What type of Pension should I consider

simm31

Hello, Not posted here before and despite a long look through posts I thought it would be easier to start a fresh one.

My scenario is this;

39 this year, good income, married, twins, but as usual not much spare cash each month despite fairly high income.

Two old Company pensions that are frozen and only had about 5 years paid in to each.

Opted out of SERPS years ago and got the Pension Protection to perform a guide as to what me and the wife might get from the state each week, looks to be about the published average on here ~ £120 p/w-ish.

I'm paying a mortgage of £1100 p/m (repayment) with 15 years to go and can overpay without penalty (it's a Nationwide product) I overpay each month by £200.

What with life, 2 cars, kids and insurances there is not much left each month.

My Company are about to back date me from Jan in to their Stakeholder pension scheme but cannot confirm just yet how much they will pay in...

Therefore I want enjoy life now and pay the house off hoping it will rise in value in the next 20 years.

What sort of spare money each month should I tuck away in (what) product that would provide some form of comfortable retirement?

I have savings now, but nothing substantial.

My IFA advised against a pension right now and said focus on paying off your largest debt i.e the house.

BTW the house is worth ~ £385,000.

I'd like to here some suggestions about anyone in a similar position and how much I could save in a pension over the next 20years and if this is the best way of giving us both a retirement income,,,so far I have'nt seen great results and kinda in the 'camp' live for today, worry about tomorrow when it comes...tomorrow is approaching fast and I feel I need something in place.

Many thanks I look forward to seeing what you canny investors think might work for me!

Cheers

Simon

CLAPTON

how much money in todays terms do you need in retirement
how much are the two pensions likely to pay out (in todays terms)

a key issue is how much your emplyer will pay into the new pension and does it depend upon you paying in too

Loughton_Monkey

I think you are not untypical, and you are right to start thinking seriously about it.

Before the 'meat', I would just make the observation that paying off your mortgage [as opposed to investing for retirement] is not usually the best advice, and I am very surprised to learn of an IFA saying that. He could be right if you are on a high rate of interest, but most people have very low rates currently. It usually makes more sense to keep it to 'interest only' or at least minimum payment, and let the mortgage 'inflate away'.

That point apart, I would say that to 'correct' the situation, you really need to go through the following steps. [Many of us who retired early - perhaps because we did this from day 1 - recognise the need for meticulous retirement planning long before it's too late].

1. Firstly, you should dust off a new spreadsheet and list every single asset you have. This will include your house and a bit of savings, your 'Serps' pension, your two company pensions (you should write to them for a current valuation of benefits), and your state pension forecast.

2. Critically examine your spending. Try to get as much 'past data' as possible. It is (I believe) essential to keep accounts so you know where all your money goes. Within your expeniture is [what I would call] your 'lifestyle' expenditure. This is groceries, utilities, insurance, holidays, motoring, taxation, house maintenance...... everything it normally costs you to live and have a decent time. Your expenditure will also include other things. Keep your mortgage costs seperate (because they will eventually go) and spending on children will eventually go away (! But could well increase in future before they are off your hands). Remember that standing orders to savings accounts, or pension contributions are not 'spending'.

3. Now you need to make some assumptions on inflation, interest rates (savings), investment rates (pensions, S&S ISA's), house price inflation, extra expenditure [e.g. kids schooling/weddings.....]. Plus your wage inflation. Factor in any future spouse income....

4. Now putting all this together [and to be polite I am going to assume that going forward, your income exceeds expenditure]. Assume that the surplus is invested (say in a pension or Stocks & Shares ISA). You should end up with a complete (assumed) income and expenditure stream between now and retirement. It should also calculate the total value of 'assets' available to you at that time (e.g. including pensions/state pension etc.)

5. Naturally, this then can feed into a 'post retirement' cash flow - just the same - except your income will consist only of pensions and a bit of other savings/investment income. [if you know the value of your pension pots, it's easy to get a ballpark annuity rate]. Assume you keep to the same 'lifestyle' [cost of]. And look at when the money runs dry, and/or how much you are short.

6. Now with all the calulations neatly automated, you can now 'play around' with the figures and work out how much less you need to spend [i.e. by how much you need to 'downsize' the cost of your lifestyle] before your model shows that you can contiues that right up to (say) age 90.

This exercise is well worth doing, even though it will not be totally accurate. However, it is likely to be 'ball park' correct and judging from what you have said, I think you will have a complete shock coming to you. You will find that had you benfitted from savings/pension contribtions - including employers - in the order of 20% of gross income right from back when you started work, then you are 'on course'. It is an inescapable fact that this is roughly the amount it normally takes to retire in comfort - even at state pension age, let alone earlier.

To put this another way. He who earns [insert any figure, but I'll just dream up £40K] and spends £40K will have a nice £40K lifestyle but will then have a mammouth drop to £7K (?) in retirement.

But he who earns £50K, but behaves just like the guy above, and lives on £40K will be comfortable enough to retire and live the same way for the rest of his life.

I very strongly believe that you must not rush just yet to your IFA, or anywhere else for a pension. Do the above first, and get that over with. Otherwise you will have an unrealistic idea of what you need to do. There are more ways than one to invest and provide adequately for retirement. Almost certainly some form of pension contributions will form part of it. But think of it as retirement planning first, and only after that plan in detail how you're going to get there. Whatever the exact recipe, it will involve spending far less than you bring home. It will also involve some form of investing.

I would add that many people do a 'shorcut' to this. Simply ask themselves "How much do we need to retire on?". My experience is that this 'approximation' is likely to be far, far, away from the truth, and often based upon myths about the cheap and simple life in retirement. Better than nothing, but I strongly recommend as detailed a plan as you can - not least because it gives you an annual 'financial roadmap' that you are more likely to stick to, and update regularly.