Not sure whether to pay AVCs

[Deleted User]

Hi,

I'm 25 and started a pension ~3 years ago. I've had a few promotions and gone from £16,500 to £26,000 with £21,000 classed as my 'reference' salary which is where the pension contributions come from. The rest is a bonus, albeit a pretty much guaranteed night-shift bonus.

My questions are as follows. I've roughly got £3000 - £4000 in the pension at the moment and pay 5% of my salary via salary sacrifice. My employer matches this 5%. I was reading up on best practices and they say to put in a percentage half of your age, so 12.5%.

12.5 - 5 = 7.5% left for me to put in. I've asked today to increase the amount but the maximum on offer is only 6%...

Is it worth paying AVCs of say 1% of my salary given my circumstances? I'd anticipate the amount I'd want at retirement per month is just pretty much the average, nothing extragant but then again not beans on toast every night

I also currently have no savings for a pension as this is all geared towards a house deposit. I slightly dubious how much self control I'll have in the future if I saved an amount in an ISA.

Is the rule of half your age applicable as the years go by? Even though I've started pretty early on in my career contributing towards a pension.

dunstonh

I was reading up on best practices and they say to put in a percentage half of your age, so 12.5%.

That is one of those quick and rough guides. It doesnt take into account when you want to retire or any exisitng provision you have and how much you want when you retire. Its just a prompt to get people paying something that is at least reasonable.

Is the rule of half your age applicable as the years go by? Even though I've started pretty early on in my career contributing towards a pension.

I wouldnt plan my retirement on the basis of a marketing created "rule". Find out what your current planning will pay you in real terms and when and decide if its what you want. If not, pay more. If it is then fine.

[Deleted User]

I can do calculations on sites like http://www.h-l.co.uk/pensions/pension-calculator but at my age it's very difficult to know how much is a reasonable amount to live off in my twilight years and how much I may need.

In your opinion(s) does my current setup look "average" for a 25 year old? Are there pitfalls to AVCs? Would it be the perfect way to get around their imposed 6% limit or are there things to watch out for?

dunstonh wrote: »

That is one of those quick and rough guides. It doesnt take into account when you want to retire

Who knows! It's so far off. I'd hope, like most I expect, for it to be closer to 55 than 65.

Is it common practice to increase the amount you contribute as the years roll on? Would this be something only really required if I were starting a pension in my 30s?

dunstonh

Here is a quick and dirty for you.

your state retirement age is 68. you are aged 25 so have 43 years to retirement. In real terms that would be a pot around £400k.

Thats £100k in the bank and £300k providing an income which at 5% p.a. would be £15k a year. Add basic state pension of £4700 on that and you are nearly 20k.

Because you are so far away from retirement, any small change in the assumed inflation rate or rate of return or wages increases over the years will have quite a large impact on the range of figures you will get back.

If you dont want to wait until age 68 (forget 65 as that doesnt apply to you) then you need to start thinking at some point about making provision for it. That would need you to more or less double your pot if you are looking at 13 years earlier.

[Deleted User]

dunstonh wrote: »

your state retirement age is 68.

That seems ridiculous the state can keep their sticky mits on my money until I'm that old. Oh well

dunstonh wrote: »

you are aged 25 so have 43 years to retirement. In real terms that would be a pot around £400k.

Can I ask how you worked this rough figure out? Is this in today's terms or 'money terms' as the h-lc.o.uk puts it?

dunstonh wrote: »

Thats £100k in the bank and £300k providing an income which at 5% p.a. would be £15k a year. Add basic state pension of £4700 on that and you are nearly 20k.

If the 400k is roughly accurate then ~20k a year doesn't seem too bad at all. Surprisingly. Thanks for the heads up on 4.7k, I've wondered what the basic was for a while.

dunstonh wrote: »

Because you are so far away from retirement, any small change in the assumed inflation rate or rate of return or wages increases over the years will have quite a large impact on the range of figures you will get back.

Yep I appreciate that which is why I've questioned AVCs, whether they're worth it for me, what pitfalls they have and how common it is for someone aged 25 to be using them in addition to their standard work pension?

dunstonh wrote: »

If you dont want to wait until age 68 (forget 65 as that doesnt apply to you) then you need to start thinking at some point about making provision for it. That would need you to more or less double your pot if you are looking at 13 years earlier.

From this I take it your figure of 400k is based on me retiring when my state pension comes to fruitation.

Using the calculator it comes out my work pension would payout 15k a year if I retired at 68, £8,800k if it was at 60.

A 1% increase using an AVC increases it to £9,600 whch doesn't seem at all that much more. A 2% increase would be £10,300.

I suppose there's so many unknowns, as you say like the pay out rate, my future wage increases, assumed inflation. Bearing all these in mind is 2% really going to make that much difference as I really can't predict all these unknowns so I've no way of knowing...

dunstonh

Can I ask how you worked this rough figure out? Is this in today's terms or 'money terms' as the h-lc.o.uk puts it?

That is in todays terms. The monetary value would be much higher but brought back to todays terms (in todays spending power) was what I was working on. I have closed the program now but I think it was 4.5% growth with 2.5% for inflation and assumption that your current contributions would go up in line with inflation.

Surprisingly. Thanks for the heads up on 4.7k, I've wondered what the basic was for a while.

It would be more than that as you have the second state pension on top. However, I tend to ignore that at your early stage as the Govt have played around with it over the years and retrospectively reduced it. The maximum someone starting out now can get on it is about £3300. Yet not too many years back you could get over £7000. The basic state pension cant really be mucked about with because the media will pick up on it. Its a major part of the welfare state. but the second state pension can because most people dont understand it and that especially goes for journalists.

Yep I appreciate that which is why I've questioned AVCs, whether they're worth it for me, what pitfalls they have and how common it is for someone aged 25 to be using them in addition to their standard work pension?

An AVC would be a strange option for someone with a money purchase scheme. If you wanted to pay more than increasing your personal contribution would be normal (either directly or by salary sacrifice - although if you are buying a house soon and pusing limits, salary sacrifice may not be the best option in the short term) or use an ISA.

I suppose there's so many unknowns, as you say like the pay out rate, my future wage increases, assumed inflation.

Just to give you an idea, a 2% difference in the rate of return per annum nearly doubles your pension pot. You are paying in a good figure at the moment and I would focus on getting your deposit for a house built up.

[Deleted User]

dunstonh wrote: »

You are paying in a good figure at the moment and I would focus on getting your deposit for a house built up.

Great. Thanks for all your suggestions. I've decided I'll increase the current 5% from me and 5% from my employer to 6% from me and still 5% from my employer.

It's only £10 less a month which really isn't a lot for me at all. I'm also not going to bother with AVCs for now.