Pensions, how do they work and which one?
Discussion
Currently i am enrolled in my workplace pension, which to me, looks a bit crap. I pay in 1%, which is matched 1% by my company, which will be rising to 3% over 3 years.
Doesn't really seem worth it to me, my wage is 27k a year, and im currently 23 years old.
Speaking with other people they get much better, pay in 3% And company puts in 12%
Ive not had any advice into pensions, but i think i should be getting better than i am currently.
How do they work?
How much do i need to put in a month to have a comfortable retirement, assuming my wage will increase over the next 50 odd years
What stops them going bust like the royal mail one did a few years back?
Why do you have to pay tax when you retire instead of now?
What happens to the money you put into one?
Are they secured?
Whats the best return for my money?
Wheres my money going to safest?
Any advice is appreciated.
Doesn't really seem worth it to me, my wage is 27k a year, and im currently 23 years old.
Speaking with other people they get much better, pay in 3% And company puts in 12%
Ive not had any advice into pensions, but i think i should be getting better than i am currently.
How do they work?
How much do i need to put in a month to have a comfortable retirement, assuming my wage will increase over the next 50 odd years
What stops them going bust like the royal mail one did a few years back?
Why do you have to pay tax when you retire instead of now?
What happens to the money you put into one?
Are they secured?
Whats the best return for my money?
Wheres my money going to safest?
Any advice is appreciated.
1. You're asking the right questions but you won't like all of the answers.
2. If your employer is offering ANY contribution - take it.
3. The sooner you start the better the long term outcome.
3. You are right, 1% + 1% is not much. It is, however, better than nothing.
4. Don't try to invest in "safe". That's the road to poor returns. You should buy some mainstream stocks and shares fund or alternatively what's called a balanced fund.
5. There's lots of tax relief available. Make the most of it.
6. And this is the bit you won't like - a "decent" pension is likely to cost from about 15% of your earnings. Yes, 15% every month of every year throughout your working life.
But don't be put off. Make a start.
2. If your employer is offering ANY contribution - take it.
3. The sooner you start the better the long term outcome.
3. You are right, 1% + 1% is not much. It is, however, better than nothing.
4. Don't try to invest in "safe". That's the road to poor returns. You should buy some mainstream stocks and shares fund or alternatively what's called a balanced fund.
5. There's lots of tax relief available. Make the most of it.
6. And this is the bit you won't like - a "decent" pension is likely to cost from about 15% of your earnings. Yes, 15% every month of every year throughout your working life.
But don't be put off. Make a start.
Play around with some calculators, one here: http://www.hl.co.uk/pensions/interactive-calculato...
it makes various assumptions that you may or may not take, but at least you get the gist of how big a pot you really need if you want to retire one day...
it makes various assumptions that you may or may not take, but at least you get the gist of how big a pot you really need if you want to retire one day...
As said above, the sooner you start, the better off you will be. Anything is better than nothing.
Don't get too hung up on the 3% - 12% matched: that would be beyond market leading, and very few will have something as good through work.
If you are concerned, speak to an independent pensions advisor. Lots of private schemes out there
Don't get too hung up on the 3% - 12% matched: that would be beyond market leading, and very few will have something as good through work.
If you are concerned, speak to an independent pensions advisor. Lots of private schemes out there
Before you blink you will be 30. Blink again and 40... by then time is not on your side. Defo get it sorted asap.
Don't just look at pensions.
It needs dedication and regular reviews though. Those who are lucky to get excellent pensions via their PAYE don't have these worries!
My last word of caution is inflation.. £10 now is not going to be £10 when you retire!
Don't just look at pensions.
It needs dedication and regular reviews though. Those who are lucky to get excellent pensions via their PAYE don't have these worries!
My last word of caution is inflation.. £10 now is not going to be £10 when you retire!
red_slr said:
Before you blink you will be 30. Blink again and 40... by then time is not on your side. Defo get it sorted asap.
Don't just look at pensions.
It needs dedication and regular reviews though. Those who are lucky to get excellent pensions via their PAYE don't have these worries!
My last word of caution is inflation.. £10 now is not going to be £10 when you retire!
Very few people have excellent pensions via PAYE, unless you are talking about state employees.Don't just look at pensions.
It needs dedication and regular reviews though. Those who are lucky to get excellent pensions via their PAYE don't have these worries!
My last word of caution is inflation.. £10 now is not going to be £10 when you retire!
In the private sector some schemes are much more generous than others, but few are sufficiently generous that the individuals concerned don't still have significant worry about income in retirement!
red_slr said:
I was not saying anything about how many people do or don't just saying those that do are lucky. Very lucky.
I suppose fortune can be very subjective. I just reviewed my friend's British Gas final salary pension and after a £105k TFLS it comes to around £16k pa.This is with the levelling option ie at 65 it drops to £10k and the State Pension covers the shortfall.
Not really a king's ransom after 42 years with the same company in the private sector.
Jockman said:
I just reviewed my friend's British Gas final salary pension and after a £105k TFLS it comes to around £16k pa.
Not really a king's ransom after 42 years with the same company in the private sector.
£105,000 tax free cash isn't a bad starting point!Not really a king's ransom after 42 years with the same company in the private sector.
For the sake of argument if the tax free cash was 25% of the overall value that would make a total pension value of £420,000. Not bad by most people's standards.
42 years in a final salary scheme offering, say, 1/80th p.a. would make a total pension of more than half his salary. Again, not bad at all.
Ozzie Osmond said:
£105,000 tax free cash isn't a bad starting point!
For the sake of argument if the tax free cash was 25% of the overall value that would make a total pension value of £420,000. Not bad by most people's standards.
42 years in a final salary scheme offering, say, 1/80th p.a. would make a total pension of more than half his salary. Again, not bad at all.
Pretty much correct on all points, Ozzie.For the sake of argument if the tax free cash was 25% of the overall value that would make a total pension value of £420,000. Not bad by most people's standards.
42 years in a final salary scheme offering, say, 1/80th p.a. would make a total pension of more than half his salary. Again, not bad at all.
It's just that £16k pa doesn't >feel< like a lot of money, if you get what I mean.
In a sense that's one of the problems with perception - it's easy to overlook just how big the multipliers need to be now that life expectancy has increased so much.
Fancy a pension of £1,000 p.a. from age 65 with inflation protection and something for the wife after you die? Yes Sir, you'll be needing at least £25,000 to get yourself one of those.
But I have to live to age 90 before I break even!!
Well, don't forget the inflation protection has to be paid for, and the widow's benefit, and the investment risk. And you have a reasonable chance of living beyond 90 now that average life expectancy is over 80.
Holy cow!
Fancy a pension of £1,000 p.a. from age 65 with inflation protection and something for the wife after you die? Yes Sir, you'll be needing at least £25,000 to get yourself one of those.
But I have to live to age 90 before I break even!!
Well, don't forget the inflation protection has to be paid for, and the widow's benefit, and the investment risk. And you have a reasonable chance of living beyond 90 now that average life expectancy is over 80.
Holy cow!
Ozzie Osmond said:
In a sense that's one of the problems with perception - it's easy to overlook just how big the multipliers need to be now that life expectancy has increased so much.
Fancy a pension of £1,000 p.a. from age 65 with inflation protection and something for the wife after you die? Yes Sir, you'll be needing at least £25,000 to get yourself one of those.
But I have to live to age 90 before I break even!!
Well, don't forget the inflation protection has to be paid for, and the widow's benefit, and the investment risk. And you have a reasonable chance of living beyond 90 now that average life expectancy is over 80.
Holy cow!
More like £35k, based on the 'Best Buy' tables in the FT!Fancy a pension of £1,000 p.a. from age 65 with inflation protection and something for the wife after you die? Yes Sir, you'll be needing at least £25,000 to get yourself one of those.
But I have to live to age 90 before I break even!!
Well, don't forget the inflation protection has to be paid for, and the widow's benefit, and the investment risk. And you have a reasonable chance of living beyond 90 now that average life expectancy is over 80.
Holy cow!
Vocal Minority said:
Don't get too hung up on the 3% - 12% matched: that would be beyond market leading, and very few will have something as good through work.
that is in the realms of legacy schemes , as even the public sector schemes ( which are now CARE for new entrants in many cases ) are no where near as generous in terms of employer contributing 80 % of the contribution )as much as you can afford and as soon as possible
the auto-enrolement schemes aren;t necessarily going to be the best schemes as they are about safe returns - but the employer;s contribution and the tax treamtnets are 'free money' effectively ...
bmwmike said:
BTL looking like the better bet then
100k flat paid off would yield 5.5k pa round my way at the moment. Maybe slightly more.
I don't currently have a flat but rather than pay extra into a pension I may never see it seems to me they are a safer bet. Plus you can leave to kids etc.
Pension funds have a multi-decade investment horizon, and the analysis tells us they need to be braced for lower returns than in the past. A client hoping to earn a seven % annual return won’t be able to do that without taking unfeasible risk. And with a lower risk-free rate than in the past, that means taking more risk to earn the same return. 100k flat paid off would yield 5.5k pa round my way at the moment. Maybe slightly more.
I don't currently have a flat but rather than pay extra into a pension I may never see it seems to me they are a safer bet. Plus you can leave to kids etc.
The level of returns today are remarkably low, they are unsustainably low and ultimately there’s going to have to be a rebalancing and a realisation that we all need to realign our aspirations. But when that rebalancing happens the level of withdrawal rates and fund returns are not going to be anything as benign as we have been deluding ourselves over.
What we, as advisers, should be telling clients, and what I am telling them, is that returns on a balanced diversified portfolio could be something in the range of four to five (occasionally gusting five point five/six)% over the medium term - and that’s probably lower than many clients and pension fund managers are hoping for. It is however, a reality that savers must be prepared to contend with. That has an impact on what they wish to achieve; they either save more, they retire later or they retire at the same time on less money.
I have always sniffed at the so called 'safe' 4% withdrawal rate, preferring c.3.5% instead. Now it seems, even that's optimistic. I don't think unduly so, but I'm certainly beginning to consider 3.1/3.25% for some clients planning for retirement and/or on the cusp of considering drawdown.
It’ll be interesting to see how Gilts perform in the event of the issue around the Eurozone and Greece kicking off again, and Brexit. If we assume that annuity rates are based on 15-year gilt yields, and that last month the value dropped from 2.96% to 2.10% (or 14 basic points (bp)), you’d be on average, about 1.3/1.5% better off. We live in interesting times. Mario Draghi has hinted about reducing deposit interest rates (sell, sell, sell) resulting in something like a 14 bp rise in the 15-year gilt yields which didn’t help.
For context, at the end of last year, they were running at 1.68%.
^^^
interested in those figure as I intend to use drawdown at age 58 - should have 500K in my pensions then (3 years time) ,
I was hoping to pull out 24k ish P.A
don't mind some loss of the pot size as want to downsize from detached property to bungalow once we reach about 70 , that should free up 175k
achievable or not??
interested in those figure as I intend to use drawdown at age 58 - should have 500K in my pensions then (3 years time) ,
I was hoping to pull out 24k ish P.A
don't mind some loss of the pot size as want to downsize from detached property to bungalow once we reach about 70 , that should free up 175k
achievable or not??
bmwmike said:
BTL looking like the better bet then.
At the end of the day when you can,- get 40% tax relief going into a pension
- get compound tax free growth
- get 25% out tax free at the end, and
- only pay tax at a lower rate on the pension
Compare BTL,
- potentially Stamp Duty at enhanced rate on purchase
- significant transaction costs getting in and out
- significant costs dealing with tenants, rental deposit etc
- very limited tax relief on interest paid
- tax on income at your highest marginal rate
- Capital Gains Tax charged when you sell.
dingg said:
^^^
interested in those figure as I intend to use drawdown at age 58 - should have 500K in my pensions then (3 years time) ,
I was hoping to pull out 24k ish P.A
don't mind some loss of the pot size as want to downsize from detached property to bungalow once we reach about 70 , that should free up 175k
achievable or not??
Lots of variables. I'd certainly be aware of keeping low volatility in the first few years of drawdown (the race isn't won on the first bend, but it can certainly be lost on it, etc).interested in those figure as I intend to use drawdown at age 58 - should have 500K in my pensions then (3 years time) ,
I was hoping to pull out 24k ish P.A
don't mind some loss of the pot size as want to downsize from detached property to bungalow once we reach about 70 , that should free up 175k
achievable or not??
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