to our pensions! Using MSE's spreadsheet I've calculated our spending and after going out, fuel, food, clothes, everything basically, we seem to have around £900 a month spare cash which is currently spent in fits and spurts on home improvements, holidays, gadgets etc. It looks like some of this would be more wisely spent saving for retirement.
Should I increase our pension input? Should we save into an ISA instead and leave it until retirement? (We don't have any ISAs). Should we not touch the shares until retirement? (This was going to be my Porsche fund in a few years!)
Any input or advice greatly appreciated.
Well done for making the effort!!
Your wife's contribution will be grossed up by the government to £100.
Keep chiselling away - unfortunately life expectancy well in to your 80s or even 90s is working against you ironically so keep chiselling away.
No harm in enjoying your current lifestyle but be mindful of big ticket items like house moving or kids that will derail you for a period of time
Your wife's contribution will be grossed up by the government to £100.
Keep chiselling away - unfortunately life expectancy well in to your 80s or even 90s is working against you ironically so keep chiselling away.
No harm in enjoying your current lifestyle but be mindful of big ticket items like house moving or kids that will derail you for a period of time
You're doing well, nice one. Bear in mind that access to a personal pension is intended to trail state pension age by ten years, so you might not get your hands on it until aged sixty or so.
If you're a basic rate taxpayer now, why not consider salting it away in an ISA for the moment until you pay higher rate tax, at which point you could switch it into the pension and get more relief? As alluded to by Simpo, predicting what the state has in mind for the pension wrapper is a bit like predicting the weather.
Try and equalise the income in retirement for you both, be tax efficient with income too - as well as contributions. There's nothing to lose by not making massive deviations in your savings thrust right now; stay light on your feet until the uncertainty surrounding the pension wrapper clears a little, at which point you can make an informed decision about how to save.
The state seems to have cooled a little on the idea of a pension ISA but the fact you're thinking about the future bodes well.
If you're a basic rate taxpayer now, why not consider salting it away in an ISA for the moment until you pay higher rate tax, at which point you could switch it into the pension and get more relief? As alluded to by Simpo, predicting what the state has in mind for the pension wrapper is a bit like predicting the weather.
Try and equalise the income in retirement for you both, be tax efficient with income too - as well as contributions. There's nothing to lose by not making massive deviations in your savings thrust right now; stay light on your feet until the uncertainty surrounding the pension wrapper clears a little, at which point you can make an informed decision about how to save.
The state seems to have cooled a little on the idea of a pension ISA but the fact you're thinking about the future bodes well.
I'd look at it a slightly different way. When do you want to retire and how long do you think you'll live for? The first question is perhaps easier to answer than the second! Let's say you wanted to retire at 55 and thought you might live until 85, in that case your 'pension' would need to last 30 years. Next, how much do you think you'd want to spend each year? Assume you won't have a mortgage and no need to save (and let's conveniently leave tax on this income off for now). Let's say you felt like 20k/year would be sufficient.
The next bit is more tricky but this is my approach... I ignore inflation - by that I mean that any money I have invested (shares, property, funds, whatever) will over time do better than inflation. By not taking inflation into account I'm giving myself a worst case scenario, but for now that's better than being too optimistic. So, 20k/year over 30 years would mean I'd need a pot of 600k. That's in today's money - now you've just got to work out if you can save (into whatever vehicle suits you) to get to that figure by the time you want to retire.
There are a few things to remember from the above though...
- you don't know when you'll die
- I've not taken into account any tax you'd have to pay on the income
- hopefully, your investments (post retirement) will grow by more than inflation (so you'd need less in total), although this 'may' be negated by payable tax
- also hopefully, there will still be a state pension of some sort to supplement your own pension
There's no easy answer to all this and what suits one person may not suit another. The fact you're saving and thinking about it is really positive but don't underestimate how much you'll need.
As an aside, I have a friend who earns about 30k/year and thinks their working life will be about 30 years. They also think they'll live for another 30 years yet want 30k/year pension!!!
The next bit is more tricky but this is my approach... I ignore inflation - by that I mean that any money I have invested (shares, property, funds, whatever) will over time do better than inflation. By not taking inflation into account I'm giving myself a worst case scenario, but for now that's better than being too optimistic. So, 20k/year over 30 years would mean I'd need a pot of 600k. That's in today's money - now you've just got to work out if you can save (into whatever vehicle suits you) to get to that figure by the time you want to retire.
There are a few things to remember from the above though...
- you don't know when you'll die
- I've not taken into account any tax you'd have to pay on the income
- hopefully, your investments (post retirement) will grow by more than inflation (so you'd need less in total), although this 'may' be negated by payable tax
- also hopefully, there will still be a state pension of some sort to supplement your own pension
There's no easy answer to all this and what suits one person may not suit another. The fact you're saving and thinking about it is really positive but don't underestimate how much you'll need.
As an aside, I have a friend who earns about 30k/year and thinks their working life will be about 30 years. They also think they'll live for another 30 years yet want 30k/year pension!!!
Funnily enough I was looking at this yesterday.
It's scary when you realise how big your pot has to be, and when you think (probably) how little most people are paying into it. There are going to be a lot of people when I retire (I'm 42 now) who will have next to nothing without government help.
No advice from me as I'm not a specialist but what's here seems good and you're at the right age to address it.
It's scary when you realise how big your pot has to be, and when you think (probably) how little most people are paying into it. There are going to be a lot of people when I retire (I'm 42 now) who will have next to nothing without government help.
No advice from me as I'm not a specialist but what's here seems good and you're at the right age to address it.
I have around £8k per year going in to a pension, and my other half is a teacher so has a final salary type arrangement. We're late twenties.
Even then the calculators make it look a bit bleak for retirement!
Generally speaking they're not a fantastic investment unless you get good employer contributions.
Even then the calculators make it look a bit bleak for retirement!
Generally speaking they're not a fantastic investment unless you get good employer contributions.
blank said:
Generally speaking they're not a fantastic investment unless you get good employer contributions.
Pensions can be invested in anything you like, so they're as good as any investment. Plus they have the advantage of being funded by salary before tax, which no other vehicle offers.Personally I now limit my pension on the basis that I fear govt rule changes. I still pay in (around 10%) but I do not plan to increase it any time soon. Other than the (lower rate) tax benefit the fact it could be almost impossible to get to my money (when I want too) is a big problem. (I am self employed)
We have gone down the BTL route now with c.30% mortgage. This means the rental income will pay off the mortgage in the next 5 years leaving us at 40 ish with a decent rent coming in which we will probably just plonk into ISAs from 40 to 55.
We do not want to work beyond 55, I stated full time work at 17. I don't earn a fortune but you do have to plan way, way ahead and at times it seems like a lot of money to put in. I have friends who only started working full time in their late 20s and they are now in their mid 30s with little to no pension. Scary stuff.
We have gone down the BTL route now with c.30% mortgage. This means the rental income will pay off the mortgage in the next 5 years leaving us at 40 ish with a decent rent coming in which we will probably just plonk into ISAs from 40 to 55.
We do not want to work beyond 55, I stated full time work at 17. I don't earn a fortune but you do have to plan way, way ahead and at times it seems like a lot of money to put in. I have friends who only started working full time in their late 20s and they are now in their mid 30s with little to no pension. Scary stuff.
blank said:
I have around £8k per year going in to a pension, and my other half is a teacher so has a final salary type arrangement. We're late twenties.
Even then the calculators make it look a bit bleak for retirement!
Generally speaking they're not a fantastic investment unless you get good employer contributions.
'Generally speaking' that's a totally meaningless comment, as you can invest in pretty much anything you like and will also be getting tax breaks on top!Even then the calculators make it look a bit bleak for retirement!
Generally speaking they're not a fantastic investment unless you get good employer contributions.
sidicks said:
blank said:
I have around £8k per year going in to a pension, and my other half is a teacher so has a final salary type arrangement. We're late twenties.
Even then the calculators make it look a bit bleak for retirement!
Generally speaking they're not a fantastic investment unless you get good employer contributions.
'Generally speaking' that's a totally meaningless comment, as you can invest in pretty much anything you like and will also be getting tax breaks on top!Even then the calculators make it look a bit bleak for retirement!
Generally speaking they're not a fantastic investment unless you get good employer contributions.
LoxleyArcher said:
Our only other form of saving is £100 a month each in to the company share scheme (after 3 years company matches amount, and after 5 years tax free withdrawal), effectively +-£250 each a month after 5 years. I have around £9k in so far, just over 3 years 3 months since starting, and my wife has just started.
I'd be wary of this. Sinking all your money into the company could be dangerous, and is one reason why they probably offer such great incentives! My uncle ploughed many many many thousands into Kodak share options etc as in the 70s 80s and some extent the 90s no-one could have foreseen such a massive company would go down the pan, which it did. (He was some kind of high-up manager type). I don't know the exact details but I know he was buggered. Look at the banks, even - who would have thought they would go bankrupt?IMO think twice since you're also getting your missus to invest in the same pot!
Thanks for all the replies guys, very helpful and it looks like as suspected there aren't any hard and fast rules!
As far as mortgage goes, we recently re-fixed for 5 years. Our remaining term was 26 years but we knocked that down to 20. Unfortunately our Post Office/Bank of Ireland mortgage is rather pants in terms of overpayment, you can overpay but all it does is reduce your monthly payments from that point, so no reduction in term length, rather pointless. Should have thought about that more at the time I guess but we will have to review it in 5 years and not make that mistake again. At least we have kind of forced ourselves to overypay by reducing the term by 6 years.
Going forward I think the point about equalising our pensions is a good one, so perhaps another £150 a month in to my wifes pension would be a good idea? I think I will keep mine as is for the moment as I am matching the max. employer contribution. In addition, I think we should start an ISA and pay £250 a month in to this, just as another savings pot for retirement. If we combine this with the share scheme of +-£500 a month after 5 years, how would that sound?
I take your point CoolHands about the shares, there is a definite risk of our £200 a month disappearing at some point, but I think the return will be worth it. Our company is a reasonably diverse FTSE250 multi disciplinary consultancy, so nothing too small and therefore more risky?! The Kodak point is a good one though, it could all go tits up!
As far as mortgage goes, we recently re-fixed for 5 years. Our remaining term was 26 years but we knocked that down to 20. Unfortunately our Post Office/Bank of Ireland mortgage is rather pants in terms of overpayment, you can overpay but all it does is reduce your monthly payments from that point, so no reduction in term length, rather pointless. Should have thought about that more at the time I guess but we will have to review it in 5 years and not make that mistake again. At least we have kind of forced ourselves to overypay by reducing the term by 6 years.
Going forward I think the point about equalising our pensions is a good one, so perhaps another £150 a month in to my wifes pension would be a good idea? I think I will keep mine as is for the moment as I am matching the max. employer contribution. In addition, I think we should start an ISA and pay £250 a month in to this, just as another savings pot for retirement. If we combine this with the share scheme of +-£500 a month after 5 years, how would that sound?
I take your point CoolHands about the shares, there is a definite risk of our £200 a month disappearing at some point, but I think the return will be worth it. Our company is a reasonably diverse FTSE250 multi disciplinary consultancy, so nothing too small and therefore more risky?! The Kodak point is a good one though, it could all go tits up!
CoolHands said:
LoxleyArcher said:
Our only other form of saving is £100 a month each in to the company share scheme (after 3 years company matches amount, and after 5 years tax free withdrawal), effectively +-£250 each a month after 5 years. I have around £9k in so far, just over 3 years 3 months since starting, and my wife has just started.
I'd be wary of this. Sinking all your money into the company could be dangerous, and is one reason why they probably offer such great incentives! My uncle ploughed many many many thousands into Kodak share options etc as in the 70s 80s and some extent the 90s no-one could have foreseen such a massive company would go down the pan, which it did. (He was some kind of high-up manager type). I don't know the exact details but I know he was buggered. Look at the banks, even - who would have thought they would go bankrupt?IMO think twice since you're also getting your missus to invest in the same pot!
For most people, a SAYE share option scheme in the company that they work for is a fantastic way to save that can often be easily converted back into cash, to spend or diversify into another uncorrelated investment, to avoid having 'all their eggs in one basket'.
sideways sid said:
Nobody forces you (or your uncle) to keep the shares that you have bought at a discount!
For most people, a SAYE share option scheme in the company that they work for is a fantastic way to save that can often be easily converted back into cash, to spend or diversify into another uncorrelated investment, to avoid having 'all their eggs in one basket'.
Don't you normally have to hold the shares for a certain period as otherwise the tax benefit is given up?For most people, a SAYE share option scheme in the company that they work for is a fantastic way to save that can often be easily converted back into cash, to spend or diversify into another uncorrelated investment, to avoid having 'all their eggs in one basket'.
sidicks said:
blank said:
As in once you've maxed out employer contributions you'd be better off over paying mortgage/saving for a house deposit/paying off debt than making extra contributions on top.
Still wrong in many cases!pension is the quickest way of saving for me over the last 15 years ...I get an employer match + tax back, means ive turned £1000 into £2400 before it goes into the stock market. My mortgage is 2% and I do overpay so it will be gone in 1/2 the time, but the pension is still most tax efficient and a lot more interesting now you dont *have* to buy an annuity with the pot.....
bogie said:
How come? do you get 40% tax relief on those too ?
pension is the quickest way of saving for me over the last 15 years ...I get an employer match + tax back, means ive turned £1000 into £2400 before it goes into the stock market. My mortgage is 2% and I do overpay so it will be gone in 1/2 the time, but the pension is still most tax efficient and a lot more interesting now you dont *have* to buy an annuity with the pot.....
Very much depends on the interest rate being charged on the mortgage!pension is the quickest way of saving for me over the last 15 years ...I get an employer match + tax back, means ive turned £1000 into £2400 before it goes into the stock market. My mortgage is 2% and I do overpay so it will be gone in 1/2 the time, but the pension is still most tax efficient and a lot more interesting now you dont *have* to buy an annuity with the pot.....
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