pensions - is there an alternative?

jamels2

as soon as i started working i was sent loads of information about contributing to a pension, employer would also contribute etc.

first of all i don't even want to think about retiring at this age, and secondly, it all sounds so complicated!

why couldn't i just put money aside myself into a savings account, every month?

what about buying a property for an investment, and rent it out for an income?

forgive me for my lack of knowledge but throwing money into a pension i know nothing about, can i trust this? how do i know it's going to rise in value any more than a savings account?

finally, why did i not learn about this at school? what is a pension? how does it work? what about people who dont work, how do they get a pension? etc etc

GlynD

A pension IS a savings account but it's protected by law so you can't draw the money out until retirement age.

The choice of pension fund is yours, or you can let your employer pick one and if you ever leave the firm you can either keep on paying into the fund or transfer it to a new pension of your choice.

atush

WHY, if your employer would contribute to the pension as well, would you say No? You'd be saying no to 'free money' which is basically stupid?

first of all i don't even want to think about retiring at this age, and secondly, it all sounds so complicated!

why couldn't i just put money aside myself into a savings account, every month?

You can, but you would not get tax relief or employers contribs. Tax relief means that every 80 you put into a pension becomes 100. And if your eomployer contributes as well, it could be 200. What can you do with 80 that will turn it into 200?

what about buying a property for an investment, and rent it out for an income?

This is something that can be considered alongside pensions and Isas but is too risky for your only investment in your future. Have you forgotten how much property has gone down these last few years? If you had bought in 06, you could be sitting on a Loss.

forgive me for my lack of knowledge but throwing money into a pension i know nothing about, can i trust this? how do i know it's going to rise in value any more than a savings account?

because the money would be invested, and get tax relief as explained above, it should outperform cash over longer preiods such as decades.

jamels2

Thanks, so it's basically a savings account with the above mentioned advantages and limitations. What kind of interest rate could I expect? With a savings account I know what % I would be receiving each year.

Also how do you go about choosing a fund? This is where I find it very complicated. What are they doing with the money I'm giving them? Is there a chance it might not make any money, and actually lose money?

GlynD

jamels2 wrote: »

Thanks, so it's basically a savings account with the above mentioned advantages and limitations. What kind of interest rate could I expect? With a savings account I know what % I would be receiving each year.

Also how do you go about choosing a fund? This is where I find it very complicated. What are they doing with the money I'm giving them? Is there a chance it might not make any money, and actually lose money?

Take the advice of the financial advisors who are appointed by the firm. The trustees should administer your pension and change funds when necessary but you can keep tabs on it yourslef and make requests if you think you know better.

The interest rates vary all the time, nothing is guaranteed and yes a pension can lose money. All the more reason to spend some time evaluating your pension at least once a year and don't leave everything to chance.

atush

You are not guaranteed any % returns. your money will go up and own with the market depending on what you choose to invest in.

But as said above, you can choose the default fund suggested, or a lifestyling option that takes into acct your attitude to risk and the no of years before retirement.

Consider your other savings as well. Have you saved 3-6 months of spending/outgoings in instant access cash (such as ISAs?).

Have you chosen to use your S&S ISA allowance? If you did this, you could look again for funds that spread your investments across different countries/companies/assets so that you don't have to invest too much time in learning about investing.

Looking after your future should generally be a 3/4 prong approach with pensions, cash savingins, investments, and owning your own property being the 'prongs'.

Linton

jamels2 wrote: »

Thanks, so it's basically a savings account with the above mentioned advantages and limitations. What kind of interest rate could I expect? With a savings account I know what % I would be receiving each year.

Also how do you go about choosing a fund? This is where I find it very complicated. What are they doing with the money I'm giving them? Is there a chance it might not make any money, and actually lose money?

The return % will vary year on year. Some years it will be negative. Very rough figures - overall plan on say 5% but hope to get perhaps up to 10% annually.

You pay the money into investment funds which use it to buy shares in a range of companies worldwide. So you would only make catastrophic losses if the world economy collapsed, and if that happened I would have thought that your pension would be the least of your and everybody elses worries. Taking into account the fact that maybe 50% of the total input is "free" a major loss to "your" money is very unlikely.

The chances are that your employers scheme will offer a small choice of funds, one of which would be regarded as the default. Once you get more experience and have built a large pot of money it may well be worthwhile making your own choice, but the default will be fine to start off with.

There is a chance it will lose money in the short term, but in the long term it would be expected to gain significantly even after inflation. Dont forget that a savings account isnt risk free. After inflation the returns could well be negative, like they are now for most savings accounts.

BLB53

finally, why did i not learn about this at school? what is a pension? how does it work? what about people who dont work, how do they get a pension? etc etc

I think it is a great pity financial education is not taught in schools. Young people finish their full time education and are then expected to make major decisions about things like pensions.

Fortunately, the government have just announced this will be added to the schools curriculum so maybe young people will become more financially savvy in the future.

So far as joining the company scheme - the general advice would be to join - the employers contribution is free money.

The book of the week on www.Monevator.com this weekend (lots of good articles) was 'DIY Pensions' so may be worth a read. Another source of info is www.retirementinvestingtoday.com and also www.fool.co.uk

atush

Martin has been banging on abt financial education in schools for ages. and now it seems to be on the cards.

But people who don't work, only get the State pension so will be poor in retirement. Some people who do work, and don't save will be the same. So here's to celebrating the fact that you won't be one of them ;-)

dunstonh

why couldn't i just put money aside myself into a savings account, every month?

Because that would almost certainly result in lower provision. No tax relief and subject to inflation risk and shortfall risk. You would probably need to pay around three times more than a pension to get the same amount.

what about buying a property for an investment, and rent it out for an income?

Its one option but one that requires work and typically you need to have around 6-6-8 properties pre retirement to cover off the capital gains tax and needing to clear the mortgages.

forgive me for my lack of knowledge but throwing money into a pension i know nothing about, can i trust this? how do i know it's going to rise in value any more than a savings account?

How do you know property will rise in value? How do you know savings will give real terms growth (rarely do)?

Do you drive a car? Do you know how to fix an engine? Probably not but you still drive. You dont need to know the real ins and outs as you can get someone to do that for you. Doing it is the main thing.

R_P_W

Start paying in as early as you can especially if your employer contributes to it as well. Rough rule of thump as a percentage of monthly income is half your age.

You wont be able to access this money until you retire, so dont plough everything you have into it as I assume you will want to save some cash, buy a house etc.