Explain it to me like I'm 5 y.o. - Pensions

[The Beaver King]

I have no doubt that this has been covered loads of times, but I can't seem to find the right thread and search is borked.

Could somebody link me to an existing thread that gives a simple explanation about pensions and investment options?

I appreciate it is a massive subject, but I need a base point to start my learning. I'm getting grown up now and need to get my head around finances/pensions/investing etc.

As a quick question about pensions. At 21 years old, is there any reason to pay your pension into something classed as 'high risk' or is this better left until a few years from retirement? I get the impression it's better to go for something low/medium risk and build up a pool first, then look at high risk when you are a few years from retirement in the hope of making a 'quick buck' on your investment. I could be extremely wrong though.

Also, actively managed versus Index? I hear AC funds don't really perform long term versus and index type. Best to go with Index in these early stages?

Thanks, I realise it's all a bit rambly

[JB!]

I'm 25, been paying into my pension since I was 19.

best thing to do is ring your pension provider, i had the option of final salary and it wasn't untill i rang them and had theoretical numbers infront of me that it all made sense.

[mrmr96]

The Beaver King said:

I get the impression it's better to go for something low/medium risk and build up a pool first, then look at high risk when you are a few years from retirement in the hope of making a 'quick buck' on your investment. I could be extremely wrong though.

You are extremely wrong.

Normal course of action is to take riskier/higher yeild investments when you are young and then look to de-risk as you get older.

Have a look at this too:
http://www.scottishwidows.co.uk/guides/pensions/pa...

[Odie]

My understanding,

You give a percentage of your wages a month to a bank (your work place might match it), the bank then invests it on your behalf at varying levels of risk depending on various factors (how much money is in your fund, how long you have left until retirement etc).

When you retire you get the money back plus the profit generated (minus fees etc) to live on.

ETA I don't think the return on the investment is what it once was when it comes to pensions, personally I'm thinking of saving and buying safe shares (if their is such a thing) and see how that goes.

Edited by Odie on Tuesday 29th October 16:33

[davepoth]

It is of course worth deciding whether a pension is actually the right thing to invest in. Saving for the future is of course important, but pensions can sometimes not be the best thing to put the money into depending on your circumstances. It would be best to go and talk to a financial advisor rather than people on the internet.

[Newc]

Start here:

http://www.pistonheads.com/gassing/topic.asp?h=0&a...

[aka_kerrly]

It is never too early to start saving for your future. The potential issue with saving into pensions at a young age is unlike ISAs for example you cannot get your hands on the money you have invested prior to retirement. You have to view a personal pension as a long term investment, it is not a current account.

Also note your strategy is the wrong way around, when you are younger you can afford to take more risks because if it goes pear shape you have time to recoup your losses. As you near retirement you want to move towards the safer end of the scale and select funds which provide a reasonable income as you really wouldn't want to risk losing even 10 or 20 percent of a fund you spent 40 years accumulating would you?

Depending on your work you may find your employer has a pension scheme running, you do not have to use that you can get your company to pay into a pension scheme of your choice but take note of the tax benefits on personal contributions and your employer matching or bettering your contribution. These benefits will certainly make your savings pot grow quicker when you consider for 3% of your salary you also get 3% or possibly more from your employer plus tax relief.

So, at your age it may be wiser to utilise ISA savings in the shorter term especially if you are yet to join the property ladder in which case you may need access to savings but equally starting a pension sooner rather than later is beneficial.

[The Beaver King]

You are extremely wrong.

Normal course of action is to take riskier/higher yeild investments when you are young and then look to de-risk as you get older.

Have a look at this too:
http://www.scottishwidows.co.uk/guides/pensions/pa...
[/quote]

That's the kind of answer I was looking for, thanks.


I'm dipping my toe in the water at the minute and just trying to get a feel for how pensions work. It's not my pension I'm looking at currently, it's the GF's. Although this has spurred me to take more interest into my own.

I'll be looking into getting some professional advice in the near future, but I want to try and understand it a bit first before I make any rash decisions.

[DocArbathnot]

davepoth said:

It would be best to go and talk to a financial advisor rather than people on the internet.

You're absolutely right. However it never does any harm in doing some homework before discussing with the experts. It's nice to have an inkling of what the hell they are talking about (this goes for anything btw)

[rossmc88]

Do pensions not work by giving your money to a company that probably won't exist by the time you retire? Then you get hardly anything back because they have skimmed it all for themselves?

[aka_kerrly]

rossmc88 said:

Do pensions not work by giving your money to a company that probably won't exist by the time you retire? Then you get hardly anything back because they have skimmed it all for themselves?

Haha Equitable Life.......

Plus it's worth mentioning a lot of the workplace schemes I've seen that invest in the insurers own funds are largely under performing.

[mrmr96]

The Beaver King said:

Mrmr96 said:

You are extremely wrong.

Normal course of action is to take riskier/higher yeild investments when you are young and then look to de-risk as you get older.

Have a look at this too:
http://www.scottishwidows.co.uk/guides/pensions/pa...

That's the kind of answer I was looking for, thanks.


I'm dipping my toe in the water at the minute and just trying to get a feel for how pensions work. It's not my pension I'm looking at currently, it's the GF's. Although this has spurred me to take more interest into my own.

I'll be looking into getting some professional advice in the near future, but I want to try and understand it a bit first before I make any rash decisions.

No problem.

It is a PITA to learn about, but in several years time "future you" will thank "present day you" for having got off his ass and sorted it out!

I think it's pretty common when you enter a scheme you'll be asked questions to assess your attitude to risk. Your money can then be invested into a plan which suits you.

Basically there are pots of money called "Funds" which are invested into similar assets. So say there's 4 Funds available:

1. Cash - Low risk (virtually zero), low returns.
2. Bonds - Still low risk, better returns
3. Shares - More risky, better returns still
4. Mental shares - Riskiest, potentially awesome returns

The person running the funds doesn't care where the cash he's investing came from, it's just his job to take that money and invest in the type of things which meet the risk/reward profile of the fund.

You won't invest in a fund, though, you'll invest in a Plan. A Plan is basically a mixture of funds, which changes over time.

So say there's 3 plans available:

Plan	Age to 30	Age to 50	Age to Retirement
Cautious	50% Bonds, 50% Cash	25% Bonds, 75% Cash	100% Cash
Balanced	25% Bonds, 50% Shares, 25% Mental Shares	25% Cash, 25% Bonds, 50% Shares	50% Cash, 50% Bonds
Active	50% Shares, 50% Mental Shares	75% Shares, 25% Mental Shares	50% Bonds, 50% Shares

You can see there's a different risk profile for each Plan, and all the plans split your investment between funds. They also all de-risk as you get older.

You need to read up on the plans available with your pension provider and then have a good think about what you're like and what kind of risk/reward you want to achieve. Then choose an appropriate plan.

The main thing, no matter what Plan you put the money in, is to start putting something somewhere!!

HTH

[DocArbathnot]

Sound advice. I'm pleased I was prudent when I realised that in my early fifties I could pay off my mortgage and give up work. (work was getting very boring, time consuming and my boss was an upstart)

[HarryW]

[talking to 5 year old mode on]
When you get your pocket money, rather than spending it all on sweets now you put some of the money into the Piggy bank and buy less sweets now.

You do that every week of every year until a time comes when you no longer get pocket money and think can't buy sweets anymore.

However as you've been good all your life you can then start to spend the money you put into the piggy bank and if you've saved enough you can continue to buy sweets until you fall asleep and don't wake up..........
[talking to 5 year old mode off]


You could have so much fun with this ...........

[blank]

Pensions might not perform brilliantly but when you consider tax relief and employer contributions they tend to make sense.

E.g. if you're a 20% tax payer and your employer matches your contributions then £200 in your pension pot would only actually be £80 in your pocket to invest in something else. So it will have to do extremely well to beat a pension.

[Simpo Two]

Pensions seem to be of less value if you're self-employed.

It is only one form of investment, and seems to me a very limited and over-rated one. How many people live long enough to 'win' all their premiums back in pension payments? You'll pay tax on it somewhere, either at the start or the end.

The main thing is to build up a pile of money you can live on one day; how you get there is up to you.

[Terminator X]

rossmc88 said:

Do pensions not work by giving your money to a company that probably won't exist by the time you retire? Then you get hardly anything back because they have skimmed it all for themselves?

Plus their management fees etc.

At the risk of annoying the financial people on here isn't it better to crack on yourself rather than rely on other people / companies to sort out your retirement eg build up some funds, buy some land, build a house, sell it on etc?

TX.

[fandango_c]

Pensions are just a wrapper with some limitations on how/when you can take benefits from them.
The assets invested in the pension are a completely subject from the pension itself.

[Simpo Two]

My cousin was an IFA in the 1980s. He said the definition of a stockbroker was 'a man who invests your money until it's all gone'. He went to a meeting of said fellows once and reported that they mostly seemed to compare the sizes of their yachts. Oddly no mention was made of their client's yachts...

[JB!]

HarryW][talking to 5 year old mode on said:

When you get your pocket money, rather than spending it all on sweets now you put some of the money into the Piggy bank and buy less sweets now.

You do that every week of every year until a time comes when you no longer get pocket money and think can't buy sweets anymore.

However as you've been good all your life you can then start to spend the money you put into the piggy bank and if you've saved enough you can continue to buy sweets until you fall asleep and don't wake up..........
[talking to 5 year old mode off]


You could have so much fun with this ...........