Need to seriously start thinking about saving for long term future.

MsDee

Hi everyone,

I was hoping to get some of your thoughts about my saving plans for the long term. I have just left my job and am taking a couple of months out, before I start my own graphic design company.

I am nearly 30 and I paid into my company pension for 2 years, and I will get £700 p.a off them at 65. I'm thinking about leaving that in there and not transferring it into another provider.

I don't want to do S&S as I am not confident enough and am a low risk taker. My plan for the long term (i.e retirement) is to max out my cash isa every year and then start another pension but what one??

How does one go about choosing a pension provider? I'm looking to put £100 away each month for the next 35 years - that combined with my £5,100 each year for my cash ISA and my £700 p.a each year from previous company will it be enough??

Thanks very much

Richie(UK)

MsDee wrote: »

... will it be enough?? ...

There are many here that are far more knowledgeable than I am with regards pensions and savings so I won't comment directly on that. However, from a commonsense perspective, I think when looking at this sort of scenario we need to first decide how much is enough.

There is no generic answer - it will depend on individual circumstances. Think about what your position will be in retirement; will the mortgage be repaid (probably), how long will you car last and what will its running costs be (probably less than when working but it depends on what you plan to do in retirement), what will your household costs be (heat, light, water, food, TV licence etc), what will you actually be doing and how much will it cost (hobbies, holidays, eating out etc etc). Once you have an idea of how much is enough for you, you can then set about trying to achieve that figure.

Consumerist

MsDee wrote: »

. . . will it be enough??

I agree with Richie(UK).

In addition, you need to account for inflation between now and when you retire. Over recent years inflation has been at historically-low and fairly consistant levels at around 3% pa. It would be wise to assume double that for thext 35 years (assuming retirement at age 65), so let's say 6% pa average inflation.

In 35 years time, average costs are then likely to be some eight times higher than today. So, once you have established how much you might need today, you then need to multiply that amount by at least eight to get to what you might need at age 65.

MsDee

Consumerist wrote: »

I agree with Richie(UK).

In addition, you need to account for inflation between now and when you retire. Over recent years inflation has been at historically-low and fairly consistant levels at around 3% pa. It would be wise to assume double that for thext 35 years (assuming retirement at age 65), so let's say 6% pa average inflation.

In 35 years time, average costs are then likely to be some eight times higher than today. So, once you have established how much you might need today, you then need to multiply that amount by at least eight to get to what you might need at age 65.

Ok, good point - but now I am very confused. How is one meant to save then for retirement, no one can save eight times as much now in time ready for retirement?

lvader

You need to take some risks, cash ISAs are no good for long term saving.

twinkone

Consumerist wrote: »

It would be wise to assume double that for thext 35 years (assuming retirement at age 65), so let's say 6% pa average inflation.


Unbelievable - have been reading this forum for ages but I just had to register to comment on this. I really don't agree that it would be "wise" to assume 6% pa average inflation over 35 years.....incredibly prudent? yes (perhaps recklessly so)....wise? no.
If you really did have this view then extend yourself as far as possible on your mortgage (as long as it remains affordable) and let the hugely aggressive inflation rate erode away the value of the debt in no time at all.
If inflation is going to be 6% per annum, invest in NS&I index linked securities....not sure which one but there are a couple that pay inflation plus 1 % or so.

Don't get hung up on inflation...what is important is the "real" rate of return on your investments within your pension ie. the amount by which they (and long term investments outside of pension wrapper) return more than inflation . If you are close to 30 and investing for retirement then you have a long time horizon for your investments and this long period of time has the effect of reducing equity risk.....if you invest in equities for a week, its high risk....for a month, high risk.....for a couple of years medium to high risk (some would say still high risk)......for twenty years plus (on a pound cost averaging / drip-feed basis), the risk that equities do not outperform almost any other investment class is very small indeed. [all this very general re. equities as a single asset class - there are low risk equities and very high risk equities, but I hope you get the picture]

As Ivader suggests, for real long term investments cash isas are no good and very few of them even keep up with inflation. They are great however for the usual 3-6month emergency fund in case your income dries up.

As has been mentioned on these forums several times....poor people invest in cash, and it keeps them poor.

Consumerist

MsDee wrote: »

Ok, good point - but now I am very confused. How is one meant to save then for retirement, no one can save eight times as much now in time ready for retirement?

Over the next 35 years you should invest in a personal pension, as a first priority, which will gain in value by more than inflation over the long run.

To give you an insight to how much you should contribute to a pension suitable for your needs, you could start here.

The general procedure is to establish how much income you will need in retirement, as discussed earlier. This income will normally be generated by buying an annuity with the lump sum you have saved with your pension contributions during your working life.

From the link provided earlier, a woman aged 30 would need to save 14% of income in order to provide a pension equal to half her salary.

Now this this is a bit rule-of-thumb because pensions can have several variations in benefits but I hope this helps to get you started.

You should do some research on the annuities available and their purchase cost then post again on this site if you have any questions. Pensions are a complex subject which would be impossible to discuss in any detail in a single post.

I hope this will give you enough to get you started.

Consumerist

twinkone wrote: »

Don't get hung up on inflation...what is important is the "real" rate of return on your investments within your pension . . .

What is the "real" rate of return if it is not relative to inflation ?

dunstonh

I don't want to do S&S as I am not confident enough and am a low risk taker. My plan for the long term (i.e retirement) is to max out my cash isa every year and then start another pension but what one??

You need to amend your views as you are a bit confused on risk.

You say you are not a risk taker so want to rule out the S&S ISA. You then say you may start another pension. Yet the S&S ISA and pension have virtually identical investment options. So, whatever you have in the pension you can get in the ISA or vice versa.

Also, with Cash ISAs you won't have investment risk but you are replacing that risk with shortfall risk and inflation risk. Indeed, using cash ISAs could end up being riskier than using a balanced spread of investments.

How does one go about choosing a pension provider? I

By chosing the one which is cost effective for the type of investments you want and has the features you want.

As you are going self employed, you are going to get a lower state pension as the self employed dont qualify for the full state pensions. So, you need to do more for yourself. However, ruling out S&S ISAs, focusing heavily in cash ISAs is not the way to do it.

Consumerist

twinkone wrote: »

Unbelievable - have been reading this forum for ages but I just had to register to comment on this. I really don't agree that it would be "wise" to assume 6% pa average inflation over 35 years.....incredibly prudent? yes (perhaps recklessly so)....wise? no.

I quite agree that inflation is not likely to be as high as 6% pa over the long run. What would have been better to say is that one should aim for 6% pa growth over the period. I was just trying to keep things simple for the OP.

Perhaps you could explain things to the OP in your own way. I look forward to your contribution.

MsDee

Ok, thanks everyone - need to go away and do some research I think.

I have an appt with Nationwide about stocks and shares next week, so that will give me a clearer idea about how much to put in to get back etc.

As Arnie once said..I'll be back:D:D