Can I just save myself for a Pension?

iyiarz

I've always been a bit wary of pensions.
For a start, I have little knowledge of them.

I didn't take the opertunity to take the company pension
when it was offered.

Can i just save money every month in ISA's / Saving?

I did some sums, and if I religously saved £50 a month until I was 60
(I'm almost 30) I'd have £173,698.77 earning £7,816.44 interest at 4.5%

If I save £100 a month,
I'd have £347,397.54 at 60, with £15,632.89 interest a year
The interest alone is enough to live on.

Or am I missing something, Taxes etc?

Cheers

John

Glad

well looking at your post simply

if you save £100 a month for 30 years you would have £36,000 before any interest earned,
a long way from the figures you are quoting, or am I missing something??

iyiarz

Maybe I have my maths wrong
Probably, since I got a 'D' in GSCE ...LoL

Each year, I'm saving £1200, + the interest from the year before...

POT

---

Interest
£1,200.00

---

£54.00
£2,454.00

---

£110.43
£3,764.43

---

£169.40
£5,133.83

---

£231.02
£6,564.85

---

£295.42
£8,060.27

---

£362.71
£9,622.98

---

£433.03
£11,256.02----£506.52
£12,962.54----£583.31
£14,745.85----£663.56

etc...

iyiarz

Ooops, I'm not 1 years old...

If I'm 30 now, when I'm 60, it would be £73,208.48 / £3,294.38 (i)

Is this still possible, or are there any pitfalls?

Knowing my luck, Bread will cost £50 a loaf in 30 years

dunstonh

With pensions, you get 22% tax relief (or 40% if higher rate tax payer and potentially upto 72% if you receive childrens tax credits). Assuming the lowest rate achievable, 22%, your £1200 contribution would be £1538.46 in a pension. Ignoring rate of return, thats £46,153 compared with £36,000 on savings.

Don't forget when you retire as well. You are using 4.5% as an example for growth. You would need to continue that 4.5% in retirement. However, that would fluctuate with interest rates. A single life annuity rate at age 65 is 7.2% at the moment for non smoker and good health. Even at age 60 with 50% spouse benefit and increasing, you are looking at 4.7% for non smoker, good health (smoker and poor health get more). Both higher than 4.5%. On your examples, you won't be retiring at 60 anyway.

As we have said on here many a time before (more so over the last month), the pension is just a savings wrapper. It has terms and conditions that state how the money must be paid on maturity but the investment inside the pension can be a whole range of items and you get to choose what is "inside".

If you are low risk, then pick low risk funds. Gilts, corporate bonds, commercial property, fixed interest, cash are all lower risk than stockmarket funds. However, risk is diluted a bit by time. A stockmarket investment over 30 years is lower risk than a stockmarket investment over 5 years.

deemy2004

iyiarz wrote:

Ooops, I'm not 1 years old...

If I'm 30 now, when I'm 60, it would be £73,208.48 / £3,294.38 (i)

Is this still possible, or are there any pitfalls?

Knowing my luck, Bread will cost £50 a loaf in 30 years

You would need to work out what the money is in todays terms by applying inflation....

To save you time... using your 73,208 pot, at 2.8% inflation rate equates to a cash ISA pot in todays money of £31,228.

If your going to use Cash ISA's, which is a wise choice , you had better up the rate to £3k rather than 1.2k

Now this would give you a cash isa pot of £183,505, and in todays money of £78,277, which at 4.5% would give you income of £3,522 per year (in todays money).

Now the benefit over pensions is the flexibility, we don't know where pensions will be in 30 years time, what the rules will be it is for easier to manipulate cash isa than a pension fund

As an example....

Say at 60 you only had your original figures of say £31.2k in todays money... Now on retirement if that was in a pension fund, it would be used to buy an annuity which would give you about £1400 per year. Now the Minimum income guarantee would be about £2k per year, thus they would take off £1400 and give you £600 per year, which means that your pension is worthless.. As you would have got it anyway.

Now if you had cash-isa's and you can see this is how things stack... You have the luxury of deploying those funds in assets such as a property or gifts which would mean you would get the full 2k per year !

Also what if you retired but still wanted to do somework on the side ? Then what ? Your pension is taxable income whereas your cash-ISA interest is TAX FREE !

There are too many variables that can change and committing to somethign as inflexibile as a pension 30 years hence is a BIG risk ............ The cash-isa route is a far more flexible product.

Afterall, if interest rates are high in 30 years time and you do chose to buy an annuity, then you can whereas with a pension you have no choice ! What if interest rates are 2% ? Then what ? on your £35k hard savings (todays cash), equates to a pension of £700 per year !!!

Given an ageing population it is blunt common sense that annuity rates both ARE and WILL fall - This is regardless of what short-term rates do !!! So the future for annuity rates does not look well - You could infact end up with higher short-rates than long rates , which favours cash-isa's !

Are are many variables that the advocates of pension funds ignore.. One of the most obvious is thet cost of annuitizing a fund which is usually between 10-12% of the pension fund value !..

If you really want to get into it then you may want to read

http://www.econ.bbk.ac.uk/wp/ewp/ewp9918.pdf

Justin_Credit

30 years is a long time. Have you considered a stock market based investment such as a Tracker ISA as advocated by the Motley Fool. You could still put some cash into a Cash ISA and the rest into a tracker fund.

Have a look at the Tracker pages at https://www.fool.co.uk

Hope this is useful.

JC

dunstonh

Given an ageing population it is blunt common sense that annuity rates both ARE and WILL fall

There was an article in money marketing in the last fortnight suggesting that annuity rates may begin to rise.

With the Govt needing to borrow more, there is likely to be an increase in the availability of Gilts. In addition, the overpayment of annuities in the 80s is beginning to work it's way out of the system and current rates are lower to reflect those overpayments.

Have you considered a stock market based investment such as a Tracker ISA as advocated by the Motley Fool

They would not say that you use an ISA for pension planning. That would be considered advice and they could get fined and shut down for doing that. I think you are mixing up product and investment fund. You can get a tracker fund in a pension as well as an ISA.

It should be noted that Deemy is anti pensions and his figures quoted use lower rates than those currently achievable (i.e. annuity rate).

Whatever you put in an ISA will be lower than what you put into a pension when you invest in the same areas. The tax relief and often lower charges on a pension will see to that. Especially if you are a higher rate tax payer and in reciept of tax credits.

You can also ignore the pension credit as that won't apply. Any savings in the cash ISA would be considered in a similar way as a pension and your total planning would have to only pay out less than around £30 pw for pension credit to apply. At your age, it is unrealistic to consider that an issue. It's also folly to plan round what is effectively a benefit for low income households.

In reality, the important thing is to do something. Doing nothing is the wrong thing. It would probably be sensible to plan round ISAs and Pensions. The younger you are, the more favourable a pension is. As you get older, the more favourable ISAs get. That is until you are in retirement, then both can be good depending on circumstances.

iyiarz

Thanks for all your replies.

I'm swayed towards the ISA route at the moment.
I wouldn't however put it anywhere near a product that uses the stock market. I know too may people who have lost £1000's this way.
I'm a non-gamble person, I don't take risks.
I'd rather 4.5% that 6.5% at a risk.

I didn't like the fact that if I died before my missus, she would only get half of my pension... Where'd the other half go!

If the money was all mine, I could leave it to my partner tax free... Looking at documents on IR website.

What are Annuity rates, Do/Why do i need to pay them?

dunstonh

I wouldn't however put it anywhere near a product that uses the stock market. I know too may people who have lost £1000's this way.

Who says pensions have to invest in the stockmarket?

Even if you did choose to invest in the stockmarket, I don't think you will find anyone who has lost money on the stockmarket over 30 years.

I didn't like the fact that if I died before my missus, she would only get half of my pension... Where'd the other half go!

That is incorrect too. If you die before retirement, the whole value of the pension fund is paid to your nominated beneficiary. When you retire, you choose the annuity you want and you can pick a joint life annuity which pays out full amounts to both of you.

What are Annuity rates, Do/Why do i need to pay them?

Annuities are a risk free income product. You buy one with the remainder of your pension fund after you have taken your tax free lump sum from it.

I'm sorry but i feel you have taken the wrong option. You are giving up valuable tax relief for totally the wrong reason.

iyiarz

Who says pensions have to invest in the stockmarket?

Even if you did choose to invest in the stockmarket, I don't think you will find anyone who has lost money on the stockmarket over 30 years.

Sorry, I should have said that I was refering to ISA's which use the stock market.

That is incorrect too. If you die before retirement, the whole value of the pension fund is paid to your nominated beneficiary. When you retire, you choose the annuity you want and you can pick a joint life annuity which pays out full amounts to both of you.

I see. I assumed this after using a website to calculate a pension.

Annuities are a risk free income product. You buy one with the remainder of your pension fund after you have taken your tax free lump sum from it.

Oh right. So I save for 30 years and then go and buy a product..?
Why do they make it so complicated? Is it because of the timescales involved?

I'm sorry but i feel you have taken the wrong option. You are giving up valuable tax relief for totally the wrong reason.

I haven't made a decision yet , I just said I'm swayed. I'm trying to learn about pensions and the pro's and con's of the different scenarios.