Private pension - is it worth it?

aussiesbird

I took out a private pension approx 4 years ago when I was in full time employment on the advice of a colleague. The pension is with Scottish Widows and I have paid in just £20 per month. I have since had to give up work due to long term illness, as you can imagine money can be tight living on benefits and I am wondering if it will be worth my while continuing with this pension. My father keeps telling me that it won't be worth the paper its written on and to stop it. He suggests putting the money into a bank account each month. My problem with that is if it were in a bank and I was short of cash at any time the temptation would be there to withdraw some. Should I continue with the £20 per month? I am confused and don't understand pension schemes one bit. Any advice would be appreciated.

dunstonh

My father keeps telling me that it won't be worth the paper its written on and to stop it.

£20pm isnt worth the effort unless you are aged 16 and keep it up with inflation.

He suggests putting the money into a bank account each month.

You obviously need an emergency fund but if you are on benefits, you may find money in the bank hits those benefits.

Should I continue with the £20 per month?

No one here can answer you with that. Pensions are a regulated product and this is a specific advice question. So, if we did say yes or no then we would breach FSA rules. We can give opinions and comment but we cannot give any advice. Even those of us who are authorised to give advice cannot because we dont know enough about your circumstances to say what is best and it would be impossible to do on an open forum like this.

I certainly think it is right to consider what is best for you. You need to look at affordability and if the contributions are going to be of any benefit to you later in life. That will very much depend on your future working life and benefits.

jamesd

aussiesbird, please obtain a state pension forecast and say what the projection says. Please also give details of the amounts you expect form any other work pensions. Please also say what benefits you are on and whether you have any medical conditions that might reduce your life expectancy or require residential care earlier than usual. Also please say which funds the Scottish Widows pension is invested in at the moment and what the current values and units held are.

If you are married please provide a state pension forecast for your partner and details of any work and personal pensions they have.

Please also say how old each of you is and when you expect to retire.

If your benefits will continue after retirement please give some idea of how much income they will produce and how pension income affects them, if you know - whatever you know is OK even if it's not much.

As dunstonh noted, whether it's worthwhile continuing depends on your likely income in retirement and the pension details are needed to get some idea of what that will be. For low total pension values where benefits play a role it's possible that a personal pension will do no more than eliminate benefits that exactly equal the value of the pension. So one key task is to find out if this could apply to you.

20 a month increasing with inflation for 30 years could produce a pension income of about 1250 a year or 24 a week at 5% annuity rate with 7% growth. This would be added to whatever state pensions you qualify for.

Your father is wrong about the pension not being worth the paper it's written on if the money is invested in a good selection of funds but it still may be worth exactly nothing to you in the end if all it does is reduce your benefits.

Sorry to ask so many personal questions but they really are necessary to give you at least some guidance on what may be best.

aussiesbird

Thanks so much for that jamesd I will have to get back to you with that info as alot of what you are asking is a foriegn language to me! (sorry but I have no idea about pensions LOL)
The things I can tell you now is I am not married (yet) we plan to marry in the next couple of years. My partner is a Paramedic (for the past12 years) and has his own pension he pays into at work (supperannuation £129.18 pm) and I am on long term incapacity benefit, which shouldn't see me needing long term care or reduce my life expectancy - don't freak - it's a mental health problem. (A lot of people think I am absoloutly loopy when I say that but I'm not honestly LOL)
My partner is 38 and I am 3 days off of 40 :eek:
Retirement age would probably be around 60 for my partner. I don't know if I will be allowed to work again so unsure of what to say for me (sorry) At the moment I get Incapacity Benefit and Disability living allowance and have done for the past 3-4 years - not sure if my illness will improve.
Sorry to be vague.

pamaris

aussiesbird wrote: »

Retirement age would probably be around 60 for my partner.

Actually, my husband is 38 and they have changed his retirement age to 68. So neither he nor your partner will get any state pension before that age. AFAIK they can take their private pensions earlier.

dunstonh

it is 68 from 2044. Someone that is 38 now would have a state retirement age of 66 or 67 depending on which side of the tax year they are born.

EdInvestor

aussiesbird wrote: »

I don't know if I will be allowed to work again so unsure of what to say for me (sorry) At the moment I get Incapacity Benefit and Disability living allowance and have done for the past 3-4 years - not sure if my illness will improve.

This is the key factor.

As James says

For low total pension values where benefits play a role it's possible that a personal pension will do no more than eliminate benefits that exactly equal the value of the pension.

At retirement the benefits you get now would be replaced by pension credit.If you don't work again,or only do so occasionally and thus don't accumulate much state pension such that you are below the pension credit level (around 120 a week IIRC at present) the state will give you a topup.

So say you have 80 pounds in state pension, you would get an extra 40 top up from pension credit. But if you had 80 pounds state pension plus 40 pounds from your Scottish Widows pension, you wouldn't get any topup.So your payments to Widows would simply have replaced money you would get anyway.Your father would be right.

Would it affect your benefits now if you saved the money elsewhere?

aussiesbird

Would it affect your benefits now if you saved the money elsewhere?
No my benefit payments are not reflected on any savings - not that I have any!! LOL

dunstonh

not that I have any!! LOL

In which case, building a pot up would be a good option. Probably better than the pension. The pension would only be wiped out with pension credit (assuming that still exists in the future). Whereas the savings pot wouldnt have any impact on that providing you dont go above a certain amount.

jamesd

aussiesbird, with no savings I'd say go for building them up in a cash ISA comes first at the moment. Try for enough to live on for three months, or at least a month so screwups with the benefits payments don't leave you in immediate trouble.

Perhaps reduce the monthly pension contribution to 5 so you don't stop completely.

One standard piece of advice to couples is to split the pension investing evenly between the partners. You each get a personal tax allowance that's going to be close to 10,000 a year so you can avoid tax on twice that by splitting the contributions. You can't split the work pension, just any additional voluntary contributions being made.

Now, I don't know the effect of pension credit with a couple's earnings but it's sounding to me as though when you're both married the two of you should be looking to put some of your total pension investing in your name to exploit this.

For 26 years at 7% return each 10 a month you put in the pension can be expected to deliver you 8 a week in pension payments. Quite likely more if you pick good investments and monitor and adjust them regularly.

For pension credit today it'll apply up to 120 a week if you're single when you are eligible. 87 is the basic state pension so that leaves 120-87 = 33 as the amount you have to get from a pension to be better off if you're single. 33/8 = 4.125 chunks of ten pounds a month each delivering 8 in pension. So about 42 a week in pension and if you're single you should be a bit better off in retirement. Being cautious, you should probably do better than this with good investments - 30 being enough isn't unlikely.

But... I think that your benefits mean that you will get income from the additional state pension and I think that that will take you to the pension credit level. If so, any pension investing you do will make you better off. So, you should ask about this in the benefits section or by asking the pension people directly. You will also have built up some additional state pension entitlement when working and the pension forecast will say what that is likely to be.

Once you're married things change a lot. First the couple's threshold for pension credit is 182 a week. It seems to me that it's very unlikely that his work pension will be lower than this (9500 a year including his basic and additional state pension payments), so it seems likely that you will not be eligible for pension credit at all as a couple. And that means that even 5 a month gives you a higher income when you're retired.

This does mean that his likely pension income is a critical factor to know for your planning, because if he's going to end up with a pension over 10,000 a year any additional voluntary pension payments should probably go into your pension first, until it's on track to deliver 10,000 a year.

I've ignored the potential for other benefits, like housing benefit, in retirement, for the moment. Can't really ignore that because it could be significant.

If he's in a similar position with minimal cash reserves both of you should be looking to build up savings sufficient to cover all bills for 3-6 months. Any voluntary (non-work) pension should really be cut back to a low level until you have this.

So, overall I think that you need to be mostly building up savings right now but that it's likely that any pension contributions you make will leave you better off and are worthwhile. But you do need to find out about additional state pension from the benefits and about your partner's likely pension income to reduce the uncertainties.

In any case, the easy bit now is: cut the pension back to 5 a month and start putting the difference in a cash ISA. This looks like a good idea regardless of your final pension situation. If the pension people won't take 5 a month, just suspend the pension payments for now and review your situation in a year, when you might have a savings pot of 200-250 built up. Ideally, save more than that, to try to get to the point where you can stand benefits payments problems lasting a few months.

For the non-pension part: do you have debts, if so what are they and what are the interest rates? Paying off some debt might be better than building up savings.

aussiesbird

Thanks for that jamesd, its a lot to take in so I will sit quietly and digest over a period of time but just looking at what you said I think I will reduce the pension payments down and start putting the remainder into an ISA. Thanks alot I appreciate your time.