Pensions - half your age as a percentage rule
Discussion
Quick question on the idea that you should save the same percentage of your salary as half your age i.e if you're 20 save 10%, if you're 40 save 20%:
- does this "rule" suggest that you increase the percentage by 0.5% each year, or is it that if you start when you're 20 10% will be enough for your entire life?
- does this "rule" suggest that you increase the percentage by 0.5% each year, or is it that if you start when you're 20 10% will be enough for your entire life?
To my recollection its stated as a rule of thumb and that if you start later you need to be putting that "half your age" amount away to catch up but its no guarantee.
I wouldn't have been much older than 20 when i started with a contribution of 12% so i was ahead of plan but through career moves i had a gap in my late 20s/early 30s where i contributed nothing for 5 years. A few years at a blue chip US tech giant had me adding 15%+ and i am back down to 10% today but on a much larger salary. At 43 i am ahead of plan. ie with even modest returns i will hit the LTA cap before 60.
I wouldn't have been much older than 20 when i started with a contribution of 12% so i was ahead of plan but through career moves i had a gap in my late 20s/early 30s where i contributed nothing for 5 years. A few years at a blue chip US tech giant had me adding 15%+ and i am back down to 10% today but on a much larger salary. At 43 i am ahead of plan. ie with even modest returns i will hit the LTA cap before 60.
Whilst that's obviously true but when you first start off it's usually true that you're earning comparatively SFA; I know I was. So although I did make some AVCs when I first started working these really amounted to bugger all.
By comparison to most on pistonheads I earn a pittance but I am now quite a bit past the higher tax threshold so not only do I earn a lot more than I used to as a 23 year old I also have more incentive to lump into my pension given it only costs me ~60p in the pound vs ~70p in the past.
By comparison to most on pistonheads I earn a pittance but I am now quite a bit past the higher tax threshold so not only do I earn a lot more than I used to as a 23 year old I also have more incentive to lump into my pension given it only costs me ~60p in the pound vs ~70p in the past.
brickwall said:
No idea.
But I’ve always thought it’s a stupid rule - the effect of compounding means you should be putting away MORE when you’re younger, not less.
Let’s say growth is 5%, compounding.
£1 put in at age 25, which grows for 40 years, is worth £7.36 at age 65
Put that £1 in at 40 and give it only 25 years, and it’s worth less than half - only £3.48
So load up the pension as much as possible, as early as possible. You can always turn the tap down later.
Yes and no. But I’ve always thought it’s a stupid rule - the effect of compounding means you should be putting away MORE when you’re younger, not less.
Let’s say growth is 5%, compounding.
£1 put in at age 25, which grows for 40 years, is worth £7.36 at age 65
Put that £1 in at 40 and give it only 25 years, and it’s worth less than half - only £3.48
So load up the pension as much as possible, as early as possible. You can always turn the tap down later.
You want to maximise the tax rebate so paying in more when your paying 20% isn’t as smart as doing when your earning 40/45% (or the £100-125k level when they remove your tax free allowance)
Clearly there is a balance but it’s not that straight forward.
You could salary sacrifice to obtain child benefit over losing child benefit by earning more.
I’d say if it’s a matched scheme you should always at least mirror the matching
PeteinSQ said:
Quick question on the idea that you should save the same percentage of your salary as half your age i.e if you're 20 save 10%, if you're 40 save 20%:
- does this "rule" suggest that you increase the percentage by 0.5% each year, or is it that if you start when you're 20 10% will be enough for your entire life?
No, the "rule" is based on when you start contributing, it's not intended to grow as you age.- does this "rule" suggest that you increase the percentage by 0.5% each year, or is it that if you start when you're 20 10% will be enough for your entire life?
I.e. you begin at 20, you ensure contributions (including employer) are at least 10% throughout your career.
You start at 30, that would be 15%.
Evanivitch said:
PeteinSQ said:
Quick question on the idea that you should save the same percentage of your salary as half your age i.e if you're 20 save 10%, if you're 40 save 20%:
- does this "rule" suggest that you increase the percentage by 0.5% each year, or is it that if you start when you're 20 10% will be enough for your entire life?
No, the "rule" is based on when you start contributing, it's not intended to grow as you age.- does this "rule" suggest that you increase the percentage by 0.5% each year, or is it that if you start when you're 20 10% will be enough for your entire life?
I.e. you begin at 20, you ensure contributions (including employer) are at least 10% throughout your career.
You start at 30, that would be 15%.
This is a topic that has been on my mind recently.
Unfortunately a 'bury head in sand' approach during my 20's and upto mid 30's + around 5 years of non-contribution due to contracting have left my overall pension quite low for my age and am now playing catch up.
Currently contributing around 25% (includes employer matching) via salary sacrifice.
In hindsight, lessons learned (mainly applicable for DC pensions)
1. Contribute at least enough to get max employer contributions but ideally more if possible and start EARLY in your career
2. Review the funds...the default funds aren't always great for performance and I've switched both of my pension funds
Unfortunately a 'bury head in sand' approach during my 20's and upto mid 30's + around 5 years of non-contribution due to contracting have left my overall pension quite low for my age and am now playing catch up.
Currently contributing around 25% (includes employer matching) via salary sacrifice.
In hindsight, lessons learned (mainly applicable for DC pensions)
1. Contribute at least enough to get max employer contributions but ideally more if possible and start EARLY in your career
2. Review the funds...the default funds aren't always great for performance and I've switched both of my pension funds
Evanivitch said:
No, the "rule" is based on when you start contributing, it's not intended to grow as you age.
I.e. you begin at 20, you ensure contributions (including employer) are at least 10% throughout your career.
You start at 30, that would be 15%.
Actually that makes a lot more sense. I.e. you begin at 20, you ensure contributions (including employer) are at least 10% throughout your career.
You start at 30, that would be 15%.
brickwall said:
No idea.
But I’ve always thought it’s a stupid rule - the effect of compounding means you should be putting away MORE when you’re younger, not less.
Let’s say growth is 5%, compounding.
£1 put in at age 25, which grows for 40 years, is worth £7.36 at age 65
Put that £1 in at 40 and give it only 25 years, and it’s worth less than half - only £3.48
So load up the pension as much as possible, as early as possible. You can always turn the tap down later.
"But I’ve always thought it’s a stupid rule -"But I’ve always thought it’s a stupid rule - the effect of compounding means you should be putting away MORE when you’re younger, not less.
Let’s say growth is 5%, compounding.
£1 put in at age 25, which grows for 40 years, is worth £7.36 at age 65
Put that £1 in at 40 and give it only 25 years, and it’s worth less than half - only £3.48
So load up the pension as much as possible, as early as possible. You can always turn the tap down later.
Most of these rules (the 4% safe withdrawal rate being another example) are.
It’s not a rule though is it, it’s a rule of thumb, the basic principle being that generally the later in life you start saving the more you need to save to maintain income parity, generally the only way to do that is as a higher % of income, however this can vary depending on the individuals circumstances.
Isn’t it (broadly) the case assuming a 1 person pension scheme
Defined benefit needs an ongoing 24% joint payment into a pension scheme
CARE needs an ongoing 15% joint payment into a pension scheme
Defined contribution - well you need to define what you would like to have as an annual pension then backtrack.
Defined benefit needs an ongoing 24% joint payment into a pension scheme
CARE needs an ongoing 15% joint payment into a pension scheme
Defined contribution - well you need to define what you would like to have as an annual pension then backtrack.
brickwall said:
No idea.
But I’ve always thought it’s a stupid rule - the effect of compounding means you should be putting away MORE when you’re younger, not less.
Let’s say growth is 5%, compounding.
£1 put in at age 25, which grows for 40 years, is worth £7.36 at age 65
Put that £1 in at 40 and give it only 25 years, and it’s worth less than half - only £3.48
So load up the pension as much as possible, as early as possible. You can always turn the tap down later.
It's more a question of how much you need to put in to survive in retirement. So using compound interest to get away with putting in less if you start young.But I’ve always thought it’s a stupid rule - the effect of compounding means you should be putting away MORE when you’re younger, not less.
Let’s say growth is 5%, compounding.
£1 put in at age 25, which grows for 40 years, is worth £7.36 at age 65
Put that £1 in at 40 and give it only 25 years, and it’s worth less than half - only £3.48
So load up the pension as much as possible, as early as possible. You can always turn the tap down later.
A bit like taxi drivers finishing for the day once they've made a target amount, so doing longer hours on days when the income per hour is less. Not the best way of maximising income, but when pension contributions mean sacrifices in other areas does have a certain logic.
This thread reminded me I need to get the calculator out (yawn) and figure out what I’m doing.
Fortunately a good scheme at work (35.6% total contributions inc employer standard, my contributions and then matching), getting in when I first started working and also lucky fund choice (Go Sharia investments!) mean its going ok.
However… playing with the fund manager provided calculator shows two possibilities:
1) I’ll be living off beans in retirement
2) I’ll blast through the LTA so need to consider reducing my contributions (I think I could live off state pension and the current value of my contributions (assuming performance matches inflation), so maybe I do need to reduce them, no idea).
So in summary, who TF knows
Fortunately a good scheme at work (35.6% total contributions inc employer standard, my contributions and then matching), getting in when I first started working and also lucky fund choice (Go Sharia investments!) mean its going ok.
However… playing with the fund manager provided calculator shows two possibilities:
1) I’ll be living off beans in retirement
2) I’ll blast through the LTA so need to consider reducing my contributions (I think I could live off state pension and the current value of my contributions (assuming performance matches inflation), so maybe I do need to reduce them, no idea).
So in summary, who TF knows
So what you put in is only half the story. As another poster said, rule of thumb/old wifes tale/rumour was start at half your age as a percentage but if you can afford that with no pain and still have beer/coke/hooker/911 tokens then maybe crank back on all of them and put in some more. Just dont get to parsimonious that life is miserable.
The other half of the story is what you do with it in the pension. I had great fortune early in career to spend the guts of 3 years in North America. It was a production line type environment despite me being theoretically a qualified engineer. Between downtime i was amazed by the interest "blue collar" staff had in their 401K/investment plans. (A 401K is the US equivalent of a SIPP). The youngest newbie to the oldest had one and knew what was in it. Watching stocks semi regularly and discussing opportunities occasionally.
We have a different attitude in the UK. Twenty years after that time i have friends, colleagues and so on from 20s through 40s who say, "oh i dont understand all that". Like it's OK to be ignorant of your own financial future. I am struggling with my brother at this stage and he is 60+ on the very same topic. Case in point, a young girl (early 30s) who started as a PA at a place i worked, she worked her way up into a marketing roll, had been assigned RSUs(effectively a type of stock option) over a 3 -4 year period but never sold them as she didnt know what to do, nor understand them nor value them. We got acquired then she started getting very urgent calls from the US broker as the shares were converted to cash and they needed to pay her. With a bit of guidance, filling in the right forms they started paid out £30K. Not pensions per se but an example of almost a naivety that i often see where people dont think to be nosey about their own situation.
Long story short, a pension is a tax wrapper, no matter who your employer uses as the pension company (eg Scottish Widows, Aegon, L&G, Aviva**....etc) there will be options and while you are young you should pay heid to what is going on around you and make informed investment decisions rather than just defaulting to any of the vendors "lifestyle" options which typically are a bit ropey and typically dont make decent gains. *
The other half of the story is what you do with it in the pension. I had great fortune early in career to spend the guts of 3 years in North America. It was a production line type environment despite me being theoretically a qualified engineer. Between downtime i was amazed by the interest "blue collar" staff had in their 401K/investment plans. (A 401K is the US equivalent of a SIPP). The youngest newbie to the oldest had one and knew what was in it. Watching stocks semi regularly and discussing opportunities occasionally.
We have a different attitude in the UK. Twenty years after that time i have friends, colleagues and so on from 20s through 40s who say, "oh i dont understand all that". Like it's OK to be ignorant of your own financial future. I am struggling with my brother at this stage and he is 60+ on the very same topic. Case in point, a young girl (early 30s) who started as a PA at a place i worked, she worked her way up into a marketing roll, had been assigned RSUs(effectively a type of stock option) over a 3 -4 year period but never sold them as she didnt know what to do, nor understand them nor value them. We got acquired then she started getting very urgent calls from the US broker as the shares were converted to cash and they needed to pay her. With a bit of guidance, filling in the right forms they started paid out £30K. Not pensions per se but an example of almost a naivety that i often see where people dont think to be nosey about their own situation.
Long story short, a pension is a tax wrapper, no matter who your employer uses as the pension company (eg Scottish Widows, Aegon, L&G, Aviva**....etc) there will be options and while you are young you should pay heid to what is going on around you and make informed investment decisions rather than just defaulting to any of the vendors "lifestyle" options which typically are a bit ropey and typically dont make decent gains. *
- Most of the above irrelevant if you are in a DB scheme
- Aviva were my previous employers pension provider and actually allowed investment in direct shares in the FTSE & AIM in the UK.
off at a tangent but whats the problem with "blasting through your LTA"
I am in a similar situation, (hopefully), all my contributions have been gross, ie i havent paid tax at all, every £1 only costing me 60p and all that. So say i "blast through" my £1.073M LTA and i attract a much higher tax charge(55% iirc) then surely thats on anything above the £1.073M and its effectively me being normalised against what would have been taxed income anyway?
I should explain that my busting through the LTA is a function of fortunate stock choice and not necessarily huge contributions so maybe i feel less aggrieved.
I am in a similar situation, (hopefully), all my contributions have been gross, ie i havent paid tax at all, every £1 only costing me 60p and all that. So say i "blast through" my £1.073M LTA and i attract a much higher tax charge(55% iirc) then surely thats on anything above the £1.073M and its effectively me being normalised against what would have been taxed income anyway?
I should explain that my busting through the LTA is a function of fortunate stock choice and not necessarily huge contributions so maybe i feel less aggrieved.
Captain Raymond Holt said:
This thread reminded me I need to get the calculator out (yawn) and figure out what I’m doing.
Fortunately a good scheme at work (35.6% total contributions inc employer standard, my contributions and then matching), getting in when I first started working and also lucky fund choice (Go Sharia investments!) mean its going ok.
However… playing with the fund manager provided calculator shows two possibilities:
1) I’ll be living off beans in retirement
2) I’ll blast through the LTA so need to consider reducing my contributions (I think I could live off state pension and the current value of my contributions (assuming performance matches inflation), so maybe I do need to reduce them, no idea).
So in summary, who TF knows
I think you've highlighted that these calculators can do more harm than good.Fortunately a good scheme at work (35.6% total contributions inc employer standard, my contributions and then matching), getting in when I first started working and also lucky fund choice (Go Sharia investments!) mean its going ok.
However… playing with the fund manager provided calculator shows two possibilities:
1) I’ll be living off beans in retirement
2) I’ll blast through the LTA so need to consider reducing my contributions (I think I could live off state pension and the current value of my contributions (assuming performance matches inflation), so maybe I do need to reduce them, no idea).
So in summary, who TF knows
Edited by MikeKite on Thursday 15th July 10:11
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