Pensions for dummies
Discussion
I'm the dummy.
I don't understand pensions.
I pay a few percent (6? Maybe 8?) out of my salary each month in to a company-run (I think) pension scheme, administered by (I think) Willis Tower Watersons. My employer also pays money in, up to 5% I think. They send me emails and statements and things that read like a bank account - fine. Money goes in every month, and a fee comes out. I understand the number at the bottom of the page is my total, again, like a bank account.
When I hit retirement, that number freezes, and I can take that money out of the bank or let it pay me 100 quid a month or whatever the small print says.
Am I right to trust these people to run the account? Their fee isn't huge, I think a percent or so, but it goes up a small amount every month. In 10 years it'll be a fairly sizeable chunk. Also, it's a pension for tens of thousands of people so is it too "broad" and one-for-all, if that makes sense?
If I move to one of these self-service pensions (SIPPs?) am I likely to be better off over the next 25 years? Assuming retirement at 65. Are there people that do that for you, or is that the realm of the uber-wealthy private banking people? Is that in effect what the pension people in my current company do?
Life has recently begun - happy birthday to me - and I need to pull my head out of my arse and actually do something sensible with money rather than waste it on cars and booze. Not talking massive figures but that's all the more reason to maximise what I've got.
Where would a noob start on this path of knowledge?
PS I'm not thick, I'm an engineer by trade so numbers etc aren't an issue, but the process and world of money are something I've always shied away from, as long as I've got enough in my pocket to eat, put fuel in the car, and pay the mortgage, I've been OK. But family stuff etc may soon loom and I need to improve my future...
I don't understand pensions.
I pay a few percent (6? Maybe 8?) out of my salary each month in to a company-run (I think) pension scheme, administered by (I think) Willis Tower Watersons. My employer also pays money in, up to 5% I think. They send me emails and statements and things that read like a bank account - fine. Money goes in every month, and a fee comes out. I understand the number at the bottom of the page is my total, again, like a bank account.
When I hit retirement, that number freezes, and I can take that money out of the bank or let it pay me 100 quid a month or whatever the small print says.
Am I right to trust these people to run the account? Their fee isn't huge, I think a percent or so, but it goes up a small amount every month. In 10 years it'll be a fairly sizeable chunk. Also, it's a pension for tens of thousands of people so is it too "broad" and one-for-all, if that makes sense?
If I move to one of these self-service pensions (SIPPs?) am I likely to be better off over the next 25 years? Assuming retirement at 65. Are there people that do that for you, or is that the realm of the uber-wealthy private banking people? Is that in effect what the pension people in my current company do?
Life has recently begun - happy birthday to me - and I need to pull my head out of my arse and actually do something sensible with money rather than waste it on cars and booze. Not talking massive figures but that's all the more reason to maximise what I've got.
Where would a noob start on this path of knowledge?
PS I'm not thick, I'm an engineer by trade so numbers etc aren't an issue, but the process and world of money are something I've always shied away from, as long as I've got enough in my pocket to eat, put fuel in the car, and pay the mortgage, I've been OK. But family stuff etc may soon loom and I need to improve my future...
You need to find out if you move your pension will your employer contribute to it or is the scheme exclusively linked to your employer. I doubt moving it and giving up your employers contributions would be worth doing. Also find out more info from your employer, sometimes if you up your contribution they will increase theirs up to a specified percentage.
Thanks for that.
I can't find the paperwork but it looks like both my employer and I were each putting in 6% but they've reduced to 5% due to the economic situation.
I will find out about the work contribution to an external account but I doubt they will, I'd imagine there are massive corporate backhanders/benefits and stuff going on.
I can't find the paperwork but it looks like both my employer and I were each putting in 6% but they've reduced to 5% due to the economic situation.
I will find out about the work contribution to an external account but I doubt they will, I'd imagine there are massive corporate backhanders/benefits and stuff going on.
Willis Towers Watson is the company and they are a reasonable firm as a pension manager.
Pension scheme fees tend to be in the 0.4-1% range, the gov cap for auto-enrollment schemes being 0.75%, I think the average for one pensions associate I saw a while ago was c0.5%.
The fee is usually on the total funds under management and will should only increase as an actual £ amount as your fund grows the % should stay the same.
Your employer should have an easy to read explanation of their scheme, which will tell you how it works.
You won't be able to take the total pot as cash, but usually you can take up to 25% tax free at a specified age (often 55). The balance will pay you a monthly amount from the agreed retirement age.
As another poster said - get the info from your employer as the first step.
Pension scheme fees tend to be in the 0.4-1% range, the gov cap for auto-enrollment schemes being 0.75%, I think the average for one pensions associate I saw a while ago was c0.5%.
The fee is usually on the total funds under management and will should only increase as an actual £ amount as your fund grows the % should stay the same.
Your employer should have an easy to read explanation of their scheme, which will tell you how it works.
You won't be able to take the total pot as cash, but usually you can take up to 25% tax free at a specified age (often 55). The balance will pay you a monthly amount from the agreed retirement age.
As another poster said - get the info from your employer as the first step.
dingg said:
Look to see what your plan is invested in and make sure its right for what you want at the present time, probably the plan provider has stuck you in a bog average steady Eddie when you may be wanting to take a bit more risk
This. I'm on the wrong side of my 30's and only recently checked both an old pension and my current employer pension to understand the underlying investments. The current one which I am contributing to was in a pretty rubbish default lowish risk fund. Obviously we all have different risk appetites depending on age and other factors but with another 25-30 years left for me(if I even make it that far..) I switched the current pension fund to 100% Equities actively managed and the uptick in performance since has been v noticeable. I just wish I had checked a few years back. Note that I did my due diligence before switching taking into account historical performance compared to the default fund and fund charges. VR99 said:
dingg said:
Look to see what your plan is invested in and make sure its right for what you want at the present time, probably the plan provider has stuck you in a bog average steady Eddie when you may be wanting to take a bit more risk
This. I'm on the wrong side of my 30's and only recently checked both an old pension and my current employer pension to understand the underlying investments. The current one which I am contributing to was in a pretty rubbish default lowish risk fund. Obviously we all have different risk appetites depending on age and other factors but with another 25-30 years left for me(if I even make it that far..) I switched the current pension fund to 100% Equities actively managed and the uptick in performance since has been v noticeable. I just wish I had checked a few years back. Note that I did my due diligence before switching taking into account historical performance compared to the default fund and fund charges. Performance for the last 12 mths has been at +22.33% according the Aviva App.
Even with the company provided pot you may be able to change the fund in which it is invested.
I have been looking at doing that for my contributions.
My company adds in 2% for every 1% that I put in, up to 12% from them.
So, 6% from me makes it 18% - no brainer.
I find it difficult to decide on the fund to move it to as the current Aviva provided is a steady Eddie.
I'm happy to take some more risk now whilst markets are depressed in the hope that there is some higher growth as we come out of this mess.
Good on you for taking the time to look into this - it really makes a difference when it is all compunded up!
I have been looking at doing that for my contributions.
My company adds in 2% for every 1% that I put in, up to 12% from them.
So, 6% from me makes it 18% - no brainer.
I find it difficult to decide on the fund to move it to as the current Aviva provided is a steady Eddie.
I'm happy to take some more risk now whilst markets are depressed in the hope that there is some higher growth as we come out of this mess.
Good on you for taking the time to look into this - it really makes a difference when it is all compunded up!
Thanks for the replies all.
Daimler - yes, 5% from the company is not to be sniffed at. I pay PAYE on everything so I'm sure I do pay tax on it somewhere, unless it comes out of my pre-tax earnings. (that's the sort of level of my understanding of finances!) If it's pre-tax, then I'll bump up my contributions to 8% I think.
Wsurfa - They have got an explanation of the scheme, but it's in 5 x powerpoint slides, provided by WTW, and it reads like marketing bumf. I think the fee I pay is based on everything I've got "in the pot", rather than just the amount I increase the pot by each month, so my addition becomes a good amount less over time. I guess eventually my fee will be more than my contribution (theoretically, if I worked til 200 years old). But yes, I need to get some sort of basic guide from them in plain english.
VR/dingg - I'm happy to take more risk. Something else to look at, although how involved is it? I'm not after chasing market graphs and working out all the impacts of child trafficking through Yemen affecting the price of yams or anything.
Thanks for the help though chaps, it's a learning curve but one I'm somewhat looking forward to.
Daimler - yes, 5% from the company is not to be sniffed at. I pay PAYE on everything so I'm sure I do pay tax on it somewhere, unless it comes out of my pre-tax earnings. (that's the sort of level of my understanding of finances!) If it's pre-tax, then I'll bump up my contributions to 8% I think.
Wsurfa - They have got an explanation of the scheme, but it's in 5 x powerpoint slides, provided by WTW, and it reads like marketing bumf. I think the fee I pay is based on everything I've got "in the pot", rather than just the amount I increase the pot by each month, so my addition becomes a good amount less over time. I guess eventually my fee will be more than my contribution (theoretically, if I worked til 200 years old). But yes, I need to get some sort of basic guide from them in plain english.
VR/dingg - I'm happy to take more risk. Something else to look at, although how involved is it? I'm not after chasing market graphs and working out all the impacts of child trafficking through Yemen affecting the price of yams or anything.
Thanks for the help though chaps, it's a learning curve but one I'm somewhat looking forward to.
wsurfa said:
You won't be able to take the total pot as cash, but usually you can take up to 25% tax free at a specified age (often 55). The balance will pay you a monthly amount from the agreed retirement age.
Is this true post pension freedoms? I thought the point was that you no longer have to buy an annuity with any portion of the pot so could take it out in cash (after tax) at the appropriate age.Something else I'm not sure about.
Annuity = set pay packet every month until you die.
Drawdown = the entire pension pot acts like a bank account, and any time you take anything out you pay tax on it, just as if you were receiving a salary?
What is the most current thinking? Much like interest-only mortgages have gone out of fashion, have annuity pensions become old-fashioned or are they still a premium choice?
(I have mortgage questions too, but they are maybe better saved for another time)
Annuity = set pay packet every month until you die.
Drawdown = the entire pension pot acts like a bank account, and any time you take anything out you pay tax on it, just as if you were receiving a salary?
What is the most current thinking? Much like interest-only mortgages have gone out of fashion, have annuity pensions become old-fashioned or are they still a premium choice?
(I have mortgage questions too, but they are maybe better saved for another time)
OpulentBob said:
Annuity = set pay packet every month until you die.
Drawdown = the entire pension pot acts like a bank account, and any time you take anything out you pay tax on it, just as if you were receiving a salary?
Annuities provide pretty poor value at the moment, so most people choose drawdown - although it's up to you to be sensible and take it a sustainable rate. Drawdown = the entire pension pot acts like a bank account, and any time you take anything out you pay tax on it, just as if you were receiving a salary?
When you retire, you can take 25% tax free right away, then set it to draw down a set amount amount each month until it's gone. The pot stay invested, so it can still grow.
There's also an option to take series of lump sums, and 25% of each is tax free and the rest is taxed as income. I like this way.
OpulentBob said:
VR/dingg - I'm happy to take more risk. Something else to look at, although how involved is it? I'm not after chasing market graphs and working out all the impacts of child trafficking through Yemen affecting the price of yams or anything.
Lol nothing too detailed and geeky. My pension provider had one of those pdf's with a simple table setting out historical returns of each fund for the last 5 years..I compared each fund and even when taking into account the OCF (on going charge?) difference between crap passive default fund and 100% Equities Active (higher ocf=higher fees for me to swallow), in layman's terms the Equity fund had massively sh*t over the default fund and then some. That's all I did then asked my pension administrator to switch funds..yes I will take a bigger hit in a falling market but on the whole I'd rather take the risk with Equities as believe it will pay off in the long term..so they say! I follow the same approach with my s&s ISA..100% equities and as I get closer to retirement will dial down the risk accordingly.NickCQ said:
wsurfa said:
You won't be able to take the total pot as cash, but usually you can take up to 25% tax free at a specified age (often 55). The balance will pay you a monthly amount from the agreed retirement age.
Is this true post pension freedoms? I thought the point was that you no longer have to buy an annuity with any portion of the pot so could take it out in cash (after tax) at the appropriate age.In my case i have a few pensions from previous work plus a current one that myself and my employer pay into, for that i use a salary sacrifice where my payments come off my gross salary, so don't get taxed on what i pay in.
OP needs to find out precisely what type of scheme they have, get the policy number and the company the policy is with then register online and look at your own plan details. Often the agent used to set up the scheme and provide advice is not doing the investment, you may find they charge a fee for this service and the pension company are also charging a fee on the fund. You need to know 100% what you actually have before you can go further.
Also worth bearing in mind is you should nominate your death beneficiaries, otherwise you run the risk of your pension pot being kept by the provider or given to the UK treasury.
All my schemes allow me to change the funds the money is invested in, the usual split they set you up in are crap for growth, it's a good idea to split your fund into various smaller pots and spread the risk and geography of where it is invested. Don't believe the hype about them managing this for you, all they really mean is your money is in a mixed portfolio of shares they tinker with. I have my funds in 4 different types of managed funds to split the risk, so when UK goes tits up it tends to balance out via the non UK area. I have one chunk purely in tech stocks and that has done really well in the last 4 years in particular. It's something you should asses regularly if you want to have gains that beat inflation, most schemes allow a fund switch for free each year.
It's also worth bearing in mind that whilst you are purchasing stocks through regular from salary payments, if a particular market is on it's arse but is likely to recover (UK for example), that's a good thing for you long term as you get more stock for your money. You need to think differently between any old pension pots and anything currently actively receiving payments.
VR99 said:
dingg said:
Look to see what your plan is invested in and make sure its right for what you want at the present time, probably the plan provider has stuck you in a bog average steady Eddie when you may be wanting to take a bit more risk
This. I'm on the wrong side of my 30's and only recently checked both an old pension and my current employer pension to understand the underlying investments. The current one which I am contributing to was in a pretty rubbish default lowish risk fund. Obviously we all have different risk appetites depending on age and other factors but with another 25-30 years left for me(if I even make it that far..) I switched the current pension fund to 100% Equities actively managed and the uptick in performance since has been v noticeable. I just wish I had checked a few years back. Note that I did my due diligence before switching taking into account historical performance compared to the default fund and fund charges. £4k per annum at 6% over 35 years =£472k
at 8% = £744k!
OpulentBob said:
I think the fee I pay is based on everything I've got "in the pot", rather than just the amount I increase the pot by each month, so my addition becomes a good amount less over time. I guess eventually my fee will be more than my contribution (theoretically, if I worked til 200 years old).
This will be the case, and is generally the case with most investment arrangements to some extent generally you seek to minimise fees, but if moving to a SIPP costs you the company contribution, you're losing more than you gain.On the bright side, the investment return in the long term should average significantly more than the fee, and quite possibly more than your contributions as you get towards the end of the paying in part of the process.
xeny said:
This will be the case, and is generally the case with most investment arrangements to some extent generally you seek to minimise fees, but if moving to a SIPP costs you the company contribution, you're losing more than you gain.
On the bright side, the investment return in the long term should average significantly more than the fee, and quite possibly more than your contributions as you get towards the end of the paying in part of the process.
If it isn't significantly more than that you did extremely badly.On the bright side, the investment return in the long term should average significantly more than the fee, and quite possibly more than your contributions as you get towards the end of the paying in part of the process.
Thank you everyone for your input and explanations. Very helpful and quite common sense once you start to look in to it. I appreciate the tolerance of my naivety. I think I've just been daunted by terminology and the sheer long term scale of it. Once you start thinking about your pension being worth 6 figures, it all gets a bit scary!
I think getting details of the existing pension/plan is key, that will be my next step. And then up my payments I think.
I will be back with any further questions!
I think getting details of the existing pension/plan is key, that will be my next step. And then up my payments I think.
I will be back with any further questions!
OpulentBob said:
Thank you everyone for your input and explanations. Very helpful and quite common sense once you start to look in to it. I appreciate the tolerance of my naivety. I think I've just been daunted by terminology and the sheer long term scale of it. Once you start thinking about your pension being worth 6 figures, it all gets a bit scary!
I think getting details of the existing pension/plan is key, that will be my next step. And then up my payments I think.
I will be back with any further questions!
i think you have done well to look and examine your pension that you do have. Its often a dark topic that gets put to one side and forgotten about. I pulled my finger out after reading IM postings on here and got around to do something and bring into the light my pension and understanding of it all. I think getting details of the existing pension/plan is key, that will be my next step. And then up my payments I think.
I will be back with any further questions!
superlightr said:
OpulentBob said:
Thank you everyone for your input and explanations. Very helpful and quite common sense once you start to look in to it. I appreciate the tolerance of my naivety. I think I've just been daunted by terminology and the sheer long term scale of it. Once you start thinking about your pension being worth 6 figures, it all gets a bit scary!
I think getting details of the existing pension/plan is key, that will be my next step. And then up my payments I think.
I will be back with any further questions!
i think you have done well to look and examine your pension that you do have. Its often a dark topic that gets put to one side and forgotten about. I pulled my finger out after reading IM postings on here and got around to do something and bring into the light my pension and understanding of it all. I think getting details of the existing pension/plan is key, that will be my next step. And then up my payments I think.
I will be back with any further questions!
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