Half-Way To Retirement - Is my pension doing ok?
Discussion
I'm turning 34 this year and it's become a sort of "half-way to retirement" mental fixation for me, prompting me to check what I actually pay into my pension and whether it's enough. I'm looking for some reasonable/honest/open advice so have set up a throwaway account to be able to post numbers more freely. I fully expect state pension age to keep increasing but I'd rather not be working full-time much past 65 if I don't need to...
I earn a basic salary a few quid short of £40,000 and commission and bonus on top of that which varies but this financial year was around £15k. For the basis of my online research I've used £50k as my current income and most online calculators suggest I'll need an income of £32k in retirement (in today's money) for a similar standard of living once my mortgage is gone. This feels about right to me knowing my expenses.
I currently have two pension pots, one from a previous job which sits at £12,500 and one with my current employer at £32,000. My contributions are via salary sacrifice at £525/month, and logging into the pension provider's website it shows a monthly amount of £690 being paid in suggesting my employer adds £165 or so, plus the associated tax relief.
I genuinely don't know how this works - It used to be a standard(?) pension under which my employer paid 5% and I paid about 10% and when the salary sacrifice model was introduced last year it was set at a level to provide an equivalent net income each month as I had previously. I assume my employer's contribution is their previous 5% as it's the same figure give or take a few pence.
One online pension calculator (unbiased.co.uk) suggested with these numbers that I could have a pension of £56k/year and another (moneyhelper.org.uk) suggested £29,000 - both inclusive of state pension. Meanwhile my pension provider itself suggests only that my total fund value could be £610k at retirement.
I simply cannot make sense of the numbers and would greatly value a little wisdom from those who grasp these things better than I do. Am I doing okay? Do I need to up my contributions? Do I need to find someone to offer professional advice? Thanks in advance.
I earn a basic salary a few quid short of £40,000 and commission and bonus on top of that which varies but this financial year was around £15k. For the basis of my online research I've used £50k as my current income and most online calculators suggest I'll need an income of £32k in retirement (in today's money) for a similar standard of living once my mortgage is gone. This feels about right to me knowing my expenses.
I currently have two pension pots, one from a previous job which sits at £12,500 and one with my current employer at £32,000. My contributions are via salary sacrifice at £525/month, and logging into the pension provider's website it shows a monthly amount of £690 being paid in suggesting my employer adds £165 or so, plus the associated tax relief.
I genuinely don't know how this works - It used to be a standard(?) pension under which my employer paid 5% and I paid about 10% and when the salary sacrifice model was introduced last year it was set at a level to provide an equivalent net income each month as I had previously. I assume my employer's contribution is their previous 5% as it's the same figure give or take a few pence.
One online pension calculator (unbiased.co.uk) suggested with these numbers that I could have a pension of £56k/year and another (moneyhelper.org.uk) suggested £29,000 - both inclusive of state pension. Meanwhile my pension provider itself suggests only that my total fund value could be £610k at retirement.
I simply cannot make sense of the numbers and would greatly value a little wisdom from those who grasp these things better than I do. Am I doing okay? Do I need to up my contributions? Do I need to find someone to offer professional advice? Thanks in advance.
You're asking the right question at the right time, because you won't like the answers but there's time to do something about it.
Let's say you want a pension of 2/3rds of your current earnings of £50k p.a. so £35,000 p.a.
At age 60/65 you'd need an accumulated "pot" of 30 x £35k to provide that pension. That's £1million. (Ouch!)
But on the good side you'll get a state pension of, say, £10k p.a. so if you deduct that the arithmetic becomes 30 x £25,000 = a pot of £750,000
How are you going to get there?
Let's say you want a pension of 2/3rds of your current earnings of £50k p.a. so £35,000 p.a.
At age 60/65 you'd need an accumulated "pot" of 30 x £35k to provide that pension. That's £1million. (Ouch!)
But on the good side you'll get a state pension of, say, £10k p.a. so if you deduct that the arithmetic becomes 30 x £25,000 = a pot of £750,000
How are you going to get there?
- You need to increase those annual pension contributions to at least £10,000 p.a., and
- You'll need a decent investment strategy (stocks and shares based, not savings) to get the compound investment returns you need.
Play around with a compound interest calculator like this one.
https://www.thecalculatorsite.com/finance/calculat...
It's crude as investments zig and zag rather than give nice linear returns but it will help give some basic indications what you might expect to see in the pot after X years of Y contributions at a given average rate of return.
https://www.thecalculatorsite.com/finance/calculat...
It's crude as investments zig and zag rather than give nice linear returns but it will help give some basic indications what you might expect to see in the pot after X years of Y contributions at a given average rate of return.
If your current scheme is indeed salary sacrifice, ensure you contribute enough to receive the maximum employer contribution (if not already doing so) and I would recommend reviewing the investments to see if they are appropriate for your age...in most cases your pension contributions are going into a medium risk 'default' fund of some kind which is typical for employer pension schemes and the performance of those funds can be hit and miss.
I will add, make sure you do some reading/research/consult before messing around with the fund selection, being able to select funds is great but means there is a heightened risk of b*ggering it all up of you go too extreme on the risk scale (in either direction).
FWIW you are in a better position than I was at 33....as I recall there was less than £20k in my pension at that point
I will add, make sure you do some reading/research/consult before messing around with the fund selection, being able to select funds is great but means there is a heightened risk of b*ggering it all up of you go too extreme on the risk scale (in either direction).
FWIW you are in a better position than I was at 33....as I recall there was less than £20k in my pension at that point
Edited by VR99 on Monday 27th March 17:15
okgo said:
I’d be putting as much in as you can afford to and just ensuring it’s in something vaguely appropriate for your age and that you’re not getting done on fees.
Agreed but I would caution some balance rather than stack away every penny you can. Pensions are a gamble and you may not make it and one should always bear that in mind. I have seen some people live really frugal and stack everything for jam tomorrow and then tomorrow never comes okgo said:
Pretty unlikely though to die before then these days. Far more intelligent to plan on the high percentage chance than you’ll live well into and perhaps past your 80’s.
Agreed. Sometimes people make it sound as though it's 50/50, but the vast, vast, majority make it. We all know exceptions to that, but people need to think in statistical terms.Panamax said:
You're asking the right question at the right time, because you won't like the answers but there's time to do something about it.
Let's say you want a pension of 2/3rds of your current earnings of £50k p.a. so £35,000 p.a.
At age 60/65 you'd need an accumulated "pot" of 30 x £35k to provide that pension. That's £1million. (Ouch!)
But on the good side you'll get a state pension of, say, £10k p.a. so if you deduct that the arithmetic becomes 30 x £25,000 = a pot of £750,000
How are you going to get there?
The above is a fair guess, but bear in mind that investments, interest rates, health, insolvencies & legislation can all change a huge amount in 2 or 3 decades.Let's say you want a pension of 2/3rds of your current earnings of £50k p.a. so £35,000 p.a.
At age 60/65 you'd need an accumulated "pot" of 30 x £35k to provide that pension. That's £1million. (Ouch!)
But on the good side you'll get a state pension of, say, £10k p.a. so if you deduct that the arithmetic becomes 30 x £25,000 = a pot of £750,000
How are you going to get there?
- You need to increase those annual pension contributions to at least £10,000 p.a., and
- You'll need a decent investment strategy (stocks and shares based, not savings) to get the compound investment returns you need.
Fusion777 said:
okgo said:
Pretty unlikely though to die before then these days. Far more intelligent to plan on the high percentage chance than you’ll live well into and perhaps past your 80’s.
Agreed. Sometimes people make it sound as though it's 50/50, but the vast, vast, majority make it. We all know exceptions to that, but people need to think in statistical terms.craigjm said:
Fusion777 said:
okgo said:
Pretty unlikely though to die before then these days. Far more intelligent to plan on the high percentage chance than you’ll live well into and perhaps past your 80’s.
Agreed. Sometimes people make it sound as though it's 50/50, but the vast, vast, majority make it. We all know exceptions to that, but people need to think in statistical terms.In my case, there is headroom to put away more into the pension above my current contributions (22 ish percent including employer match) however I do want to enjoy some of my life with the family as opposed to living on pot noodles whilst building up a huge pension... exaggerating somewhat but you get the general picture.
Edited by VR99 on Monday 27th March 19:19
VR99 said:
I would agree with both sides of the argument here= balance.....it is a no brainer for those in the 40% tax band(and esp those in that 60% bucket) to shovel as much of that income as possible into the pension... however be mindful of when you can access the funds as the govt. do like to tinker with the rules and we can't all say with 100% certainty that we wil make 55/57 or whatever the access age will be come retirement. For those of us with DC pensions only, we are also at the mercy of the markets so in an ideal world you would want some diversification of assets and how/where they are held..however the reality is that will only be possible for some and certainly not most of us.
In my case, there is headroom to put away more into the pension above my current contributions (22 ish percent including employer match) however I do want to enjoy some of my life with the family as opposed to living on pot noodles whilst building up a huge pension... exaggerating somewhat but you get the general picture.
It’s why actually I think ISA contributions should be held in higher esteem. Yes no tax saving on the way in (but you do on the way out vs pensions) but there obviously is also no requirement to wait until some arbitrary age. In my case, there is headroom to put away more into the pension above my current contributions (22 ish percent including employer match) however I do want to enjoy some of my life with the family as opposed to living on pot noodles whilst building up a huge pension... exaggerating somewhat but you get the general picture.
Edited by VR99 on Monday 27th March 19:19
Personally wish I’d started the ISA compound machine way earlier than 32. All being well we will be ISA wealthy some way short of being able to do absolutely anything with whatever pensions we have. And of course it would allow an element of combining it with pension to reduce tax burden too if that was interesting.
Assuming they don’t change it. Which they may.
bricks said:
I simply cannot make sense of the numbers and would greatly value a little wisdom from those who grasp these things better than I do. Am I doing okay? Do I need to up my contributions? Do I need to find someone to offer professional advice? Thanks in advance.
First thing I would say is you are asking the right questions and you've started at the right time (i.e. as early as possible, which is always today). Many people don't ask themselves these questions until mid forties, at which point they are 10 years too late.My take is that your pots (44.5K) while a great start, are not going to be enough even with the time you have left unless you start paying in way more than you currently are. I wont comment on final pot sizes as others have done that.
That said, there is some additional information missing in the picture that might further influence what you do today.
Do you have a partner and what does their provision look like - similar, zero, better? - If your other half is a teacher for example, then you might consider the overall outlook is in a much better place, if they have zero, then the challenge is a bigger one.
You've crossed the 50k threshold with the bonus, because of this, you are paying higher rate tax, ugh, fiscal drag is a bummer.
But (potentially more importantly) I'd also ask about children - as over 50K, you start losing the child benefit for every pound you go across the threshold. This is a bugger when you factor it in to your marginal tax rate. This makes it a must to avoid if you have / are planning to have kids imho.
i.e. it may make even more sense to overpay the pension in order to get to below the magic number as the marginal tax rate at 60K if you have 2 kids for example is much much worse than the headling figure of "just" 40%.
Other comments - You should definitely dig into the numbers on the workplace pension to know exactly what you/they are paying and make sure you are matching at the max level as this is the definition of free money, and b) if you are going to pay more in to your pension now, ask them if you can increase the sacrifice amount, as this has the benefit of also avoiding your NI - every little helps.
You should also look at the platform they use - what are the annual management charges. Somewhere near 0.5% good, Somewhere near 1% bad
Oh, and if you are over 50K, and you do want to get under for this financial year, then you have a week left to pay an amount into your pension to bring you under. Go check you March payslip to see the "taxable amount" and tax paid on it to work out the exact number you need to pay in.
Lots of work to do. (p.s. I'm not a pensions adviser, just a saddo that finds all of this stuff interesting!)
okgo said:
It’s why actually I think ISA contributions should be held in higher esteem. Yes no tax saving on the way in (but you do on the way out vs pensions) but there obviously is also no requirement to wait until some arbitrary age.
Personally wish I’d started the ISA compound machine way earlier than 32. All being well we will be ISA wealthy some way short of being able to do absolutely anything with whatever pensions we have. And of course it would allow an element of combining it with pension to reduce tax burden too if that was interesting.
Assuming they don’t change it. Which they may.
Meh, hindsight is a wonderful thing, the fact you are consciously thinking about it is positive. I’m soon to be 34 and have just started to really pay attention to my pension and savings as I’ve been mullered by the taxman this year. Whenever I have a conversation about this with friends, I just get shrugged shoulders, most have no idea how much is in their pot or what they contribute. I expect there aren’t that many people in their early 30s paying close attention to retirement.Personally wish I’d started the ISA compound machine way earlier than 32. All being well we will be ISA wealthy some way short of being able to do absolutely anything with whatever pensions we have. And of course it would allow an element of combining it with pension to reduce tax burden too if that was interesting.
Assuming they don’t change it. Which they may.
I’ve just bumped my contribution from 5% up to 15% (excluding company contribution) and feel pretty chuffed about it, what I’ve found is the impact to my take home is not enough for it to be considered life changing, I’m still able to do everything I do now. Its tempting to pile in more as it averts more of the 40% tax for me but I don’t feel comfortable locking that money away until my late 50-60s like you've said. With that in mind I’ve opened up a fixed rate cash ISA for short term savings and intend to open an S&S ISA for medium term, if I can ever decide which one to go with.
Bricks do you pay your bonus into your pension? It might be worth considering as its likely to be a salary sacrifice and save you a wedge of tax.
Edited by Volare on Tuesday 28th March 09:06
Saddo or not, this is the most helpful response so far - Thank you! My responses below.
My take is that your pots (44.5K) while a great start, are not going to be enough even with the time you have left unless you start paying in way more than you currently are. I wont comment on final pot sizes as others have done that. By how much? The gist of my question is to understand how much needs to be paid in... I mean, I'm doing a combined 15% of my pay which feels fairly significant... How short am I, realistically?
That said, there is some additional information missing in the picture that might further influence what you do today.
Do you have a partner and what does their provision look like - similar, zero, better? - If your other half is a teacher for example, then you might consider the overall outlook is in a much better place, if they have zero, then the challenge is a bigger one. Partner is in a similar role to me but we both take a practical approach that as we're not married our pensions our for our individual futures only; There's no guarantee we'll still be together in 40 years so it's best to plan for our own security.
You've crossed the 50k threshold with the bonus, because of this, you are paying higher rate tax, ugh, fiscal drag is a bummer. Yes, but this year only by £830 and going forward I should be below it as my contributions are salary sacrifice.
But (potentially more importantly) I'd also ask about children - as over 50K, you start losing the child benefit for every pound you go across the threshold. This is a bugger when you factor it in to your marginal tax rate. This makes it a must to avoid if you have / are planning to have kids imho. No kids, no chance of them, no matter how hard we might "try". Perks of being a raving homo.
i.e. it may make even more sense to overpay the pension in order to get to below the magic number as the marginal tax rate at 60K if you have 2 kids for example is much much worse than the headling figure of "just" 40%.
Other comments - You should definitely dig into the numbers on the workplace pension to know exactly what you/they are paying and make sure you are matching at the max level as this is the definition of free money, and b) if you are going to pay more in to your pension now, ask them if you can increase the sacrifice amount, as this has the benefit of also avoiding your NI - every little helps. Have looked into it and yes, they commit 5% of my basic pre-bonus/commission pay as a maximum. This is the £165/month being paid in.
You should also look at the platform they use - what are the annual management charges. Somewhere near 0.5% good, Somewhere near 1% bad It's in Peoples Pension. They charge £2.50/year plus a 0.5% fee which is reduced by 0.25% for pots between £25,000 - £50,000. I think that makes my fee 0.25% + £2.50.
Oh, and if you are over 50K, and you do want to get under for this financial year, then you have a week left to pay an amount into your pension to bring you under. Go check you March payslip to see the "taxable amount" and tax paid on it to work out the exact number you need to pay in.
Lots of work to do. (p.s. I'm not a pensions adviser, just a saddo that finds all of this stuff interesting!)
fat80b said:
bricks said:
I simply cannot make sense of the numbers and would greatly value a little wisdom from those who grasp these things better than I do. Am I doing okay? Do I need to up my contributions? Do I need to find someone to offer professional advice? Thanks in advance.
First thing I would say is you are asking the right questions and you've started at the right time (i.e. as early as possible, which is always today). Many people don't ask themselves these questions until mid forties, at which point they are 10 years too late.My take is that your pots (44.5K) while a great start, are not going to be enough even with the time you have left unless you start paying in way more than you currently are. I wont comment on final pot sizes as others have done that. By how much? The gist of my question is to understand how much needs to be paid in... I mean, I'm doing a combined 15% of my pay which feels fairly significant... How short am I, realistically?
That said, there is some additional information missing in the picture that might further influence what you do today.
Do you have a partner and what does their provision look like - similar, zero, better? - If your other half is a teacher for example, then you might consider the overall outlook is in a much better place, if they have zero, then the challenge is a bigger one. Partner is in a similar role to me but we both take a practical approach that as we're not married our pensions our for our individual futures only; There's no guarantee we'll still be together in 40 years so it's best to plan for our own security.
You've crossed the 50k threshold with the bonus, because of this, you are paying higher rate tax, ugh, fiscal drag is a bummer. Yes, but this year only by £830 and going forward I should be below it as my contributions are salary sacrifice.
But (potentially more importantly) I'd also ask about children - as over 50K, you start losing the child benefit for every pound you go across the threshold. This is a bugger when you factor it in to your marginal tax rate. This makes it a must to avoid if you have / are planning to have kids imho. No kids, no chance of them, no matter how hard we might "try". Perks of being a raving homo.
i.e. it may make even more sense to overpay the pension in order to get to below the magic number as the marginal tax rate at 60K if you have 2 kids for example is much much worse than the headling figure of "just" 40%.
Other comments - You should definitely dig into the numbers on the workplace pension to know exactly what you/they are paying and make sure you are matching at the max level as this is the definition of free money, and b) if you are going to pay more in to your pension now, ask them if you can increase the sacrifice amount, as this has the benefit of also avoiding your NI - every little helps. Have looked into it and yes, they commit 5% of my basic pre-bonus/commission pay as a maximum. This is the £165/month being paid in.
You should also look at the platform they use - what are the annual management charges. Somewhere near 0.5% good, Somewhere near 1% bad It's in Peoples Pension. They charge £2.50/year plus a 0.5% fee which is reduced by 0.25% for pots between £25,000 - £50,000. I think that makes my fee 0.25% + £2.50.
Oh, and if you are over 50K, and you do want to get under for this financial year, then you have a week left to pay an amount into your pension to bring you under. Go check you March payslip to see the "taxable amount" and tax paid on it to work out the exact number you need to pay in.
Lots of work to do. (p.s. I'm not a pensions adviser, just a saddo that finds all of this stuff interesting!)
You need to think not just about pensions, although for someone in your position they can be very tax efficient. Think about having an immediate access emergency fund & then channeling some into ISAs. Pensions are great, but getting the money out can be inflexible & subject to tax. ISAs are funded from tax paid funds but are much more flexible than your pension. Given you don't anticipate having children then it's possible that the IHT advantages of funds in a pension are not that useful to you.
If you asked me if I wanted £1m in a pension or £1m in an ISA I'd go ISA, but that's just me in my position.
If you asked me if I wanted £1m in a pension or £1m in an ISA I'd go ISA, but that's just me in my position.
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