Young Person Company Pension Advice

choo_choo_2

Hello,

I've been working myself into an absolute tizz over pension schemes and other types of savings. This morning I decided to go for it and filled in the form and posted it - but since I've been indecisive again! My mum thinks I should pay in to one, Dad just came home and restated his opinion that they're a massive con! There is an option to cancel.

Background info: I'm 24. I have no savings (I used to have ISAs but personal circumstances depleted it). I was in a permanent job for ten months and paid in to a pension scheme. I have since received a short service letter to either transfer the money or take a lump sum. I put in ~£390 (net), but would only get a lump sum of ~£330.50 (I'm not sure where my employer contributions have gone, maybe I don't get to take them out as I was short service). The "value", whatever that really means, is ~£1600 which I can transfer to a new pension scheme.

So I'll be starting a new job soon. They don't provide any benefits so my salary is a base + ~£4k to make up for benefits. They have a Legal and General pension scheme and will match contributions up to 5% but no more. I've been looking at the projected annuity rates and they don't seem that much.

In my last place, I worked with a lot of older (40's/50's) colleagues who said that it wasn't worth paying into a pension, it was better to save towards a house (which is another headache to be honest, it's darn near impossible to save £50k for at least a decade, from where I'm standing - longer if I'm putting part of money in pension pot). My dad has the same viewpoint - save money to buy a house asap. From my own analysis of things, it seems I might be better off with ISAs, rather than banking on a good annuity when I choose to retire. But everything I've read online, including MSE and Which? articles, say take the company pension. My peers, all use their company scheme, but their explanation is more that they feel they should - when I mention other investment methods, or prioritising saving for a house, they say "I don't know".

That's the background, I imagine after all that you are wondering what my actual questions are! There's two parts:
1. Is it worth sectioning your money into an inflexible pension which you then have to use most of on annuity / income drawdown - which in recent articles I have been reading the Govt has drastically cut? It's something you can't pass down to your kids either, unlike property. However I don't think I'd be able to save as near as much without the employer contributions effectively doubling what is in the pot.
2. As I'm relatively young, should I put all my money towards saving for a house deposit? Most of my money went/will go on London rent.

What it boils down to I guess, is that I don't want to make a decision now that I will regret in 40 years (retirement age will probably increase even more). Or even that I will regret in 6 years when I wish I had a home. My two main sources of advice (dad and older colleagues vs internet articles) are diametrically opposite in their views. Also all the people who seem secure are the ones who saved and bought property and let it out.

Apologies for the long post and for repeating questions I know have been asked (I've been reading them). Any insight you can offer will be greatly appreciated. It's really been bothering me, especially as I am the kind of person who doesn't like to do anything without being fully aware of the risks and consequences. Who knows what the circumstances will be when it comes time for me to draw a pension.

mania112

A general rule of thumb is that the priority for your money is 1) Pension, 2) Savings and 3) Investments.

I.E, if you can only afford to do 1 of those things it's the pension.

To reinforce that, you've answered your own question in a way: Your company will match your contribution, up to 5%.

So if you earn £1,000 pcm - you can contribute up to £50.

That £50 will be met with 2 increases. First is tax relief. Basic rate taxpayers would have their £50 increased to £62.50, then the employer will match it with another £62.50 - your £50 has become £113. That's before any performance growth of the fund (which is unpredictable, so we won't go into that).

No other investment vehicle could match that, right? Sure, you'll pay tax on 75% of your retirement fund at the other end, and you'll have to live to 95 (or whatever) before you've managed to take all the income back out again - but it's still a quality product for retirement. That's another thing, with an ISA the temptation to take your money early when you're skint in a few years time is too great, it's too easy to spend it too early.

That being said, you should also put money aside for an ISA - this will be your house deposit fund.

It's expensive to save, but very important.

Linton

Suggest you ask your father when he is planning to retire, how much he will have to live on, and whether it will be enough. I fear that he wont have thought about it and wont know.

As to your colleagues in their 40s/50s - are they whistling in the dark? What will they say in 10 years time when they desperately want to retire and enjoy life but cant, because they cant afford it?

To respond to your two questions:

1) If you think a pension is inflexible what about a house? If you want to get at the cash you have to sell all of it and then wont have anywhere to live. What use is having a house to pass down to your kids whilst you are living in near poverty? Is that what you want from your parents?

When you include the matching % from your employer and the tax breaks you will be paying less than half the cost of your pension contributions. Surely anyone can see it would be foolish to throw this benefit away. Look at your previous job. The pot is worth £1600 for which you paid £390, so the value is 4 times what you paid in.

2) Should you put all your money towards savings for a house deposit? A general rule in my experience is that you should never put ALL your money into anything. I would suggest that you rent somewhere that will minimise the total annual cost of rent, bills, and commuting. Put some money into your pension: if you only put say 3% of salary in, this would cost you in net income 2.4% of salary - work out what that means in £. How much difference would it mean as to when you were able to buy a house, assuming that you could afford to buy a house without paying into a pension?

After that I would suggest that you try and save as much as possible in a high interest scheme. If that means missing out on some of the pleasures of London life so be it. In 5 years time it wont matter, but a failure to save could affect you for a long long time.

Current house deposits are very high but that is a function of the global economic situation. Of course that could continue forever but from history its not going to. In general when things are very bad they get better, and when they are good they get worse.

You say that in 40 years time pension age could increase further - of course it could and with no retirement provision of your own you would have no choice but to accept that. The more you have saved the more you can be in control of your own life. Retirement is no different. With a large pension pot you decide when you want to retire, not the state.

choo_choo_2

Thank you mania112. It's helpful to have an individual "internet" answer to supplement the articles. One of those things, when you have a one real person (say like my dad) say something, it carries more gravitas than reading lots of well-sourced articles. What you say makes sense.

I guess when I am working again I will prioritise the pension, and if I really want to stop paying extortionate rent one day have less dinners and nights out and a bit more studying of MSE money-saving tips!

McKneff

Its always best to get yourself int a company pension scheme if you can especially if your employer adds to it too. This is like having a salary increase and if it goes straight into your pension, you dont notice it at all, and you get to the stage you really dont notice your own contribution going in either.

My OH and I are pensioners and he get £107 a week state pension, I believe mine is about £70. That really is not a lot to live on even though we have no mortgage now.

I'm only too glad that we thought about private pensions when we did, otherwise we would be virtually on the breadline.
The private pensions arnet massive, about £220 a month (how I wish I had started my pension a lot earlier in me life.) but we manage quite well on it.

Annisele

I think relying on your hypothetical future children to pay for your retirement is a very dangerous strategy! What if you end up falling in love with somebody who can't have (or doesn't want) children? Or you find that your future children can't afford to pay for your expenses because they're busily paying for your future grandchildren?

Reducing your spending to a bar of soap every other week is all great until you need to eat...

As for the buy to let, I agree with Linton that it's a bad idea to put all of your money into one thing, regardless of what that thing is. If you buy your own house, then invest in a collection of buy to lets, you're seriously exposed to a property crash.

I can tell you with absolute confidence that there will be a property crash before you retire. And then a boom, and a crash, and another boom...the thing I can't tell you is when they'll be, and whether you'll be bitten by there being a crash at the exact moment you want to take money out.

Coffee room chat is usually a bad place to learn about pensions. People have read in the papers about the big bad evil bankers, and suddenly pensions (which are just tax wrappers) get demonised. If the funds in your pension fell, that's because those funds fell - they'd have fallen just as much if you'd held those funds in an ISA wrapper.

mania112

Annisele wrote: »

I think relying on your hypothetical future children to pay for your retirement is a very dangerous strategy! What if you end up falling in love with somebody who can't have (or doesn't want) children? Or you find that your future children can't afford to pay for your expenses because they're busily paying for your future grandchildren?

In some cultures/walks of live generations supporting older generations is a normal thing.

choo_choo_2

Thank you Annisele.

I deleted my third post, as it was just extra personal info in reply to Linton's post but unrelated to my original query. And I don't want to encourage thread tangent (e.g. into generational support etc).

Thank you for your replies, it has really helped. I'm also enjoying being an MSE'er there are some amusing threads!. I think this one is done and dusted

Coffee room chat is really the only way for me to get advice from people with similar experiences e.g. income and career projections. Most of my friends/peers chose to go into the City (so their financial circumstances, lifestyles etc are entirely different); my family/family friends are housewifery/family business. My mum's succinct pension advice is get married lol!

atush

join the pension at the new company, then transfer the old one into it. If you have to transfer before then, open a Personal pension to transfer the 1600 to.

Then look at savings you can make on your lifestyle, and save that cash into ISAs for emergencies and property.
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And ask your father and co workers what they plan to retire on of they don't have a pension. Or are they gonna work til they drop?

Its_a_secret

You shouldn't definitely just transfer the old pension in case it has any benefits that would be given up in the new plan or a personal pension. If it has a transfer value of £1600 but they'd only pay you £330.50 then that doesn't sound like a DC Scheme to me.

somethingcorporate

Who wouldn't want a 5% payrise?

Just because you cannot access it for a number of years it is always there growing away in the background. There is so much myth and misunderstanding (not to mention downright inaccuracies) surrounding pensions and if they were called something less menacing like "long term" of "lifetime" savings perhaps they would not be the enigma they appear to many. The only people that lose out from the lack of understanding are those that do not invest the time to make sense of it, unfortunately, it is likely to cost them big time over their life and leave them in poverty when they are older.

Pensions are great, a bit of short-term pain that will really pay dividends in the long run.

Looking at annuity rates today for pensions payable in 40 years time is foolish by the way, the rates change daily so expecting it to be the same in 2050 is lunacy! It still does not detract from the fact that the more you put in the more you get out (regardless at the prevailing annuity rate at time of taking one if you chose to).

I could have had the life of riley had my wife and I not spent out mid-20s putting lots of cash into our pensions - we have a very comfortable life but still have managed to amass £50k in our pensions over the last 5 years (with some employer contribution for myself but not my wife).

There was a great example on the BBC website a while back about Adam and Bob. If Adam put £100 a month into a pension from when he was 20, Bob would need to put £200 a month into his pension if he started at 30 just to match the same size pot at retirement - crazy stuff but that is the power of compound interest! so get started!

Good luck