Completely bewildered

mrsdwhite

Hi,
I have just turned 30 and despite being employed solidly since I was 16 I have not yet set up a pension :eek:
I did 'opt-in' to the NEST pension though I'm not convinced that the contributions will be significant.
I am considering setting up my own pension plan, though my employer no longer offers one
I am completely bewildered by all of the jargon and how pensions work. Can anyone clarify it all for me, and tell me how it all works, where to start etc.?
Thanks in advance

bigfreddiel

well, you're going to need a pension

setup a sipp - google it

contribute at least 15% of your salary (1/2 your age as a %ge is the rule of thumb)

your sp age will be 68 or more so you have 38 years at least to accumulate a pot for your pension - draw down or annuity

do not ever stop contributing

many others may add to this thread with other ideas and complicated suggestions like buy to let and other such crazy schemes

ignore it

a sipp based on a balanced portfolio will be work and is easy to manage

if you dont feel confident to diy then a lifestrategy 80% fund will be fine (google lifestrategy)

good luck

fj

mania112

Do not just 'setup a sipp' without finding out if it's right for you. For one thing you can have a balanced portfolio in a cheaper Personal Pension.

A PP can be started online by googling - Cavendish Online, or if you want to receive professional Financial Advice, find a local IFA at https://www.unbiased.co.uk (then you'll have someone to shout at if it doesn't go according to plan (and it has a better chance of going right)).

Also, you should definitely (this time without question) continue with the auto-enrolment because there's free money going in from your employer which won't be there in another pension.

atush

I did 'opt-in' to the NEST pension though I'm not convinced that the contributions will be significant.

I am considering setting up my own pension plan, though my employer no longer offers one

Slightly confusing. Your employer offered NEST and pays in, so they do offer a pension?

In any case, yes you need one, and yes you should pay in 15% (incl any paid into NEST by your and employer and tax relief).

And SIPPS are great if you want all the options and understand investing. If you don't, a personal pension either DIY with lifestyle funds or one with an IFA would perhaps suit you better.

bigfreddiel

here we go -plenty of advice all confusing - at the end of the day it willall even out regardless of what you do

the important thing is not to waste anytime pondering

just open a sipp - lifestrategy fund for now and pay in 15% of salary -its just too easy

had you started this at 20 you would only be paying in 10% of your salary

wait till you're 40 and it will be 20% (see my first reply for reason)

just to reiterate, there will be loadsof replies all saying something different, but actually all meaning the same thing

one other point - keep costs down - down to less than 0.5% -if you don't you'llbe handing over thousands of pounds to the providers over the next 40 years

cheers

fj

FatherAbraham

mrsdwhite wrote: »

I am completely bewildered by all of the jargon and how pensions work. Can anyone clarify it all for me, and tell me how it all works, where to start etc.?

I'll try and summarize the basic concepts. If it doesn't make sense, just keep asking questions until things have been explained properly.

At the end of your working life, you'll get a basic state pension of about £7,500 (in today's money terms -- the amount you'll getshould rise by about inflation every year).

That's not much to live on, so you can also save into a pension fund. This builds up through the years, and at retirement, you can use this "pot" of capital to buy a pension, which means "an income for the rest of your life".

This income for the rest of your life can be provided by using the capital in the pension fund to buy an "annuity" from an insurance company. This is a type of insurance policy which guarantees to pay you the purchases income until you die -- so there's no way you can outlive the income.

So, that's how one uses the money in a pension fund. What about how the pension fund is built up?

Well, when you put some of your earnings into a pension fund each month, you're effectively deferring that income until later in life. Because of that, you don't have to pay income tax now on that saving. This is sometimes called "tax-relief" on pension contributions. If you take £100 of income now, and it's taxed at 20%, then you'll only have £80 to spend. If you defer that £100 of income, by putting it away into a pension fund, then your pension fund gets the full £100, but you've only "lost" £80 of current net income.

However, you can't get the money in the pension fund out again to spend -- it's kept safe until you retire, and then it's used to buy you income for life (a pension). So, you really have deferred that income.

When you're receiving the income you've bought with your pension fund, it will be taxable -- so you haven't escaped taxation altogether. However, since the first £10,000 of personal annual income is tax-free, and your state pension will only be £7,500 per year, that means the first £2,500 of income per year from your personal pension will be tax free -- so you'll have saved tax overall (unless you're currently earning at a very low level).

You can also take one quarter of the money in your pension fund as a tax-free lump sum on retirement, so that reduces your effective tax rate on pension savings even further. If you want, you can use this tax-free lump sum to buy or provide more regular income.

So, a pension is a tax-advantaged way of saving for regular, safe income in one's old age, by deferring one's current income into a restricted investment shelter, where it can grow until you need it.

I've missed out some details, and more complicated alternatives -- you can learn about those later, once the basic concepts are clear.

Warmest regards,
FA