Pensions query

girllikeme1

I am 30 years old and have been paying into various pension schemes with employers over the past 9 years since graduating.

My current employer's pension scheme matches contributions up to 10% of salary. However at the moment I am only paying the minimum 3% which is matched by my employer's contributions* (see end of thread for my excuses...).

Anyway, the point is, I have the option to change to a different scheme with my employer, which will involve me contributing 2.5% to be matched by the employer at 8%. However the life assurance will only be 3x salary rather than 6x salary.

The way I see it, the current pension scheme is only better if (a) I can contribute 10%, which I don't think I can given my other financial commitments, or (b) if I died, in which case the life assurance payout would be better.

Am I considering all the right points or if there's something else I should be bearing in mind when making this decision? Once I change schemes I will not be able to change back.




* I know my current pension contributions are not enough to save for retirement, however:

- I am still paying off my post-1998 student loan (approx £8,500 left to pay)
- We have a mortgage which we are overpaying presently due to a low interest rate
- We are looking to move house again soon and are trying to save more towards moving costs / deposit
I have started to save in an ISA (only recently got a job that pays enough to enable me to do so).

Lokolo

1) You shouldn't be overpaying your student loan, you are stupid to do so.

2) Overpaying whilst interest rates is also, the a bad thing to do.

3) Thats fine though.

When your mortgage is 1% and savings are 3% you are better off putting money in savings. For example, if you have £100. Putting that £100 in your mortgage will reduce interest payments by £1 a year. However, putting in savings will gain you £3 a year. So why would you not want that extra £2 which could then go on to reduce the mortgage even more?

Student loan is currently 1.5%, and with the same example above, if student loan is 1.5% and savings are 3%, you are losing out on £1.50 for every £100 you put towards the student loan.

Personally I think you should be contributing 10%. When you move house and you have higher mortgage repayments, are you going to use that excuse for not contributing more?

You also have the safe assurance if you should pass away, your partner will find it easier financially.

girllikeme1

Thanks for your advice, I will bear that in mind. I am not overpaying my student loan, just the minimum contributions through payroll. I know there will always be an excuse not to pay more - and yes, higher mortgage rates will be a factor.

I'm overpaying my mortgage and saving in an ISA

kidmugsy

How badly do you need life insurance? How many dependants/potential dependants do you have? Children? Ageing parents? If you don't need it now or in the foreseeable future, discarding it shouldn't be hard.
Another way to look at it: how much would it cost you to replace the missing life insurance simply by buying a policy yourself? I mean, if it were to cost less than 0.5% of salary, you'd be quids in. Even if it cost nearer 5% you might persuade yourself that you'd be better off swapping pension scheme.

Mind you, in your shoes I might wonder at your employer's burst of generosity - are they having trouble retaining staff?

Lokolo

girllikeme1 wrote: »

Thanks for your advice, I will bear that in mind. I am not overpaying my student loan, just the minimum contributions through payroll. I know there will always be an excuse not to pay more - and yes, higher mortgage rates will be a factor.

I'm overpaying my mortgage and saving in an ISA

Ah good to hear!

And yes the last sentence is the worrying factor with a lot of todays employees. Obviously no-one wants to spend money which they will not get for another 30 years.

You may want to consider trying this out:

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

It will give you some figures for you to look at about your pension contributions

girllikeme1

Thanks for your comments.

Life insurance isn't a major issue at the moment. I don't have children yet and my parents are quite young (both still working full time).

I suppose since I already have a policy and have been paying it since I got my mortgage it's not really an issue. Previous employers haven't offered this level of life assurance anyway.

My employer is offering employees the chance to switch schemes due to a merger that happened before I joined. They are now letting us transfer into the new group scheme if we wish to.

Loughton_Monkey

Although the 2½%/8% deal 'looks' the most 'efficient', I would strongly suggest paying the extra 7½%, and getting a further 2% is very cost effective in its own right. Surely this makes better sense rather than pay off a low-interest mortgage. Low interest mortgages should be paid down as slowly as possible. The balance will inflate away. [Those of us with 'Offset' mortgages are actually going the whole hog. Having offset mine fully, I've withdrawn the whole lot again - £214K - and earning a 'free' couple of % extra by saving it in bonds].

I can guarantee that in later life, you would regret not having put more into pension, at least while such a generous employer offer exists.

You look to be thoughtful and sensible with your finances. So was I. But I'd also offer another 'key point' often overlooked. This is the fact that throughout our working life, ignoring all the emotional ups and downs, our 'lifestyle' can be measured very accurately by the amount we spend. At first thoughts, it is common to think that every extra £1 we spend is simply that. Another £1 spent on something 'good'. But mathematically speaking, you are raising your lifestyle by £1 and denying yourself £1 extra to boost lifestyle when you no longer have earned income.

This 'doubling up' is far more significant than most people realise. Unless you want to spend the whole of retirement 'regretting' that you didn't spend less (and save more) - i.e. when there is not a thing you can do about it - the trick is to ratchet your spending up in a controlled way only to a level that can be fully maintained when the earnings dry up.

girllikeme1

Hubby and I have talked about offsetting before, but it almost seems too good to be true! I guess I will be able to find more info on this in these forums (will do a search!).

Thanks for all your pointers
:j

kidmugsy

Making the bigger contribution would be particularly attractive if either (i) it let you avoid higher rate tax, or (ii) your employer offered "salary sacrifice".

girllikeme1

I should have pointed out that although the 'new scheme' only requires 2.5% employee contribution, we can make additional payments into our pension.

So I could benefit from getting my employer's 8% contribution, paying 2.5% and then adding a further few % employee contributions, with the ability to change my % contribution each year.

I think this way *might* be beneficial as I would be guaranteed the 8% employer contribution even if one year I had to stop making the additional payments and was only contributing 2.5% - whereas with the existing scheme my employer would only match what I put in.

Does this sound logical?