Young Man Needs Help! Pension or another way?

dazanteney4

Hello Everyone!
First time post!
I need some help planning for my retirement.
I’m 23, full time employment.

I understand planning for my retirement is important, the more i put away now the better in the long run. What i am struggling with is the whole pension fund, am i better off looking at something different and if the answer is yes then what should i be looking at.

I currently have a work pension which pays in around £40 a month plus a one off payment of my yearly salary (3.5% i think it was last year). I try and put away £15-£20 a week on my own. Should this go into my pension fund or should i put this in a ISA? Or should i do something different?

Any help would be great!

Thanks

Darren

dunstonh

What i am struggling with is the whole pension fund, am i better off looking at something different and if the answer is yes then what should i be looking at.

Working it backwards from retirement.
- you need an income in retirement
- that means you need a pot of money to provide that income
- that means you need to save up in your working life to build up that pot
- that means you need to select the most efficient way of doing that.

I currently have a work pension which pays in around £40 a month plus a one off payment of my yearly salary (3.5% i think it was last year). I try and put away £15-£20 a week on my own. Should this go into my pension fund or should i put this in a ISA? Or should i do something different?

Pensions and stocks & shares ISAa are both suitable for retirement provision. Cash ISAs are not at your age.

pension will beat the ISA for income provision in retirement but the ISA will beat the pension for capital expenditure. That is in part why people generally use both.

jamesd

You'll probably want to buy a property at some point, so ISA is likely to beat pension for you except for any pension matching that your employer will do, exploit that as much as you can.

Dimey

I don't want to put you off pensions but I had one pension company go bust and I lost a large chunk of my contributions and a company final salary pension go into the Pension Protection fund and lost 10% plus a large chunk of my AVC's.

I'm won't get nearly half what I'd banked on when the new flat rate state pension comes in. Who knows what state pension will be like by the time you get there.

If I'd relied on pensions I'd have been in trouble. Luckily I invested in property and that has saved me.

Obviously you must take advantage of your employer contributing pension scheme. But maybe look for other options to run alongside.

dunstonh

I don't want to put you off pensions but I had one pension company go bust and I lost a large chunk of my contributions and a company final salary pension go into the Pension Protection fund and lost 10% plus a large chunk of my AVC's.

The caveat to all that is that a personal pension cant go bust thanks to the way they are set up and ring fenced. Where a defined benefit pension scheme does fail, the PPF kicks in and whilst you lose upto 10%, the cost of the benefits on final salary schemes was typically tiny. So, even with 10% shaved off, the benefits almost certainly exceed what you paid for them by a fair bit.

AVCs are normally money purchase and not affected by the solvency of the main scheme. Added years though would be as would some hybrid options that can exist.

atush

I don't understand your contributons. the 40 a month, is that you or your employer? the 3.5% is that you or your employer?

You need to put in enough to get the most your employer will pay. Ideally later you will put in more.

But in the mean time, you need an emergency cash float. To fund things you really need so you don't get into debt (such as a new fridge or car repairs, travel to see a sick relative etc). This needs to be in cash, and in a cash ISA is good if you pay tax. It should be about 3 months expenses in case you lose your job.

Then you need a fund to save for future upcoming expenses. Like a holiday, change of car, house deposit. This should be in cash (isas maybe) or S&S isas depending on how far away it will be before you need your money. If you don't need the money or have specific plans you can use a S&S ISA but only if you have your emergency cash float done first.

dtsazza

Dimey wrote: »

I don't want to put you off pensions but I had one pension company go bust and I lost a large chunk of my contributions and a company final salary pension go into the Pension Protection fund and lost 10% plus a large chunk of my AVC's.

As dunston says, if you look at what you actually paid in contributions, and compared that with the annuity you received from them, you almost certainly would be getting a great deal for those contributions (including the haircut).

If I'd relied on pensions I'd have been in trouble. Luckily I invested in property and that has saved me.

Most of the time when people say this, it's because they don't really appreciate what pensions are. They're one of the most effective ways to save up a big pot of money (literally hundreds of thousands of pounds) to fund one's retirement.

But they're not magic. They can't turn £20/month into a £20,000/year annuity. You can't just "have a pension" and then everything's sorted for retirement.

If people started to think of them more like a tax-free savings account (and they really are much like an S&S ISA) - and thought about how much annuities cost - I expect they would get a clearer picture of what's involved. Especially when the employer makes "free money" contributions. And if they had little to live on in retirement, they wouldn't blame "the pension", but their own insufficient contributions.

Apologies Dimey if you really did suffer a major capital loss under some old regulation scheme, and so did actually lose out through no fault of your own. But even if so, that kind of thing can't happen today; pension funds are ringfenced and protected against the provider going bankrupt. In the context of our 23-year-old OP, it's not possible for him to invest sensible, responsible amounts in a pension only to see them disappear like that.

I'm won't get nearly half what I'd banked on when the new flat rate state pension comes in. Who knows what state pension will be like by the time you get there.

I agree with this, though. If you're in your twenties, it seems prudent to assume that the state pension will be zero, and make your retirement plans accordingly. If there does happen to be anything left by the time you reach 95, then that's a bonus.

Dimey

No offence taken Dtsazza.

I lost my personal pension money to Equitable Life. And I was forced to take my AVC's as an annuity way early just as the annuity market crashed because you can't transfer them into the PPF and they wouldn't refund.

I'm not an expert like you guys but I have trod the path as a consumer and I hope a variety of opinion is useful to the OP. I wish I'd had MSE advice when I was young.

dazanteney4

atush wrote: »

I don't understand your contributons. the 40 a month, is that you or your employer? the 3.5% is that you or your employer?
.

Sorry this may not have been clear. My employer puts in £40 then 3.5% of my yearly wages as a "bonus"payment.
I then have an extra £15-£20 a week to pay into whatever scheme i choose.

atush

what % of your monthly salary is 40 quid? We need the total % of salary going into the pension. And to knwo how many monhts spending you have saved in cash.

dazanteney4

atush wrote: »

what % of your monthly salary is 40 quid? We need the total % of salary going into the pension. And to knwo how many monhts spending you have saved in cash.

£40 is about 3.5 % of my salary.

As for the savings I have £1500 atm