How much to put aside?

firstinflight

Hi everyone,

The time has rolled around to start thinking about my future and set up a pension. This must be a question that comes up a lot, but how much should I aim to pay in each month? I know the general answer is “as much as possible” but obviously I want to try and find a balance that leaves me with some money to enjoy now as well!

A bit about me, I’m 29, and I know this makes me something of a late starter and will increase the amount I need to put in. I have a steady job, no debts to speak of, and usually have around £600 per month to spare after rent, bills and general expenses. I’m currently saving for a deposit, and this is where all of my surplus cash has gone in the last few years, although I think now I’ll be in a position to buy a place in the next 12 months or so.:j

My work has a pension scheme which will match my contributions up to about £100 a month (inc tax relief), so guess that’s a good minimum to start with, in order to get the “free money” on offer.

After that, I’m a bit clueless. What is a realistic amount needed to fund a comfortable retirement? What kind of balance should I strike between making pension contributions and continuing to save up a deposit? Once I buy somewhere, I guess the question will change to finding a balance between pension, mortgage overpayments and cash savings.

I don’t want to plow every spare penny I have into a pension, but at the same time, I want to make sure I’m putting enough aside. Any advice would be much appreciated.

Cheers.

webnibbler

The very basic guide for contributions is half your age as a percentage, so in your case it would be around 15%(of gross salary).

If you don't want to commit all your savings to a pension you can always use a Stocks and Shares ISA. I invest about 60% of savings into a SIPP and the rest into an S&S ISA.

I would recommend reading Tim Hales - Smarter Investing: Simpler Decisions for Better Results. This is often recommended reading for starting out in pensions and savings.

atush

I agree, you should start your pension ASAP and put in as much as you need to, to get max eomployers contribs. I would say put more in, but maybe you should wait unit you have enough for your deposit and expenses.

And don't forget that you still need a cash emergency buffer after any purchase.

JoeCrystal

I agree. Where else you can spend £80 net would meant £200 in pension scheme instead. There is also often mentioned fact that in order to get pension income of two third of your final salary, it would requires 25% of your salary for forty years. Alas, for lot of people, that kind of sum will make their faces pale at such thoughts.

To be honest, if you really want a rather good guide to how much it take in order to get an income, then there is this HL Pension calculator you can use to figure it out.

Cheers

Joe

bilbo51

JoeCrystal wrote: »

I agree. Where else you can spend £80 net would meant £200 in pension scheme instead.

Wow. How can I get some of that?

hugheskevi

Wow. How can I get some of that?

a) Matched employer contributions [£80 net to get £200 gross]
b) Be in receipt of Tax Credits and on the 41% taper [£78 net to get £200 gross]
c) Be a higher rate taxpayer with access to salary sacrifice with employer National Insurance Contributions savings added to the pension [£88.40 net to get £200 gross]
d) Earn a bit over £100,000 (ie facing a marginal income tax rate of 60% as personal allowance is withdraw) [£80 net to get £200 gross]

There, plenty of ways

dtsazza

hugheskevi wrote: »

a) Matched employer contributions [£80 net to get £200 gross]
b) Be in receipt of Tax Credits and on the 41% taper [£78 net to get £200 gross]
c) Be a higher rate taxpayer with access to salary sacrifice with employer National Insurance Contributions savings added to the pension [£88.40 net to get £200 gross]
d) Earn a bit over £100,000 (ie facing a marginal income tax rate of 60% as personal allowance is withdraw) [£80 net to get £200 gross]

There, plenty of ways

And of course (a) can combine with (b), (c) or (d) to make things even more attractive.

The "free money" from matched employer contributions is a great deal that should never be overlooked unless you're right on the breadline and need your own contributions for survival right now.

gadgetmind

webnibbler wrote: »

I would recommend reading Tim Hales - Smarter Investing: Simpler Decisions for Better Results. This is often recommended reading for starting out in pensions and savings.

It's a great book, but it's more about portfolio construction and drawdown rates/risks than the basics of pensions.

ISTR there is also some Times book that people recommend.

gadgetmind

firstinflight wrote: »

My work has a pension scheme which will match my contributions up to about £100 a month (inc tax relief), so guess that’s a good minimum to start with, in order to get the “free money” on offer.

Do that, ideally yesterday, but tomorrow will do. No, really, that's a no brainer even if you just kick off putting the money into the default fund.

Who's the provider?

After that, I’m a bit clueless. What is a realistic amount needed to fund a comfortable retirement?

Play with this pension calculator.

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

It might scare you (it scared me first time!) but remember that your pay will keep rising and you could therefore keep nudging up contributions.

What kind of balance should I strike between making pension contributions and continuing to save up a deposit? Once I buy somewhere, I guess the question will change to finding a balance between pension, mortgage overpayments and cash savings.

I think £200 a month is a very good start. You'll also need a *much* bigger cash buffer than you expect after buying a house - trust me on this!

JoeCrystal

Thanks, hugheskevi for posting that answers to bilbo51. I am aware of point a and indeed point b (I am using point b with my own pension scheme happily ) But sadly, my employer do not contribute into pension scheme *sighs*

Loughton_Monkey

firstinflight wrote: »

After that, I’m a bit clueless. What is a realistic amount needed to fund a comfortable retirement? What kind of balance should I strike between making pension contributions and continuing to save up a deposit? Once I buy somewhere, I guess the question will change to finding a balance between pension, mortgage overpayments and cash savings.

Talk to 100 people, and there are literally 100 different answers as to what you need for a 'comfortable' retirement.

I can tell you how I defined it personally, and the answer was "I need as much money - per year - as I spent while I was working."

People are different. Their careers are different. For some, their salary at middle age virtually 'flat lines' until they retire. For others, there is continued career progression, and salary (and perhaps spending) rises annually accordingly. I was lucky enough to be more towards the latter category, and my spending got to a 'comfortable' level meaning that every bonus, and every pay rise was effectively salted away for retirement.

There are two traps into which you can fall:

1. Simply spend every penny you earn. Then when retirement comes, you will suffer a huge financial slap in the face and have to live, metaphorically, on beans and dry bread.

2. Rather better than 1, just bung 'as much as you feel you can afford' into a pension, and tick the box headed 'retirement planning' and fool yourself into syaing that it's "sorted". Although better than nothing, this will, for the majority of people, provide much less than what they would define as "comfortable".

Perceived wisdom would say that unless you invest around 25% of your lifetime earnings, then you will be in one or other of the above categories.

But clever people don't leave it to chance. A relatively simple spreadsheet calculation [but it takes some time to develop properly] will inform you quite well on whether or not you are on course. Update it at least annually, and it gives you more than enough time to plan, adjust, correct, and put you in control of your own destiny. Retirement is not all about pensions. It is about Stocks & Shares ISA's, housing, and to a lesser extent cash savings. Investment into buying your own home is a retirement investment at least to the extent of giving you rent-free accommodation. It can also add more if you downsize or equity-release.

Just to add a final 'wrinkle'. If you do what I suggest, then there is a strong possibility that you will be building up enough behind you so that you can ask the question that is far better than "Will I have enough income when I retire". The true question you should ask is "At what age can I retire, and still maintain the lifestyle to which I am accustomed."