Workplace pension query

[egor110]

The Mrs employer is rolling out the govt. workplace pension scheme in march.

She's 42 and works in the care sector and earns around £1000 a month, her employer has stated there going to start staff paying in 1% and they'll match it so effectively £20 combined a month , then they'll up it to 2% then 4% then 5% however her employer will only pay in a maximum of 4%.

Is it even worth her/her colleagues starting such a scheme when they'll be paying in such small amounts?

They could just have cash isa's tax free with no risk of anyone badly investing or just paying off a mortgage quicker.

Our mortgage is low and should be paid off by the time she's 50 so we'd then be £700 up a month to stick in isa's or possibly a rental property.

[fat80b]

Sounds like a good plan to me.

Your Mrs invests £40 per month pre tax, the company matches it so you have £80 in the pot.
Compound this at 7% and it will be worth over £25k at retirement at 57.

Even at 3% it ends up being worth over £18K


Alternatively you can do it yourself. Your unmatched £40 at the 7% interest rate assuming you can get it would only be worth £12K.


Why wouldn't you want the benefit provided by the workplace pension?

Bob
http://www.thisismoney.co.uk/money/saving/article-...
To do the sums on the Internet yourself....

[blank]

It is free money.

If she takes the cash as normal and does something else with it then it is taxed.

£200 in her pension pot would be about £68-£80 in her pocket when you take off tax and NI. If you can turn £80 into £200 quickly, at low risk and easily then fine. Otherwise taking the maximum pension contributions you can tends to make sense.

[egor110]

Thanks for the advice.

I've only ever worked for royal mail so signed onto there pension scheme aged 18 and just in each week an forget about it so have no idea about what's a normal/bad scheme.

Royal mail pay 5% if i pay 3%, 7% if i pay 5% or a max of 9% if i pay 7%.

Edited by egor110 on Monday 16th February 19:43

[Ginge R]

Egor,

If she's 42, she'll get benefits at 55. As a suggestion, have her consider limiting her fund to £10,000 - that's what is (currently) known as a trivial pot and she can take it out in one go.

[Claudia Skies]

Whenever an employer offers to contribute to your pension it's a good idea (if you can afford it) to pay enough contributions yourself to suck the maximum possible amount/rate out of the employer.

As someone has already said above, the employer's contributions are quite literally "free money" for you as an employee. Instant pay rise!

[Ginge R]

As long as you don't exceed an annual or a lifetime allowance by doing so of course. In the wider context, it might not always, automatically be the best course of action.

[egor110]

Thanks for all the advice, our situation may of changed a bit though.

Just spoken to mortgage company about upping the payments by £200 a month and it turns out our mortgage will be paid off in 5 years time, therefore we'd have £700 month to whack into pensions/isa's etc.

[Claudia Skies]

Out of interest, what rate of interest are you paying on the mortgage? And what is your top rate of income tax - 20% or 40%?

I ask because the mortgage interest rate needs to very low indeed to justify Borrowing and Saving at the same time, especially if you're a 20% taxpayer.

[egor110]

Claudia Skies said:

Out of interest, what rate of interest are you paying on the mortgage? And what is your top rate of income tax - 20% or 40%?

I ask because the mortgage interest rate needs to very low indeed to justify Borrowing and Saving at the same time, especially if you're a 20% taxpayer.

2.50% 20% tax bracket

[oop north]

Sounds like auto enrolment - but the employer may be contributing more than standard. The standard involves contributions being made (by employee and employer) only on earnings above I think the primary threshold for NIC purposes (£8,060 in 2015-16). So it would be payable on around £4k salary on the figures given (assuming £1k per month is pre-tax/gross pay not post-tax/net) assuming employer is setting up the minimum required. If the employer is paying / the employee is paying a % based on full salary then the offer is more than the standard

Ultimately, you should be able to get 25% of the pot tax-free and a chunk of the actual pension itself will probably be tax free also (State pension alone not enough to use the full personal allowance - which the various parties seem keen on increasing further in the next few years anyway). The employee gets 20% tax relief on what goes into the pension and benefits from employer contributions - so all round should be a good deal (though it's not going to be guaranteed)

Be aware that, if you say no now, that might restrict the possibility of joining later

[Sharted]

Claudia Skies said:

Out of interest, what rate of interest are you paying on the mortgage? And what is your top rate of income tax - 20% or 40%?

I ask because the mortgage interest rate needs to very low indeed to justify Borrowing and Saving at the same time, especially if you're a 20% taxpayer.

Eh?

Even if your savings are taken pre-tax and your, generous, employer is immediately weighing in an equivalent amount?

Wouldn't the mortgage need to be at around 100% to offset this?

[egor110]

Sharted said:

Claudia Skies said:

Out of interest, what rate of interest are you paying on the mortgage? And what is your top rate of income tax - 20% or 40%?

I ask because the mortgage interest rate needs to very low indeed to justify Borrowing and Saving at the same time, especially if you're a 20% taxpayer.

Eh?

Even if your savings are taken pre-tax and your, generous, employer is immediately weighing in an equivalent amount?

Wouldn't the mortgage need to be at around 100% to offset this?

Re generous employers i contacted our pension dept to up my own contributions to 6% to get 9% of royal mail, imagine my surprise when i was told i was already paying 6% and royal mail are paying 17.1% due to when i started my pension, i have 22 years final salary as well.

[Sharted]

egor110 said:

Re generous employers i contacted our pension dept to up my own contributions to 6% to get 9% of royal mail, imagine my surprise when i was told i was already paying 6% and royal mail are paying 17.1% due to when i started my pension, i have 22 years final salary as well.

Then you, my son, are landed!

[egor110]

Sharted said:

egor110 said:

Re generous employers i contacted our pension dept to up my own contributions to 6% to get 9% of royal mail, imagine my surprise when i was told i was already paying 6% and royal mail are paying 17.1% due to when i started my pension, i have 22 years final salary as well.

Then you, my son, are landed!

22 years ago i and the other young posties who turned 18 that year were called into a office where a manager and union pod advised us to sign up for the pension and forget about it.

We decided if the union bod and manager both agreed on something it must be good and signed up.

[Claudia Skies]

egor110 said:

Claudia Skies said:

Out of interest, what rate of interest are you paying on the mortgage? And what is your top rate of income tax - 20% or 40%?

I ask because the mortgage interest rate needs to very low indeed to justify Borrowing and Saving at the same time, especially if you're a 20% taxpayer.

2.50% 20% tax bracket

OK, so at your rate of income tax you need to earn 3.1% to pay the 2.5% out of taxed income, if you see what I mean. i.e. you need to earn £31 to pay each £25 of interest, after tax.

So unless your investments give you at least a 3.5% return, you're going backwards. Understood?

What I'm saying is that if you use your cash to pay off mortgage you know exactly where you are. If you use your cash for investments, which involve uncertainty, then unless those investments earn an investment return of at least 3.5% you'd have been better off to pay down the mortgage. [If the investments are in ISA or pension then there is some additional benefit from the favourable tax regimes, but the benefit is bigger for a 40% taxpayer than for a 20% taxpayer.]

There's no magic answer. These are the factors to take into account. 2.5% is a nice low mortgage rate at the moment.

[Claudia Skies]

egor110 said:

i was told i was already paying 6% and royal mail are paying 17.1% due to when i started my pension, i have 22 years final salary as well.

That is a VERY GOOD arrangement for you. It's exactly the sort of public sector pension which receives widespread criticism these days. Look after it - nice work if you can get it!

[egor110]

Claudia Skies said:

egor110 said:

i was told i was already paying 6% and royal mail are paying 17.1% due to when i started my pension, i have 22 years final salary as well.

That is a VERY GOOD arrangement for you. It's exactly the sort of public sector pension which receives widespread criticism these days. Look after it - nice work if you can get it!

I'm a postie so it's hardly a hard to get job, anyone of you could join up pay in 6% and get royal mail (who aren't public sector) to pay 9%.

[Hungrymc]

egor110 said:

I'm a postie so it's hardly a hard to get job, anyone of you could join up pay in 6% and get royal mail (who aren't public sector) to pay 9%.

That may be the issue. As shareholders demand better returns, you may see RMG pensions deteriate (certainly for new starters, and can't rule out changes for current members).

Generally, it's worth joining most pension schemes to get hold of the company contribution. The statutory minimum for auto enrolled workplace pensions is ridiculously small and isn't going to make a significant difference to people. But over the years the state pension will be worth less and less, as the minimums for workplace pensions goes up, and these workplace pensions will become a more significant part of people's income.