Advice for first time pension planner

dunstonh

and continue my investigations again if it turns out to be non-contributory.

Probably going to match NEST requirements or even be NEST itself. i.e. unlikely to be non-contributory.

One further thing I need to consider is whether a pension is sensible while still saving for a house deposit. I'm about a year off having a decent deposit saved, so part of me thinks I should focus on that before focussing on the pension.

Its a bit like asking whether you should pay the gas bill or the electric. You do both.

mickflynn39

I've just had a quick read through the above posts (more in-depth read coming later), but I've a quick question before I have a chance to do the maths. The industry average increase of 4% that's been quoted (whether you agree with it or not) - does this take into account the tax benefits you'll recieve if you're a higher rate tax payer?

The 4% I quoted is for a basic rate tax payer so would be better for
a higher rate tax payer.

dunstonh

to make a personal pension worthwhile you will have to put a considerable amount of money away.

Only if you put the decision to start off. When you are young, you can get away with a much smaller contribution in real terms for the rest of your life.

Can you really afford to do this at your stage of life with all the inevitable costs that are going to be coming your way over the coming years e.g. mortgage, children (they cost a fortune), holidays etc.

There is always an excuse not to do. You list some of them. However, once those things are gone you suddenly realise that you have very few years left to save to retirement and it will cost you a fortune.

Forget the hype and relax and if you haven't joined any company schemes by the time you are 45 then I'd start thinking about a pension then.

£100pm in your 20s can get you over £10k a year pension in todays terms. £100pm at 45 (in todays money) will get you around £1500 a year pension.

Don't be fooled by the high rate of return the finacial industry would have you believe they can achieve.

What high rate? The illustrations typically show 5%, 7% and 9%. 7% is a good guide as its the one that balanced managed has a long term average. The fact many investors are not happy unless they average out double digits doesnt matter. If you go by 7% you should be fairly realistic.

Judwin

jdobrowski wrote: »

I've just had a quick read through the above posts (more in-depth read coming later), but I've a quick question before I have a chance to do the maths. The industry average increase of 4% that's been quoted (whether you agree with it or not) - does this take into account the tax benefits you'll recieve if you're a higher rate tax payer?

No. If you put in a nett contribution of £60 per month, the tax man will contribute another £40, making a gross contribution of £100. At the end of year 1 assuming 4% above inflation growth gives you £104.

jdobrowski wrote: »

If I can claim back 40% of my pension contributions, even if I get 0% growth, doesn't a pension out-grow any other financial product (even if I'm paying 20% tax on my post-retirement income)? Apologies for any naievety on this

When you draw the pension, up to 25% can be taken as a tax free lump sum - the other 75% produces a taxed income. So if you're a lower rate tax payer in retirement, your pension pot is effectivly taxed at 15% - yet you recieved 40% tax relief on the way in.

So any other form of retirement provision has to provide a 25% better growth than the pension simply to match it.

My oppinion - Start a pension plan NOW, even if its only £100 p/m. There are some low cost persional penson plans with a decent selection of funds out there which will negate most of mickeyfinns objections. I started mine at age 23, and I'm happy with it.

Judwin

dunstonh wrote: »

What high rate? The illustrations typically show 5%, 7% and 9%. 7% is a good guide as its the one that balanced managed has a long term average. The fact many investors are not happy unless they average out double digits doesnt matter. If you go by 7% you should be fairly realistic.

I'm beginning to wonder if many of the complainers are falling into the "Regular Saver" trap we see on the savings board? Basically saying - "I saved £100 p/m for 10 years (£12000), yet my pension pot is only worth £12600 after all that time - that's only a 5% growth in 10 years".

But not all the money has been in for all the time, so the real growth is more like 10%.

mickflynn39

Only if you put the decision to start off. When you are young, you can get away with a much smaller contribution in real terms for the rest of your life.

The reason the financial industry wants you to start young is because it gives them longer to get their hands on more of your money.
Let's take the case of someone who starts saving £5,000 a year into their pension at the age of thirty. The £5,000 would include a tax rebate from the government of 20%. Over the last 50 years or so, the average pension fund has given a return of around 4%. However, the average fund costs at least 2.5% a year in fees, management charges, dealing costs and other expenses. If we use the 4% growth and 2.5% costs and just look at this person's first 10 years of savings, then by the time the saver is 40 they will have put in £40,000 and the government will top this up with another £10,000 - so £50,000 in all. This money will have grown a bit and the saver would have paid about £7,500 in costs leaving pension savings of around £54,000. Because of the fairly generous costs, the saver's £50,000 will only have gone up by around £4,000 - just 8% in 10 years giving less than 1% a year growth - not great even with a tax break. So the saver gets a thoroughly modest increase in value - a mere £4,000 - while almost twice as much (£7,500) goes to various finance professionals.

However, spool forward another 27 years to when the saver decides to retire at 67. By now, assuming the same 4% growth and just 2% costs as many pension schemes drop their charges by 0.5% after 10 years, the value of the first 10 years' savings will have reached just over £90,000, for the saver, but the fees paid will have shot up to almost £50,000. Thus the first 10 years' savings will have given the saver an extra £40,000, but the financial services people will have pocketed a healthy £50,000 in fees and management costs. It's debatable who has received the most benefit from this saver's conscientious decision to start putting money aside early and it's not obvious that the main beneficiary has been the saver.

Judwin

Or....

mickflynn39 wrote: »

Let's take the case of someone who starts saving £5,000 a year into their pension at the age of thirty. The £5,000 would include a tax rebate from the government of 20%. Over the last 50 years or so, the average pension fund has given a return of around 4%. However, the HSBC Tracker fund costs 0.27% a year in fees, management charges, dealing costs and other expenses. If we use the 4% growth and 0.27% costs and just look at this person's first 10 years of savings, then by the time the saver is 40 they will have put in £40,000 and the government will top this up with another £10,000 - so £50,000 in all. This money will have grown a lot and the saver would have paid about £1,000 in costs leaving pension savings of around £61000. Because of the fairly miserly costs, the saver's £50,000 will only have gone up by around £11,000 - 44% in 10 years ...BLAH..BLAH

This is MSE. No doubt you can find a pension fund returning the figures you quote. The purpose of MSE is to educate people and steer them away from such poorly performing schemes into ones with lower costs.

And...

mickflynn39 wrote: »

the saver's £50,000 will only have gone up by around £4,000 - 8% in 10 years ...giving less than 1% a year growth - not great even with a tax break.

....Is misleading, verging on wrong. If the £50K had been in there for the full 10 years, then yes, less that 1% growth p/a. But the £50K hasn't been in for 10 years - £5000 has been in for 10 years, £10000 for 9 years, £15000 for 8 years, etc... down to £50000 for one year. Therefore, over 10 years the average value of the fund has been £25K, not £50K, so the return is 2%, not 1%.

For any regular saving product, the return is roughly double the apparant growth rate which is the point I was making in my previous post .

mickflynn39

£100pm in your 20s can get you over £10k a year pension in todays terms. £100pm at 45 (in todays money) will get you around £1500 a year pension.

You are assuming unrealistic growth rates. Ball park, a basic rate tax payer who wants a pension of £10,000 (inflation linked) needs to save 30 times this amount. So a fund of £300,000. £100 per month would get nowhere near this amount.

mickflynn39

This is MSE. No doubt you can find a pension fund returning the figures you quote. The purpose of MSE is to educate people and steer them away from such poorly performing schemes into ones with lower costs.

I've quoted the industry average. You've quoted the cheapest pension fund you could find.

Judwin

mickflynn39 wrote: »

I've quoted the industry average. You've quoted the cheapest pension fund you could find.

True, but I used your rate of growth of 4%. The actual rateof growth over the 17 years that fund has been running is over 6% (launched Sept-1994 at 50p, currently 142.5p). Would you like me to re-run the calcs using the real figures?

I can't find any funds charging 2.5% - your "industry standard". Most of the ones I use are in the 1.5% to 1.75% range, and these can often return 10%-20% p/a.