Pension Planning

DreamerV

Hi there,

I'm after a bit of pensions advice. I note that most pension guides seem to mention that it's ok to leave pension planning aside in your 20s if you are saving up deposits for a house, etc. and mention that by the time you hit 30, you should really be putting money aside for your pension. I have a pension from my 20s which if I understand correctly will pay out around (the future equivalent of) £3100 a year (from age 65). I left that job, and am about to enter another job from next September.

My new job starts the same week I turn 30. After 3 months, I can start a pension. I will pay 6% of a gross salary of £25,500, and the company will match this for 2 yrs. At 2 years onwards, I will still pay 6% of my salary (with the salary rising to £40k after 3 yrs from my start date), but the company will pay in 12%. On top of this, I get a flexible benefit that I can choose shop vouchers from or use for pension contributions. The value is the equivalent of 3% of my gross salary, and it sounds like it is matched by employer (and I assume I will also get tax relief on my portion although not sure as it technically isn't from my base salary). I think I can start using this benefit for pension from the start of year 2 (as I can't join the pension when I start, but do start the benefit, which I can't change more than once a year).

I think I have a fair handle on it so far (not great, but fair). Mainly, what I have worked out is that my employer is generous with contributions, and I am to be enrolled in a contracted in money purchase pension (last pension was contracted out). However, I want to build up a pension of £20,000 a year taken from age 65 (without counting on state pension being around), and even with this generous scheme, I don't think it's doable. I would like to have the option of retiring at 57, but would work till 65 if I still enjoy the 9 to 5 (or more like 8 till 7). I will have savings to fund the gap between 57 and 65 in full.

Assuming a fairly low growth rate say around 2% (after the effective 0.5% charge), is it possible to save a big enough pot over 26.5 yrs to retire on a total of £20,000 (meaning this new pension would pay £16900 a year)?

Also, am I right in saying that even though I am risk averse, taking the higher risk fund for the pension may be better because I can ride out the lows and highs of the stock market? Obviously I would change this later, perhaps to a medium risk when 10 years to go, and a low risk when 5 years to go.

Sorry for such a long post! If you read the whole lot, I very much appreciate it! If you have any advice, thank you even more so!

I'm going to go find a pension calculator to play around with (thinking a HL one).

dunstonh

I note that most pension guides seem to mention that it's ok to leave pension planning aside in your 20s if you are saving up deposits for a house, etc.

Does it really say that? Thats really irresponsible.

and mention that by the time you hit 30, you should really be putting money aside for your pension.

And that late start would require at least twice the monthly contribution that had you started at a more sensible age. Plus, if you are not used to paying money out, to find the many hundreds of pounds you will need to pay in your early 30s is just as hard as finding half of that in your early 20s. Indeed, maybe harder as there is always some excuse to put it off (saving for larger house, children, blah blah)

Also, am I right in saying that even though I am risk averse, taking the higher risk fund for the pension may be better because I can ride out the lows and highs of the stock market?

Risk is not on/off. It is a sliding scale. The longer the timescale the more it dilutes the risk on investemnts but increases the risk on cash. Someone in their 20s will likely see 4-6 recessions and economic cycles.

DreamerV

dunstonh wrote: »

Does it really say that? Thats really irresponsible.

I've looked for where I saw the advice and realised it was on thisismoney, which on closer inspection is somewhat hit and miss with financial advice. That will teach me not to google search and click on the first link because it's the first. However, since I've seen this only recently, it hasn't impacted me financially at least.

dunstonh wrote: »

And that late start would require at least twice the monthly contribution that had you started at a more sensible age. Plus, if you are not used to paying money out, to find the many hundreds of pounds you will need to pay in your early 30s is just as hard as finding half of that in your early 20s. Indeed, maybe harder as there is always some excuse to put it off (saving for larger house, children, blah blah)

I have invested in pension at all points of my working life (hence the pension I have so far built up - unfortunately I haven't worked many years. However I thought the rule of thumb is around 10% if you start at 20, 15% if you start at 30 (and for me 15-18% will be going in per yr for 2 yrs, and then 21-24% thereafter)? I'm happy to pay in more (could afford to put in £500 a month till the salary rises) although not sure if worth it past the point of employer matching.

I am used to living frugally so paying out money will luckily not be such a chore for me. I like to feel increasingly confident about my future finance, more than I enjoy spending money today which I worry I might need in future. Unfortunately, it's unlikely I will ever be able to have children, and I won't ever be upsizing. On the upside, I need only worry about my own future.

To anyone else reading this, listen to dunston - I wish I had worked through my 20s and contributed greater amounts into pensions!

dunstonh wrote: »

Risk is not on/off. It is a sliding scale. The longer the timescale the more it dilutes the risk on investemnts but increases the risk on cash. Someone in their 20s will likely see 4-6 recessions and economic cycles.

Ah ok, this is very interesting, I hadn't realised quite how often we could go into/come out of recession. I think though, if long term retirement planning, the "opportunity fund" may suit ok for now if the risk is somewhat diluted by the timescale. Or perhaps the one they call "moderate". That might better suit my attitude to risk. The one labelled "cautious" doesn't seem sensible at this stage. I can just let them choose, although this seems lazy on my part. Will look into it further.


Thank you very much for taking the time to reply to my post.