Is this adequate?

ftbworried

Hi

I'm thinking of taking out a virgin stakeholder pension. I'm a 22 year old female and due to anticipated career path it will mean lots of job moves, possibly as a contractor or funded by research grants (therefore no company pension).

I've realise that cash saving is not the way to go as inflation eats it up. Based on saving £200 a month into a pension I got this quote...


Your savings will be worth £ 584,000
This will give you an income of £ 40,300 a year
In today's money, that's the equivalent of £ 13,900 a year

Increasing the amount you save each year will have a dramatic effect. For example, if you increase your payments by 10% a year:

Your savings will be worth £ 3,770,000
Giving you an income in today's money of £ 89,900 a year

Now, I would be looking to increase my payments of £200 year on year. The figures for raising payments by 10% look v attractive! but it would mean that pension payments would be as follows:

year 5 £292
year 10 £471
year 20 £1223
year 40 £8228!!!!

Is this realistic? it sounds like a LOT of money, but my parents mortgage is £70 a month which was all of my fathers wages 25 years ago! Obviously it's not a lot nowadays! Would a 5% increase be more realistic?

Also these pension calculators seem to all assume an annual 7% growth. Is this realistic too?

Thanks

dunstonh

I'm thinking of taking out a virgin stakeholder pension.

Why would you want to do that? Poor fund range and a full charge contract with no advice given. Avoid it.

Is this realistic? it sounds like a LOT of money, but my parents mortgage is £70 a month which was all of my fathers wages 25 years ago! Obviously it's not a lot nowadays! Would a 5% increase be more realistic?

A better way is not to go 10% annual increase but RPI or NAEI. They are more realistic.

Also these pension calculators seem to all assume an annual 7% growth. Is this realistic too?

Depends. Mine is averaging 16% a year (long term). With a virgin pension fund selection, then 7% is a fair average.

5, 7 & 9% is an FSA requirement when using monetary growth rates. (some exceptions possible)

ftbworried

Quote:
Why would you want to do that? Poor fund range and a full charge contract with no advice given. Avoid it.

Because I know no better. Unbelievably, you do not come out of the womb knowing about pensions- and unless you have financially savvy parents (mine certainly aren't) then who teaches you about them? So what other options do I have?

Quote:
A better way is not to go 10% annual increase but RPI or NAEI. They are more realistic.

What are RPI and NAEI?

EdInvestor

Hi ftbworried

Are you a basic rate taxpayer?If so, you might well be best to put this money in an ISA. The ISA tax perk is a "use it or lose it" one, on an annual basis, whereas after A-day in April, pensions will move over to a lifetime allowance basis.

This means you can pick up the tax relief in full by putting in a lump sum to a pension closer to retirement.No need to do it now.People of your age are usually best advised not to lock their savings away in things like pensions, where they can't get the money out. This is because they might need their money later for things like a deposit on a house.

Regarding returns, if you invested 200 quid a month in a savings acount for 25 years, you should end up with 102,103.

If you put the same amount into a stockmarket investment in an ISA and it increased @7% after charges than you should end up with 157,494.

With a pension wou will end up with more because of the upfront tax relief, but then you lose most of this because the money is taken back when the income is taxed at the normal rate when you retire.Only 25% is tax free.

Note that charges often add 2%, so you need 9% growth to get a standard investment return.You can check charges for ISAs and pensions on the regulator's site here:

https://www.fsa.gov.uk/tables

ftbworried

Thanks for the advice- however, I do not need any savings for a house deposit. I have already bought a house, a car, and paid for a wedding so I have little use for saving a large lump sum of money. I am keen to start to put something away from my retirement sooner rather than later though (I'd also like to start getting used to putting this money away and NOT having access to it).

I actually don't pay tax at the moment. I'm doing a PhD where I get a healthy stipend (but this is not eligible for tax). My PhD funding last for 4 years.

EdInvestor

ftbworried wrote:

I have little use for saving a large lump sum of money. I am keen to start to put something away from my retirement sooner rather than later though.... I actually don't pay tax at the moment.

You may be interested to see the size of the lump sum required to buy pension incomes these days.
It's quite large

A pension tax wrapper won't be of any use to you until you are working and paying tax - the ISA is definitely the one to go for.

DavidLaGuardia

ftbworried wrote:

Quote:

What are RPI and NAEI?

RPI refers to Retail Price Index which is a measure of UK price inflation based on a basket of goods and services. It is the figure used on the news and other things to refer to "inflation"

NAEI is the National; average earnings index. In a growing economy this tendss to be bigger than actual inflation as people get more financially better off. Pensioners often complain that the state pension goes up by RPI rather than NAEI which makes their pension progressively less in relation to everyone else.

Sorry, but must disagree with Edinvestor on slating pensions. the tax relief still makes them more efficient than ISAs and the funds are protected from creditors. More flexible ways of taking the income are evolving and politcially there is likely to be more to favour pensions over the years. ISAs may have a terminated shelf life at any time.

furthermore, unlike what Edinvestoer says, if you are not paying tax the pension vehicle is attractive as you still get basic relief effectively on up to £3,600 gross a year.

dunstonh

Quote:
Why would you want to do that? Poor fund range and a full charge contract with no advice given. Avoid it.

Because I know no better. Unbelievably, you do not come out of the womb knowing about pensions- and unless you have financially savvy parents (mine certainly aren't) then who teaches you about them? So what other options do I have?

Sorry. I assumed as you were doing it yourself and not seeking advice that you did know something about it. What other options do you have? seeking independent financial advice would be the best thing for someone that needs advice.

Like David, I too believe that Ed incorrectly slates pensions. Whilst not being a perfect product, it will beat an ISA for providing retirement income. Also, as you are not a tax payer now you will benefit from a free handout from the state. ISAs do have advantages which are not present on pensions but pensions also have advantages not present on ISAs.

EdInvestor

DavidLaGuardia wrote:

if you are not paying tax the pension vehicle is attractive as you still get basic relief effectively on up to £3,600 gross a year.

This is true: but bear in mind that the tax relief on the money going in is offset by the tax payable on the income of the money coming out at the end as a pension - only 25% of the fund is actually free of tax.

Mind you, I'm sure that a 22 year old who has already got a house, a car, and paid for a wedding would already be aware of that - and might also think that the 3600 allowed p.a in pension saving was a bit puny compared with the ISA limit

dunstonh

This is true: but bear in mind that the tax relief on the money going in is offset by the tax payable on the income of the money coming out at the end as a pension - only 25% of the fund is actually free of tax.

Potential tax at the other end. Its is taxable income but that doesnt mean tax would be paid.

ftbworried

EdInvestor wrote:

This is true: but bear in mind that the tax relief on the money going in is offset by the tax payable on the income of the money coming out at the end as a pension - only 25% of the fund is actually free of tax.

Mind you, I'm sure that a 22 year old who has already got a house, a car, and paid for a wedding would already be aware of that - and might also think that the 3600 allowed p.a in pension saving was a bit puny compared with the ISA limit

Well, the way I saw it is that if you get tax relief NOW, then you earn 'interest' on that tax... so when they take it back from me in 40 years time i will only have to give them what they have 'invested', I get the interest that I have made on the tax 'investment'?

BTW isn't the ISA limit only £3000 per annum? compared to £3600 for pensions?