Help me understand pensions please?

SteL

A little over 12 months ago I began a salary sacrafice pension and have been contributing £133c from my gross salary into it.

I know very little about pensions, my basic understanding is that when I reach 55 I can begin withdrawing from my private pension and when I reach 68 (or whatever they decide the state retirement age to be nearer the time) I can begin receiving my state pension too.

I have heard recently (and I don't know if this is a new thing or not or indeed whether it is true) that your private pension is deducted from your state pension. Can anyone clarify this as it would seem pointless to pay into a private pension if it is only going to be deducted from my state pension :huh: very confusing!

Linton

SteL wrote: »

A little over 12 months ago I began a salary sacrafice pension and have been contributing £133c from my gross salary into it.

I know very little about pensions, my basic understanding is that when I reach 55 I can begin withdrawing from my private pension and when I reach 68 (or whatever they decide the state retirement age to be nearer the time) I can begin receiving my state pension too.

I have heard recently (and I don't know if this is a new thing or not or indeed whether it is true) that your private pension is deducted from your state pension. Can anyone clarify this as it would seem pointless to pay into a private pension if it is only going to be deducted from my state pension :huh: very confusing!

Your state pension is not affected by your private pension. The new state pension scheme that is planned for 2017 does not change this.

Your basic understanding of when pensions can be accessed is correct.

GhIFA

Your basis understanding is correct. Although, whether you want to start taking th pension at 55 is another question - this will depend on the rates available at the time for converting the fund into income, the value of the pension fund, amongst other factors.

What you have heard about this amount being deducted from your state pension is wrong.

Salary sacrifice is a good way of making the contributions as it saves you National Insurance as well as tax. If the NI savings are being used to enhance the pension contributions then it is even better.

dunstonh

Unless you need the pension income at 55 you should not take it. Before you commence a pension you get increased death benefits (tax free paid outside of estate). Once you commence it the death benefits reduce. Plus, income rates will be based on you living 13 years longer than state pension age. Plus, you miss out on 13 years of increasing your pension fund through contributions and tax free growth. Finally, statistically, there is a strong chance you would get a qualifying illness for enhanced annuity terms by 68. You would not be able to alter the annuity once commenced. So, taking it at 55 when its not needed could end up being an expensive mistake.

SteL

Thank you everyone. I'm starting to really think about putting something away for my future now and will be looking into the Pension v's ISA debate in as much detail as I can understand.

I'm 29 and have been paying £133 into the pension for a little over 12 months (the first (£800 would have gone to the IFA who helped me set it up so there won't be that much in there at the moment).

At the moment I am trying to arrange a chat with the company's financial director as the company haven't been passing on their NI saving even though they said they would.
I have also been thinking of increasing my contributions but need to decide whether to do this or open an ISA and stick the rest in there instead, basically the best place to put what little money I can afford to put away.

atush

yes do get the NI sorted out.

How much does your company put in? How much more would you need to put in to get their max contributions?

Both Pensions and ISAs have their place in your long term plans and goals. You need both really.

Jack_Griffin

Just a note, Martin Lewis rule of thumb for the level of prension contributions you need is here, http://www.moneysavingexpert.com/savings/discount-pensions#howmuch

According to that guideline you should be putting by about 15% of your salary (before tax) every year till you retire... to get a comfortable retirement.. on that basis I suspect you are paying rather too little into it.. anyway have a read of the pages on the main site as they should clarify some issues..

SteL

The company don't contribute anything, they are simply diverting £133 from my gross salary to my pensions pot.

Is it 13.8% of £133 they have been saving each month, so £18.35 which they should have been putting in the pot too?

Thanks for the link, 15% of my current gross salary would be around £240 p/m. I can't stretch that far but I can certainly look at contributing a little more, i'll have a chat with the financial director at work about the employer NI contributions and see what April brings before I make any changes.

quatrofromageo

I'm equally baffled about how pensions work.
My Father encouraged me to set one up when I was 21 and in stable work. Been paying about £90 a month ever since.
No idea why...

GhIFA

quatrofromageo wrote: »

I'm equally baffled about how pensions work.
My Father encouraged me to set one up when I was 21 and in stable work. Been paying about £90 a month ever since.
No idea why...

To give you some income in retirement.

How old are you now? When do you want to retire? What income do you want in retirement? What other savings do you have?

dunstonh

quatrofromageo wrote: »

I'm equally baffled about how pensions work.
My Father encouraged me to set one up when I was 21 and in stable work. Been paying about £90 a month ever since.
No idea why...

Hopefully you increase that £90pm each year. Otherwise it will erode in value over time. Its a common mistake people make. They start with a decent amount but forget to keep it as a real terms value and all the hard work they did from the start is lost.

e.g. people who started in 1988 with £30pm had a good contribution in real terms. However, cost of living means that £30pm now is peanuts. Back in 1988, £30 was three tanks of petrol. Now its about half a tank. A house cost £25,000. The same house now would be £125,000.
£30pm was a good contribution in 1988. Now, anything less than £100pm is not very good.

If you want to have an income in retirement, you need to put aside for it. That is what a pension does.