MSE News: Young people 'confused by pensions'

hello_sunshine

I'm 27 and I'm bloody well confused by pensions! (I think I still just qualify as "young" in terms of retirement saving.....)

It's not because I can't be bothered to find out either- the answers aren't there from a reliable source which address the questions that I have.

I know that my mother set me up with a pension a few years ago as [STRIKE]a tax dodge[/STRIKE] good tax planning but I don't know if I should sign up to the pension scheme offered by my new employer.
Should you sign up to a scheme if you aren't going to stay with them until you retire? Is that just money down the pan? And given that permanent jobs these days are like rocking horse poo for young people, what happens if you're on a rolling or fixed term temporary contract? Are we going to have to manage a dozen different plans for every employer that we've had until we retire if we're auto enrolled?

I agree wholeheartedly with the comment about pensions being a pyramid scheme- that's certainly how I feel about the state pension. I don't think there will be a state pension by the time I retire.

It's confusing because the information and advice available for young people isn't aimed at us- it's aimed at people in their 30's and 40's who haven't got student loan payments already coming out of their pay and who have a permanent job!

Most of the people I know who are my age and thinking about pensions fall into two camps:

1) they work for the public sector and are likely to do so for their entire career or a significant portion of it(medics, teachers, civil servants, armed forces) and so have signed up to their relevant pension scheme

2) they know that pensions are a thing they should have, but they have seen their parents' private pensions plundered by Gordon Brown, so they think f*** it, I'll make some other investment, because it's just not worth the aggro.

bigadaj

Hs you make some good points that are often glossed over by old fog is, saying when I was young etc

You have a he'll of a lot of drain on your resources in your twenties and pennons aren't necessarily the most urgent. I'm in my mid forties but didn't start serious pension saving until my mid to late thirties and am perfectly comfortable with that. I didn't have serious student loans to repay, though my masters cost me some money, then worked overseas for a while and didn't settle down until my early thirties. I concentrated on cash savings inititslly, then a leave deposit for my house and clearing the mortgage in less than ten years. Also to me the ability for travel and socialising is far more valuable in your twenties than on retirement, others may differ.

Paying into a pension makes sense if your employer contributes, and if your contribution is necessary to gain that, if they give some money anyway it's less important. Saving a deposit for a house is a big challenge now, though house prices are not shooting up in the near future. Ultimately it best to prioritise your life, decide what you what out of it and most importantly don't moan when things don't go swimmingly. If you pay basic rate tax then there is a strong argument to save into isas initially, as they are at least accessible if needed, though not for a saturday night out, a holiday or shopping.

furndire

Never mind young uns being confused re pensions now, I bet 90% were also confused many years ago. I know I certainly was - and luckily I didn't fall for the twaddle that was spouted many years ago - more by good luck than good management.
We just had a feeling that the financiers where
1, gambling with our hard earned money, & 2 charging for the privilege.
We luckily ended up ok - but I do not envy any one trying to sort out their long term finances.

hello_sunshine wrote: »

I agree wholeheartedly with the comment about pensions being a pyramid scheme- that's certainly how I feel about the state pension. I don't think there will be a state pension by the time I retire.

.

Funnily enough this was exactly what our account said to me about 30 years ago - he was just a bit too soon with his prediction, as I have retired.
The problem with the state pension is that what is being paid out today is going straight to the pensions that people are receiving today
More & more of the population reaches a much higher age than previously - there are less people contributing to the pension pot (loss of jobs etc, there is not going in to sustain todays pensioners.
The golden age of better off pensions has gone, and I cannot see any way that it can come back. The whole lot needs a huge overall.

DreamerV

I am really confused by pensions and I'm 28. I have tried to look into it, but I end up more confused. When I was in the civil service, I learnt about the scheme offered (and would do the same when employed again by another employer, fingers crossed, after my studies in about a year). However, at the moment, I know I want to secure my future, as I'm possibly only going to pay into a pension 27 years, and then have a gap of 8 years before I can draw my nuvos pension (I figured out I'd get out around £3100 a year with the overpayments I made, and the generous contributions my employer made). I'm not counting on a state pension, as I really am 50-50 about whether it will exist.

So I now have the dilemma whether as someone earning around £7000 a yr while studying through renting out my property, I should invest in a private pension of some sort, or whether I'd be better putting money in a S&S isa. I've tried but I can't figure out how to work out which is the best S&S isa for me (I find it hard to trust what I see online as it differs so much from site to site). I also worry about whether I can pay into a pension which will actually lose value. Until I have more time to research, I'm just putting money in high interest fixed accounts, and maxing out cash ISAs.

Having worked out how much I want in retirement (£21k gross per year) I also think of myself as more financially savvy than most of my friends my age (most of whom are professionals). Yet, I am really struggling. I wish the government ran free or cheap classes that I could go along and learn about these things from and ask questions. And I definitely think financial education in schools is needed.

JoeCrystal

Well, in my case, I was not confused by the pensions but rather I did not know about it. I heard about it, of course but naively believe that it did not apply to me. Happily and indeed, most fortunately, I somehow stumbled into this pension forum and whole new realisation that I need to start planning for retirement at young age of twenty four which eventually leading to setting up private pension scheme with an IFA to pay into.

Since then, I never look back and still remain in this forum, hopefully a helpful member of this forum.

Cheers

Joe

dunstonh

2) they know that pensions are a thing they should have, but they have seen their parents' private pensions plundered by Gordon Brown, so they think f*** it, I'll make some other investment, because it's just not worth the aggro.

That is just an excuse from someone that doesnt know what they are talking about and are looking for reasons to not pay into a pension and are scraping the barrel. (GB's changes affected all conventional investments whether held in a pension or not)

However, at the moment, I know I want to secure my future, as I'm possibly only going to pay into a pension 27 years, and then have a gap of 8 years before I can draw my nuvos pension

Are you funding to retire 8 years earlier than the scheme pension age and 11 years earlier than state pension age?

I'm not counting on a state pension, as I really am 50-50 about whether it will exist.

It will exist.

I also worry about whether I can pay into a pension which will actually lose value.

S&S ISAs and pensions share the same investment and same costs. So, why are you worried about this with pensions but not with S&S ISAs?

Until I have more time to research, I'm just putting money in high interest fixed accounts, and maxing out cash ISAs.

Which is fine for short term money but almost certainly the worst option for long term money. You are replacing investment risk with inflation risk and shortfall risk.

Having worked out how much I want in retirement (£21k gross per year)

That would require you to have a pot of money of around £750,000 at age 55. You say you are earning £7000 a year.

To hit that pot of £750k in 27 years using an annual growth rate of 5% would require you to pay £1113 per month. Double what you earn per year. Doesnt matter if you use pensions, ISAs, savings or whatever. Your objective is not affordable. (actually, if you used savings you would need to pay closer to £1750 pm but the point here is currently your objectives are not affordable and looking at solutions before knowing the requirements is back to front)

Plus, you wont need £750k. Inflation would see the requirement being something closer to £3 million.

DreamerV

dunstonh wrote: »

That is just an excuse from someone that doesnt know what they are talking about and are looking for reasons to not pay into a pension and are scraping the barrel. (GB's changes affected all conventional investments whether held in a pension or not)



Are you funding to retire 8 years earlier than the scheme pension age and 11 years earlier than state pension age?



It will exist.



S&S ISAs and pensions share the same investment and same costs. So, why are you worried about this with pensions but not with S&S ISAs?



Which is fine for short term money but almost certainly the worst option for long term money. You are replacing investment risk with inflation risk and shortfall risk.



That would require you to have a pot of money of around £750,000 at age 55. You say you are earning £7000 a year.

To hit that pot of £750k in 27 years using an annual growth rate of 5% would require you to pay £1113 per month. Double what you earn per year. Doesnt matter if you use pensions, ISAs, savings or whatever. Your objective is not affordable. (actually, if you used savings you would need to pay closer to £1750 pm but the point here is currently your objectives are not affordable and looking at solutions before knowing the requirements is back to front)

Plus, you wont need £750k. Inflation would see the requirement being something closer to £3 million.

Thank you for your in depth post. Your posts are actually ones I tend to look out for as they seems to make a lot of sense, and give reasoned opinions.

I am in the lucky position that I am worth around 333k at the moment. And I worked out I'd need around 780k in today's money (to earn 21k in today's money value in retirement), hoping my money would rise with inflation at least. I live fairly simply/frugally and save very well, and should be set to earn around 23k a year after graduation, rising to around 30-35k after 3 years, and I have no rental/mortgage costs. I've worked out on top of what I have in savings, property, and nuvos pension, I could save a further £14k per year towards retirement if I use the rent-a-room-scheme and get paid on average £28k per year from work (rising with inflation) for the 27 years I want to be able to retire after. On top of this, I am likely to inherit (after tax) at least 200k from my parents in the form of half their house. Along with £3100 pension from aged 65, I still think it's possible.

Obviously I'd need to re-assess if I have children, or become ill again. But if I save at that high a rate, it seems like I'd have more than enough....I just need to work out where to put it (although presumably later I'll be on a good pension plan through my employer).

Am I still being completely naive? It is possible that I am. I thought I would have enough with 14k (or the equivalent by then) a year over 27 yrs (£378k in today's money, not counting any employer contributions), plus the £333k I'm worth now (not counting student loans to pay back), plus the nuvos pension kicking in at 65.

Obviously I may retire after age 56/57...I just want the option. My neighbours saved up for a round the world cruise after retirement, and within weeks after retirement both were diagnosed with cancer, and my friend's mother also died within 6 month of retirement (brain tumour). I'm terrified of saving for a retirement I won't be here for, hence I want the option to retire early so I'm saving for that.

DreamerV

dunstonh wrote: »

Are you funding to retire 8 years earlier than the scheme pension age and 11 years earlier than state pension age?



It will exist.



S&S ISAs and pensions share the same investment and same costs. So, why are you worried about this with pensions but not with S&S ISAs?
.

Funding to retire at 57th birthday (2040), having worked for 27 years from age 30. Nuvos pension kicks in at 65. State pension at the moment looks like it would be 68.

If state pension exists, it will be a bonus

You are completely right about the S&S ISAs and pensions....so I have no idea why I was thinking like that. Thanks for pointing it out. I will sit down with my father, and ask him a host of questions when I next see him, and then probably be dragged along to his regular IFA appointments (he likes to do this, he thinks I might learn something - I hope so too!).

Edited to add: I earn an average of 3.58% across all my savings at the moment. IIRC this is currently keeping pace with inflation finally. Long term I realise this is a poor strategy (cash savings that are unlikely to prove useful in the short term).

hello_sunshine

dunstonh wrote: »

That is just an excuse from someone that doesnt know what they are talking about and are looking for reasons to not pay into a pension and are scraping the barrel. (GB's changes affected all conventional investments whether held in a pension or not).

That's quite a logical leap, and one that isn't true. The entire point about the changes is that pensions were supposed to be secure and tax efficient, so if they don't confer any tax planning benefit, what's their attraction over other forms of investment?

Plenty of people my age have savings that we're quite happy to pay into and lock away, so we're not all scraping the barrel for excuses. I know that I'm not the only one among my friends who sees a pension as a financial product which isn't something that they don't want, but which is inappropriate for their needs.

Linton

hello_sunshine wrote: »

That's quite a logical leap, and one that isn't true. The entire point about the changes is that pensions were supposed to be secure and tax efficient, so if they don't confer any tax planning benefit, what's their attraction over other forms of investment?

Plenty of people my age have savings that we're quite happy to pay into and lock away, so we're not all scraping the barrel for excuses. I know that I'm not the only one among my friends who sees a pension as a financial product which isn't something that they don't want, but which is inappropriate for their needs.

Pensions do have tax planning benefits compared with ISAs. You get full tax relief for payments in and a 25% tax free lump sum at the end. The tax benefits are particularly good for people who are higher rate tax payers whilst employed and standard rate when retired.

Why would you not want this?