Starting company pension at 59 years old

andyb2002

I have been enrolled in the company pension scheme and I am now contributing £155 a month of my salary plus £155 from the company. using one of many pension calculators on the web I get figures which suggest I can get a tax free lump sum of just over £5000 and a monthly pension of £39.

I would need to live around 40 years after retiring to get back just what I put in at that rate. Why on earth would any one in their right mind pay £310 a month to get back a miserly sum of £39 a month. To me it does not make sense. Surely I would be better putting this money into an ISA at least all the money would be mine and when I die any money left over would go to my family unlike the pension scheme.

The gov has forced us all into this so why are they not making the insurance companies improve the returns!!

Dunroamin

andyb2002 wrote: »

I have been enrolled in the company pension scheme and I am now contributing £155 a month of my salary plus £155 from the company. using one of many pension calculators on the web I get figures which suggest I can get a tax free lump sum of just over £5000 and a monthly pension of £39.

I would need to live around 40 years after retiring to get back just what I put in at that rate. Why on earth would any one in their right mind pay £310 a month to get back a miserly sum of £39 a month. To me it does not make sense. Surely I would be better putting this money into an ISA at least all the money would be mine and when I die any money left over would go to my family unlike the pension scheme.

The gov has forced us all into this so why are they not making the insurance companies improve the returns!!

You wouldn't be putting in £310 pm, you'd only be putting in £155. You can't put the employer's contribution in an ISA!

[Deleted User]

andyb2002 wrote: »

I would need to live around 40 years after retiring to get back just what I put in at that rate. Why on earth would any one in their right mind pay £310 a month to get back a miserly sum of £39 a month. To me it does not make sense. Surely I would be better putting this money into an ISA at least all the money would be mine and when I die any money left over would go to my family unlike the pension scheme.

1. As mentioned Dunroamin, your portion is only £155 (which is pre-tax) which means you're more than doubling your money instantly.

2. Starting a pension at 59 and only contributing £300 per month is obviously going to produce very little returns because the money does not have the time to generate significant growth from investments. Starting a pension at 59 is like starting a race when everyone else is near the finish line, of course you won't see the same results as those that started early! Pensions are good regardless because of employer contributions (free money!) but the value of starting a pension at 29 vs. 59 is very clear.

3. Pension schemes all have their own rules; some will pay out to your family if you die. You should check this before hand.

Here's a better question to ask yourself: If you don't start a pension now, what are you going to do for retirement? £39 a month isn't a lot, but it's better than nothing. If you can post some information on your current retirement expectations (eg: retirement age, state pension eligibility) you can get some better advice regarding your situation and what the best thing to do is

jamesd

The big missing piece there is when you plan to retire.

From the £5,000 lump sum number you've given it appears that the £310 a month would be getting paid in for about five years for retirement at age 64. That's assuming 4% growth rate. The actual growth rate that they use should have been given in the projection. After taking a £5,000 tax free lump sum from the £20,000 pension pot that leaves £15,000 to buy an annuity. £39 a month is about right for an RPI annuity at that age, they are a bit over 3% at the moment.

Next thing is that they will normally use an RPI inflation linked annuity. Those start to pay out about 3% a year, increasing with inflation. About nine in ten people who buy annuities buy a level annuity instead. Those start out paying about 6% but don't increase with inflation.

Your £155 a month before tax is costing you net £105.40 after basic rate income tax. I'll assume it's not by salary sacrifice so the cost doesn't drop to £105.40 instead. Five years of £155 a month is a total of £9300 paid in. Divide by £39 and by 12 months and it takes 19.9 years to break even. Life expectancy for males aged 65 in normal good health is to about age 87 at the moment, so half are expected to live 22 years or more after retiring at 65.

Now, I've just used the income there, ignoring the value of the lump sum and the income tax on the pension payment because I assumed that your total income will be within the personal allowance. The lump sum can probably generate about 5% tax free if invested in an ISA, so that's another £20.83 a month, if invested so it increases with inflation. Whether it will depends on how you invest it. At this point the break-even is now down to 12.95 years.

A break even of about 13 years for a life expectancy of 22 years looks reasonable enough to me.

andyb2002 wrote: »

Surely I would be better putting this money into an ISA at least all the money would be mine and when I die any money left over would go to my family unlike the pension scheme.

If you want the money to go to your family when you die, why choose to buy an annuity? You can use income drawdown instead. That just means leaving the money invested and taking an income from it. Your spouse, if any, can then inherit the whole remaining pot into a pension of their own when you die. Anyone else or a spouse can instead get money outside a pension pot after a 55% tax charge. If you choose this option you can probably get between 4% and 6% of the pension pot size as annual income, while keeping up with inflation, depending on the specific mixture of investments you use.

andyb2002 wrote: »

The gov has forced us all into this so why are they not making the insurance companies improve the returns!!

Who should pay the extra taxes for this subsidy? The insurance companies aren't making a fortune from the RPI annuity business, it's so lacking in profit and high in risk of life expectancy increases that there's not a lot of competition in it. There would be more if they thought it was a very profitable business. The level annuity business is bigger and with more competition, one of the reasons why those pay out more.

Roughly, you've been misled into thinking pensions are bad value by the assumptions used in the pension projection and how you'll take income. It's not an uncommon problem, rather one that seems to have been growing. If you use the same investment and income choices for pension and ISA the pension both pays out more and leaves your spouse with more money after you die, compared to an ISA. Assuming tax rates don't change, that is - the ISA currently protects you against that.

andyb2002

Well a big thanks to all who read and replied to my post, as you can see I am complete mumpty when it comes to pensions, however, I am sure I am not alone in this. The pensions industry is a minefield and the information is very badly distributed to us mumpties.

I see the figures and the only reason I took up the pension was for the free money i.e. the company contribution and the tax free lump sum when I do take the pension in some 5 to 6 years.

I just wished the government would shake up the insurance companies and somehow improve the returns for people like me, who are being made to enrol at ages of 59 and the like.

dunstonh

The pensions industry is a minefield and the information is very badly distributed to us mumpties.

I disagree. The information is published and people are available to give advice. However, there are too many myths and misinformation is rife from people who have nothing to do with pensions.

I just wished the government would shake up the insurance companies and somehow improve the returns for people like me, who are being made to enrol at ages of 59 and the like.

You cannot create returns like that. What will be will be.

atush

They really can't legislate for people not being able to do basic maths.

Your pension is not funded by YOUR 310/m it is being funded by you by less than 124 pre month. The rest of the 310 is tax releif and employers contributions.

So in fact you are paying 124/m for 5K plus pension. Which could be any figure as we don't know what you are invested in and how that will perform.

w/o returns, you will have paid in only 8929 over a full 6 years. So if you retired at 65, you'd only need to live just over 8 years to get all your money back at 39/m. Given you should live much longer than that, you'll be quids in.

System

There is a kind of self-delusional myth, running as follows:

1) People in Britain are in general pathetically unprovided for pensions, millions facing nothing at all
2) The government is introducing new semi-compulsory workplace pensions to try to rectify this
3) Therefore the problem is solved and all will be rosy.

The answer is, it might be for younger workers retiring in the far future, but it won't be much help for people of 59 who have done nothing until now.
It is impossible to save enough at 59 to provide for a reasonably prosperous old age, unless you have an enormous income or have other financial advantages or luck.

patanne

A couple of questions for you. Do you have any other pension provision besides your state pension? Have you requested a state pension forecast? Even with the new flat rate, it will take into account second state pension etc earned already. Do you really need or have to take the lump sum (that would up the £39 to £52)? Have you considered taking it annually as you get more that way normally? If your state pension is over £182 per week and you don't have a private pension you will still be filing self assessment to HMRC in your nineties. Not a pleasant prospect! Just a few things for you to mull over.

Just a bit of background to the above - I am looking at having to wait another approx 3 years before half my personal pension is enough to fulfill my tax bill requirements and they can't take more than half in tax. My aim is to reach a stage where I will not need to file self assessment. The goal is total independence for as long as is possible.

kidmugsy

andyb2002 wrote: »

I can get a tax free lump sum of just over £5000 and a monthly pension of £39.
... Why on earth would any one in their right mind pay £310 a month to get back a miserly sum of £39 a month.

Why do you ignore the £5000 in your comparison?

opinions4u

I just wished the government would shake up the insurance companies and somehow improve the returns for people like me

Have you tried asking the magician Dynamo to magically enhance returns? Or do you fear a Paul Daniels outcome of not a lot.

Government is invariably stupid. But how, precisely, do you propose they "somehow" force improved returns?

who are being made to enrol at ages of 59 and the like.

Out of interest, why gave you left it until now?