Do I Need a Pension?

Jakaru

Hi,

I had a pension when I worked in Local government about 10 years ago (paid in for about 3 years) - but that's been it. My finances have never really allowed me to have the money going out that a pension required.

Now, at 33, with my first child just been born - and hence no salary coming in from the wife - I'm on a general cost-cutting and financial re-organisation kick (and this site has been a great find!).

I'm having to shell out in better life insurance etc (to be sure the wife and kid are cared for), and I'm cutting expenses down to the Bone (mortgage requoting looks like it will be a good saving to cover the needed life insurance), but I know from my very detailed budget that my wage allows us to live. I'll be doing whatever I can to gain Some extra income to improve standard of life etc.

The online pension calculators tell me that I should be paying in £200 a month to a pension scheme. Not even Remotely possible, just aint got the cash. All the advice tells me that if I don't start paying into one asap then I'm costing myself a fortune. Rock - Hard Place - etc.

Basically, the sums look to me like if I could somehow find the cash, I'd have to suffer financial difficulties for 30 years, to retire at a tiny income. (If I live past 75, i.e. on pension for 10 years, I'll get more out than I put in - woohoo.)

So - looking at it - I'm wondering how much gain there really is in getting a pension?

Am I perhaps better off saying that I carry on as I am, putting money aside when possible, perhaps even attempting over the years to lessen the mortgage down even further (currently at 18 years), and then when That bill is gone, put that monthly payment into savings and build up as much as possible?

Just after general advice and opinions really...

dunstonh

Basically, the sums look to me like if I could somehow find the cash, I'd have to suffer financial difficulties for 30 years, to retire at a tiny income. (If I live past 75, i.e. on pension for 10 years, I'll get more out than I put in - woohoo.)

The UK average retirement age is 63. So, what are you going to do between age 63 and 75?

Also, if you are going to spend 30 years paying in £200, then you should expect not much back that much more in the years after retirement. However, I think you arent looking at the figures in context to how they are calculated so your are basing your views on inaccurate data.

37 years of £200pm would be a final fund value of £399,244 with 7% growth p.a. at age 67 (your state retirement age). If that was invested to give a 5% income in retirement, then its £19,962 a year. If you keep the £200pm in line with inflation then that figure should more or less be a real terms figure.

So - looking at it - I'm wondering how much gain there really is in getting a pension?

Basic state pension is £4381 a year. You may qualify for a top up on the second state pension but at maximum you are loking at around £8500 a year.

So, if you have financial difficulties now, just think what living on £8500 a year will be like (and you will be taxed on it as well).

Am I perhaps better off saying that I carry on as I am, putting money aside when possible, perhaps even attempting over the years to lessen the mortgage down even further (currently at 18 years), and then when That bill is gone, put that monthly payment into savings and build up as much as possible?

Not usually. Investment returns typically outperform mortgage interest rates and the money you pay in during the early years will be the most beneficial to you in retirement.


I would also consider you look at the calculator you used and place the information in context. Most freebie calcs available are not that good. Has inflation been taken into account? Has your contribution been based on level or increasing? What growth rate was used and does that reflect the investment potential? What reduction in yield was used to cover charges?

Funding for retirement (which quite often doesnt mean pension) is something that only you will benefit from. If you dont put money away, then you wont get it back later.

You dont chose whether you should pay the gas or the electric. You pay both and that is how you need to start thinking about your retirement planning. It should be noted that in 2012, the NPSS being introduced by the Govt will automatically enrol you into a pension scheme and take contributions from you.

If you do nothing, then start looking forward to a miserable retirement. There is no other way of putting it.

Jakaru

Thanks for that.

My initial age thing was mis-leading sorry. My figures are based on retiring at 65. The figures on the pension calculators i was using seemed to imply that the next 32 years of money going in, equates to roughly 10 years of money coming out. I.e. If i live past 75, I've gained from having a pension, as opposed to having simply stuck the money in a bank account. That was my reading of those figures anyway.

Telling the Standard life calculator my age and retirement age, and 200 a month put in - it gives afinal fund of £98,600 - paying out £4,090 a year. (Thats reading as 18-19 years out before I hit what went in (76,800, perhaps I mis-entered info earlier). So, if I put £200 a month away for 32 years, and then live to 84 - I win. If I don't live to 84 (and of everyone I know, I know only 1 person that age or above), I'd have been better off keeping the money myself? Am I seeing that wrong?

I'm assuming that the Standard life calculator wouldn't be £300k off the mark - but maybe it is. £400k of contributions from £200 a month seems oddly high to me though....?

EDIT: Having gone off and tried a few other calculators - the standard life one is awful.

Jakaru

Also meant to say....

Let's say I do nothing for 18 years - then put £300 a month into a Savings account (from my then gone Mortgage payment). Thats 14 years, that's £50k, ignoring interest. As I'd hope at 65 to have no debt, and little in the way of living expenses. I'd hope 50k would quite a long way. Of course, I'd hope to have put away even more than that.

cheerfulcat

Hi, Jakaru,

The online pension calculators tell me that I should be paying in £200 a month to a pension scheme. Not even Remotely possible, just aint got the cash. All the advice tells me that if I don't start paying into one asap then I'm costing myself a fortune. Rock - Hard Place - etc.

It doesn't have to be a pension scheme; it could be a Maxi ISA, or even invesments outside of a tax wrapper. And you don't necessarily have to contribute as much as that; why not start off working out how much you can afford to put away?

Basically, the sums look to me like if I could somehow find the cash, I'd have to suffer financial difficulties for 30 years, to retire at a tiny income. (If I live past 75, i.e. on pension for 10 years, I'll get more out than I put in - woohoo.)

Not sure where you're getting your figures from? You can have a play with calculators here, ( the long-term savings one ) which will give you a rough idea. I wouldn't use anything less than a 5% return for your calcs and nothing greater than 10%. Play around with the contribution amounts, as well. EDIT: You might like to read this article on the Motley Fool about compound interest, as well.

If you are worried about getting more back than you put in then I suggest that you would be better off going down the non-pension route, btw, as that way the capital will always be yours.

Am I perhaps better off saying that I carry on as I am, putting money aside when possible, perhaps even attempting over the years to lessen the mortgage down even further (currently at 18 years), and then when That bill is gone, put that monthly payment into savings and build up as much as possible?

No! There are several things which determine investment returns but the most important - and the most precious, because we have so little of it - is time. The longer you are invested, the better your returns will be, all other things being equal.

Jakaru

http://www.pensioncalculator.org.uk/ seems to be a bit more realistic than the Standard life one.

£200 a month gives me (in real terms) £600 a month back. Taking me back to my 'get 10 years of pension before you've took back more than you paid' thing.

Am I perhaps better stopping myself from delaying completely by starting a Very small pension (maybe £20 a month), so that I can have an aim to gradualy increase it as changes in my income allow? Probably better than taking a '£200 is out, so its nothing' approach?

Jakaru

yes, the time thing appears to be my enemy (odd really, I've only been working like 10 years, and you don't think that much about pensions when you first start off on minimum wage - I didn't realise How much time I'd really lost).

Increasing my retirement age to 70 seems to make a Huge difference in the total payout available.

cheerfulcat

£200 a month gives me (in real terms) £600 a month back. Taking me back to my 'get 10 years of pension before you've took back more than you paid' thing.

If you invest outside of a pension this won't be an issue.

Jakaru

Exactly - but I get the impression that it's only a pension that will give me That scale of a return? I can't see how evern £200 a month would add up to the massive Pots pensions seem to state.

Is a Maxi ISA the next best option?

(I actually have an ISA, used to have a couple, but buying a house drained them! Must check whether my remaining is a Maxi or Mini...)

cheerfulcat

Did you try the calculator I linked to? There is nothing magic about pension schemes. If anything, the returns can be less than similar holdings outside a pension. The returns are based on where you are invested, not on the kind of tax wrapper you use. In fact a basic rate taxpayer investing in a small way can get similar returns even without a tax wrapper like an ISA.

I can't see how evern £200 a month would add up to the massive Pots pensions seem to state.

Read the link about compound interest...

Jakaru

I'm just playing with the long-term savings calculator actually (thanks again for that link, very useful).

£200 a month at 5% for 32 years, £190k.

(I must confess, I have enough sense in these things to know that savings need time, but wouldn't have thought the compound interest makes the huge difference it does to a relatively small amount of money)

So, assuming at that point that I had £190k, earning 5% (i.e. £9,500 a year), I could draw that out to live on (£790 a month) pretty much indefinitely? Choosing perhaps to shrink that income and take a lump sum out.

If I can get over 5% interest for at least a Period of time, I can perhaps increase that, or ideally for now, lower the monthly payment down to something more manageable.