Financed lifestyles

[CaptainSlow]

bogie said:

I thought like that until mid 30s then read some investment books, and started to think differently, particularly due to more tax efficient saving like ISA and SIPP. A "pension" is a product that is sold by financial services companies or provided by employers/government. What you have available these days with a SIPP account is really just a tax efficient savings account that you cannot access until 55 years old that you can use to purchase all kinds of different financial assets.

Say you earn £120k gross and dont bother with a pension at all you will take home £6178 a month

If you now save say 25% of gross pay (£2500 per month) into your pension you now take home £5012

Due to tax relief of £20k per year you now get £50,000 going into your pension for a net cost to you of £1166 a month or £13992 a year

Can you think of another way you can turn £13992 into £50k before you even invest it in other assets ?

This tax break may not be as generous forever, so I am trying to make the most of it whilst its there

Work it out for yourself with your own salary here https://www.moneysavingexpert.com/tax-calculator/

Seems like nobody has picked you up on this so I will.

You don't gross up the gross contribution ie the £30k is the gross amount so that is what goes into the pension...not £50k.

Even if the £30k was the net contribution the amount going into the pension would be £37.5k....with a further £7.5k coming back to you via your tax return.

I agree with you on your point about the tax efficient nature of pensions though....especially if the 25% tax free element stays untouched.

[Condi]

mccrackenj said:

Exactly. Full state pension now £8.7k, so £9.7k + £8.7k X 2 = about £36.8k or £2,875 per month net. that sounds OK to me too. How much does a couple in their 70s need? Especially if they can release a bit of housing equity by downsizing.

Maybe fine if you are a couple. Not so fantastic if single or windowed.

[Groat]

mccrackenj said:

How much does a couple (or a single) in their 70s (or 80's or 90's) need?

This very rarely asked or addressed question is arguably the one that people should ask themselves first and foremost before worrying or stressing about needing some grandiose sum for their old age.

There's little sadder than watching a now retired codger running around trying to enjoy a lifestyle they always denied themselves because of the effort to ensure a padded dotage.

Edited by Groat on Monday 22 July 13:18

[JaredVannett]

I 8 a 4RE said:

This will be a very unpopular post on here ... so get the pitchforks ready:

86.5% of new cars are bought on finance. Financing a depreciating asset, aka Bad Leverage.

But tell anyone and they will say "It is only such a small part of my income, I can afford it."
Buddy, the fact you had to put it on Finance is the definition of not being able to afford it.

You raise an interesting point, in that what does "can you afford it" actually mean?

Can you afford the deposit, payments over the term - yes?
Can you afford to buy the vehicle without finance - no?

The biggest issue I see with living financed lifestyles are the liabilities. When your making monthly payments for everything it affects your perception of risk. For example, suppose in your mid 30s you decide you want a complete career change.... chances are your first job (in a new industry) will pay below what your currently on due to lack of experience, junior role. By signing up to many monthly liabilities you have anchored yourself to a salary band... which would force you to consider such career change moves as "high risk" even though in reality the long term upside is probably infinite and you'll be happier.

As an aside, I went online to shop for a garden shed to buy.... every single one of them were available on finance..... a shed, a bloody shed!

[red_slr]

jshell said:

djc206 said:

mccrackenj said:

Exactly. Full state pension now £8.7k, so £9.7k + £8.7k X 2 = about £36.8k or £2,875 per month net. that sounds OK to me too. How much does a couple in their 70s need? Especially if they can release a bit of housing equity by downsizing.

Relying on the state pension being both available and of equivalent value decades in the future is brave.

I don't doubt there will be changes to the state pension over the next 30 years but I doubt the level of income from it will go down.

I suspect we might see them playing with the SP age again and perhaps, just perhaps a graduated pay scale based on a means test.

[btdk5]

Taaaaang said:

I'm 37 and don't have a pension. I have significant savings but I can't help but feel that it's only a matter of time before I get fked by the govt in some way if I start a pension.

It's a really tricky situation and I'm not too sure what my next move is.

Is this fear of the government some made up excuse to justify not putting any savings in place?

What policies have previously been put in place which have started this thinking?

[boyse7en]

djc206 said:

boyse7en said:

Do you mean the pot they expect to have at retirement age? Or is that the pension pot they have accumulated at 45-54?

If the latter it doesn't sound that bad an effort. Starting a pension at 30 (probably the age at which most people start thinking about what they are going to do and also have a bit of spare cash available) you'd be paying well over £200 a month to get to that - which is quite a large proportion of the average £28k annual wage

Their pot as it stands. The same article says they need ~£450k to retire comfortably so basically they’re pretty screwed if that’s all they’ve got at that point.

Well, yes, but if the average salary is circa £28k, how does anyone expect the average worker to have managed to save nearly half a mil? I'd say that managing to save/invest £70k in a pension by the age of 50 is pretty good going. It might not give you the pension you would like, but that is hardly the fault of the saver

[Testaburger]

boyse7en said:

Well, yes, but if the average salary is circa £28k, how does anyone expect the average worker to have managed to save nearly half a mil? I'd say that managing to save/invest £70k in a pension by the age of 50 is pretty good going. It might not give you the pension you would like, but that is hardly the fault of the saver

The issue is that we are often late in realising that we need to save for retirement. Of course, weddings, buying a house, kids etc get in the way, but the key is starting early.

Put it this way. If you put 165 a month in from age 20, the govt top that up to 200.

With a 6% annualised return, that’s worth 550k at 65.

If you do the same from age 30, it’s worth 200k.

If you start at 40 it’s worth 140k. Or put another way, you need to save 835 a month instead of 200 to reach that 550k number at 65.

Unfortunately our population are starved of education on personal finance until they smell the coffee, which is usually too late. Mandatory classes in school would be the best investment the U.K. could make in itself.

Edited by Testaburger on Monday 22 July 14:47

[GT03ROB]

Testaburger said:

The issue is that we are often late in realising that we need to save for retirement. Of course, weddings, buying a house, kids etc get in the way, but the key is starting early.

Put it this way. If you put 165 a month in from age 20, the govt top that up to 200.

With a 6% annualised return, that’s worth 550k at 65.

If you do the same from age 30, it’s worth 200k.

If you start at 40 it’s worth 140k.

Unfortunately our population are starved of education on personal finance until they smell the coffee, which is usually too late. Mandatory classes in school would be the best investment the U.K. could make in itself.

I'm probably wrong but I thought this was where workplace pensions were supposed to come in? It needs to be mandatory for employers & employees to contribute to a pension outside of the state schemes.

Educate all you like they still won't do it unless mandated to.

[Testaburger]

GT03ROB said:

I'm probably wrong but I thought this was where workplace pensions were supposed to come in? It needs to be mandatory for employers & employees to contribute to a pension outside of the state schemes.

Educate all you like they still won't do it unless mandated to.

WPP is a start, and I think will be very effective for those who enter the workforce under 25 years of age. Opting out should not be an option until your pot hits a certain value. It needs to be extended to age 18 (currently its 22 I think), and it needs to become 5% + 5% employer/employee contributions, rather than the 3 + 5 it is now.

On your last point - perhaps, but I’m a little less cynical than you in this regard. I didn’t give pensions/investments too much thought until I got my first well-paid job. I wasn’t in a position to put much more than what seemed like a token gesture into the pot, so I figured I’d make up for it later. What I subsequently learned is how much I missed out on as a result.

I knew saving is good and overspending is bad, but nothing pointed me in the direction of the cold hard numerical facts. That would certainly have altered my view. Perhaps it would do the same for many others?

[Dr Jekyll]

Testaburger said:

I knew saving is good and overspending is bad, but nothing pointed me in the direction of the cold hard numerical facts. That would certainly have altered my view. Perhaps it would do the same for many others?

The complication is of course, that if everyone saves a higher proportion of their income, savings overall are likely to drop.

[Terminator X]

brickwall said:

- House prices. Someone who bought a house in 1995 and sold in 2015 will likely have made a lot of money - ultimately paid for by the (likely younger) person buying the house.

That won't change though assuming said person can buy a house today eg in 20 years time it will have increased ish like the 1995-2015 one.

TX.

[Testaburger]

Dr Jekyll said:

The complication is of course, that if everyone saves a higher proportion of their income, savings overall are likely to drop.

Mathematically yes, but I only half agree, because we don’t save anyway. I rather suspect that if we save a mandatory 10% (5+5 employee/employer) then most will just continue to spend what they have left. But, that’s fine - because that 10% will work for 45 years and be able to provide the same income if drawn-down at 4% pa.

This will allow means-testing of the state pension, too.

Roughly If you gross 24k from age 20 you’ll have 200 stashed away each month and using my numbers above, you’ll get almost the same amount back at 4%.

Perhaps state pension funds can be used to make up shortfalls in given years etc.

Pie in the sky, I know, but I do think WPP is a huge positive step. It just needs tweaking.

[Groat]

If you buy a sofa on finance you get a sofa to sit on while you're paying it up.

If you buy a car on HP you get a car to drive while you're paying it up.

If you buy a Rolex on credit you get a watch to wear while you're paying it up.

And if you buy a house on a mortgage you get to rent it out/live in it till it's paid off.

BUT if you buy a pension to live on 50 years in the future, you get nothing till it's paid up (if you live that long).

You can kind of see why pensions aren't the most attractive thing to buy on the never never, can't you?

[NRS]

Terminator X said:

brickwall said:

- House prices. Someone who bought a house in 1995 and sold in 2015 will likely have made a lot of money - ultimately paid for by the (likely younger) person buying the house.

That won't change though assuming said person can buy a house today eg in 20 years time it will have increased ish like the 1995-2015 one.

TX.

Given the wages versus house price multiples increases I doubt that's happening. Let alone including the change over time to 2 wages per couple etc which has pushed prices up which can't be repeated surely?

[I 8 a 4RE]

Groat said:

If you buy a sofa on finance you get a sofa to sit on while you're paying it up.

If you buy a car on HP you get a car to drive while you're paying it up.

If you buy a Rolex on credit you get a watch to wear while you're paying it up.

And if you buy a house on a mortgage you get to rent it out/live in it till it's paid off.

BUT if you buy a pension to live on 50 years in the future, you get nothing till it's paid up (if you live that long).

You can kind of see why pensions aren't the most attractive thing to buy on the never never, can't you?

Have you ever heard of Compound Interest?

[moles]

Who knows maybe parents will move back in with kids funding a further bubble to house prices. Makes sense if a parent/parents sell and the 4 adults chip in to buy a bigger house or property with land and build a granny annexe.

[Testaburger]

Groat said:

If you buy a sofa on finance you get a sofa to sit on while you're paying it up.

If you buy a car on HP you get a car to drive while you're paying it up.

If you buy a Rolex on credit you get a watch to wear while you're paying it up.

And if you buy a house on a mortgage you get to rent it out/live in it till it's paid off.

BUT if you buy a pension to live on 50 years in the future, you get nothing till it's paid up (if you live that long).

You can kind of see why pensions aren't the most attractive thing to buy on the never never, can't you?

Of course you can see that. It doesn’t diminish its importance, though.

It’s a mindset. If you present it to a 20 year old as losing out for 30 years, it’s not going to be an easy sell.

If he believes he gets to ‘own’ his financial security, then he may be more interested.

After all, it’s incredibly cheap to do it for 40 years, and it gets exponentially more expensive as time drags by.

Using your finance example is slightly disingenuous (but I agree with the thrust of your point). A more correct credit analogy would be buying a car on finance now and getting to own it while you pay it up, or saving up to buy it outright down the line.

The catch is, if you finance it now, it’ll cost you four times as much.

They’re the roughly proportional numbers for starting at 20 vs 40.

[Groat]

I 8 a 4RE said:

Have you ever heard of Compound Interest?

I've HEARD of it....

....that's the thing that struggles to compete with inflation, market forces, currency devaluation, and a whole host of other impacts on savings isn't it?

Remind me. What would £100 put in the average current account in 2009 be worth today? £105? £102? and in real terms, what? £95?
£90?

Compound schmompound.

[NRS]

Groat said:

I've HEARD of it....

....that's the thing that struggles to compete with inflation, market forces, currency devaluation, and a whole host of other impacts on savings isn't it?

Remind me. What would £100 put in the average current account in 2009 be worth today? £105? £102? and in real terms, what? £95?
£90?

Compound schmompound.

Why are you saving it in a current account? That'd be the equivalent of buying a £1 million house, and getting say your £1700 a month. A stupid idea.