Pension or long term saving??

markdeb04

Hi

I'm 41 years old and currently do not have a pension. I have savings and can save a considerable amount per month - would I be better joining a pension (works or not) or putting my money into an investment scheme/bonds/etc?? Every time I start to look into this, the terminology just baffles me, so if anyone has any easy to understand advice, it would be very much appreciated.
Thanks:eek:

dunstonh

would I be better joining a pension (works or not) or putting my money into an investment scheme/bonds/etc??

Pensions are just tax wrappers that contain investments. So effectively you are asking here whether you should buy a car or petrol.

If you want to invest then you need to look at the best ways of doing it. Such as pensions, S&S ISAs etc.

Does the employer offer a works scheme? if so, is it based on years of service or if invested, do they pay into it for you? Are you a higher rate taxpayer or in receipt of working/childrens tax credits? How much is a considerable amount per month?

Loughton_Monkey

Pensions? If your employer has some sort of 'matching' where he will pay into your pension pot to match your own contributions, then this is a no-brainer. You must join it. Every £80 you put in becomes £100 because of your own tax relief, and then becomes £200 because of employer contribution.

If you are not lucky enough to have such an employer, I would still advocate a pension. No other investment turns £80 into £100 instantly. However, drawbacks include the fact that you cannot really get your hands on that money until you retire. Then, you can take a lump sum (or not) but the rest then gets paid 'on the drip' until you die. [In reality, more complicated because you can elect to have guaranteed payment periods and/or ongoing widow pensions].

Note that some people advocate ISA's [Max £10,200 a year] as a viable alternative. There is no tax relief on contributions (i.e. every £80 in is only worth £80) but it rolls up tax free.

At the end of the day, it's your own decision, and a lot depends upon your own circumstances and attitude. If you have savings already, and can save a "considerable" amount, then I would go as far as to say that if you have neither pensions nor ISA's, then you are definitely losing out big time.

You will have heard about the (almost extinct) 'Final Salary Pensions'. Basically, if you worked for the same employer for 40 years, you could retire and live the rest of your life on 2/3rds of your final salary. Is this what you would like to do? It is staggering to learn that under such a scheme, your employer's (plus your own) contributions will have been in the order of 15%/20% of your gross income - every one of your 40 years - and invested pretty well too!

Probably too late to think on this grand scale at age 41, but believe me, it is not too early to start banging it away. Sounds like you are, but possibly not in the right things.

In summary, (a) make sure you have some "emergency" savings that you can get your hands on if necessary, (b) then try to put 10%/15% minimum into a pension, and (c) anything else, bung in an ISA (cash ISA or Stocks and shares depending upon your attitude to risk). Take other advice and do research.

I am speaking from personal experience, as someone who was able to retire early at age 56. This was by choice, and was planned over many years. Although my resources are dwindling away slowly, now, my lifestyle isn't.

The "leverage" on pensions is actually a lot more than many people think. Let me explain. Your lifestyle costs money. If, say, you 'net' £30,000 a year, and spend it all, then your lifestyle is costing £30K. Do this all your working life, then you can see what a drop you take when you retire. If, on the other hand, you can choose a slightly more modest lifestyle, say, costing £27K - and get used to this, then the "drop" at retirement is significantly less than the £30K drop. Work it out yourself. £3k per year in pension is actualy £3,750 a year invested. Roll this up at, say, 5%, to age 65, and then apply a "ballpark" annuity rate (it would be about 6½%). If you did this for, say 24 years, you would probably end up with a pension income of at least £10K. This is a "drop in lifestyle" of only £17K. This is almost half the drop suffered by the person who cannot take just a 10% in living costs while working.

jem16

Loughton_Monkey wrote: »

I would still advocate a pension. No other investment turns £80 into £100 instantly.

You need to be aware though that apart from the 25% tax-free lump sum that £100 of pension income can turn back into £80 depending on tax status at retirement. Try to keep the pension income under £10k and it's tax free.

Note that some people advocate ISA's [Max £10,200 a year] as a viable alternative. There is no tax relief on contributions (i.e. every £80 in is only worth £80) but it rolls up tax free.

It's usually advocated because a mix is probably the best option. Pension income up to £10k (remember that includes the state pension) then ISA income thereafter.