Retirement planning starts now - where to start

Gary123456790

Hi all,

Apologies now if this gets long - I am wanting to plan now for retirement and am unsure if a totally pension based route is the best way to go, or to split future income between different investments.

I am 29 and in (not quite) full time employment earning a very reasonable salary - not in the higher rate of tax but not far off. I work 4 days a week and look after my daughter 1 day.

I have a small pension from a previous employer which I paid into to get the employers contributions but this currently amounts to a vast pot of around £2,000.

My wife has a similarly small pension pot from a previous employer which isn't being paid into. She is an IT contractor through her own ltd company and earns almost as much as me.

Previously any spare money has been used to overpay our mortgage as it was on a fairly high rate, so there was a guaranteed saving from overpaying. We will shortly be moving house and the mortgage will be on a much lower rate and therefore money is better put into savings or a pension. Of course rates may not stay low so flexibility may be useful in the future.

I want to start thinking now about retirement. I know a lot of people my age who do not have pensions - of course this is risky if you don't have some other form of retirement income but many young people either do not understand pensions or feel retirement is too far off.

I see some downsides with pensions which may or may not be valid:
- Inflexibility - you cant get the money out if you fall on hard times or wish to switch it into another form of investment.
- Annuity rates - from what I can see you have to lock your money up and in 30 years buy something from a limited market which may or may not be good value.
- There is no inheritance for children when you die which there is with other assets (inheritance tax permitting of course).

My wife has a 50% share of a rental maisonette which her father bought in the 80's - it is a non standard construction and was unmortgageable at the time so was cheap and is now worth around £120k (it is easily mortgageable these days). This provides net £500 pm rent total (so £250 to her) after all costs and gives food for thought when it comes to retirement.

I feel that the best way to fund retirement would be to split my retirement income into 3 investments:

- Pension - best invested if/when I do get into the higher rate of tax
- Rental Property - the value of property may come down but rental money will continue to come in (with some breaks without tenants) and you still have the original asset to sell or pass on to children
- Cash / Liquid investments - such as ISA's, etc which can be switched to other investments or can be used to pay off some of the mortgage if the rate rises above that gained on the investments

I see pensions as very inflexible - property investments are more liquid than pensions but less than cash savings (ISA's, etc). Having available cash enables you to help out children with uni fees, house deposits, or an periods of unemployment, etc. and with inheritance benefits.

Am I severely missing something and heading for disaster or is this viable?

What massive benefits of pensions have I missed? I understand that tax can be reclaimed but this comes at a cost of the drawbacks above.

I would welcome any views to help me plan better for retirement and make good use of the current fortunate position that I am in of having 2 good incomes.

The pension calculators tell me that to have a small retirement income I should be putting away around £500 pm for the next 25-30 years. That seems an awful lot of money for such a small income in retirement, although how that directly compares to other investments such as rental property I am not sure.

Thanks all,

Gary.

Drp8713

The inflexibility of not being able to access your pension unt you retire is in my eyes a good thing. It means by then you wont have eaten away at your pension and will be able to stop working earlier.

Tax relief is a huge bonus.

Also if you are empoyed, your employer will usually match your contributions up to a certian point in a DC scheme and if you have access to a DB scheme its a no brainer

Gary123456790

Hi,

Thanks for the reply.

My current employer will not input into any kind of pension - it was a previous employer that did so - therefore I do not currently pay into a pension at all and neither does my wife.

Gary.

GhIFA

Gary123456790 wrote: »

Hi,

Thanks for the reply.

My current employer will not input into any kind of pension - it was a previous employer that did so - therefore I do not currently pay into a pension at all and neither does my wife.

Gary.

You current employer will be required to make a contribution in the not too distant future.

hugheskevi

Looks a pretty well thought-out view. Some of the things that struck me:

- Annuity rates - from what I can see you have to lock your money up and in 30 years buy something from a limited market which may or may not be good value.

- There is no inheritance for children when you die which there is with other assets (inheritance tax permitting of course).

Research capped drawdown (and possibly flexible drawdown, although less relevant to you) which overcomes both of these things.

- Pension - best invested if/when I do get into the higher rate of tax

Agreed, but take what is on offer from employer when they have to make contributions.

Worth noting that you can invest in a S+S ISA, and later move money into a pension when you are a higher rate taxpayer. That both gives you flexibility in case you should need it whilst the money is in the ISA wrapper, and you also gain from higher rate tax relief (assuming you get there, and have enough income in the higher band to move the ISA money across and still gain from higher rate relief).

- Rental Property - the value of property may come down but rental money will continue to come in (with some breaks without tenants) and you still have the original asset to sell or pass on to children

Unless you have a beneficial trade skill or want to build a portfolio of properties, this may not give a good return compared to the effort/expense involved. It also isn't diversified, leaving you vulnerable to price changes in a single asset class or one-off risks such as tenants destroying house (which can be insured against of course, but that gets back to is the return good enough).

Am I severely missing something and heading for disaster or is this viable?

Not much wrong with thinking, although I'd expect to see more mention of S+S ISAs and less mention of cash (cash only being appropriate for pecautionary saving really).

What massive benefits of pensions have I missed? I understand that tax can be reclaimed but this comes at a cost of the drawbacks above.

Tax efficiency is a huge benefit. You should be plannning to at least use up all your own and your partner's personal allowance in retirement.

You say your wife has her own company. That may make pension contributions attractive for her as a way to take money out of the business in a tax efficient way. But she may already have some very tax efficient ways of doing that - something to consider and investigate.

There are other fringe benefits, eg, protected in case of bankruptcy, can reduce income so as to qualify for higer means tested benefits, favourable inheritance positio, etc, but I doubt any of those things are especially relevant to you.

dunstonh

I know a lot of people my age who do not have pensions

A pretty bad state of affairs. It used to be that parents would encourage their siblings to start a pension when they first got their job. Many would be paying in from 18-23. 29 used to be considered a late start (it still is but not catastrophic compared to early 40s say)

I see some downsides with pensions which may or may not be valid:
- Inflexibility - you cant get the money out if you fall on hard times or wish to switch it into another form of investment.
- Annuity rates - from what I can see you have to lock your money up and in 30 years buy something from a limited market which may or may not be good value.
- There is no inheritance for children when you die which there is with other assets (inheritance tax permitting of course).

- inflexibility is not an issue. You are planning for retirement. That is the objective. It isn't a savings account for an emergency fund. You have other funds for that.
- Annuity is not the only options. Rates are influenced by interest rates but you shouldnt concern yourself about that. It is unlikely annuity will be the method of choice by the time you get there.
- (post retirement) inheritance is possible depending on the options you select at retirement. (pre-retirement) your full pot is paid out tax free to beneficiaries (outside of estate. So no iht)

- Rental Property - the value of property may come down but rental money will continue to come in (with some breaks without tenants) and you still have the original asset to sell or pass on to children

What about repaying the mortgage, capital gains tax and inheritance tax?
How many properties would you go for? (about 5-8 is the normal amount needed)

- Cash / Liquid investments - such as ISA's, etc which can be switched to other investments or can be used to pay off some of the mortgage if the rate rises above that gained on the investments

Very poor option for long term planning. Guaranteed to suffer shortfall risk. Likely to suffer inflation risk.

What massive benefits of pensions have I missed? I understand that tax can be reclaimed but this comes at a cost of the drawbacks above.

Tax relief, tax free growth, tax free lump sum on maturity.

The pension calculators tell me that to have a small retirement income I should be putting away around £500 pm for the next 25-30 years. That seems an awful lot of money for such a small income in retirement, although how that directly compares to other investments such as rental property I am not sure.

The amount has nothing to do with the wrapper you use. Although if you use savings accounts/cash ISAs you will need to pay in around three times more than a pension. The issue is that you need a pot of £X to pay an income of £Y. Whatever method you use to achieve that is going to cost you money.

Also be realistic. You are unlikely to be able to afford to retire earlier than state pension age based on what you have said. So, why are you looking at 25-30 years (that takes you to 54-59). Also, if you are only going to be paying £500pm for 25-30 years and then have a further 25-30 years to draw the pension, do you really think you are going to get that much more?

Gary123456790

Thanks for the replies above especially hugheskevi and dunstonh - I hadn't thought about the tax free allowance in retirement or saving money in an ISA and putting this in the pension in one go to get higher rate tax back on all that money - of course as long as i've earned enough over the tax rate.

I have to agree getting 40% tax added to pension contributions plus anything the employer will have to put in come pension changes, then getting the 25% tax free lump sum and personal allowance in retirement makes it a lot more appealing.

I also recognise the comment about cash getting devalued - inflation will really count against cash invested at a poor rate - it does need to be in some kind of vehicle such as an S+S ISA as suggested.

Of the people aged 30 and under that I know, if they are saving at all, they are trying to save a deposit to buy a house or are paying considerable mortgage payments and a pension is a dream.

Gary.

AlwaysLearnin

Gary123456790 wrote: »

... or saving money in an ISA and putting this in the pension in one go to get higher rate tax back on all that money...

You probably wouldn't do it in one go. For example, there are annual limits to pension contributions. In reality what you would probably do is drip it in over a few years as you approach retirement.

Have a read of this post onwards for some good ideas:

https://forums.moneysavingexpert.com/discussion/comment/62320417#Comment_62320417

In fact, the entire thread is very good

jamesd

Capped income drawdown lets you leave the money invested and take an income, after taking up to 25% as a tax free lump sum. Before taking any benefits it's fully inheritable by anyone with no tax charge. After, it can all go into the pension pot of a spouse or to a spouse outside a pension pot or anyone else after a 55% tax charge.

Since you appear to expect to be a higher rate tax payer it seems sensible to wait until then for pension contributions.

Until then, now's a good time to be using your full stocks and shares ISA allowance for investing, so you get the same sort of long term growth options as in a pension. This has the big advantage that it can cover life's other contingencies, like long term unemployment. Which is also a disadvantage if you run out of savings, because the pension pot would be protected from being drained in that way.

What I chose to do was try to accumulate enough to live without needing means tested benefits as soon as possible and I got there after six to seven years of very diligent investing.

It's unlikely that mortgage interest rates will rise above the likely returns for investments for more than a short time. Even routine UK tracker investments might be expected to return more than 5% plus inflation on average. A mortgage might cost more than 5% but the capital debt's real value is being reduced by inflation. That makes slow paying off of a mortgage a lot cheaper than it looks, because inflation steadily makes it cheaper in real terms.