No Pension - 25, Gov looking to increase SPA to 75 HELP!!

[Groat]

JulianPH said:

Now let's look at the reality:

The basic rate tax payer realises that he doesn't want to downsize into a hovel in 25 years time in order to retire, so does some financial planning and compromises, buying a £200,000 property, aiming to extend or up-size as his future earnings increase.

He then pays the difference in the deposit and mortgage repayments into a pension.

In 25 years time he owns the (now £600,000) house outright with no need to downsize and has £486,776 in his pension.

The higher rate taxpayer does the same and buys a £300,000 home with the same intentions.

In 25 years time he owns the (now £900,000) house outright with no need to downsize and has £1,307,781 in his pension.

Hmmmm. Admittedly this article is over a year old, but isn't THIS a lot closer to "reality" ? :


About 15 million people have no pension savings and face a bleak future in retirement, according to a major survey of Britain’s personal finances published this week by the Financial Conduct Authority.

The Financial Lives survey of 13,000 consumers by the FCA, the biggest of its kind, found that 31% of UK adults have no private pension provision and will have to rely entirely on the state in their retirement. The full state pension is £159.55 per week, but that is only available to individuals who have a complete record of national insurance contributions.

Of particular worry is the group of people aged over 50 who are not paying into a pension and have few years left to build one up before they reach their 60s. When the FCA asked why they had made no provision, 32% said it was too late to set one up, 26% said they could not afford it and 12% said they were relying on their partner’s pension.

Auto-enrolment has brought millions of people into pension saving for the first time, but millions of self-employed and part-time workers are not in the scheme.

The figures reveal a big gap between men and women: 33% of men expect to retire with just the state pension, but that rises to 53% among women.

Even among those with a company pension, the survey reveals few people will benefit from a generous “final salary” arrangement, which is based on their income just before retirement. The FCA found that only 16% of working people have a final salary pension, while 41% will have to depend on a “defined contribution” (DC) pension, where the payouts will depend on the vagaries of the stock market.

Most people with DC pensions state that they have relatively little in their pension pot. Around two-fifths have less than £5,000 and only 12% have more than £100,000. Half the people who have so far accessed their DC pension say it is not enough to live on.

People also find it difficult to envisage how long they will live in retirement. The average 55- to 64-year-old said they expected to live until 83, which is a few years below actuarial predictions.

The report notes widespread pension confusion among the public. Four in 10 adults aged 35-44 had no idea how much their company was paying into their pension pot, while a third said they had not given any thought to how they would manage financially in retirement. The FCA cited one respondent, Obedi: “All the information is on the [work] intranet, but I don’t understand it. They try and describe it in layman’s terms and I’m not thick, but you’ve got to know what they are talking about ... the full comprehension of it is difficult.”

[JulianPH]

That is certainly the reality for people who don't plan or bury their heads in the sand.

I was talking of the reality of people who do plan ahead.

Your post just highlights the disparity between the two approaches.

We need personal financial education in schools (and out side them, it appears).

Cheers

[Fonzey]

I'll be honest Pensions were not even in the top-100 things I thought about in my 20's, every payrise was just a nicer car or a better holiday or whatever - never thought to put aside the money into the company pension (which by all accounts had pretty generous employer contributions).

At about 28 I was auto-enrolled but I left it at whatever the automatic enrolment was, never thought about ramping it up.

At age 30 I went self-employed and for the last two years we've put £20k/year into a SIPP - but even then I was just a 'passenger' and following the lead of my business partner who was trying to make us tax efficient etc. I paid no real attention to the process or SIPP, and didn't activate my online account for it (to view its progress) until a month or two ago.

Now at 32 with a kid on the way I've finally started paying attention and have done some maths, my expectations vs reality for what pot I'll want/need for retirement has been a huge gulf.

So now, at 32yo I've got £40k in a SIPP (not doing that well, it seems) and about £12k in my previous employers pension and going forward I plan to ramp things up nicely. It's taken a while to get online access to the various bits, but now I have visibility of it all - it's become a bit more 'real' and I have motivation to sort it. What's scary is that I could have easily gone another 10 years without paying much attention to it, and after playing with the various calculators I've seen how insane just a few years makes.

I did one particular calculation and the pot if I worked till 68 was DOUBLE that if I worked till 64... I thought I'd be done at 55 but I've got a lot of work to do in the next 23 years for that to happen!

We tried to do a similar exercise for my wife to figure out how her pot is looking, and as she's in her 7th(?) year of full time teaching it seems her pension is already mental - and if she can stick it out till 68 she's going to be financially carrying us I'm sure I must have misinterpreted something, are teacher pensions that good?!

[Phleaser]

A book that was recommended by many on PH, is Andrew Craig - How to Own The World.
This might provide some clarity on pensions for you.

[JulianPH]

If anyone would like clarity on pensions, Ill kep this short.

• Basic rate taxpayers get an immediate uplift of 25%

• Higher rate taxpayers get an uplift of 66.66% (partly in their pocket)

• All growth and income whilst you are saving (accumulation) has no CGT or Income tax

• 25% is tax free when you start drawing down (of just want to take a lump sun)

• The rest is taxed at what is very likely to be a lower rate than when you were working

• You can invest the money you put into a pension in any way your like (providing it is subject to pension rules - which are wider than ISA rules)

• A pension is a tax allowance, not a product. Use it as such and it will work very well for the investments you select to hold with it

There are even more benefits for others, but I'll leave it at that for now.

[Phleaser]

Very helpful, thanks JulianPH.

I am always glad to see good advice from you!

[JulianPH]

Phleaser said:

Very helpful, thanks JulianPH.

I am always glad to see good advice from you!

Cheers!

Please ignore the typos, I was writing this in a rush between many phone calls.

[Testaburger]

JulianPH said:

If anyone would like clarity on pensions, Ill kep this short.

• Basic rate taxpayers get an immediate uplift of 25%

• Higher rate taxpayers get an uplift of 66.66% (partly in their pocket)

• All growth and income whilst you are saving (accumulation) has no CGT or Income tax

• 25% is tax free when you start drawing down (of just want to take a lump sun)

• The rest is taxed at what is very likely to be a lower rate than when you were working

• You can invest the money you put into a pension in any way your like (providing it is subject to pension rules - which are wider than ISA rules)

• A pension is a tax allowance, not a product. Use it as such and it will work very well for the investments you select to hold with it

There are even more benefits for others, but I'll leave it at that for now.

Julian’s brevity is always valuable to paint a picture.

It’s madness to ignore the benefits of pension wrappers. The efficiency/instant yield is unmatched. The only downside is that you’re subject to age restrictions and upper limits. Put another way, as a higher-rate tax payer scenario.

You pay £32,000 into a SIPP. It immediately becomes £40,000 and you get an £8,000 tax refund in your pocket on top, which can be bunked into an ISA, which in turn grows free of any taxation and can be used at any time (perhaps to bridge the gap from early retirement to SIPP drawdown age).

You’re effectively getting 48 grand for the price of 32. That’s before any tax-free growth and the highly efficient withdrawals.

[mfmman]

Testaburger said:

You pay £32,000 into a SIPP. It immediately becomes £40,000 and you get an £8,000 tax refund in your pocket on top,

Could that be clarified, I'd imagined (maybe wrongly) that the £8k refund would only apply if you had paid tax on that sum from your income at that rate.

As an example (rough figures only) if your income was £60k and normal threshold applied then £12.5 k at 0%, next £37.5k at 20% and last £10k at 40%. So pension addition would be £32,000 made up to £40,000 and the rebate would be 20% of £10k (£2,000)

May be way off though!

[Testaburger]

Apologies, I could have been clearer; my example was assuming that all personal contributions were from income in the higher marginal rate, so you’d need to be earning a gross 82k or so to make that possible.

Essentially, once you’ve reduced your taxable income down to the higher rate threshold (by pension contributions or any other means), then only basic rate relief is available. Still, an immediate 25% uplift isn’t to be sniffed at.

I fully appreciate that many/most simply can’t dump tens of thousands a year into pensions, of course. That said, the compounding effect of even a few hundred quid that would’ve gone to the tax man growing in your pension is staggering.

100 a month growing at 7% over 40 years ends up being worth 265k.

As a basic rate taxpayer, that’s over a quarter of a million EXTRA added to your pot for putting in £400 a month, generated solely by the government top/up.

[mfmman]

Understood (and I was right, phew!)

[Edible Roadkill]

Interesting read.

What do people genuinely aim for as a pension income?

Using those calculators it’s saying two thirds of current income which I thinks a bit much!?

I was thinking between mine & mrs pensions a combined 30-35k in today’s money would perhaps be enough.

After all, house paid, kids long gone, outgoings will be minimal.

[rossub]

Edible Roadkill said:

Interesting read.

What do people genuinely aim for as a pension income?

Using those calculators it’s saying two thirds of current income which I thinks a bit much!?

I was thinking between mine & mrs pensions a combined 30-35k in today’s money would perhaps be enough.

After all, house paid, kids long gone, outgoings will be minimal.

Lots of leisure time could be expensive though. Unless you just go fishing or hit the golf course every day I suppose.

[Edible Roadkill]

rossub said:

Edible Roadkill said:

Interesting read.

What do people genuinely aim for as a pension income?

Using those calculators it’s saying two thirds of current income which I thinks a bit much!?

I was thinking between mine & mrs pensions a combined 30-35k in today’s money would perhaps be enough.

After all, house paid, kids long gone, outgoings will be minimal.

Lots of leisure time could be expensive though. Unless you just go fishing or hit the golf course every day I suppose.

Well goes without saying it depends what your aspirations are I guess if you want to be a big dick swinger join the local yacht club and tour the world that comes with a price yes.

I don’t have many leisure activities now so upon retirement I envisage much the same. Probably more likely just want to just live quite a basic lifestyle when I’m 65+ Walk the dog, few weeks in the sun a year, potter about, meal out now and then.

By that point I plan to have done enough now to tick the life achievements boxes, been and seen everywhere I want. Done the nice cars etc

Pension wise I’m doing ok with a very generous final salary employer pension which pays in around a grand a month and also a Sipp which I put a lumper in each march - as previously mentioned for the tax benefits alone. Wife’s got a public sector pension which is also pretty good.

I can’t foresee any issues but when i stick numbers into that calculator it’s suggesting I’m only on 50% target for what they suggest as two thirds of my current salary.....and that’s just for me not for both of us.

I just can’t imagine needing much at that age. My parents are in their 70’s now retired at 55 and manage very well on less income.

[mike9009]

At some stage in 'one's' life, pensions suddenly become a reality.

Just to make others 'feel' better (or worse?) this is my tale.


I started my pension at 26. I put the bare minimum in for almost 14 years. I moved jobs, switched pension and took a look how much mine was worth - the answer? not that much. The last five years I have slowly been ramping up my contributions, more than quadrupling the % contribution overall now. This is 'tight' but also plays into the child benefit game.

My fund is at ~£150k now (and I know I am luckily compared to many/ most colleagues).

Those taking it seriously in mid twenties/ early thirties will have a serious benefit over my prospects.

I will have some income in retirement but perhaps not to the level of lifestyle I would have wanted if I 'realised' earlier. Only 20 years to go

[Groat]

Something rarely considered in looooong term savings/investment is the impact Mr Inflation has on the pot.

For example, anyone aiming to achieve a million pound pot by 2060 (in 40 years) should bear in mind that a million today has the same purchasing power £200k had in 1979 (40 years ago).

So if the aim is to have the same purchasing power in 2060 that a £1million pot has today, it might be sensible to aim at accumulating a £5million pot by 2060.

[JulianPH]

Testaburger said:

JulianPH said:

If anyone would like clarity on pensions, Ill kep this short.

• Basic rate taxpayers get an immediate uplift of 25%

• Higher rate taxpayers get an uplift of 66.66% (partly in their pocket)

• All growth and income whilst you are saving (accumulation) has no CGT or Income tax

• 25% is tax free when you start drawing down (of just want to take a lump sun)

• The rest is taxed at what is very likely to be a lower rate than when you were working

• You can invest the money you put into a pension in any way your like (providing it is subject to pension rules - which are wider than ISA rules)

• A pension is a tax allowance, not a product. Use it as such and it will work very well for the investments you select to hold with it

There are even more benefits for others, but I'll leave it at that for now.

Julian’s brevity is always valuable to paint a picture.

It’s madness to ignore the benefits of pension wrappers. The efficiency/instant yield is unmatched. The only downside is that you’re subject to age restrictions and upper limits. Put another way, as a higher-rate tax payer scenario.

You pay £32,000 into a SIPP. It immediately becomes £40,000 and you get an £8,000 tax refund in your pocket on top, which can be bunked into an ISA, which in turn grows free of any taxation and can be used at any time (perhaps to bridge the gap from early retirement to SIPP drawdown age).

You’re effectively getting 48 grand for the price of 32. That’s before any tax-free growth and the highly efficient withdrawals.

Cheers mate, and you illustrate this point very well. Paying the higher rate relief into an ISA to bridge an early retirement gap makes excellent sense.

I fail to understand why a higher rate taxpayer would choose to pay 40% tax on part of their earnings, rather than have this invested for their own future.

[whatxd]

Here’s a different perspective for what it’s worth.

Age 31, self employed, no pension at all, absolutely no intention of setting one up.

I believe the money is more use to me here and now, if invested properly and I continue to work hard. If I was wasting it on toys and holidays, sure it would be better in a pension.

I have one btl that is currently being paid off at a rate of £300 per month. Another at £250.

At current rate, they’ll both be paid off by my mid 50’s. I realise interest rates can change only for the worse, not to mention targeted taxes.

In the here and now, currently renovating, got a little lucky with the house we ended up with as it was a hidden gem, house next door but one just sold for £135,000 more than we paid for ours and we have one extra bedroom.

Every penny I have goes to finishing this project by next year. Putting money into a pension would not be good for me as it would only push me back now.

As soon as this is done, we’ll be selling and doing a self build (bricklayer by trade) which would put us almost mortgage free before my wife’s 30th birthday.

Once I’ve achieved these goals, I’ll reassess my situation, but I view those houses as my pension if nothing else.

Almost every penny I’ve earned since I was 19 has been saved and invested into these properties and having (soon) fantastic equity in my main domicile, which like a pension contribution is tax free, which will then be put into a self build which is also tax free and VAT free is far more efficient for me and my wife than putting money into a pension.

[Mr Pointy]

whatxd said:

(Edited for brevity) Almost every penny I’ve earned since I was 19 has been saved and invested into these properties and having (soon) fantastic equity in my main domicile, which like a pension contribution is tax free, which will then be put into a self build which is also tax free and VAT free is far more efficient for me and my wife than putting money into a pension.

That's great, but I think you'd have to admit yours is a very atypical case. Very few of us are in the position to physically build a house to make money on.

The Telegraph has a piece on BTL v pensions:
https://www.telegraph.co.uk/investing/buy-to-let/p...

[JulianPH]

whatxd said:

Almost every penny I’ve earned since I was 19 has been saved and invested into these properties and having (soon) fantastic equity in my main domicile, which like a pension contribution is tax free, which will then be put into a self build which is also tax free and VAT free is far more efficient for me and my wife than putting money into a pension.

Except that you have had to pay full tax on every penny you put into this, so it is not like a pension contribution.

However, congratulations on doing so well at such a young age. I genuinely applaud you in this and hope that you will also come to see the tax benefits of other investments as you move forward.