What % contribution should I make?

abundant1972

Hi everyone...

I'm new to the pensions forum, and looking to maximise what money I do have.

I'm 40, work 30 hours in the NHS [Gross £23,004 p/a]
I have 3 years in the NHS scheme
Currently I pay 9% contributions and the NHS pays 14%

I was wondering what I would need to plough in to get a half decent pension as I feel I should have started years ago...

I still rent (don't own any property) and have £7K debt (all at 0% interest, and on a DMP).

I probably have £250 spare income after my debt payments (£375 p/m) have gone out.

I could plough it into debt clearance - but as it's 0% it seemed better to maybe use some of it to increase my pension as that is taken out from my wages before the tax man gets it!

I'm curious as to what % of their gross wage others are paying...

Many thanks

Spirit_2

I pay 12.3% standard contribution, and buy added years at another 9%. My employer pays 14%.

PuzzledDave

Disclaimer: I'm certainly no financial advisor.. take all this with a pinch of salt.

It seems to me you need to think about what you want - then work backwards to see if you can fund it. Perhaps start with:

1) When you retire, where do you plan to live ? Carry on renting for as long as you can live at home or will you buy a home between now and then ?

2) At what age do you want to retire ?

3) How much do you want to live on ?

From there, using the projections in your last annual pension statement you could perhaps have a better idea as to what to work towards.

For me personally, I am in the private sector (not final salary) which means it will cost me a hell of a lot more to get something equal to what you will enjoy. I'm not saying this as an attack on the luck you have with your employers provision, but to illustrate a pure percentage comparison you ask for means not much in itself, you need to also know about the plan(s) it is being put towards.

However, since you asked: 18.9% from me, 6% employer. I'm glad it's as high as 6%, my previous employer was supplying 4%.

abundant1972

Thanks for those replies...

My pension is pretty good - I'm just mad I never joined when I was in my 20s... back then, an extra £150 in my pay packet seemed like a lot of money and I opted out... Course I also made lots of other bad financial decisions - which I'm only just getting to grips with.

a) Looking ahead - I'd be happy with a 1-2 bedroom apartment... nothing huge. If it was my own I'd not have rent payments and my outgoings would be less. That makes sense. As to where... It's tricky... my job is down south, but I've thought of moving back home up north... to spend more time with family, but ultimately when my parents have gone - i'd probably want to retire back down here...

b) Ideally I'd like to retire at 60 (55 would be awesome - but probably unrealistic).

c) How much to live on...? I could get by now on £750-1000 p/m if there was no rent cost, no problem... What that transfers to in 20 years time I'm not sure... do pensions take inflation into account?


Lots to think about...

spock007

Jesus!! Employer contribution of 14%!?!?
That's amazing!!
I get 4.5% from employer!! And my financial advisor said that was decent!!

abundant1972

It is a good pension... although as an NHS worker - looking at what we do every day - we get a pittance in our monthly pay pack... healthcare - unless you are a doctor, pays poorly, and we don't get very nice things to do... and it's kind of life or death scenarios. Plus - no other perks whatsoever besides the pension... It balances out.

PuzzledDave

Whilst it may be somewhat late, let us just be glad you have shown up to the party at all.

So let's see what we have, you should get your state pension at 67 - is that likely to be a full pension (i.e. have you worked all your life) ? If you are not sure best to get a state pension forecast.

Currently you contribute 23% of your salary (employee & employer) of £23K = £5.3K per year (near enough).

Total Contribution by age 60 = 23 years x £5.3K per year = £122k
(Your total pension should be better than this though).

You want to retire by 60 in your own home, probably down south (~£100K minimum mortgage to pay). Which means between age 60 to 67, your NHS pension (should you carry on working for them) and savings needs to give you between £750 to £1,000 per month (i.e. £9k to £12k per year) on your £122k contributions.

It sounds a very tall order to me, but then I am no financial expert and you may have substantial savings already or perhaps inheritance, lottery win coming.

I guess your next steps would be to find out from your NHS pension organiser how much the pension is likely to be able to be at age 60 once adjusted to inflation and if you can take a lump sum (how much ? ) to help fund the gap between retirement at 60 and state pension.

Then look seriously at the price of the flats in the are you are thinking of and see if they are realistic to purchase given your current savings to pay for the deposit, moving costs e.t.c. and the entire mortgage before you hit 60.

jamesd

Your current work pension is great, one of the best ones around. Given the DMP and not owning a home but wanting to, what I suggest you do for now is use saving or investing inside an ISA to accumulate money for a deposit. Once you've got that deposit together, then would be a better time to be thinking of pension contributions. Don't delay more pension contributions after you get a mortgage in place though, except if you borrow at more than 75% LTV, then getting down to that can pay in reduced mortgage costs - but buying at higher than 75% LTV can be cheaper than renting.

I don't know how NHS pay varies regionally but for a lot of jobs you end up better off outside the SE if you leave the SE because of the lower cost of living. Might be worth checking to see what would happen if you could relocate to be closer to family.

Age 40 and now in the NHS pension gives you a pretty good start and still time to make a big difference to your income when retired.

When it comes to buying a place sometime, take a look at what's available over time. There can sometimes be some really cheap places around that can greatly cut your costs. Not the best of places, often needing refurbishment. But can be a good way to really cut your expenses for a while before you move on to somewhere else later.

abundant1972

Thanks for that PuzzledDave...

That was very helpful. It is kind of scary when you add up all of the figures - there is quite a big shortfall... Looks like I'll be working until 65 after all hehe. I've tried a few pension calculator things and those 5 years extra make quite a big difference.

I will be entitled to a full state pension, and I am able to take a lump sum at 3 x my annual pension amount I think (with subsequent fall in annual pension). If I retired at 65 I'd only have a few years to manage on a lower income.

The biggie is the house/mortgage situation. I will stand to inherit something but I almost don't want to think or rely on that. I guess if/when it comes along it I just need to have a plan in place.

I'm meeting with my work's pensions officer next week to look at increasing my contributions from 9% to maybe 16% (totalling 30% with Employer's). All spare cash for now needs to go towards clearing debt and saving for a deposit I guess.

Thanks again for the advice!!!

abundant1972

Thanks JamesD - great advice too.

The South West is pretty expensive it seems... I guess if I want to move... I worry about retiring here nearer the time. House prices will have changed and there will be new properties etc...

I wish they'd taught money management in school... my parents as much as I love them were no help in teaching us about finance or any of this stuff... It's something I've stumbled on as I've eventually grown up! As you say though... Better late than never!!!

jem16

abundant1972 wrote: »

That was very helpful. It is kind of scary when you add up all of the figures - there is quite a big shortfall... Looks like I'll be working until 65 after all hehe. I've tried a few pension calculator things and those 5 years extra make quite a big difference.

The pension calculators will not help you as the NHS pension is a defined benefit scheme. The calculators are all set up to work with a defined contribution scheme where there is actually a pot of money.

With the NHS scheme what matters is your length of service and at the moment your final salary. So if you had 20 years service and finished on £30k you would have 20/60ths of £30k which is a pension of £10,000 per annum.

In 2015 the NHS scheme is changing to a career average scheme and retirement age is going to be your state retirement age. You can leave early but would have an actuarial reduction of your pension.

I will be entitled to a full state pension, and I am able to take a lump sum at 3 x my annual pension amount I think (with subsequent fall in annual pension). If I retired at 65 I'd only have a few years to manage on a lower income.

You will have a full basic state pension but at the moment you are in a contracted out scheme which does not pay full NI. This will lead to a deduction in the flat rate scheme which should be in force by the time you retire. Again this will change in 2016 where you will probably pay full NI and be able to get some of this deduction back.

However remember that the NHS retirement age will be the same as your state pension age.

As to your NHS lump sum you can take 25% tax free but the pension is reduced by a commutation rate of 12:1. This is not good value and should be avoided if possible.

I'm meeting with my work's pensions officer next week to look at increasing my contributions from 9% to maybe 16% (totalling 30% with Employer's). All spare cash for now needs to go towards clearing debt and saving for a deposit I guess.

You need to stop thinking about your employer's contributions as it doesn't have any bearing on a defined benefit scheme. Your employer pays what it needs to pay to provide your benefits. That can be from zero percent upwards.

In the NHS scheme you can't simply increase your contribution rate. To get extra retirement benefits you have to either buy Additional Pension or AVCs.

The Additional Pension is just the same as your main pension but you buy an amount up to £5k and you would be given a price for that either to pay monthly or in a lump sum.

AVCs are also available. This is a money purchase scheme where you pay an amount each month into funds which will go up and down according to the market. AVCs are only really good if you are able to use the pot to take your tax free lump sum from as opposed to taking it from the main scheme where the commutation rate is dire as it is with Public Sector defined benefit schemes.