Company pension or premium bonds?

NoNamesLeft

I have received an offer to join my company pension scheme it is a stakeholder pension with Standard Life, I am expected to pay 4% of my salary to which my company match also with 4%.
I am aged 37 and if I pay till I retire at 65 a total of 28 years a sum which starts now at £75 a month payable by me, allowing for inflation my final pension in todays figures will be worth £3100 a year!, pretty pathetic I say.
So would I be better off putting that £75 a month into premium bonds or some other means.
You advice would be greatly apreciated as I have to make a decision soon.
I have worked full time since aged 16 so expect to be entitiled to the full state pension upon retirement.
Thank you

margaretclare

You say it's pretty pathetic. I say the opposite. You are asked to pay in 4% of your salary which the employer will match. If you choose not to do this you are chucking away free money, turning down that extra 4% from your employer. Like refusing a 4% pay-rise.

Premium Bonds are a form of gambling, you may get a prize, you may not! You're guaranteed to get your money back but you might not get any more than you put in. Your employer's offer is worth far more than that.

Margaret Clare

dunstonh

Premium bonds with an average prize return of around 3% is pathetic compared to receiving 4% "free" from your company, 22% tax relief on the contributions and long term average growth of around 7% p.a.

Premium bonds wont even come close to providing a fraction of what the pension will.

I have worked full time since aged 16 so expect to be entitiled to the full state pension upon retirement.

£4381 is the full basic state pension. Try living on that.

You are aged 37. You have around 30 years to state retirement age. We dont know if thats when you intend to retire but without any decent provision, it certainly wont be earlier. For you to put aside only 4% of your income for retirement provision is too low. You need to be looking at double figures at least. How much would depend on what provision you have made already.

Your company should be given a well done for paying in 4% not called pathetic. I would also take care looking at todays terms income projections when the contributions are based on your salary. You are almost certainly not taking into account future increases in contributions.

caveat_emptor

Don't forget the government adds to your pension contribution, so your 4% becomes about 5.1%. Take the pension, there are millions of premium bond holders who don't get this return and only a few that do.

NoNamesLeft

Im not saying the company paying 4% is pathetic I am saying the final pension figure is pathetic, as an earlier poster said the basic state pension in todays terms is just over £4k a year, well if my company scheme is just over 3k, then whats the point, I may as well accept the state offering at retirement and gamble with premium bonds?

EdInvestor

First of all, anyone thinking of investing money in a pension should check out how much they are are already accruing in the two state pensions - get a forecast here - which in this case is probably rather more than 4k a year, possibly twice that.

Both these pensions are index linked, this is very important because inflation protection costs a lot.

I am aged 37 and if I pay till I retire at 65 a total of 28 years a sum which starts now at £75 a month payable by me, allowing for inflation my final pension in todays figures will be worth £3100 a year!, pretty pathetic I say.

Could I suggest you look into this forecast a little more closely?Very possibly it reflects a pension with a full set of bells and whistles: fully index linked, with a 100% spouse's pension.It will also be based on current regulator growth forecasts and annuity rates. You may not need these features.

What actual size of fund ( in money terms) is projected at retirement? This is what you need to know.Then you can compare how much you would end up with in 27 years' time compared with premium bonds which will show no growth.

dunstonh

Im not saying the company paying 4% is pathetic I am saying the final pension figure is pathetic, as an earlier poster said the basic state pension in todays terms is just over £4k a year, well if my company scheme is just over 3k, then whats the point, I may as well accept the state offering at retirement and gamble with premium bonds?

You are making wrong assumptions.

You are looking at a projection that is based on you maintaining your 4% contribution at it's current level and then getting a 2.5% p.a. deduction for inflation. Yet you are not including the fact that your salary will rise over the years and this 4% p.a. you pay (8% in total) will increase and push the final figure up with it.

Standard Life do tend to use lower projection rates in their illustrations and often include joint life, increasing annnuity rates.

Premium bonds have a average payout of 3% p.a. The pension funds will grow around 7% p.a. Pension fund is tax free and gets tax relief on contributions plus you get 4% given to up front. If all that free money gives you 3k, how on earth do you expect premium bonds to be better?

For information: (30 year term considered)
Assuming premium bonds average 3%, £840 a year into those would give you a final pot of £41,162
A pension getting £1680 a year put into it (doubled due to employer contribution) and growing at 7% p.a. would give you a final pot of £169,802.

Using 5% income as the a guidence figure, the premium bonds final figure would pay you £2058 a year (premium bonds dont pay income but assuming re-investment to achieve 5%)

The pension would give a tax free lump sum of £42450 (more than the whole of the premium bonds total you would have got). However, assuming 5% on the lot would have an income of £8490. More than 4 times higher than the premium bonds.

Please dont take this the wrong way but I think it needs to be as strong as this... You would be a fool not to take the pension and pay into premium bonds instead.

cheerfulcat

NoNamesLeft wrote:

Im not saying the company paying 4% is pathetic I am saying the final pension figure is pathetic, as an earlier poster said the basic state pension in todays terms is just over £4k a year, well if my company scheme is just over 3k, then whats the point, I may as well accept the state offering at retirement and gamble with premium bonds?

NNL, the final figure is pathetic because you have left it very, very late to start saving for retirement, and the amount which you are intending to save is very, very small. However, lending it to Gordon Brown at a derisory, non-guaranteed rate of interest in the faint hope of winning the million is not the solution. Saving/investing more might be...

nrsql

margaretclare wrote:

Premium Bonds are a form of gambling, you may get a prize, you may not! You're guaranteed to get your money back but you might not get any more than you put in.
Margaret Clare

Pensions are also a form of gambling as is everything you do - you are just making an estimate of the oods.
You don't know what the rules will be when you come to take an annuity/lomp sum, how much will be taken out by the chancellor, fund managers etc. or how the fund will perform.

The employers contribution makes this look fairlt irresistable but I wouldn't rely on a single pension fund or even just multiple funds to support a retirement. 4% isn't a lot to contribute but maybe it's a reasonable amount to risk (gamble?) in a single place.
Maybe it's time to have chat with an advisor and review what you have in place at the moment and what your objectives are.

NoNamesLeft

OK heres the bottom line:
What might I get back at 65 in todays prices assuming monthly payments increase at 2.5% each year
Your pension will increase each year with the Retail Price Index
inflation every year is set at 2.5%
Final fund value could be £79k, giving taxable pension of £3020, then for your dependent on death £1510
...now for the bit WITHOUT adjusting for the effects of future inflation and no pension payable to dependents on death
based at 2.5% final fund value £111,000, taxable pension of £5950 or tax free sum of £27900 and taxable pension of £4460.

So to summerise what do you reckon.?...oh and to quote previous poster about leaving it to late to start one, yes I have, but boy have I enjoyed myself with that money! and rather then when i was younger!...no regrets

dunstonh

That is fine. Standard Life are using SMPI basis illustrations (which deducts inflation at 2.5%) and they are using RPI on the annuity terms, which again uses a lower basis. Plus it uses Standard Life annuity rates which are rarely close to being near the best available (luckily you can move the pension on the open market in the future).

The figures being quoted are examples and they are conservative examples. Better to be prepared for a low figure and maybe come in with more than the other way round.