Future investment options - Pension?

[teddy87]

I'm 24 and beginning to think a little more about the future.

I have a reasonable income and a few savings accounts towards a house deposit, car maintenance/purchase, holidays and a contingency account (if I were to lose my job, I should be OK for a few months).

My car account should cover me for the annual insurance, breakdown cover, servicing, tax, MOT, £750 P/A maintenance and a further sum to cover depreciation, of which will go towards the next purchase. I'm simply aiming to keep on par with what I have now.

My house deposit account should allow me to purchase my first property in 18 months time (based at the current criteria and prices).

I have no debts and nothing on finance, the only outgoings are rent/utilities.

The company I work for offer a private pension contribution scheme. They offer to match my monthly contribution of up to 3%, although, I'm unsure exactly what this entails? There's not many sound investments which offer x2 ROI, but herein lies my issue, what with all the news/press pensions have received recently I don't trust them (and no, I don't read the Daily Mail!).

It seems a wise choice to invest 3% each month, which will be matched by my employer, but would an additional contribution be worthwhile if it's not being matched by my employer?

Very basic rough Maths and for arguments sake, let's say 1% = £1

3% contribution by me = £3 investment from me with a £6 return (+ interest/growth)
5% contribution by me = £5 investment from me with a £8 return (+ interest/growth)

If, as I do now, I were to pocket the 3%, I'd only receive around £2 due to Tax/NI etc, so I'd have to somehow invest the £2 to return £6, which I find unlikely without huge risk!

If I were to invest 3% for the £6 return, it then leaves me with around £1.33 to return £2, which seems a little more realistic, but again, I'm unsure if the pension would be save, or even advisable.

I imagine a pension adviser would be a better option, but having lurked here for a number of years, I'm hoping the expanse of PH knowledge could offer some advice!

Thanks in advance

[sidicks]

teddy87 said:

I'm 24 and beginning to think a little more about the future.

I have a reasonable income and a few savings accounts towards a house deposit, car maintenance/purchase, holidays and a contingency account (if I were to lose my job, I should be OK for a few months).

My car account should cover me for the annual insurance, breakdown cover, servicing, tax, MOT, £750 P/A maintenance and a further sum to cover depreciation, of which will go towards the next purchase. I'm simply aiming to keep on par with what I have now.

My house deposit account should allow me to purchase my first property in 18 months time (based at the current criteria and prices).

I have no debts and nothing on finance, the only outgoings are rent/utilities.

The company I work for offer a private pension contribution scheme. They offer to match my monthly contribution of up to 3%, although, I'm unsure exactly what this entails? There's not many sound investments which offer x2 ROI, but herein lies my issue, what with all the news/press pensions have received recently I don't trust them (and no, I don't read the Daily Mail!).

It seems a wise choice to invest 3% each month, which will be matched by my employer, but would an additional contribution be worthwhile if it's not being matched by my employer?

Very basic rough Maths and for arguments sake, let's say 1% = £1

3% contribution by me = £3 investment from me with a £6 return (+ interest/growth)
5% contribution by me = £5 investment from me with a £8 return (+ interest/growth)

If, as I do now, I were to pocket the 3%, I'd only receive around £2 due to Tax/NI etc, so I'd have to somehow invest the £2 to return £6, which I find unlikely without huge risk!

If I were to invest 3% for the £6 return, it then leaves me with around £1.33 to return £2, which seems a little more realistic, but again, I'm unsure if the pension would be save, or even advisable.

I imagine a pension adviser would be a better option, but having lurked here for a number of years, I'm hoping the expanse of PH knowledge could offer some advice!

Thanks in advance

To get a 'decent' pension (think of 50% of your salary at retirement, increasing with inflation) when you retire, then you need to be looking to invest around 20% or more per annum (a good rule of thumb is to invest your age, so for you 24% of your gross salary!).

However, for most people this is highly unrealistic and average contributions are much lower.

As you have identified, the advantage of a pension as a long-term savings vehicle is that contributions are made from gross salary, investment return is broadly tax free, and in some cases employers will also match contributions.

The biggest downside is that you can't access your money until retirement, and at that point there may be restrictions as to what you can do with the accumulated fund.

As a minimum I'd take advantage of the employers 3% matched contribution.

Sidicks

[teddy87]

That's an interesting concept of age:contribution, which would be perfectly feasible if my employer matched like for like, rather than capping @ 3%

I'll start with the 3% and go from there, thanks for the advice

[Cyder]

sidicks said:

To get a 'decent' pension (think of 50% of your salary at retirement, increasing with inflation) when you retire, then you need to be looking to invest around 20% or more per annum (a good rule of thumb is to invest your age, so for you 24% of your gross salary!).

However, for most people this is highly unrealistic and average contributions are much lower.

I thought the recommended amount was 1/2 your starting age as a percentage? At 25 I should be putting 12.5% but currently I contribute 4% and my employer contributes 4%. I'm not sure where I'll get an extra 4% from, possibly when I get the next couple of payrises I'll increase my contribution inline with those so I don't feel out of pocket.

[sidicks]

Cyder said:

I thought the recommended amount was 1/2 your starting age as a percentage? At 25 I should be putting 12.5% but currently I contribute 4% and my employer contributes 4%. I'm not sure where I'll get an extra 4% from, possibly when I get the next couple of payrises I'll increase my contribution inline with those so I don't feel out of pocket.

I didn't explain too well - I think the contribution = age 'rule' is based on starting age:

I.e if you start contributing at age 20, then a 20% contribution thereafter would buy you a 'decent' pension. If you wait until you are 30 years old then you would need to contribute 30% of your salary until retirement etc etc.

Clearly only a very high level rule, which depends on investment returns, retirement age, interest rates at retirement etc etc.

Sidicks

[teddy87]

Well I've opted into the 3% today whilst I ponder.

I'm expecting a % rise in the coming months, therefore I may offset the increase to up my contribution.

Not sure whether it'll actually make any money though, are pensions a safe bet, can you lose money?

[Simbu]

I've just done the exact same thing. I'm in a very similar position - 25 and wanting to think about the future. I've gone for a matched 3% from my employer too (they are legally obliged to offer this, I believe). I sat down with the accountants my employer use and was talked through my options, which was very helpful.

I've set mine up so it tracks my salary raises automatically with the 3%. I see it as free money in the future, so it's silly not to take advantage.

My understanding with my plan is that it's largely invested in a mix of risks, with a fairly conservative attitude. When i approach retirement age, more of my money is moved into no-risk investments to protect me from a short-term crash in value. Of course, the provider i'm with (Standard Life) may change as i doubt i'll be with my employer my entire working life, and it might be transferred to a provider my new employer wants me to use.

[sidicks]

teddy87 said:

Well I've opted into the 3% today whilst I ponder.

I'm expecting a % rise in the coming months, therefore I may offset the increase to up my contribution.

Not sure whether it'll actually make any money though, are pensions a safe bet, can you lose money?

Can you lose money? It depends what you invest in!!

The default option is often a 'lifestyle' approach (as outlined by the other post above) in which at the start the fund has a larger exposure to equities and property (which are expected to produce higher returns over the long term) and as you approach retirement fund is moved into more stable assets such as government bonds.

In the short term, equity volatility is not a problem as if the market falls, your next contributions buys more assets!

Sidicks

[Simpo Two]

sidicks said:

As you have identified, the advantage of a pension as a long-term savings vehicle is that contributions are made from gross salary, investment return is broadly tax free,

Thought I heard on R4 this morning that the value of pensions has fallen 30% in 10 years so that rather wipes out any 'tax saving'... add in more QE and the fact that annuities are only going to go one way - down - and I seriously wonder if pensions are really a good investment now.

Save for the future by all means, but part of thinks that the wise old sages who trot out 'oh but pensions are tax free and the stock market always recovers' are falling off the curve.

[sidicks]

Simpo Two said:

Thought I heard on R4 this morning that the value of pensions has fallen 30% in 10 years so that rather wipes out any 'tax saving'... add in more QE and the fact that annuities are only going to go one way - down - and I seriously wonder if pensions are really a good investment now.

The value of investments linked to pensions may have gone down 30%, but so would those investments in outside of a pensions wrapper.

QE may increase inflation in the short term, but is unlikely to have a significant impact on the long term. Additionally, interest rates are likely to go up rather than down from here, meaning cheaper pensions. So I don't agree that 'annuities are only going to go one way'. Also, the requirement to annuitise has been changed if not withdrawn, so this should not be an issue.

Simpo Two said:

Save for the future by all means, but part of thinks that the wise old sages who trot out 'oh but pensions are tax free and the stock market always recovers' are falling off the curve.

If you are a long way from retirement then a higher investment in equities is likely to provide the best long-term returns, albeit there could be a rocky road in the short term.

Sidicks

[fid]

Simpo Two said:

Thought I heard on R4 this morning that the value of pensions has fallen 30% in 10 years so that rather wipes out any 'tax saving'... add in more QE and the fact that annuities are only going to go one way - down - and I seriously wonder if pensions are really a good investment now...

If pensions are falling, doesn't that mean everything that contributes to a pension is falling as well? I.e. Companies aren't growing, property prices and income aren't growing, commodity prices aren't growing...?

Bearing in mind the massive variety of things you can invest in within a pension, what alternatives are there? You lose income tax an capital gains tax from property investments, and for the majority that's only even been considered over the past decade because interest rates have been so low. The past decade under Labour has been a decade-distorting sham - global problems are purely from governments trying to keep up with the neighbours.

[Simpo Two]

fid said:

f pensions are falling, doesn't that mean everything that contributes to a pension is falling as well? I.e. Companies aren't growing, property prices and income aren't growing, commodity prices aren't growing...?

And inflation is running at how much? I agree there are pensions and pensions, and I'm not clever enough to duck and dive.

But it's irksome to see that one's fund is about the same as it would have been had you simply put in in the building society for all those years, and all the growth has simply fattened the middlemen. And then you use it to buy an 'annuity', the value of which nobody knows but is likely to be 3/4 of 5/8 of zip all. And you'll probably die before you get your money back, which is what they wanted of course.

[sidicks]

Simpo Two said:

But it's irksome to see that one's fund is about the same as it would have been had you simply put in in the building society for all those years, and all the growth has simply fattened the middlemen.

Except of course it hasn't, it's simply that the investment markets have performed poorly over the period. It's easy to see that with the benefit of hindsight, but investing is equities is risky and doesn't always pay off - but then you knew that when you decided to invest in them, right?

Simpo Two said:

And then you use it to buy an 'annuity', the value of which nobody knows but is likely to be 3/4 of 5/8 of zip all. And you'll probably die before you get your money back, which is what they wanted of course.

Well of course, while the value of the individual annuity is unknown, the value of the 'average' annuity for a portfolio of lives can be priced fairly accurately, meaning that the price charged is 'about right'. Clearly those that live longer than expected are subsidised by those that die sooner.

Of course if you have a genuine health issue that means your expected lifetime is shorter than average then you can obtain an annuity that takes into account...


Sidicks

[Simpo Two]

sidicks said:

Simpo Two said:

But it's irksome to see that one's fund is about the same as it would have been had you simply put in in the building society for all those years, and all the growth has simply fattened the middlemen.

Except of course it hasn't, it's simply that the investment markets have performed poorly over the period. It's easy to see that with the benefit of hindsight, but investing is equities is risky and doesn't always pay off - but then you knew that when you decided to invest in them, right?

The starting spiel is 'equities have always outperfomed yada yada and look at this graph which shows that between 5 Oct and 7 Sep this fund was blah'.

But you're merely compounding my point: you get the certain money, we take the gamble. The investor has his castle in the air, the IFA collects the rent.

[sidicks]

Simpo Two said:

The starting spiel is 'equities have always outperfomed yada yada and look at this graph which shows that between 5 Oct and 7 Sep this fund was blah'.

But you're merely compounding my point: you get the certain money, we take the gamble. The investor has his castle in the air, the IFA collects the rent.

I am not an IFA!!

The IFA should assess your requirements and explain the different options available and the risks / benefits of each - you decide whether you want high risk and potential higher return or instead a safer strategy but with lower expected outcomes....

Sidicks

[Simpo Two]

sidicks said:

I am not an IFA!!

Fair enough, but you speak the same langauge albeit not independently





ETA: I misheard the amount by which pensions have fallen. It is not 30% in 10 years but 30% in 2 years.

Edited by Simpo Two on Sunday 9th October 00:57

[sidicks]

Simpo Two said:

Fair enough, but you speak the same langauge albeit not independently

I speak the truth based on 17 years experience in financial services...

Simpo Two said:

ETA: I misheard the amount by which pensions have fallen. It is not 30% in 10 years but 30% in 2 years

That sounds like bks to me - where did you hear this....???

[groak]

Sounds like nonsense to me too. TWO YEARS!!! Impossible!

http://uk.finance.yahoo.com/news/Value-private-pen...


groakicks

[sidicks]

groak said:

Sounds like nonsense to me too. TWO YEARS!!! Impossible!

http://uk.finance.yahoo.com/news/Value-private-pen...


groakicks

So actally what the report is saying is that:

1) Asset values have fallen recently i.e. equity markets are down.

(Nothing to do with 'pensions' as such, just the underlying assets. You'd face the same situation if you had invested in an equity ISA, or directly into physical shares)

2)Lower projected future interest rates will produce lower income.

(Again, nothing to do with the 'pensions' wrapper really, just simple mathematics.

I assume that you'll view this as a continuation of the pensions 'con', providers 'stealing' your money etc etc etc

Sidicks

[Simpo Two]

sidicks said:

I speak the truth based on 17 years experience in financial services...

Your hindsight should be pretty good then.

sidicks said:

That sounds like bks to me - where did you hear this....???

R4 'Today' programme, Friday morning IIRC. The banking crisis - I knew credit was unsustainable but hey I'm only a punter so what would I know - plus the current state of affairs caused by supposedly clever people, would account for it. And I'll you this for free - it's going to get a whole lot worse when the Euro black hole finally implodes. Which is odd because the whole thing was set up, run and finally run into destruction by such clever people...

The old cosy frameworks are no longer working.


ETA missed your last post. Whether the product is called a pension or an ISA or a Matabele trouser bond, fact remains that we try to save our hard-earned money for our futures in good faith, trusting the 'experts' - yet is us who take risk (we even paid for the clever people in the banks when they fked up too). In short the 'system' screws us while the politicians and advisers and experts and brokers get fat.

Anyone disagree?

Edited by Simpo Two on Sunday 9th October 09:16