How much do you pay into you pension?

nh

This is a personal question but, hey, you don't have to answer if you don't want to.

How much do you pay into your pension and what kind of income do you expect that to give you in retirement?

Obviously I am mostly asking people who don't have a final-salary pension.

At the moment me and fiance pay in £200 a month to his private plan. I used to have a work plan (from the age of 21-26) but now I am a casual so can't pay into the work scheme and as we are saving for our wedding other financial issues are taking precedence (slapped hand!)

We hope to pay in £300 a month to a stakeholder in my name after the wedding if I am still unable to join the work one, as well as continuing the £200 a month to his plan

I think we are looking at requiring an income of at least £30k a year (combined) in retirement (obviously that is in today's money, it would be more when inflation etc are taken into account). We don't mind selling our home (which is currently worth £250k) and buying something cheaper when we retire in order to increase our ability to buy a decent annuity.

My question is, is £500 a month enough? (I am 27, he is 30, he was paying about £400 a month into his pension plan with Standard Life for about five years before it went down to £200 a month, but they keep sending him letters about how his pension is worth less than what he has paid in so we are loathe to increase the payments in)

dunstonh

How much do you pay into your pension and what kind of income do you expect that to give you in retirement?

It depends on what you want back at the end and the anticipated growth rate of the areas you are invested in.

A pension is just a savings product. The more you put in, the more you get out.

A rough rule of thumb is to take your age, half it and pay that as a percentage (gross) into a pension.

he was paying about £400 a month into his pension plan with Standard Life for about five years before it went down to £200 a month, but they keep sending him letters about how his pension is worth less than what he has paid in so we are loathe to increase the payments in)

Its not the pension that has gone down. It is the fund he has invested in. This is no surprise as the stockmarket is down by nearly half what it was 5 years ago. This happens from time to time and nothing to be surprised or worry about when you have as long as you do until retirement. Indeed its a good thing as you can plough the money in now and buy these units much cheaper than they were 5 years ago.

It may be that the fund spread needs to be re-examined to suit your risk profile and have a sensible asset spread.

nh

A rough rule of thumb is to take your age, half it and pay that as a percentage (gross) into a pension.

I have heard this before, but surely that depends on how much you make now and how much you want as a pension.

Should that give you, say, two-thirds of your final salary as a pension? If your salary is £100k you might not want two-thirds in retirement!

And if I pay in half my age as a percentage now, can I continue to pay that in or should I increase it as I get older?

dunstonh

I have heard this before, but surely that depends on how much you make now and how much you want as a pension.

Correct.   It is a general rule to give you an idea of the minimum amount you should be paying.

When you have chosen your provider,  illustrations are provided on the amount you wish to pay.   They will give you between 1 to 3 projections on what the fund value and retirement income could be on the selected retirement date.

And if I pay in half my age as a percentage now, can I continue to pay that in or should I increase it as I get older?

Increase it. Look at the cost of things 10 years ago, let alone 30. Think of the same happening in the next 30.

nh

Scary!

deemy2004

Nothing

Though my employer puts in £180 per month into my SIPP

If it grows by an average of 7% per year (Up 9% this year) then it should have grown to about £250k by the time I'm 60.

Which is equivalent to 105,000 in todays money indexed at 3.1%.

That would thus at an annuity of 6% generate an annual income of £6,280 in todays money. Add state pension of £4k, and serps of £2k means my pension would be about £12k in todays money.

Though on top of that I will have a savings pool which say grows at some 5.5% per year of approx £1.14million or 505k in todays money.

So , hmmmm, I think I need to spend more ! Else my family will be inheriting too much !!!  :o

I'll do the sums for you £500 NET a month for 30 years
If you put in £500 NET a month indexed at 1.5% per year, then in 30 years you will have -

Your contributions - £225k
Tax Mans 22% = £66k
Total contributions = £291k

At a growth rate of 5% (less annual charges of 1.5%), the actual pension fund will be £627k

Allowing for inflation of 3.1% in todays money your pension pots value will be £252k

If you took an annuity and the rate given was 5.5% that would generate an income of £14,000 - Thats in todays money !

Now if you add state pension on top and SERPS then your looking at possibly an additional £8k intodays money or a total pension of about £22k

nh

Wow! Thanks so much Deemy - better start saving, hey!

I was thinking we would have another £100k in today's money if we sold our house and bought a smaller one (I'm not cleaning that monster we live in now when I am 65!).

And £500 a month is a lot of our wages (well, it will be after I give up work to have kids ;D)

But I suppose there is no other option....

deemy2004

The options should include cash-isa's, which are likely to continue after their anticipated end date.

Its good to have a balance between pensions - which provide taxable earnings.

And cash-isa's which are totally tax free

Pal

Deemy - you obviously forgot to finish your post off so allow me:

"..taking account of the fact that cash ISAs are tax free because you have already paid tax on the money you put into them, while creating taxable pension income is done by saving tax free pension contributions, plus you can take 25% of the pension pot as tax free cash so you never pay tax on it at all, and your top rate income tax level is likely to be lower when you are retired compared to when you are working....etc etc.

See lots of other threads for details."

I do agree that a balance needs to be struck between immediate cash and short term savings and retirement savings, esp for those starting a family!

Out of interest, why does everyone always recommend cash ISAs for long term savings? What about bonds, equities etc etc. No-one would recommend investing pension contributions in a cash fund so why limit yourself on your ISA savings if they are for the long term?

deemy2004

Yep

As far as I am concerned the BEST long-term investment is index linked govenment stock in an ISA !

2nd best - in an pension.

No matter what happens ! your capital AND interest is index linked.

MarkyMarkD

But, Deemy, Pal's point re marginal tax rates is a vital one to consider in this, and could tend to negate your position surely?

For many people, their marginal tax rate whilst working will be higher than their marginal tax rate whilst retired. Most commonly this will be moving from 40% to 22%, but it could also be moving from 22% to 10% depending on the level of income.

The fact that you gain so much on the tax is a huge reason to opt for pension over any sort of ISA.

If you pay £600 into a pension 40 years before you retire, it becomes £1,000. If it grows at 5% per year compound, it is worth £7,040 on retirement. One quarter of that is tax-free (£1,760) and the rest is taxed at say 22% to give £4,118 net. Total net of tax fund is £5,878.

If you paid the same £600 into an ISA at the same time, and earned 5% per annum, it would be worth £4,223 on retirement - which is tax free.

The pension option leaves you 39% better off, in this scenario.

Even if you were taxed at 40% on the pension fund, it would still leave you 17% better off.

Now, admittedly, the return on the pension and the ISA may differ. But not by that much. And over the long-term I think the average return on pension funds and the average return on your index-linked ISA will be much the same (or the pension fund will outperform - but that's a different matter).