Pensions - Are They Really Worth Having?

bauhaus100

Here's a scenario...

A pair of twins both leave school at 16 and get a job working for the same company doing a similar job. One is frugal and for 40 odd years puts 10% of his net earnings away in a pension scheme. The other uses his spare cash on booze, cars and loose women. They both receive an average working wage for the length of their careers and finish up on £23,000 a year (average for my bit of the country based on Office of National Statistics figures).

The question is, when they come to retire will 40 years of prudence significantly improve the retirement lifestyle of the first twin or will disincentives to saving such as means tested benefits tend to equalize things out?

cheerfulcat

bauhaus100 wrote:

The question is, when they come to retire will 40 years of prudence significantly improve the retirement lifestyle of the first twin or will disincentives to saving such as means tested benefits tend to equalize things out?

Someone who invests a good portion ( I'd say 15% rather than 10% ) of his salary every month will be considerably better off financially in forty years' time than someone who spends the lot. Not to mention the fact that he would not be dependent on taxpayer handouts in his old age...also, I would not advise anyone to make plans for the future based on today's benefits system as it is almost certain to change over the years.

In any case, the cutoff for means tested benefits is generally pretty low - if you had saved very little then you might fall into the trap but if you invested the equivalent of £200 a month in today's money for 40 years in a tax-free wrapper ( pension, ISA or future equivalent ) and got an average return of 7% you would end up with more than half a million pounds; enough for a fairly comfortable retirement.

HTH

Cheerfulcat

dunstonh

The current state retirement system cannot continue in its current form. It will need a massive hike in taxation to continue or they will need to reduce benefits. Most feel that a combination of the two things is likely.

So, anyone failing to save anything for retirement is going to have to get used to living on the breadline for the rest of their life.

netlang

I have been paying in £200 per month since 1997 and in 2000 paid in a lump sum of £10K. At a recent pension review with an IFA it would appear I have paid in more to the fund than the fund is currently worth today. I am now seriously considering other ways of saving for retirement.

Any suggestions?

MrChips

How old are you? If you are about to retire, then this is a problem. If you have many years to retirement, then you shouldn't be too worried about short(ish) term volatility.

Any investment that gives a good expected return is going to be more volatile than one which is "safe".

I'm sure my pension fund is worth not much more than I have paid in given I started it in 2001, but with about 40 years to go until retirement this doesn't concern me (yet!).

dunstonh

netlang wrote:

I have been paying in £200 per month since 1997 and in 2000 paid in a lump sum of £10K. At a recent pension review with an IFA it would appear I have paid in more to the fund than the fund is currently worth today. I am now seriously considering other ways of saving for retirement.

Any suggestions?

Thats nothing to do with the pension. Thats to do with where it's invested.

You paid in just before the stockmarket crash. With monthly payments and a fair time to go until retirement, having an early stockmarket crash can actually be very good for you. It means you are buying everything from that point onwards much cheaper. It does mean everything you bought before has gone down but that will recover as the stockmarket recovers. However the money paid in after the crash is where you will see the biggest gains.

If you had paid into an ISA investing in the same area, you would have suffered exactly the same losses.

I'm a little disappointed that the IFA didnt spend any time with you explaining how your investments actually work.

netlang

I am at the grand old age of 42 and three quarters with about 22 years to go until retirement at 65. I do understand that the performance of the fund is where it is invested and this is spread fairly evenly (and excludes emerging markets and Asia). I feel a crystal ball might be useful here.

According to online Pension calculators to achieve a pension of £14k per year I would need to increase my contributions by around £700 per month over the next 22 years.

I now feel time will soon be running out to make wrong decisions on where to invest for retirement as I will not have the time to recover serious losses. I am already showing serious shortfalls on Endownment polices that were mis-sold to me in the mid-eighties (Legal and eneral and Scottish Equitable). I cannot address mis-selling issues because they are older than the 1988 cut off. L&G did agree Endownments were missold to me in 1989 and compensated me for this but the pre 1988 policies that were sold to me on the same grounds have no recourse. The money can only stretch so far

Within my circle of friends I am one of the luckier ones as some of them do not have any pension provisions whatsoever and have fairly hefty debts going into their forties. Obviously the key is to start saving for your pension as soon as you start working.

dunstonh

Obviously the key is to start saving for your pension as soon as you start working.

Yes it is. Old rule of thumb is that every 5 years you delay your contributions, you have to double the contribution that you could have done 5 years earlier to receive the same benefit. ie. £50pm at 20 ,£100pm at 25, £200pm at 30, £400pm at 35, £800pm at 40.

al_yrpal

Are pensions worth having? - Yup, but only as part of your retirement income. If you can get a state inflation proof pension with a second pension alongside your private pension thats good, if you can persuade the spouse to work in the public sector and get a gold plated pension, thats even better, if you can save and invest in some high gain ISA's and win thats terrific, if you can get a second property cheap thats wonderful. Thats what I did, with almost nothing in the pension pot at 46 (Thanks T&N and all those lousy employers I worked for), and now I'm comfortably retired at 63.
23 years is a long time, and a lot can happen, in my case swinging infaltion, two big stockmarket crashes, redundancy, Venture Capital investment that blew out, endowment that fell short, Equitable Life, incomplete IFA advice etc etc But... In 23 years there will be a lot of opportunities too. A pension is just a part of that. My experience is do it, but only as a small part of a bigger picture.

superscotsman

There is nothing stopping you from providing a DIY pension. In the USA this goes on all the time, whereas in the UK it is quite rare. Instead of paying a pension company to buy stock, you buy it yourself. You put as much money as you can into a bank account, when you have enough, you buy blue chip equities or unit trusts or investment trusts - things that are unlikely to go bust. The advantage of this is that when the elevator boy starts giving you share tips, you can sell that market, put the money into a bank account until the "correction", then buy back what you sold at the cheaper price. You also get your dividends which you can spend or reinvest. To me this is a better way of getting a pension than using a pension company or relying on [cue menacing music] the government.

dunstonh

You put as much money as you can into a bank account, when you have enough, you buy blue chip equities or unit trusts or investment trusts - things that are unlikely to go bust. The advantage of this is that when the elevator boy starts giving you share tips, you can sell that market, put the money into a bank account until the "correction", then buy back what you sold at the cheaper price. You also get your dividends which you can spend or reinvest. To me this is a better way of getting a pension than using a pension company or relying on [cue menacing music] the government.

You have just described investing. All of which can be done within the pension tax wrapper or a number of other wrappers. A pension is not an investment. It is a tax wrapper and defined maturity process which can contain investments of your choice.