Guidance on Pensions at 24

Hyp_Fish

Hi guys,

I finally got a permanent position after a couple of years of contracting and one of the benefits of the package is core pension contributions of around £124 a month.

Have been reading around about pensions (have to say education about these things is poor at younger ages, part of the reason this site is so valuable) and think I'm getting a handle on it.

Imagine the state pension will be long gone by the time I retire so I'm trying to get a plan of action sorted.

However, the one thing it's difficult to find is a rough guide to how much is a reasonable guide amount to be putting in per month at the start of your career (as much as possible is good advice but it would be nice to benchmark how I'm doing against a target).

I've read a couple of threads on here suggesting that a pension pot of around 35k at 35 is a good aim, which I guess seems viable if I up the contributions and progress salary-wise.

Would much appreciate any guidance on targets or even any recommended sites for reading as someone new to pensions!

Lokolo

http://www.hl.co.uk/pensions/interactive-calculators/pension-calculator

How about playing around with a pension calculator to give you an idea

Hyp_Fish

Thanks, that calculator's a lot better than the one I tried previously.

It's saying for a pension value of £126k I'd get £5.5k pa at my current contribution rate, which kinda concentrates the mind a bit! Better hope for some salary bumps...

Quite incredible the amount you lose by waiting 5 years though - suggesting -£37.5k on my calculation. Wow.

property.advert

If you think your salary will rise significantly into the 40% bracket at least, there is a very good mathematical argument for leaving pension provision until then and focussing hard on getting your own property, then moving up through property until you get a house where you believe you will spend a reasonable portion of your life.

There are lots of permeations but a couple to remember are that property must always be bought out of taxed income whereas pension provision is made from gross income. Consequently, if you are paying low taxes then you should take income (and buy property) and if you are paying high taxes you should invest in pensions.

Compounding is great over time but nothing beats 40% or 50% every year from the tax man.

Hyp_Fish

Thanks - that's helpful and makes a lot of sense.

I'm currently trying to save a deposit of about £20k, which I think I'll probably manage in around 5 years time. I suppose the trick is finding the balance between the two - I could boost my core contributions by £96.00 a month if I reallocated my flexible benefits at work but the way you've explained it, it feels like I'm doing the right thing anyway by taking it in cash and putting it in savings.

In a way a deposit does feel like the priority at the moment - £650 pm just disappearing in rent is not great to see - much rather it was going into mortgage repayments!

Loughton_Monkey

Hyp_Fish wrote: »

However, the one thing it's difficult to find is a rough guide to how much is a reasonable guide amount to be putting in per month at the start of your career (as much as possible is good advice but it would be nice to benchmark how I'm doing against a target).

The 'short' answer is usually to bung 25% of your gross income into pensions. This is historically a fairly accurate figure of what the true overall cost was - over the last 40 years - for anyone retiring today on the maximum 2/3rds (40/60ths) of their Final Salary.

The 'true' answer is that everyone is different. If you earn near to minimum wage, then State Pension is proportionately quite 'decent' and hence you don't have to save much. If you are on £100K, then state pension is peanuts so you probably need to put away more than 25%.

It all boils down to what spending you make, and what spending you want in retirement. For every 100 units earned, you spend X units on [what I call] 'lifestyle'. That's your food, entertainment, motoring, travel, holidays, bills, expenses, and things that we all have to pay to enjoy life. You spend Y units on other things that are not 'lifestyle'. These include mortgage (which will paid off before you retire), cost of children (who will be off your hands financially), and perhaps another few things that are 'one off'.

So if you can estimate 100-X-Y=Z, then whatever "Z" is, gives you the amount you have for retirement saving. If that's zero you are in big trouble. But it's the relationship of "Z" to "X" that matters. Will "Z" invested sensibly be enough to ensure that your income in retirement will be X, including state pension?

Basically, you are never too young to do this equation. It will always start off as very 'basic' and far too simplistic, but each year you go through life, and you have the previous years 'accounts' put to bed, the more it actually means something and the more it actually informs you about your current lifestyle and adequacy of retirement provision.

Hyp_Fish

Loughton_Monkey wrote: »

The 'short' answer is usually to bung 25% of your gross income into pensions. This is historically a fairly accurate figure of what the true overall cost was - over the last 40 years - for anyone retiring today on the maximum 2/3rds (40/60ths) of their Final Salary.

The 'true' answer is that everyone is different. If you earn near to minimum wage, then State Pension is proportionately quite 'decent' and hence you don't have to save much. If you are on £100K, then state pension is peanuts so you probably need to put away more than 25%.

It all boils down to what spending you make, and what spending you want in retirement. For every 100 units earned, you spend X units on [what I call] 'lifestyle'. That's your food, entertainment, motoring, travel, holidays, bills, expenses, and things that we all have to pay to enjoy life. You spend Y units on other things that are not 'lifestyle'. These include mortgage (which will paid off before you retire), cost of children (who will be off your hands financially), and perhaps another few things that are 'one off'.

So if you can estimate 100-X-Y=Z, then whatever "Z" is, gives you the amount you have for retirement saving. If that's zero you are in big trouble. But it's the relationship of "Z" to "X" that matters. Will "Z" invested sensibly be enough to ensure that your income in retirement will be X, including state pension?

Basically, you are never too young to do this equation. It will always start off as very 'basic' and far too simplistic, but each year you go through life, and you have the previous years 'accounts' put to bed, the more it actually means something and the more it actually informs you about your current lifestyle and adequacy of retirement provision.

Thanks - again, very helpful.

I think my current Z is roughly what I can afford but I'll reassess next year when the options become live again. I work with someone who's opted out of our work pension scheme and the more I read, the crazier that decision seems!

The core contributions do bump up to 8% from 5.75% once I turn 25 though which is good.

kidmugsy

Hyp_Fish wrote: »

Thanks - that's helpful and makes a lot of sense.

I'm currently trying to save a deposit of about £20k, which I think I'll probably manage in around 5 years time. I suppose the trick is finding the balance between the two - I could boost my core contributions by £96.00 a month if I reallocated my flexible benefits at work but the way you've explained it, it feels like I'm doing the right thing anyway by taking it in cash and putting it in savings.

In a way a deposit does feel like the priority at the moment - £650 pm just disappearing in rent is not great to see - much rather it was going into mortgage repayments!

Just a thought: does "core contributions" imply that a larger pension contribution would be by "salary sacrifice"?

Hyp_Fish

kidmugsy wrote: »

Just a thought: does "core contributions" imply that a larger pension contribution would be by "salary sacrifice"?

Either that or reallocating some of my flex benefits pot, which I guess is no different in the end given that I take it as cash at the moment.

kidmugsy

The point is that "salary sacrifice" payments into a pension avoid not just income tax but also National Insurance Contributions. Your employer will be able to tell you whether that advantage is available to you. Although it's a very attractive wheeze not all employers offer it.