Pension or Saving?

kriss_boy

I was thinking....

Wouldnt if be better to just pay £70 into a savings account, every month for 30 years and thus earn interest on 10s of thousands, rather than paying £70 a month and having it matched by your company?

I dont know what to do.

Im 25 and Ive never paid a pension. Im in local government and they match what you put in.

Only problem is being a bit older I know that I wont get a great lump sum as I dont intend to work till Im 65.

My parents have a big house that they own so without sounding cold I know in the future I'll get their big family home.

Lokolo

Option A) £70 a month by yourself + interest (5% interest, a lot less at the moment)
Option £70 a month by yourself, £70 a month matched by company + more interest than Option A) (as investments have proven to have given a better return than savings - although past performance is not a quite to future performance)

O..k.. and you don't think option B is good?

And you don't intend to work until your 65? When then? If you work until 50, thats 25 years, £70 a month, makes a total of £21,000. In savings you will get 5% say, thats £1050 interest a year. And that has to last you until you die? So another 30 odd years? You will spend more than £1000 a year alone so your £21,000 will soon because £0. Then what?

whu

If you are in a local gvn scheme i would imagine it is a final salary scheme so i would put your money into the pension - even if you are not in a final salary scheme it is worthwhile doing as you get the contribution from your employer either way and you get tax relief

neilp

There are three obvious (and probably other less obvious) reasons why a pension is better than a savings account for long term retirement savings:

1. Tax relief, which means that as a basic rate tax payer you only pay 80p for each £1 you contribute (and if you are a higher rate tax payer you pay 60p for each £1 you contribute).

2. Equities and other 'pension' investments have always outperformed cash over the long term (no matter how dismal they currently seem).

3. Employer contributions, which will add up.

Particularly if you are a basic rate taxpayer, there is a case for investing in an ISA rather than a pension. However, that is subject to debate (and has been discussed in this forum), and in any case the employer contributions mean a pension is almost certainly a better option.

kriss_boy

Ive been reading the leaflet and they pay you a lump sum of "YEARS SERVICE x 1/80 x SALARY"

and an annual pension of "YEARS SERVICE x 1/80 x SALARY".

Im just thinking, I mean, Im sure the people I work with recently all got letters about their pensions and how the lum sum had changed, causing them too lose money.

I take it its pretty safe? What if I 30 years time they dont have the mney to pay us all lump sums etc or is it regulated and insured in some way?

I think Ill go for it....

Uncertain

kriss_boy wrote: »

My parents have a big house that they own so without sounding cold I know in the future I'll get their big family home.

Leaving aside the moral issues, you do not know this. Anything could happen including them both needing very long term expensive residential care. Or, you might fall out and they decide to leave it to the cat's home!!

I think you should plan you own future and regard this type of income as a possible extra rather than a right. Retirement age is likely to move back not forward so, by the time you get there, 65 might be retiring early.

Sorry

kriss_boy

Ive always found it easy to make money via the internet, buying and selling etc. Its how my mum earns a living.

So its always been my plan to go back to that in the future rather than being tied to an office desk well into my 50s.

I'll join the pension.

Ive just realised why a guy in our office got a massive promotion a couple of years before he retires. He applied for a managerial role which will practicaly double his pension!!! Very crafty!! Pay a small pension for 40 years then apply for higher up jobs before you retire!!!

kriss_boy

I suppose the plan is to pay my mortgage off a bit before I retire, so that the retirement package means Im as well off as I was whilst working and earning that bit more.

neilp

There was an article in the Times a few months ago about how it is a myth that a house can be used as a substitute for a pension. I suspect it is available on their website, and is well worth a read.

jem16

kriss_boy wrote: »

Ive been reading the leaflet and they pay you a lump sum of "YEARS SERVICE x 1/80 x SALARY"

and an annual pension of "YEARS SERVICE x 1/80 x SALARY".

Im just thinking, I mean, Im sure the people I work with recently all got letters about their pensions and how the lum sum had changed, causing them too lose money.

The LGPS has changed recently but it is still one of the best around and you would be daft not to join it.

I take it its pretty safe? What if I 30 years time they dont have the mney to pay us all lump sums etc or is it regulated and insured in some way?

It's government backed so couldn't be safer.

dunstonh

neilp wrote: »

There was an article in the Times a few months ago about how it is a myth that a house can be used as a substitute for a pension. I suspect it is available on their website, and is well worth a read.

There have been similar articles since buying property became unfashionable. Thats the media for you though. When something is popular, they SPIN the news in its favour. When something is unpopular they SPIN the news against it.

That said, you do need about 8 properties to really be able to start thinking about using it as your pension. By the time you repay the mortgages and capital gains tax and assume long term average growth, average repairs, costs and dead periods, you dont really end up with as much as you think you will.

The money is in owning the properties outright. Not owning them with large levels of debt that have to be repaid.

Wouldnt if be better to just pay £70 into a savings account, every month for 30 years and thus earn interest on 10s of thousands, rather than paying £70 a month and having it matched by your company?

Just assuming that was the pension method used. That £70 has actually only cost you £56 due to tax relief (assuming basic rate). So, it would be paying £56 pm into savings account. It would actually be a little less still due to higher NI you would have to pay as well but lets ignore that for the moment.

So, you have £56 going into savings or £140 going into pension for the same net cost to you. If you got an average net interest rate of 5% on the savings, it would take each £56 19 years just to match the amount going into the pension and thats assuming you never earned a penny on the pension.

30 years of £56 into savings at 5% p.a.= £45,847
30 years of £140 into pension at 5% p.a. = £114,617

If you assume 5% income rate, then the savings will pay you £2292 p.a. The pension will pay you £5730 p.a. Or, you can take £28654 lump sum and get £4298 p.a.

Never turn down free money from the employer into the pension.