Advice sought for pension investment for 24 year old

property.advert

Scots bob should stick to what he knows best and let his under the thumb 24 year old son get some proper advice.

Kids today don't know they are born. I was onto my second lifetime well before the age of 24

The one line about not wanting to pay for advice just frightens the life out of me. This is a train wreck, an avoidable one, but a train wreck none the less.

dunstonh

At the age of 23 and with no financial knowledge I put my trust in an adviser when I got married. I wanted term assurance in case I died suddenly. I ended up with something called convertible insurance which cost me more, had to be cancelled after 5 years and was no use to me.
In 1987 I was advised to take out an endowment mortgage when I asked for a repayment mortgage.

So, both of these pre regulation and before IFAs existed.

About 10 years ago an adviser came to our school and advised teachers that something called AVCs was better than buying extra years in the teachers pension scheme. I resisted that advice and bought added years. Now I and my colleagues are retired and they are worse off and envy my decision.

That would be the Pru sales rep. Pru of course closed their sales force about 11 years ago.

In all the above cases the advice given was that equity based investments were best. In all above cases that advice was wrong.

I started investing in 1994 and have an average over 13% a year. Tell me how that makes investing wrong? That is also around 10% real terms growth. The examples I used for investments were just 2.5% real terms. I am not saying your son would get I get. He certainly wont if he follows your advice. However, even if he went to the banks and bought one of their pensions and went in their bog standard funds he would still typically end up with double what you are proposing.

You present a figure of £463,928. Why is that not an acceptable pension?

Thats not the pension. Thats the final value. If you take an income of 5% from that, its £23196. The same monthly contribution using a low risk real terms growth assumption of 2.5% on a pension would provide double that. If he gets the long term average of a basic balanced managed fund it would be even more.

According to your previous post because it is a shortfall. Falling short of what?

At 24, is he going to be able to afford to pay £700pm for the rest of his working life? Is the income it could provide going to be enough to hit his objectives?

I receive an occupational pension of £14400. Could you advise me whether or not that is a shortfall, and tell me how you arrive at your answer.

£14,400 may be enough for you depending on your lifestyle. Its not enough for me and if i was paying £700pm in real terms for 44 years I would be appalled to get only that amount.

The figures I used for S&S ISA and pension were using low risk growth figures. Not what you would typically expect to get or what higher risk investments or more advanced portfolios could get.

Any option where you put 100% of your money is going to be wrong. Irrespective of what it is. If you are basing your opinion of financial advice that was obtained back in the 80s and pre-regulation and think its the same today then you must still be driving around in an Austin Allegro and accessing the internet from a ZX spectrum.

jem16

scotsbob wrote: »

At the age of 23 and with no financial knowledge I put my trust in an adviser when I got married. I wanted term assurance in case I died suddenly. I ended up with something called convertible insurance which cost me more, had to be cancelled after 5 years and was no use to me.
In 1987 I was advised to take out an endowment mortgage when I asked for a repayment mortgage. I resisted that advice and was glad I did. Many colleagues, friends and family members have been getting letters over the last few years telling them their endowment mortgages will not pay for their homes.
About 10 years ago an adviser came to our school and advised teachers that something called AVCs was better than buying extra years in the teachers pension scheme. I resisted that advice and bought added years. Now I and my colleagues are retired and they are worse off and envy my decision.

All of the above cases would have been tied reps selling only their own products.

As to the Teacher's Pension I sought the advice of the EIS financial services as opposed to seeing a rep from the Pru. I was told that buying back years was the best option. However it was quite expensive and I know a lot went for AVCs as they appeared to be cheaper.

In all the above cases the advice given was that equity based investments were best. In all above cases that advice was wrong. The advice was based on salesmen calling themselves advisers who were driven by their own greed for commission.

No-one is suggesting your son sees a tied adviser. He needs to see an IFA who has only his interests at heart. It is likely that a mixture of pension, ISA and cash will be best and not one single option.

Your son is 24 and won't have a state pension until at least age 68 - does he want to work that long?

I receive an occupational pension of £14400. Could you advise me whether or not that is a shortfall, and tell me how you arrive at your answer.

Your situation is so different from your son's. You have an index linked final salary pension that you have had to pay very little for (£150pm roughly) and had no investment risk to you. It provides extra benefits such as spouse pension and life assurance. Most people would bite your hand off to have this opportunity. Unfortunately your son does not have this luxury.

With a pension pot of £430,000 on a similar basis to your pension - i.e. index linked, 50% spouse pension - he would have a pension of £9971pa. With £670,000 he would have £14,644.

I have gone down a similar path to you. However I have advised my 26 year old son to pay into his company pension (not final salary) and he already has a S&S ISA.

Linton

jem16 wrote: »

A
With a pension pot of £430,000 on a similar basis to your pension - i.e. index linked, 50% spouse pension - he would have a pension of £9971pa. With £670,000 he would have £14,644.

I agree with your sentiments Jem16, but I dont see how your get the above numbers.
As far as I can see an indexed annuity with 50% spouse benefit for a 68 year old should be about 3% of fund.

jem16

Linton wrote: »

I agree with your sentiments Jem16, but I dont see how your get the above numbers.
As far as I can see an indexed annuity with 50% spouse benefit for a 68 year old should be about 3% of fund.

I simply used HL's annuity quote although I do believe I used age 60 and not 68 to compare it with the Teacher's Pension.

If it's wrong I'm happy for someone to correct the figures.

scotsbob

dunstonh wrote: »

.................Thats not the pension. Thats the final value. If you take an income of 5% from that, its £23196...................................
At 24, is he going to be able to afford to pay £700pm for the rest of his working life? Is the income it could provide going to be enough to hit his objectives?.................................................
£14,400 may be enough for you depending on your lifestyle. Its not enough for me and if i was paying £700pm in real terms for 44 years I would be appalled to get only that amount.

Thankyou for your reply. £23196 in todays terms. The £463,928 lump sum would also be available to him or to his heirs.
That would be acceptable and that is why a figure of £700 a month is being saved just now.

I don't think I suggested anywhere that I expect a pension of £14400 from an investment of £700 a month. £14400 is what I receive. £700 pm is what my son is saving.

However I am more than happy with £14400, you wouldn't be. This is why I find the talk about shortfall to be very subjective.

I could have had a larger pension if I had invested more. I knew I would get one quarter of final salary and I was happy. You can compare £14400 to £20000 and say I have a shortfall. You can compare £23196 to £40000 and say that is a shortfall. Surely the criteria comes down to is the individual satisfied with their lifestyle and does the pension fund it.

"If you are basing your opinion of financial advice that was obtained back in the 80s and pre-regulation and think its the same today then you must still be driving around in an Austin Allegro and accessing the internet from a ZX spectrum."

Not at all I base my opinion on financial advisers on how they talk to me today. There is good and bad everywhere. Some are professional in manner, pleasant and helpful, others are sacrcastic and patronising.

scotsbob

property.advert wrote: »

Scots bob should stick to what he knows best and let his under the thumb 24 year old son get some proper advice.

Kids today don't know they are born. I was onto my second lifetime well before the age of 24

The one line about not wanting to pay for advice just frightens the life out of me. This is a train wreck, an avoidable one, but a train wreck none the less.

He could follow your advice and pay a professional adviser. Of course then he would be under your thumb.

Hmm, that can't be right. Maybe sarcasm and logical argument don't mix.

dunstonh

Thankyou for your reply. £23196 in todays terms. The £463,928 lump sum would also be available to him or to his heirs.

Using the pension, 65% of the value after the 25% has been taken out would be available to his heirs as well (no IHT to pay at 40% either). However, the pension pot would be much higher meaning his beneficiaries get more. If he dies before retirement they get even more as the 35% is only post retirement.

That would be acceptable and that is why a figure of £700 a month is being saved just now.

Is he going to be saving £700pm for the rest of his working life? This is an important question. I suspect he wont as its not a figure a basic rate taxpayer is likely to be able to sustain. Especially if he isnt a home owner yet and doesnt have a family.

However I am more than happy with £14400, you wouldn't be. This is why I find the talk about shortfall to be very subjective.

Shortfall risk is probably the biggest issue people have when it comes to retirement planning. We see it frequently on here. The reason you cant see it is that you are working back to front. You have set a figure your son will save without actually knowing what he wants to get in retirement and working it back using a sensible target growth rate to see what he should pay.

You say he is not a higher rate taxpayer. So, a £700pm contribution seems very high on that basis. So its unlikely that he will be able to continue to afford £700pm when later capital expenditure is required. You also say he is self employed. So, he wont be getting the full state pensions. So, he has to fund that shortfall. Plus, his state pension age is 68 minimum. Probably likely to be 70 by the time he gets there. So, if he wants earlier he needs to fund that gap.

Not at all I base my opinion on financial advisers on how they talk to me today. There is good and bad everywhere. Some are professional in manner, pleasant and helpful, others are sacrcastic and patronising.

I have children. I want the best for them as most parents do. So, it's as a parent that I can't see why you want to handicap your son's retirement plans by taking such a negative position and one that is almost certainly going to be the worst option possible. You have everyone on this thread telling you that (except digger who lives on planet gold).

jamesd

scotsbob, you probably missed the point of dunstonh's calculations.

Say you decide that a pot of £463,928 is a good target. You then have to choose how to get there.

If you choose the NS&I certificates it costs the £700 a month.

If you choose a cash ISA it costs £880 a month.

If you choose a low volatility mixture of investments in a S&S ISA it costs £485 a month.

If it's done in a pension with basic rate tax relief without salary sacrifice (that boosts it more) it costs £388 a month.

You wrote earlier about shortfall in endowments. It's right that there is a shortfall risk when you choose to invest. The endowments were sold with lower monthly repayments than a repayment mortgage and the insurance was taken out of those lower payments. The question for the people who used endowments is what benefit they have had from the lower payments and whether they used those lower payments to accumulate a reserve as well as spending it. The ones who used at least some of it as a reserve of other savings and investments should have no trouble at all, the ones who just spent it might have a problem of needing a mortgage for a bit longer.

But there's no need to accept this. Say you don't want a shortfall and you think that your low risk investment mixture might be down 20% at the time you retire. Not 40% because half the money isn't in the stock market. You need to cover yourself for that possibility of only getting 80% of what you expected. Easy enough, instead of putting £485 into investments inside a S&S ISA you put in £485 / 0.8 = £606 a month. Now even in bad times you get the desired amount but in normal times you get an extra 25% and in good times still more.

Or you get a bit more clever about it and use a 50:50 mixture of pension and S&S ISA. Then you can still put in that extra to get the safety margin but it only costs £497 a month.

The ISA gets you options like early retirement, but like the NS&I certificates also leave that part exposed to bankruptcy risk if a couple of big customers of the business fail and you're unfortunate enough to not be able to handle that size of loss. The pension isn't exposed to this risk, so it's nice to have some money with this protection to cover the risks you get in business.

Of course being prudent you don't just go and blow the £203 a month you're saving. You use it to build up a bigger property deposit or get a buy to let property deposit or pay off a mortgage early and switch to a bigger home you can trade down from when you retire. Or you put half of it towards better cars and use half of it for these other ways of accumulating money.

The pension option doesn't really cost the business £388 a month. The business can deduct pension contributions it makes as an expense, so it can save tax. And if the business makes the pension contributions direct, it saves the 12.8% employer NI and the employee saves the 11% employee NI. That's an extra 23.8% in free NI benefits added to the money paid in, so the pension half doesn't really cost you £194 a month in spendable money, it costs £194 / 1.238 = £157 instead. That's now down to a £460 a month cost for the 50:50 mixture.

I'm sure you can think of prudent and useful and maybe even some fun things to do with the £240 a month that isn't now being spent on this retirement planning. Like those mortgage overpayments, say.

And none of this is fixed in stone. Well, except the house he gets to own outright sooner. He can change his plans at any time if he feels like it or if something doesn't seem to be working well or better new options come along.

bendix

I'm with property.advert on this. What is it about today's young that their mummy and daddy's have to think this stuff through for them?

It's kinda sad. And not a little pathetic.