MSE News: Automatic pension enrolment - what it means for you

jamesd

Tom_Brine wrote: »

This (perhaps simple) view point says to me that saving the money would be better for my retirement as I would have access to more per month in my old age.

You fiddled the figures to make savings look better than they are and a pension look worse.

Put £96.24 gross into a pension using the current auto-enrollment rule of 1% employer, 0.2% tax relief and 0.8% employee contribution and your choice is £96.24 into the pension or £38.50 into say an ISA. You're not going to be able to beat the pension with a contribution so much lower. Ignoring all pension growth you'll eventually get to take out £24.06 lump sum tax free from the pension.

So your choice:

1. Pension: £24.06 lump sum plus £72.18 producing income.
2. ISA: £38.50 lump sum.

So the ISA has a lump sum of just £14.44 more than the pension and the income from that has to somehow beat the income from the £72.18 left inside the pension. Say you take out 5% a year from the pension, that's £3.61. It takes just four years for that to exceed £14.44 and by the fifth year of taking £3.61 you'd have run out of the £14.44 while the pension could keep on paying the £3.61 indefinitely. That's for a person on a low income with no tax to pay. If there's basic rate tax to pay the pension value is £2.88 instead and it'd take about six years for the non-pension option to run out of money if it tried to keep up.

It's really tough for non-pension options to beat the combination of tax relief and employer contributions. That's why in almost all cases it's good to join a workplace pension where the employer adds money. Only two exceptions in my list at the moment, Morrisons and NEST, both cases where younger employees might be better off not joining.

Of course, that's with employer contributions, what about without? Basic rate tax, pension gets £96.24, non-pension gets £76.99. Take a £24.06 lump sum from the pension and deduce the same from the non-pension and you have £52.93 outside the pension trying to produce the same income as £72.18 in the pension. Deduct 20% from the pension part to allow for basic rate tax and it's £52.93 trying to match the income from £57.74. Somehow the non-pension option has to generate 9.1% more income per Pound invested than the after tax pension if it's for long term income.

Short term you can draw more income from the non-pension option in this case and that can be useful if you're between retirement age and state pension age and want to draw faster than pension drawdown rules allow.

That's part of why I'm using a mixture of pension and non-pension investing. Each has a useful place for those who want to retire significantly earlier than state pension age.

The sticky ISA vs Pensions topic has a lot of discussion of this sort of thing.

DavidLaGuardia

Daniel_Elkington wrote: »

On auto enrolment you pay 4%, 1% tax relief and 3% employer.

So you put in 4% and get an instant 100% return - where else is this possible?

How about this?:

Currently if a basic rate tax payer pays in 4% of their gross income through salary sacrifice and their employer is willing to
a) not make any advantage and
b) put in the 1% like above

I'll use £1,000 as an easy example here:

If 4% is 1,000.00
Tax not paid 294.12
NI not paid 176.47
Gross Equivalent 1,470.59
Employer NI not paid 202.94
Sub total 1,673.53
plus 1% from employer 500.00
2,173.53
increase 117.35%

Better to opt out and do this. Even if my employer wants a little for the [small amount of] hassle I could still be better off.

Tom_Brine

Dont get me wrong I am not trying to put people off.

I would recommend a pension to anyone where the employer is also contributing, I pay into one myself and always will do where available.

The problem I have is as someone with the desire to climb I am aware I will not build up a substantial pot anywhere and so need a more significant contribution from somewhere.

People on low incomes will have a similar thought but will also be pu tinto hardship from the deduction to their pay so are even less likely to sign up.

My plan is property, but I am contributing to a pension aswell, multiple income streams is better than putting all of your eggs in one basket. But I can afford to save for a deposit and contribute into a pension at the same time. A lot of people cant do either.

The problem is pensions seem confusing to me and when I do simple calculations it seems (again maybe too simplistic) That you will not get out of them even what you have put in before you die. That is not saying I dont believe they are good. You just hear so many stories of them failing, get letters saying yours is in deficit (and question how that is possible) and all the horror stories. I am financially sound and know the value of money and they dont quite make sense to me. Someone who isnt money savy at all will just stop listening as soon as you mention annuities, fees, the fund is in deficit. They will switch off as they dont understand.

At the most basic level. Someone tells you something is in deficit that has been running for years. Would you like to invest long term, by the way if it fails (as some have) you will lose your money. But your employer is contributing to the ever increasing defict as well so its a good deal. Would you do it? Thats how it seems to the layman.

Linton

Tom_Brine wrote: »

Hi there I too would like an actual debate on this my earlier comment

Based on earning £20k for the new enrolment scheme

If, over those 40 years, there was an average 3% a year return on the funds in which the contributions were invested, then the retiree would end up with a pot of £88,488.
According to the Money Advice Service, at the current historically low annuity rates this would provide a man in good health with an inflation linked annual pension of as much as £2,714 a year, or £226 a month.
£226 a month!!!!! for an investment of £96.24 for 40 years. How long will you be retired for? 15-20 years (20 will be the maximum as pension age is increasing). Lets say 20 years, you take from the pension £54,240. It does not matter that your pot is £88,488. You take out £54,240 before you die. Leaving £34,248 for the administrators of the scheme, on top of their fees over the years.

You have paid in over 40 years £46,195.20. A quick check of the savings calculator shows that if you pay £96.24 for 40 years with 3% interest.......

After saving £96.24 a month for 40 years and 0 months, you will have £77,124.07 in savings.


It seems you will have a lot larger pot to take from. The pot itself is not larger but you can access the money as and when you like as well as earn interest that you can access the second it is earnt. Split equally without taking interest into account you have £321 a month, plus interest on the lump sum sat in your account. which is £95 more a month than the pension scheme in cold hard spendable cash.

This (perhaps simple) view point says to me that saving the money would be better for my retirement as I would have access to more per month in my old age.

Your assumptions are faulty:

Your calculations make no allowance for inflation other than in the determination of the initial annuity payment. What happens to your savings if you take increasing amounts as inflation hits?

You make no allowance for the employer contribution.

Your calculations make no allowance for the effect of tax, in particular the 25% tax free lump sum you get from a pension.

3% is an unrealisticly low investment return.

You dont have to take an annuity on retirement. There are other options: drawdown. This would allow you more money annually whilst still retaining some level of inflation protection.

Your 20 year assumption is wrong. Look at the government life expectation data. Many people deciding now on whether to contribute to a pension will be expected to live until their late 90s. 20 years life after retirement age is the expectancy now. And that average includes the relatively large number of people who have spent some of their lives in seriously life-shortening work and much of their lives smoking.

50% of people live longer than average. The trouble with taking money out of savings is the great risk with retirement planning - you die too late and run out of money too soon. With an annuity or capped drawdown that is what you are paying to avoid .

jamesd

Tom_Brine wrote: »

The problem I have is as someone with the desire to climb I am aware I will not build up a substantial pot anywhere and so need a more significant contribution from somewhere.

With all but one of the modern defined contribution pensions you can transfer the pension pot somewhere else when you leave an employer. So you can build up one central pot. NEST is the exception; it bans transfers in and out.

Tom_Brine wrote: »

People on low incomes will have a similar thought but will also be pu tinto hardship from the deduction to their pay so are even less likely to sign up.

Their choice. Hardship now or more hardship in retirement. Life expectancy from age 65 is currently around 22-24 years depending on gender and around a third of those being born now are expected to live to a hundred.

Tom_Brine wrote: »

My plan is property, but I am contributing to a pension aswell, multiple income streams is better than putting all of your eggs in one basket.

Yes, diversification is good.

Tom_Brine wrote: »

it seems (again maybe too simplistic) That you will not get out of them even what you have put in before you die.

You can start taking money out of a pension at age 55. That's about 30 years from the age at which half of men are expected to exceed. Going back to my example from earlier:

Take out a lump sum of £24.06 and ongoing income of 5% of £72.18 = £3.61 before tax, £2.88 after. After thirty years of that you've taken out £24.06 + 30 * 2.88 = £110.46. What you paid in was just £38.50 so you get out almost three times what you put in. And most of the £72.18 is still left over to be inherited.

With no employer contribution you have the same £110.46 of pension money taken out and £72.18 to inherit but the cost to you to get it is £76.99. In this case you only get 1.4 times as much out as you put in, plus more for someone to inherit.

Tom_Brine wrote: »

You just hear so many stories of them failing, get letters saying yours is in deficit (and question how that is possible)

Deficits are for final salary pensions and similar only. Largely an obsolete concern now in the private sector.

Tom_Brine wrote: »

by the way if it fails (as some have) you will lose your money.

For those final salary schemes, the Pension Protection Fund will take the money and pay 90% of the value for those on normal pension pot levels, only those with unusually high pots could lose out by much these days. The PPF was introduced to eliminate this problem and it's succeeded.

Yes, people see lots of scaremongering and don't know the truth. Part of what people here do is try to explain it to them.

dunstonh

Pont wrote: »

God in Heaven! Pension schemes leave a nasty taste in the mouth for those of us old enough to remember Maxwell et al. 'Forceable' pension schemes taste even nastier IMO.

<snip>
So long as we're in a position that the more you pay in - you'll still receive back the same amount as those who have chosen to p&%^ it all up against a wall - nothing will change.

If however, those who pay into a pension scheme will receive the same as those who chose to p&%^ it all against a wall PLUS what they've paid into a pension, maybe it will work.

To me, who pays approximately £200 per month into mine, where there's a scheme there's a schemer!

Maxwell was 30 years ago and it led to legislation that stopped it happening again. The issues with Maxwell could not affect money purchase pensions. So, its irrelevant anyway.

People who pay towards their retirement will get more than those that dont.

dunstonh

Tom_Brine wrote: »

You just hear so many stories of them failing, get letters saying yours is in deficit (and question how that is possible) and all the horror stories.

Would you like to point out any evidence to support your allegation.

no money purchase pension has failed. They cannot fall into deficit either. So, where are these horror stories that you have heard so many of?

Shelle

jamesd wrote: »

You're mixing up two things here, auto-enrollment and NEST.

All auto-enrollment schemes are required to comply with the minimum funding requirement. So if your employer uses your existing scheme to comply, it will be required to increase its contribution.

NEST is the lemon out of three schemes specifically set up to help with auto-enrollment for employers who don't have a pension scheme and don't want to pick something else.

If the company is paying anything, probably not. If it is paying nothing then maybe, depending on the charges for the investments you want to use and whether those investments are available in each.

Thanks Jamesd for your reply. As it happens my company, from what I have understood so far with the info they have released, intend to keep their existing pension scheme, but also run a sep pension scheme - the NEST one - for all new employees/those who are enrolled into it. Whether they will increase the employer contributions in the existing schemes hasnt been mentioned and they are being tightlipped!!!

Gordon_the_Moron

I've lost the letter from work telling me I'm going to be enrolled in this scheme, how do you opt out?

Before anyone tells me what a great idea paying in is, I can see that don't get me wrong but I want to opt out for the next 3 years as I'm currently saving for a house deposit and want every single spare penny to go in that fund!

dunstonh

Gordon_the_Moron wrote: »

I've lost the letter from work telling me I'm going to be enrolled in this scheme, how do you opt out?

Before anyone tells me what a great idea paying in is, I can see that don't get me wrong but I want to opt out for the next 3 years as I'm currently saving for a house deposit and want every single spare penny to go in that fund!

Is the pension contribution you make going to make any realistic difference to your ability to buy a house? No.

Lets say you do it anyway. When you have bought the house you will have another excuse as the early years of owning a house are expensive. So, you can stay opted out for longer. That will do you for another 5-7 years. Maybe you will want to move house again and you can put off the pension for another 5 years on top of that. Maybe marriage and saving for a wedding, so another few years. Then children and that will wipe out the next 25 years.

Then you are in your 50s with too little time to make much difference to your retirement provision realising you have thrown hundreds of thousands of pounds away over your working life. Luckily, you will have the property you ended up paying nearly 3 times for in interest and repayments to what it cost which you can then borrow against in retirement to raise a lump sum to live on. That interest rolling over each year and eroding the net value of your only asset. You can then spend 30 years of your life in near poverty.

You may think you are different but that is the model that so many people follow. It is hard to start paying into a pension. It gets harder the longer you leave it and the excuses for putting it off keep coming all through your life. The earlier you start. The easier it is.