Pension novice and need Noddy's Guide

lemma1968

I have been reading the "what's your number" thread - and it got me thinking that to have a reasonable lifestyle post retirement I probably need to be paying a good whack into a pension.

I have a stakeholder pension that I opened about 9 months ago - it has £3.5k in it so far based on contributions of £200 pcm on average with a 10% increase in contributions annually - so from April i shall be paying in £220 pcm etc.

I am 41! (Yes i have left it a bit late but i did not have the money to pay into a pension before). I am married with 2 children aged 3 and 9. My husband is a student but will hopefully start work in the NHS @ grade 5 initially in 2011 on a final salary pension scheme. He has no pension currently.

I am self employed and i know that i will have to keep working up to 65 easily to be able to have achieved a pot big enough for a comfortable lifestyle post retirement. I think my number would be about £20-£25k per annum.

My mother aged 70 and my dad aged 81 have struggled throughout their retirements. I help out when i can. But its just hit me that life goes so fast and i don't want to have no life on retirement.

I am lousy at maths, can't work up a spreadsheet to save my life. I can only just switch the comp on!!!!

Realistically, how much should i be putting away each month to achieve such an outcome (I know its based on the markets etc and its variable) but i don't understand the basics on how to calculate.

I also suspect that a stakeholder pension is an expensive way of saving with the 1% annual fee. Again, i just wanted to get my saving off the ground.

Any ideas?

dunstonh

I am self employed and i know that i will have to keep working up to 65 easily to be able to have achieved a pot big enough for a comfortable lifestyle post retirement.

what has made you pick 65? You are aged 41 so 65 isnt your state pension age (age 67 is). So, is it your aim to retire earlier than state? Or did you not realise that the state age was 67 for you (possibly 66 and x months depending on date of birth).

Realistically, how much should i be putting away each month to achieve such an outcome (I know its based on the markets etc and its variable) but i don't understand the basics on how to calculate.

There are different variables to consider. If you are looking at 65 then you are not going to be able to include the state pension. So, you have to fund that gap for 2 more years.

You are also self employed so that means lower state pensions than an employed person. So, that means you have to pay more towards your retirement for when you do get the state pension.

You also have to consider how you are investing and what you think the future returns will be. If you invest too cautiously, then you are running a greater shortfall risk and should assume a low rate of return. If your pension is invested in a low quality way then you should perhaps use a lower assumed return as well.

If you are looking at £25k at age 65 then you need to be putting away around £845pm with some indexation on that contribution to cover inflation. That assumes a cautious investment spread. You could get away with a bit less if you are happy to erode your capital between age 65 and 67 to make up for no state pension.

I also suspect that a stakeholder pension is an expensive way of saving with the 1% annual fee. Again, i just wanted to get my saving off the ground.

On your contribution and timescale a personal pension could be cheaper. However, 1% is the benchmark and you are right on it. So, its not expensive.

lemma1968

Thanks Dunstonh - yes, me being a tad blond on this sunny Sunday morning forgot the retirement age was going up to 67. So i would plan to work until then, maybe even further as self employed but i need to try and understand the reality of pension saving and the fact that the longer you leave it the more you need to save.

My £20-£25k figure includes anything my husband brings in from his final salary scheme with the NHS.

He is in his 3rd year of the degree now and is earning just £12k as a student audiologist. He has already started paying into the NHS pension. His 4th year will see no income but (subject to Govt cutbacks etc) he should start on about £24k in June 2011. How long it will take him to rise through the grades in unknown but at any pension from him is better than nowt.

I am looking at increasing my contributions as I realise that i am nowhere near the mark currently.

The £845 figure you gave, is that what i should be paying currently with 10% annual increase on top?

I'm sorry if they sound daft questions but its all greek to me.

Thanks x

dunstonh

My £20-£25k figure includes anything my husband brings in from his final salary scheme with the NHS.

As you are looking at state pension age you can knock off £10,000 (£5,000 each) for the state pension. However, you should get a state pension forecast to verify the amount of pension you are going to get (assuming you keep working through).

You can then knock off his NHS pension from that figure. That will bring your shortfall down and the amount you need to pay in monthly.

The £845 figure you gave, is that what i should be paying currently with 10% annual increase on top?

That is a rough figure assuming 5% a year net investment growth with an annual increase to cover inflation only. That was also against £25k (no reductions).

How did you buy your pension? The 1% amc would suggest an adviser was involved. An IFA can get cheaper than that 1% and give you the investment advice and shortfall calculations rather than you try and get it right on a contract that is paying someone for doing it for you.

lemma1968

Thanks again. You are a star!

I bought my stakeholder direct from the provider. 1% was their standard annual management fee. Obviously as the fund gets bigger that 1% figure will seem harsh - I can deal with a fee of £30 a year but when you start adding the 0's on i shall be regretting not taking advice.

dunstonh

I bought my stakeholder direct from the provider. 1% was their standard annual management fee.

Not a good way to buy. What they have done is kept all the money they would have paid an adviser for themselves. However, they have given you no advice for it. Buying direct rarely saves you money.

I can deal with a fee of £30 a year but when you start adding the 0's on i shall be regretting not taking advice.

Not to late. A local IFA can look at your situation, change the pension and get you better and cheaper and let you know more accurately what your figure needs to be. Or you can change it yourself using a discount IFA where you dont get advice but the IFA doesnt take full commission (or any commission if you do it by fee) and you get cheaper than that 1%.

lemma1968

Discount IFA's?

Are these online ones?

exil

As yet no-one's answered the basic point, how do you do these calculations!

Think of your target income. In your case, £20k.

Then take off what you might expect from OH's pension. Assume that he never gets promoted, and the NHS scheme stays at it is. Say, 20 years service, at 1/80 salary per year = pension of £6k.

2 lots of state pension at 5k each, total is £16k

So you are short by 4k.

But let's say you actually want 10k.

Assume that the rate for an index lined annuity at age 67 is 3.5% (that's about the rate today).

To find the amount you need to save, divide £10,000 by 3.5%, which gives you £285,000.

So, you need to get to £285,000 in 25 years.

Now use excel's FV function and the what-if facility to find what regular investment is needed to get there in 25 years assuming your investments will return 2% above inflation. The answer is £9,000 a year or £740 a month.

Please bear in mind that this ignores inflation - what you will have to do is increase contributions in line with inflation to ensure your final target also increases so that the pension income you expect retains its current value.

There is a lot of guesswork here - OH's job prospects, your business, inflation, investment returns, future government policy. Which is why pensions planning is an absolute nightmare.

Bear in mind that Alistair Darling will, uncharacteristically, help you reach your £285k target by giving you tax relief at the top rate of tax you pay - so in fact the £740 you put in will actually cost you less than this - say £600 a month for a standard rate and £450 for a higher rate taxpayer.

Should everything go pear shaped and you need the money in a hurry, you can start to draw down your pension at age 55 - but not before then so if you think you may need the money before your mid 50s then a pension fund is not ideal.

What it boils down to is that if you start saving for a pension in your 40s you need to put away about £1 in current income to earn a pension of £1 in your 60s. When you think about it, you have on average about 40 years left to live, so will have to save an amount in your 20 years remaining working life that will provide an income for your post-retirement life which will be also be about 20 years.

lemma1968

Thank you so much for that

lemma1968

One more thing - I am a higher rate tax payer - i have noticed on my pension history that for every £200 i am putting in at the beginning of the month my pension provider claims the tax back for me of £50 at the end of each month.

How does it work if you are a higher rate taxpayer of 40%?

How do you claim back the difference?
Would my accountant do it and ask the HMRC to add it into this pension fund?
Do I have to sort it out?

No idea you see.