No plans in place

rosy

simm31 wrote: »

Also have two houses to inherit (one day) from parents...

While this might be a possibility, it is just a possibility. You really can't count on it as a safety net, it's really only sensible to think of it as something that might be an extra addition to your finances further down the line - even if now it might seem like it would never happen to them, those houses may need to be sold to provide care for your parents (I'm speaking partially from personal experience here).Or your parents may wish/need to sell/downsize their properties and spend their money to fund their own retirement etc. - any number of things can happen to stop the inheritance materialising.
I know you are talking about funding a pension and you have mentioned the parents' houses in passing but I wanted to post just in case the anticipation of this inheritance might be taking some urgency away from the pension provision plans.

jh2009

Im not sure if its been suggested but check if your employer offers a pension scheme, and if it does whether it makes a contribution.

If they do then joining their scheme would be the obvious thing to do as their contribution reduces the amount you have to save. By not joining you could be giving away free money that would help towards the cost.

I have seen figures of 20k pa suggested on here which obviously are impossible to fund just from your income.

But remember your saving to retirement could be funded by:

1. Your contributions.
2. Tax relief from your contributions (as a higher rate tax payer this will be 40%, 20% for normal tax payers).
3. Any company contributions.
4. Investment returns.

Say for example, you are required in a company scheme to pay £400 per month and the company matches it. Thats £800 contribution, at a cost of £240 to you (60% x £400).

Then say if investment return to retirement is 2.5% a year (assuming 2.5% is after inflation). you are 39, and retire at 65. The value of this £800 at 65 would then increase to £800 x 1.025^26 to £1520.

So if thats how it went, you have really only paid 16% of the cost. (£240/£1520).

The above is just an illustration and depends on if you have an employer willing to contribute, varying investment returns, tax relief as it currently is, etc. But it illustrates that the earlier you start then the better any final pension fund will be (as you have more years of investment return), and that you may be able to work with an employer to share the cost.

Obviously if you have no employer willing to contribute then you would have to meet the full cost yourself, with of course the help of tax relief.

dunstonh

I have seen figures of 20k pa suggested on here which obviously are impossible to fund just from your income.

Not difficult if you start early but harder if you start late but still affordable for a 39 year old earning £85k a year.

at 39, It would cost £500pm gross with a 3% indexation to get £20,963 a year in todays terms. The net cost to the op is just £300. if someone earning £85k cannot afford that then they are clearly doing something wrong with their budgeting.

jh2009

dunstonh wrote: »

I have seen figures of 20k pa suggested on here which obviously are impossible to fund just from your income.

Not difficult if you start early but harder if you start late but still affordable for a 39 year old earning £85k a year.

at 39, It would cost £500pm gross with a 3% indexation to get £20,963 a year in todays terms. The net cost to the op is just £300. Is someone earning £85k cannot afford that then they are clearly doing something wrong with their budgeting.

Totally agree. To clarify when i said impossible, i mean someone paying a contribution of £20k up front each year to get a fund value of £500k, which is what appeared to be said in a previous post.

I agree £300pm very affordable to someone on £85k a year. This cost would further reduces if an employer makes any sort of contribution to an employees pension.

edinburgher

1) Paying off your house in 7 years is great. At 47 you'd have 20 years (if you work until 67) to save up for a pension. Not ideal for your pension but if you're saving £1,000pcm by no longer paying off your mortgage, I think you'll be fine.

This largely ignores the fact that the OP will lose another 7-8 years of potential investment growth and dividend returns. He's already left it very late.

My parents didn't start paying into pensions in any serious way until my Grandmother died and they inherited her house (which paid off their mortgage) At this point they were in their late 40s, early 50s. It was largely their own choice, as they had five kids and made great sacrifices to educate us well.

They're on track for a reasonable quality of life in retirement, but there's no way it'll offer the lifestyle they have now on a combined wage of £70-80k.

dunstonh

2) You need to realise when you do retire your spending will drop, naturally. Your children will be grown up and your house will be yours.

Yes it will. However, someone with a lifestyle based on £85k of earnings, is going to find it very very hard to drop to £7500 plus a few years occupational pension. They are going to have to live on around 1/10th of current income. Depending on spouse pension, it may be a little better but anyone who is living the consumer lifestyle on 85k earnings is going to find living at or below the breadline very difficult.

Marine_life

Its a interestng post by the OP and I follow some of the arguments as a lot of them were true for me as well.

A couple of observations:

1. The cost of children will go up and not down. Will you send them to private school? Even if not, what about when they want to do to university - do you want them to finish university with 50k of debt?

2. Inheriting the parents houses maybe be possible but what about if they need to go into a retirement home? How will that be paid? Could very quickly eat up any cash raised from the sale of house.

3. When do you want to retire? Sounds a stupid question but you are young now but how will you feel in 10 - 15 years time?

4. Selling your property (or your parents properties) and planning to live of the proceeds may seem realistic but are your happy not to leave your children with any legacy?

On the other hand 85 k suggests you are in quite a senior job - what are the chances of promotion and further increases in pay?

Of course there is always the chance that tomorrow you will be hit by a bus but - statistically - its very unlikely. However, making a sudden and drastic change in spending will likely be difficult and unpalatable. I would therefore suggest you review your current spending plan and allocate more money to retirement savings if possible but then add the commitment that any additional earnings are committed to pension.

I made the mistake of starting late but am in the fortunate position of having a high income so am desparately pouring money into a plan that will enable me to retire mortgage free at 50 (three and a half years time) - fingers crossed.

dunstonh

4 out of 5 men make it into retirement. So, the "could die tomorrow" argument is playing long odds.

If you do take out a pension and die, then the full value is paid to beneficiaries. Indeed, death benefits on a pension are one of the key advantages in providing family protection AND reducing IHT.

coyocacan

Simm31 - the challenge you raise is one shared by millions; how to balance the consumption demands / desires of today with prudence and preparation for the future. In the last 15 years, we have collectively lost sight of preparing for the reality of earnings dropping off a cliff when we retire.

I would strongly encourage you to start aggressively contributing to your pension sooner rather than later.

Could I ask a few other questions:

- Is your wife bought into the importance of saving for the future? Does she recognise the severe financial challenges that will have to be faced if savings are not accrued quickly?

- Do you both have a £ figure in mind that you will be happy to live from? Ask you wife what differences she thinks there will be from the day after you stop working? A light switched on with my wife when she answered - 'almost none'! Since then on, the savings culture has been transformed in our household. Far less tension, and a collective realisation of why it must take priority?

- Is downsizing (home) a possibility? What other lifestyle changes could be made that would release hundreds of pounds a month (for this is what it needs!).


Keep us updated - and the very best of luck.

kidmugsy

"yet provided like a King for my young family": there's your problem. Confucius he say "No live like King unless own King's ransom".