When should I start saving for a pension

ReportInvestor

The basics aren't so confusing.

Assuming you earn £1200 gross per month.

You decide to put in 6% of salary = £72 but you don't pay 22% tax on this so it actually costs you £56.16.

M&S, out of the goodness of their hearts, put in £144.

So you have a monthly pension fund contribution of £216 at a cost to you of £56

Nice one. And it gets better.

When you take your 25% lump sum at age 55 (or whatever they've put it up to by then) you would get back £54 were there to be no growth.

So look at it like this. On retirement every £162 of your pension fund will have cost you £2 . Assuming the rules stay as they are.

ti1980

Wow, it looks so much easier for me when you put in the figures in bold like that for me. Thanks for that, it seems so much clearer now though there are still quite a few confusing aspects to this whole pension thing.

Salary is about £1350/month before any deductions are made, its usually a bit more depending on overtime/holidays etc.

So if I was to get another job, I would need to be earning quite a bit more to replace the pension that I am getting now from my current employer.

ReportInvestor

ti1980 wrote:

So if I was to get another job, I would need to be earning quite a bit more to replace the pension that I am getting now from my current employer.

You're learning fast. Spread the word in your workplace. Companies that offer good pension schemes deserve recognition for their efforts.

And don't forget to follow the performance of your fund to learn more about investment. It is not a "pension" as such (this is the most common misconception about saving for a pension).

Your future pension will depend on three things.
a) what you and your employer(s) put in.
b) the investment performance of your fund
c) annuity rates when you retire (which are in turn dependent on perceived longevity & future long term interest rates).

But 18% of income (6% from you and 12% from M&S) should build you a very worthwhile pension in due course.

What could you expect? By way of illustration I shall assume that you are male, age 30, currently earning £13,200 pa, that your wages will rise 4% pa, that inflation will be 2.5% pa, that the investment fund performance will be 7% and that annuity rates @ 60 will be 5.5% and at 65 will be 6%.

You could get a pension worth £10,823 pa at 60 in today's money.
You could get a pension worth £17,603 pa at 65 in today's money.

The reason you need to watch the investment performance is that falls to
£7,914 at 60 and £12,160 at 65 if the fund only grows @ 5%.

ti1980

Oh gosh, you have confused me all over again. There is so much to learn.
One of the main things is that I don't feel I should be putting money into a pension seeing as I am paying off various credit cards which should hopefully be doing in about 18 months.
I was told that I really should do sharesave as it was a win win process in that if the shares didn't do well then I could always still get my money back and also a bonus.

ReportInvestor

I sorry to have done that.

All I was saying is that your final pension will be dependent on fund performance, but you can be confident it will be worthwhile. Why would M&S shell out all that money and not employ good managers for their workers' pension fund?

This pension is also a win/win process - £74 from M&S for every £26 you contribute.

If you could find more details of the sharesave scheme we could compare its prospects and give you an opinion.

As usual with these decisions, the right choice will come down to your goals & priorities. If your medium term goal is to buy a house after paying off those credit cards, that would further complicate matters as you can't do that with a pension.

If your housing is already sorted, then 8-15% pa on a credit card can probably be beaten by a good sharesave scheme - although there is a risk it won't. It can be beaten out of sight by that M&S pension if you are thinking long term.

EdInvestor

RI

You could get a pension worth £10,823 pa at 60 in today's money.
You could get a pension worth £17,603 pa at 65 in today's money.

Maybe you should do the calculation using the average wage.For one of the best pension schemes in the land, the above outcome is not exactly sparkling, is it? This is the sort of thing that turns people right off pensions.

Especially when you consider that a person will get around 8,000 pa in index linked state pensions, just by making sure s/he maintains a full National Insurance record.

Perhaps you'd also like to explain why it goes up so much in the last few years, and how that might affect the timing of any contributions to a pension under the new lifetime allowance.

ReportInvestor

It's a sparkling outcome for someone on just under £16K at age 30 . The rest of the country (MPs and Civil Servants excepted) will eventually be jealous.

I think you're taking the michael, Ed, but here goes.

The reason for the difference between retiring at 65 & 60 is two-fold.

a) the magic of compound interest/investment growth - with the implications that if you start to save early you can become rich (or at least comfortably off). 35 years of investment gives much more than 30.

b) the later retirement date (65, rather than 60) meant I added 0.5% (9% more) to the imaginary annuity rate I used.

So you can see that a) is by far the most important factor.

Regarding WHEN to start investing under the new A-Day rules. We have established elsewhere that it doesn't matter for most people if you save into an ISA and then transfer into a pension at a later stage - so A-Day gives people greater flexibility and control over their finances.

But this doesn't apply to the OP or any other reader whose company generously adds to their pension contributions, since one year missed is "lost" money - and even more importantly, lost compound interest on the original "lost" money.

The OP asked "When should I start saving for a pension?"

I think the answer is as early as possible if your company is M&S, as long as you ensure that the rest of your life/finances remain on track.

ti1980

Re: Sharesave, what did you want to know? This is what is says when I log into my portfolio.

Sharesave. If you are eligible for a company’s sharesave scheme, you are given the option to buy shares (usually at a discounted price) at a given point in the future (usually 3 or 5 years). To enable you to exercise this option at the appropriate time, you choose to save an amount every week or month which is invested automatically from your pay. The balance shows how many shares you will be able to buy when the option matures.

The total balance in my portfolio at the moment is 2299. 48 of those shares were 'freeshares' and I can cash in this year if I want but I would have to pay tax and NI on them. If I keep them for another 2 years then I can sell them free of NI and tax.
1071 I could get in 2009 and the remaining 1180 I could get in 2010.

What scares me so much about investing in a pension is that the money is 'locked' away for so long and I wouldn't be able to get any of it til I'm 60 or is it 65? I think at M&S you can take early retirement at 59 and it is soon to be raised to 55 but I'm not certain about the ages.
The thing with me is that my credit cards are my immediate problem and they won't be paid off til I'm pushing 30. I still have other debts to pay off, gonna be me forever.
Also I'm renting at the moment and at some point in the relatively near future (3 years ish after credit cards paid off) I would probably be getting a mortgage.

Anyway, I'm waffling now, thank you all very much for the help you have given me so far. I have a lot to think about.

ReportInvestor

You're not waffling, you're thinking about your goals, which is productive.

Thanks for the share scheme info, although you don't say what the past or present discount is. And where did these "free shares" come from (or is that the discount?).

Anyway, you have £13,500 of M&S shares but it would seem the wrong decision to sell and incur 22% tax & 11% NI in spite of your credit card debts. Better to wait until you can sell them tax free - and hope that M&S continues its recovery in the meantime.

It's been a star performer in a struggling retail sector recently.

That's a sizeable investment in M&S, though (more than your net annual salary). And it means that you are putting all your investment eggs in one basket, which adds to risk considerably. Going for the pension over extra M&S shares would help spread your investment risk (which is a good thing) - a further consideration :eek: .

dunstonh

What scares me so much about investing in a pension is that the money is 'locked' away for so long and I wouldn't be able to get any of it til I'm 60 or is it 65?

Its not long. Time speeds up as you get older.

You buy a house, you get married, you have children, you get the mortgage paid off and the children leave home and you then think about retirement only to realise you are in your 50s and have 10-15 years to save around half a million pounds.

I saw someone last week who has just arranged a 40 year mortgage as that is the only way they could get the money. They will be borrowing a large amount longer than they will be saving for their retirement.