When should I start saving for a pension

ti1980

I don't know much about pensions at all so please bear with me.

My take home pay is about £920-£950 after all the deductions are taken out.
I could join my employers pension scheme, they would put in double whatever I put in so for every £1 I put in, they put in £2.

I am already a member of their old scheme, where they put in 15% of my annual salary into a pension fund, I don't have to do anything myself with that.

I decided to do my works sharesave scheme so assuming I stay with them for 3 years, I would have a lump sum to put into a pension scheme potentially (at the very worse I would get the money I have put in).
Would I be better off putting a lump sum into a scheme or should I start something now?
Are there many pitfalls or something important that I should be aware of?

What worries me most is having my money locked away for over 30 years that I can't get hold of if I needed to for any reason. The works pension scheme that I am in now doesn't count to me as I don't physically put anything into it.

Thanks for any help. :beer:

crossleydd42

A pension to live on may not seem very important now, but will be later and the sooner you start again the better. Normally, you could consider 7% of your salary as being about the right amount to put in - remember that you do not pay tax or NI on pension contributions. It is always good to invest in a sharesave scheme. No doubt you have the option to buy shares at a 20% discount, so that makes it very worthwhile on maturity. If the shares nosedive during the period of the scheme, you can always cancel it and start again. Also, try not to sell all the shares on maturity so that they build up over time. Dividends always go up much faster than inflation and can form a useful form of income.

ReportInvestor

ti1980 wrote:

Would I be better off putting a lump sum into a [works share save] scheme or should I start [another pension] now?

If your employer is adding £2 for every £1 you invest in a pension, this is free money and you should jump at it.

Who is this employer whe pays 15% of your salary into a pension and then offers a bumper additional pension scheme ?

Some of us would like to know .

That said, you seem already well provided for pension-wise and have expressed caution about locking away further monies. Several posters on this board share that caution.

The company share save scheme will presumably be on potentially advantageous terms, so this will be a consideration. Against that, a single share is a risky business (especially when it's tied up with your job prospects) compared to a collective investment.

If the terms are good, with A-Day you can make large, lump sum investments into your pension up to the size of your salary in any later year.

A further argument for delaying further pension investment would be if you will become a higher rate taxpayer in future - as your some of your extra pension contributions would then qualify for 40% tax relief if the regulations remain unchanged.

But that free employer money still looks nice

dunstonh

Actually, the scheme you are already in probably is better. I am going to guess (which means I could be wrong) but I reckon that is probably a final salary scheme which would be better for you than the newer scheme.

When thinking about retirement, you have make some assumptions as its a long way away and lots can change between now and then. However, if you were to retire at age 65 and look at things in todays values what position would you be in....

You would get a basic state pension of £4381 a year. Would that be enough to live on? Your current take home pay is nearly 3 times that.

You are a member of a pension scheme so that will provide further income and your pension statement, that you get periodically, should indicate what that will be based on your current position. So, when you add that to the basic state pension, will that provide enough income? If yes, then good, if not, then you need to save some more.

A further consideration is that you will have to meet some capital expenditure in retirement. A new car, replacement boiler, holidays etc. So, you need to save up to build some lump sums which could be used in retirement. Sharesaves can do very well on that front normally.

EdInvestor

It is indeed a good idea to consider your retirement provision by checking first your entitlement to the basics - the two inflation-protected state pensions, the Basic State Pension and the State 2nd Pension (S2P formerly SERPS). S2P will double the state pension income received for those contracted in with a full NI record.

Get a forecast of what you will get here

The two state pensions will use up most peoples' tax allowance in retirement, and because pension income is taxed, an ISA ( not taxed) may be a better vehicle for some long term savings and investment for basic rate taxpayers.

Company pension schemes are sometimes "contracted out" of S2P, which means part of the company pension will replace the S2P, you won't get the extra money.This would also have a bearing ( along with free money) on how much you save in a pension scheme, versus other methods (such as share save, ISAs - or even paying off a mortgage or buying an investment property).

There are many choices now of saving and investing for retirement, especially since they changed the pension rules to the lifetime allowance.This means you can defer pension saving until you're older because you can still put in lump sums and get the tax relief.

Formerly it was an annual "use it or lose it" allowance - like your ISA still is.

ti1980

The company is M&S.
http://www2.marksandspencer.com/thecompany/workingwithus/rewardsAndBenefits/rewards.shtml
The link shows the pension scheme they operate for staff but I don't really understand it.

ReportInvestor

You put in 6% of salary and they add 12% free cash :eek: and more if you want in your first year.

This looks like the nirvana of defined contribution schemes . It's a no brainer to contribute the maximum you can afford.

And you are getting tax relief on that 6% .

And in your first eligible year you can contribute 10% tax free and they add 20% absolutely free.

But you should find out more about the scheme - eg what it's invested in equities / bonds / property etc - as a means of tracking your retirement fund and learning more about investments for the future.

And it looks easily transferable if you do switch jobs. Ask what happens (e.g. with charges) if you do and whether it can be transferred to another company pension scheme or a personal pension depending on your preference.

ffacoffipawb

crossleydd42 wrote:

remember that you do not pay tax or NI on pension contributions.

The contributions are taken from your salary before tax, so no income tax is paid.

However, you do pay National Insurance on these contributions, ie you do not get relief against NI on those contributions. Sadly.

EdInvestor

The tax is paid on the income when you retire, a fact which comes as a rude shock to many pensioners. (The other rude shock is that they're expected to give up all their fund to the insurance company to buy what is now a pathetically small annuity income).:(

Basic rate taxpayers shouldn't get too carried away about the supposed benefits of deferred tax : only 25% of the fund is tax free, the rest is taxed at your highest rate.

ti1980

It is all so confusing.

dunstonh

Basic rate taxpayers shouldn't get too carried away about the supposed benefits of deferred tax : only 25% of the fund is tax free, the rest is taxed at your highest rate.

The rest is taxed at the appropriate rate applicable. Not at the highest rate. So, if £1000 of it is in the nil rate band, there is no tax paid on it. If £2000 is in the 10% band, then 10% is paid on it etc etc.

to buy what is now a pathetically small annuity income).:(

A rate that is still higher than savings accounts and guaranteed once commenced. Unlike any other option.