Some pension questions

Xailter

Hi there,

I'm a 23 year old IT consultant earning about £30k a year. The company I work for matches whatever % you pay in up to 10% for your pension but there's a few things I'm not sure on:

1) How are the savings on tax and NI worked out?

2) Would you recommend I put the full 10% of my salary into the pension each year (it's free money I guess) or maybe even more?

3) What kind of sum could I expect when I retire (I know this is a big guessing game, but would be interested to know). I'm not sure what defines a 'good' pension at the moment.

4) Would a Stocks & Shares ISA be a good recommendation to go with a pension (after filling up the cash ISA limit)?

Many thanks

xylophone

http://www.hmrc.gov.uk/incometax/relief-pension.htm
You mention NI saving - does your employer operate a salary sacrifice scheme? http://www.moneyvista.com/guides-tools/tax-benefits/salary-sacrifice-explained/
If you can afford the 10%, then now is the time to build up your pension - the longer and the more you contribute the better the outcome is likely to be.

Making regular monthly contributions to a stocks and shares ISA enables you to take advantage of pound cost averaging.

Do some research first. http://www.moneymagpie.com/article/best-equities-isas-shares is a start.

Linton

1) Your tax savings come from your tax being calculated after your employee pension contribution has been taken. So you effectively have your tax reduced by 20% of your pension contribution.

NI isnt affected unless your employer operates a salary sacrifice scheme whereby your gross wages are reduced and the employer pays for 100% of your pension.

2) Yes

3) play with the online pension calculators - for example H-L

4) Possibly. A good strategy could be:
- ensure you have 6 months living expenses and any likely major expenditures (house deposit?) due in the next, say, 5 years covered by cash. Instant access for the 6 months expenses and perhaps fixed rate/fixed term accounts for the future major expenses. This cash could be in ISAs.

- then any money remaining could sensibly be put in an S&S ISA.

marathonic

Your companies scheme is pretty generous. Mine contributes 4% if we contribute 2%.

I started with my company at the exact same age as you and here's how my contributions went:

Year 1: Personal 2%, Company 4%
Year 2-6: Personal 20%, Company 4%

I'm turning 30 next year and am dropping my personal contribution back to 3% (the minimum contribution as, after 30, we pay 3%, they pay 6%).

My thoughts were that, when you're young, you've no child-related costs, no mortgage, minimal other expenses. By sacrificing a little early, your money has MUCH longer to grow.

My pension pot is now 1.4 times my salary. In my mind, I consider a growth rate of 7% so the growth of my pension pot alone will be about 9.8% of my salary.

Add to that my annual ongoing contribution of 9% and you get 18.8%. That leaves me in a very good position and gives me minimal worries about reducing my contributions to the minimum.

At the age of 30, pensions aren't really a concern for me and it's the best thing I ever did.

somethingcorporate

marathonic wrote: »

Your companies scheme is pretty generous. Mine contributes 4% if we contribute 2%.

I started with my company at the exact same age as you and here's how my contributions went:

Year 1: Personal 2%, Company 4%
Year 2-6: Personal 20%, Company 4%

I'm turning 30 next year and am dropping my personal contribution back to 3% (the minimum contribution as, after 30, we pay 3%, they pay 6%).

My thoughts were that, when you're young, you've no child-related costs, no mortgage, minimal other expenses. By sacrificing a little early, your money has MUCH longer to grow.

My pension pot is now 1.4 times my salary. In my mind, I consider a growth rate of 7% so the growth of my pension pot alone will be about 9.8% of my salary.

Add to that my annual ongoing contribution of 9% and you get 18.8%. That leaves me in a very good position and gives me minimal worries about reducing my contributions to the minimum.

At the age of 30, pensions aren't really a concern for me and it's the best thing I ever did.

Thanks, that's a really interesting strategy.

I like the idea of measuring ones pension pot by the equivalent work years. I've not seen it (or taken notice from it before).

What figure (in terms of salary multiples) are you looking for in your pot by the time you retire?

My pension pot is currently about 6 months salary but I got a 50% payrise last year so it set that calculation back somewhat. I get a matched 9% contribution from my employer.

marathonic

somethingcorporate wrote: »

Thanks, that's a really interesting strategy.

I like the idea of measuring ones pension pot by the equivalent work years. I've not seen it (or taken notice from it before).

What figure (in terms of salary multiples) are you looking for in your pot by the time you retire?

My pension pot is currently about 6 months salary but I got a 50% payrise last year so it set that calculation back somewhat. I get a matched 9% contribution from my employer.

I want to retire on 80% of my salary - I'll not have mortgage payments but will have health insurance payments when retired.

I have a rental property at the moment which, when I retire, should cover 30% of that requirement. The other 50% will need to come from my pension.

If I consider an annuity rate of 5%, this means that I'll need 10 times my salary in the pot by the time I retire.

I don't consider the state pension because god knows what the story will be there when I retire - anything from the state will be a bonus.

Linton

marathonic wrote: »

I want to retire on 80% of my salary - I'll not have mortgage payments but will have health insurance payments when retired.

I have a rental property at the moment which, when I retire, should cover 30% of that requirement. The other 50% will need to come from my pension.

If I consider an annuity rate of 5%, this means that I'll need 10 times my salary in the pot by the time I retire.

I don't consider the state pension because god knows what the story will be there when I retire - anything from the state will be a bonus.

What about inflation? Would you want your annuity to increase with inflation? If so think 3% rather than 5%, though of course it would depend on your retirement age. Back to your earlier post: 7% + inflation would be a remarkable average return. 7% before inflation rather more realistic.

Xailter

marathonic wrote: »

Your companies scheme is pretty generous. Mine contributes 4% if we contribute 2%.

I started with my company at the exact same age as you and here's how my contributions went:

Year 1: Personal 2%, Company 4%
Year 2-6: Personal 20%, Company 4%

I'm turning 30 next year and am dropping my personal contribution back to 3% (the minimum contribution as, after 30, we pay 3%, they pay 6%).

My thoughts were that, when you're young, you've no child-related costs, no mortgage, minimal other expenses. By sacrificing a little early, your money has MUCH longer to grow.

My pension pot is now 1.4 times my salary. In my mind, I consider a growth rate of 7% so the growth of my pension pot alone will be about 9.8% of my salary.

Add to that my annual ongoing contribution of 9% and you get 18.8%. That leaves me in a very good position and gives me minimal worries about reducing my contributions to the minimum.

At the age of 30, pensions aren't really a concern for me and it's the best thing I ever did.

Thanks for the insight! I guess I'll pump in a rather generous amount for a few years and then drop it down and let it grow over time I don't have many out goings right now, but that could change in the near future.

Guess I'll go do some sums and work out what's possible for the future though.