Pension, Debt, Savings or Mortgage?

jem16

CharlieRabbit01 wrote: »

What is good about it?

A gauranteed pension on retirement with no investment risk. Your employer pays in at least 16% to your pension which you are throwing away - would you throw away 16% of your salary?

You are paying less than 5%pa for something which is worth around 25%.

I've tried looking it up but it doesn't mean much to me hence looking for some advice on the best option to spend my spare £100 a month on.

The best option is to join the LGPS. Nothing else will come close.

CharlieRabbit01

jem16 wrote: »

A pension - or retirement saving of some sort - should be done from very early on. The longer you leave it, the more you have to pay later in life to make up.

How many years of the LGPS have you missed?

I'll have been with my employer for 4 years in November.

CharlieRabbit01

jem16 wrote: »

A gauranteed pension on retirement with no investment risk. Your employer pays in at least 16% to your pension which you are throwing away - would you throw away 16% of your salary?

You are paying less than 5%pa for something which is worth around 25%.



The best option is to join the LGPS. Nothing else will come close.

would it not be best to pay off the debt first? What if I leave my employer? What happens with my pension?

I tried speaking to payroll about wether to join or not and they directed me to the lgps website which means nothing to me.

I really wish we were taught about this at school something useful in life! Instead I've been thrown it at the deepens told get a pension now on one side and on the other not to bother I won't get much when I retire anyway.

unbiased Laymans terms would be useful, plain and simple. Thanks

JoeCrystal

Okay, bearing in mind that the LGPS is changing in few years, I will be using current rules at the moment.

Basically, every year you spent in LGPS, you buy a year. At the moment, accrual rate is 1/60 so each year you get is 1/60, hence four year is 4/60 so that is work out as 6.66% of your final salary.

If you leave your employer, it get deferred based on your salary when you left but will be index-linked until you reach retirement age. You have no worries at all, no investment risk. It shall be paid when you reach retirement age. So supposing you left now, you will be getting 6.66% of your salary every year when you reach retirement age.

To put it in contrast, I pay into private pension scheme but alas, I have to rely on stock market to hopefully make a good return and hopefully, in forty years time, would yield enough income, that if I am lucky enough not to suffer major stock crash and that if I am lucky enough that it actually yield sufficient return in the first place! The LGPS on other hand is all guaranteed, you know exactly what you be getting instead.

Basically, in order to get 2/3 of my salary (hopefully and lucky), I will be paying in 25% of my income for next forty years.

Cheers

Joe

jem16

CharlieRabbit01 wrote: »

would it not be best to pay off the debt first?

For every year you delay, you lose approximately 25% of your pay.

For 4 years service, assuming a salary of £22k, you would have built up approximately £1466pa of pension. That would require a pension pot of £48,888 on similar terms. So that's how much you have thrown away so far by not joining.

For every year you delay, it's costing you around £12,222 for a contribution of £1104 which in real terms due to tax relief is actually only costing you £883.20.

What if I leave my employer? What happens with my pension?

You would become a deferred member. Basically your pension would be calculated on leaving and would then increase in line with inflation until you can claim it at age 65.

CharlieRabbit01

Ok I understand the final pension layout. So if I got 6.66% of my final salary does that mean it doesn't matter what I pay in?

I've heard people say you could hypothetically stick £92 a month under the matress then be just a well off at retirement?

With the 1/60th return do I get back more or less than I put in?

jem16

CharlieRabbit01 wrote: »

Ok I understand the final pension layout. So if I got 6.66% of my final salary does that mean it doesn't matter what I pay in?

You pay in whatever your salary dictates you pay in.

Assuming you are in England or Wales this is what you pay, percentage wise;
http://www.lgps.org.uk/lge/core/page.do?pageId=101472

In reality it's 20% less than that due to tax relief, assuming basic rate taxpayer.

I've heard people say you could hypothetically stick £92 a month under the matress then be just a well off at retirement?

Absolute rubbish. Can you tell me how you would turn £92pm into £12,222pa by sticking it under the mattress?

With the 1/60th return do I get back more or less than I put in?

Much, much more.

£883.20 paid in assuming £22,000pa salary. Even if still on £22k at retirement ( very unlikely), you would earn £366.66pa. So in less than 3 years of retirement you have got back more than you paid in.

CharlieRabbit01

But if I pay into a pension instead of save for a mortgage even based on my current rent I'll need £4,170pa minimum.

My salary is only 18,000

jem16

CharlieRabbit01 wrote: »

But if I pay into a pension instead of save for a mortgage even based on my current rent I'll need £4,170pa minimum.

Yes but you are not going to have just one year of service, are you? Normally you would have 40 years of service. The more you delay it, the more you lose.

My salary is only 18,000

So 5.9% contribution before tax. That's £70.80pm with tax relief.

40 years service would give you a pension of £12,000pa and that's assuming you end up on a final salary of £18,000 which is very unlikely.

jamesd

Like most government pensions the LGPS one is a superb buy and being a member should be a very high priority.

If you can make no progress towards clearing your debts while being a member, the short term need to reduce the debts takes priority so you can reduce your debts to a level that is reducing instead of increasing or not changing. This will be expensive but better than keeping the debts forever.

However, it's better if you can to try to get a 0% for purchases credit card and put normal spending on that while making extra payments to other debts that match the amount you spend. This will save you the interest on the money and that will let you clear the debts while still being in the pension scheme.

Saving for a mortgage deposit shouldn't come ahead of being a member of this pension scheme, it's far too valuable.

You might find it useful to visit the debt-free wannabe section and post a statement of affairs there to see what the experts there can do to help improve your budget.