Do I Need a Pension?

cheerfulcat · 12 February 2007 at 3:15PM

So, assuming at that point that I had £190k, earning 5% (i.e. £9,500 a year), I could draw that out to live on (£790 a month) pretty much indefinitely? Choosing perhaps to shrink that income and take a lump sum out.

Yes! If the capital is yours ( i.e. not tied up in pension ) you can do what you like with it. Bear in mind that if you take all returns as income, your capital will shrink.

If I can get over 5% interest for at least a Period of time, I can perhaps increase that, or ideally for now, lower the monthly payment down to something more manageable.

I shall be astonished and severely disappointed ( not to say skint...) if returns from the stock market over the next 30+ years average as little as 5% per annum. You can certainly aim for a ( much ) higher return and smaller investments, just keep in mind that higher return generally means higher risk. But it's perfectly possible - in fact, advisable - to balance things so that a small portion of your capital is invested at a higher risk, in the hopes of boosting your total return.

Jakaru · 12 February 2007 at 3:42PM

There seems to be few savings accounts that will offer a Huge amount over 5% for any length of time. I'd rather avoid having to Too actively manage the money (i.e. moving the whole lot from one account to another every 6 months), I like the ease of a standing order straight into my ISA.

(I'm reading the savings forum now to try and improve my knowledge on this of course. Perhaps I should start a new thread there about using savings as a pension replacement and how I should go about it...)

cheerfulcat · 12 February 2007 at 3:46PM

Hmmm, let's be clear here. What we are talking about here is investing in equities, not saving in deposit accounts. If you keep all of your money in cash you are unlikely to see a return on your savings above inflation. You need to be looking at stockmarket based investments - cash will simply not do the job.

Jakaru · 12 February 2007 at 3:48PM

Oh I see, sorry, I was just looking at basic savings. I know nothing about other investments.

Do stockmarket risks not carry considerable risk? (Edit - Lets try that sentence in English...)

Do stockmarket Investments not carry considerable risk?

cheerfulcat · 12 February 2007 at 4:14PM

Depends on what you mean by " considerable risk ". Over the short term, share prices ( for example ) can be very volatile, with prices moving up and down daily. When invested in shares, the value of your capital moves with the stock market, sometimes quite wildly - the shares of some small companies can move up or down by as much as 70% in one day, though this is not normal, and of course you wouldn't have your entire capital invested in one share.

By contrast, the nominal value of your cash doesn't change. If you put £5000 into a deposit account, it's still £5000 a year later, plus interest. Unfortunately, after tax and inflation, the £5000 + interest at the end of the year won't be worth much more than the £5000 at the start...the nominal value of the original £5000 is the same but its purchasing power - the real value - has fallen.

Over the longer term the return from shares has been far greater than that from cash. Most importantly, the return from shares has historically been greater than inflation which means that unlike with cash, you get a real return.

So cash is actually the riskier home for your long-term money...

Jakaru · 12 February 2007 at 4:25PM

Ok, makes sense. Must admit I'd never considered the future real value of money until I started looking into this whole thing. I've been historically quite good at making regular deposits into savings accounts - wish I'd been better informed 10 years ago!

Anyway... taking Share based investments as a given - whats the best place to start? Maxi ISAs have a share component, but I'm guessing you are thinking some kind of managed fund?

cheerfulcat · 12 February 2007 at 5:10PM

Not necessarily, though managed funds are one option ( BTW, most Maxi ISAs are shares-only, no cash component ). Also, you can hold managed funds within an ISA. There is a whole universe of investing possibilities out there; once you get a decent grounding in the basics it becomes easier to choose.

Have a look around Incademy; also the Motley Fool's Fool School Archives ( including this article on ISAs ) and their discussion boards.

HTH

Cheerfulcat

EdInvestor · 12 February 2007 at 7:35PM

Excellent thread

Just briefly back on the pension thing, it would be very sensible if both you and your wife obtained state pension forecasts from here:

https://www.thepensionservice.gov.uk

There are two state pensions, not one,and you may thus have a better basic (index linked) income entitlement already clocked up between you than you think you have. Check it out.

dunstonh · 12 February 2007 at 8:08PM

I havent checked but I think the Standard Life calc uses SMPI basis illustrations and not monetary growth basis and that would account for such a big difference.

Ian_W · 12 February 2007 at 10:02PM

Martin has an article on the site about pensions at:
https://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1050245982,43764,
which would certainly be worth your while reading.

There is a very balanced augment for retirement savings between pensions and ISA's. Both get tax relief but in different ways.

With ISA's you pay in taxed income but when you use it later in life any income or capital gains are tax free. The other benefits are that the capital remains yours to do with as you please whereas with a pension you must use it, in the main, to provide income in your retirement.*

The reason for this is that with a pension you get tax relief on your contributions, in other words if you pay in £78 the Govt makes that up to a £100 by adding £22 to your contribution, in tax relief. 40% if you become a HR taxpayer.

Whilst it is a balanced argument, in your case I would opt for a pension over an ISA. Why? Well from what you've said you're struggling to make any real contribution so where are you going to be best served by the tax relief available? IMO, on the face of it - it's now in making those contributions bearing in mind you're going to get them boosted by 22% from the off and the contributions that are in the longest work the hardest for you.

ISA's are certainly better if you're minted enough to make the right contributions now without Govt help - but that's not the case. If you can afford to put £39 a month towards a pension then you'll actually have £50pm starting to work for you. If things change as your life progresses then think about supplementing your pension with ISA's rather than increased pension contributions but for now get the pension started ASAP.

You mentioned the LGPS in your first post but not whether your current employer has a pension scheme. If they do you should check out the details to see if they make any contribution if you join their scheme, often they do and that's free money to add to the tax relief that's going towards your pension and making your individual contribution less significant.

HTH.
*EDIT to add - you can take up to a quarter of your pension as a tax free lump sum when you retire but most is taxable income.

Do I Need a Pension?

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