No retirement plan at all, where and how should I start?

charlesmilani

Hi Everyone,

I'm a total novice when it comes to anything related to retirement planning and while I've been reading these forums for a good few months, trying to digest some of the advice, I keep putting off doing anything and currently have no kind of plan for retirement or really my future finances in general. So I'm looking for a spot of advice on where I should start and how I should go about kick-starting my retirement plan!

A few details: I'm a 27 year-old male, still living at home with my parents, paying around £150 a month rent, and making £28,000 a year.

As for savings, I currently have around £75,000 spread between various savings accounts. I have around £35,000 in a cash ISA, £15,000 in an e-savings account, a bunch of 1/2 year e-bonds, and a National Savings index-linked bond.

There is no company-provided pension at the (very) small company I work at, which is part of the reason I haven't started a pension yet, as I haven't been losing out on any employer contributions.

I know that the general rule of thumb is half your age as a percentage of your salary as a starting point, so I'm figuring I should start putting £325 or so every month into my retirement pot. The problem is I have no idea where I should be putting it. I've read the stocks and shares vs pension sticky thread, and researched it all further, but I still can't decide whether I want to start a private pension, a stocks and shares ISA, or split between both. I really have no idea where to start. Should I make an appointment with a bank or a broker, go it alone, or what?

I like the fact that with a stocks and shares ISA I'd have control over the money, and that it wouldn't be locked in until I retire like with a pension, but on the other hand, the fact that a pension is protected in the case of bankruptcy and isn't included in means testing (for if things get bad) seems like it would be a comfort, but how do I make up my mind?

Also, should I put a lump sum from my current savings into a pension/S&S ISA, or leave them as they are? I know inflation and low interest rates are eating away at my cash savings, but again I have no idea what to do with the money. I'm vaguely thinking of purchasing a property at some point in the future (although I'm in no real rush), so some cash on-hand for a deposit could be useful.

Anyway, thanks for taking the time to read this thread, any advice at all would be greatly appreciated.

dunstonh

Should I make an appointment with a bank or a broker, go it alone, or what?

Banks are the worst place. Your choice is DIY or IFA. If you know what you are doing then DIY. If you dont then use an IFA.

I like the fact that with a stocks and shares ISA I'd have control over the money

ISAs and pensions can share identical investments and choice. So, both give you the same control.

and that it wouldn't be locked in until I retire like with a pension, but on the other hand, the fact that a pension is protected in the case of bankruptcy and isn't included in means testing (for if things get bad) seems like it would be a comfort, but how do I make up my mind?

and the most important thing that pensions still beat ISAs for income provision. (not capital)

Also, should I put a lump sum from my current savings into a pension/S&S ISA, or leave them as they are?

Depends on your objectives. You need to look at now, short term, medium term and long term. Not 100% into any one period.

atush

I agree with D,

You need to decide if you want to 'run' your own pension (in which case you set up a Sipp) or if you want an IFA to assist you in choosing a pension and choosing appropriate investments.

If you are fairly comfortable with investing then you could try the DIY method andf there are many platforms to choose from. Go the the Hargreeves Lansdown and Cavendish online websites and have a read. I might also go to some other sites such as the Motley Fool and read up.

I would think that to invest around 14% of your income this way would be a good idea (and it will get an immediate uplift by BRtax). You could start by investing a small lump sum if you like (which will also get an uplift of BRtax).

Do be aware that your company will have to start contributing to a pension for you in the next few years, but don't let that put you off starting now.

property.advert

You need to look at the bigger picture of salary sacrifice employer NI savings, tax relief on pension contributions and a mortgage because you have to repay a mortgage out of taxed income whereas pensions are funded from pre tax income.

You cannot look at things in isolation because your financial position is not compartmentalised like that.

JoeCrystal

And in order to find an IFA in your local area, use this Website It might be worth seeing several as well.

The other thing to bear in mind that it may be ideal to work out just how much money you need to contribute in order to get an income you would want. Half your age as percent of salary is only as a guide. Use this HL pension calculator to figure out how much you would need to pay into as a rough guide.

I am not sure if you meant £325 as net payment which in this case grossed up to roughly £406.25 or £325 as gross payment which in this case, is £260 per month. According to calculator, paying in gross amount of £406.25 per month and assuming you retire at 65, pension fund could pay out £15,593.28 per year. Compared to £325 per month meant possible £12,474.62 per year. If you feel that it is not enough, then adjust the payment.

As it is, it is important to realise that it is good idea to ensure that your contribution keep it value over time, either raising by inflation/earnings or both.

As it is at least it is very good that you are actually start thinking of doing pension scheme at your age. The overall 'cost' of it would be cheaper than people starting in mid thirties or mid forties for example.

middlepuss

27 and £75,000 in savings. Impressive. As long as you don't leave it in cash - which will slowly lose its value over the next 40 years - you should have a very comfortable retirement if you keep saving at the current rate.

Keep in cash or near cash (National Savings etc) whatever you might need in the next 5 years or so eg for a house. Long term savings, max out your annual ISA allowance every year and invest the ISA money in stock market related investments.

If you're a novice, an index tracker and perhaps an emerging markets investment trust such as JP Morgan Emerging Markets? As you get more clued up you can always invest in whizzier things later.

Within your SIPP - which is by definition long term money - definitely have investments that should do well over the next 40, 50, 60 years - ie stock market unless you think there's going to be financial meltdown, though if there is we're all stuffed wherever our money is.

As atush suggests, the Hargreaves Lansdown website gives easy to understand guidance, and setting up a Stocks & Shares ISA and/or SIPP is a doddle.

Loughton_Monkey

Almost certainly, some regular savings into some type of pension is what you should end up with.

However, the title mentions "retirement planning", and this is where you should start.

Retirement planning is [almost] nothing to do with pensions at all. It is to do with lifestyle and spending. As you go through life, you will earn money. That's income. Then you will spend money. Much of your spending will be 'lifestyle' spending [your food, transport, housing, holidays, clothes, gadgets, wining & dining...........]. Other spending will be on 'one-offs' such as weddings/children etc.

Everyone needs a plan - however vague and hypothetical for the moment - to show exactly how that Income and Expenditure will pan out. By the simple mathematics of deducting expenditure from income, the difference, by absolute definition, must be "savings" [unless you choose to throw money down the drain].

So "Phase 2" of retirement planning is where you start to consider where these "savings" go. Do they go into equities? [If so, high, medium or low risk?]. Should some go into 'safe' cash savings/ISA's? Any into property - your own house for instance? [Everyone's own house is an investment of [U]some[/U] type - if only providing 'rent free' accommodation much later in life, but there are also 'downsizing' opportunities. Both are relevant to your retirement cash flow.] Even here, the word 'pension' still remains relatively unimportant, other than simply to understand (for your cash flow model) how they work - as opposed to S&S ISA - in respect of tax relief and how you 'take' the proceeds.

In "Phase 3", you would be seeking to see if the calculations broadly 'add up'. By that, I mean does it give you a strong possibility of a retirement income which will cover the 'lifestyle' you expect to be living in your 50's/60's? Or alternatively, you might calculate it the other way round in the form of "At what age would I be able to stop work - zero income - but continue to live my required lifestyle for the rest of my life?". If answers are not to your liking, then you must iteratively adjust your spending, since this is the only factor [other than assuming higher income] that will make a true difference. If there were an investment strategy that would 'correct' a shortfall then surely you would be using that strategy in the first place?

It is only after doing all of this, that you should really consider the last phase which is to "buy" whatever savings/investment vehicles you need. It is only now that you start to think hard about where to get that pension, and in what specific funds should I allocate the contributions etc.... You may, at this stage, need an IFA or, indeed, you might be savvy enough to have a go and do your own shopping around. Either way, I would suggest that you never go to a bank for investment products. Banks are brilliant [mostly] for your Cash ISA, your mortgage, or your easy-access savings. I love my bank. But I personally consider people who go to a bank for an investment product are even more ill-informed than any idiot who goes to his local Shell garage to buy all his weekly family household groceries. My garage has only about 10% the product range of Sainsbury's, and is probably 25% more expensive. So why would I do my bulk regular shopping there?

Speaking from experience, I can say that it is never too early to generate this model. It is so useful. I comes a sort of automatic 'budget' every year and you can easily see deviations from plan and act accordingly. It will put you much more in control throughout life and assist you to retire - within reason - whenever you want.

One last point, again from experience, do not make the mistake of assuming that you will spend less in retirement, than you did while working. I say this mainly because "why should you?", but also because it's generally a myth. Yes, there are many [make sure you are not one of them] who are forced to spend less because they didn't do the necessary retirement planning [euphamistically spent the damned lot while they were earning it!]. Then there are others who don't recognise fully the difference between 'income' and 'lifestyle spending'. Yes. When you stop work, of course your income diminishes. But since nobody should have been spending anything like 100% of their income, it simply doesn't matter. Retirement is about continuing to lead the same comfortable lifestyle you did while in work, and conceding that your financial resources will dwindle.

jamesd

£75,000 in savings and zero in investments, including zero in pension investments, is pretty thoroughly unbalanced as an investment mixture but don't go immediately putting it all into a pension.

You're right about bankruptcy and means tested benefit protection for pensions. It is worth considering that you can take perhaps 6% income from investments for a long time with a reasonably low or nil decrease in value. That £75,000 could provide you with £4,500 a year of tax free income from investments within a stocks and shares ISA.

How does that compare to your current minimal spending needs? How much more would it take to get you to the point where you could live indefinitely on the investment returns? If you can achieve that you've bought yourself security for life even if you become unemployed or unable to work. It's tough at 27 because you don't have pensions to start taking an income from a few years away, gets easier as you get older. But you're well on the way already if you want to do this. And this can also then become a path to early retirement if you want that option - don't have to take it even if it becomes possible.

The first thing that I think you should do is start to use the rest of you annual ISA allowance, shifting some money from non-ISA savings accounts into investments within a S&S ISA. This will start to get you the same sort of growth that you can get inside a pension, a good deal more than you get from savings accounts. After a couple of years of experience and learning about investments you could move some or all of the cash ISA money into S&S ISA investments with a normal ISA transfer (can't do an ISA transfer back to cash).

Ideally you'd be fully using all of your ISA allowance for S&S ISA each year and also accumulating deposit money outside any ISA - leaving money in the ISA tax wrapper and drawing on non-ISA money first for the deposit, topping up with ISA money only if necessary.

You've more than ample time to consider starting a pension when you're in a job where your employer is helping out in some way. Just get started on investing instead of saving and you won't be falling behind.

Once you're in a job where the employer is doing something, that's the time to start exploiting whatever benefits the employer is offering. Pensions are top for the lower part of income retirement, a few thousand Pounds worth of income, and it doesn't take that much put away each month to get there, nor a huge amount of time paying in.

If you just don't want to learn about investments, time for an IFA. If you are interested in learning, just get started and learn as you go. Five thousand or so a year to experiment and learn with at the start isn't too much given how keen you are on saving and what you'll have later.

If you discuss things with an IFA also ask the IFA about Permanent Health Insurance. That's insurance that will pay out an income for the rest of your normal working life if illness or injury prevents you from working. It's not hugely expensive, particularly if you only need to replace say half of your income because investments top it up by the rest that you need to live on. It's an excellent long term protection product for something you might have to live with for the rest of your life. Do this before the pension money. Though ultimately do both when you're with an employer that makes it beneficial.

Patience is good with investments and it's OK to be patient for five or so years while waiting for the legislation that forces employers to contribute to affect companies as small as the one you're in now. It's not a case of us having to persuade you into putting any money away, you're already doing that.

charlesmilani

Thanks everyone for all your advice. You've given me a lot to think about and also the confidence to actually start planning to do something with the savings I currently have rather than just ignoring the cash sitting in the bank.

Right now I think that I'll probably start by moving some of my non-ISA cash into a S&S ISA before the end of this tax year, and also create a basic income/expenditure/savings plan as was recommended, to figure everything out in a little more detail.

I'll have to re-read everything everyone wrote a few more times before I'm able to digest it all, but I already feel far more informed, and you've all given me a great starting point, so thanks again!