7% pa return over 30-40 years

yatinsardana

So I'm going to start working under the NHS in a few months time and since I'm so interested in long term planning I ask this:

Is a 7% return (I understand that's the market average over a long term) pa realistic over a 35-40 year period?

I'm hoping you guys say yes. I'm talking about a net return including dividends, fund manager fees etc. there shouldn't be any tax to account for as investments would be under ISa.

The reason I ask this is that I'm genuinely considering potentially not going for the NHS pension scheme (being fully aware I might attract a lot of confrontation here) even though it has certain benefits. I'll go into the reasons maybe in a different thread.

I believe over a long term an average of 7% return isn't unrealistic but unfortunately I don't have 30-40 years of investing experience to back me up on this

xylophone

I believe over a long term an average of 7% return isn't unrealistic but unfortunately I don't have 30-40 years of investing experience to back me up on this

Might be as well to join that pension scheme!:)

There is no reason why you should not contribute to a personal pension scheme as well or to an ISA.......

yatinsardana

I would certainly hope so but if I think about it according to the contribution rates I'll be paying about £500 on average (after tax) for majority of my working life (granted first 10 years or so it will be around 250-300 but in those years you'll also be saving for a house). Outside that 500, I wonder how much can you even realistically plan to save for ISA. I wouldn't have thought it would be much?

jem16

yatinsardana wrote: »

The reason I ask this is that I'm genuinely considering potentially not going for the NHS pension scheme (being fully aware I might attract a lot of confrontation here) even though it has certain benefits. I'll go into the reasons maybe in a different thread.

Perhaps you could explain your reasons here as it might help to understand what you are trying to achieve in turning down one of the best pension schemes around?

planteria

jem16 wrote: »

Perhaps you could explain your reasons here as it might help to understand what you are trying to achieve in turning down one of the best pension schemes around?

agreed.

i don't know much about the NHS pension scheme, yatinsardana, but i would have thought it will be a no brainer: just do it. and then decide whether to invest in an ISA or DC pension alongside. it might be tight, especially initially, but over that sort of timeframe it ought to turn out very well indeed.

CLAPTON

is your 7% net of inflation (i.e real return) or in nominal terms?

since 1999 the fts100 has had a negative capital return


what calculation have you done to say it's better than NHS pension?

yatinsardana

Well I have a few thoughts on the pension scheme:
Advantages - it's fairly safe and secure (I hope!), it's guaranteed income after retirement, tax benefits as it's taken out before pay, NHS contributes 14%

Disadvantages - the contribution proportion by the NHS staff seems to be increasing. In fact for 2014/2015 the maximum contribution will be over 14% (14.5%).
Saving 40% tax right now or paying tax later doesn't really make much of a difference to me. It appears that in all likelihood I'd still be paying 40% tax on my annual pension!
The NHS contribution doesn't seem to make much of a real difference to me as as far as my understanding goes NHS pension (2008 scheme) is based on the reckonable pay (average of 3 highest consecutively paid years in the last 10 years of working), number of membership years and 1/60th value. If the scheme was the kind where all the contributions were being invested into a pension fund and over long term it would grow, then yes the 14% NHS contribution would make a lot of difference but here, I already know how much I'll be getting as long as I remain in the pension scheme (I know thre advantage of this is the security of knowing).
Lastly the lump sum that you get tax free (according to the 2008 scheme, roughly 4.28*annual pension) is great but if I wanted to invested that money then I'd have to pay taxes on it as I won't be able to put all that money straight into an ISA.

So, alternatively if I invested my "pension" money (albeit after tax it would be a smaller amount pa) into ISA funds and stocks and cash and with dividends re invested I get a 7% return on average over 40 years, not only would my investments be much higher by retirement age, I would be able to live off dividends and capital growth every year whilst preserving capital. I won't have to pay any tax! So my equivalent " lump sum" if I wanted to invest would already be in an ISA.

My thinking may be naive or even wrong but any thoughts would be appreciated

Linton

I dont think a 7% return is a sensible basis on which to plan your long term future. Some people think the game has changed now and lower returns can be expected in the future. And in any case you dont want to rely on an average prediction that if it truly does represent the long term average has a 50% chance of being optimistic.

yatinsardana

One thing I do wonder is (and int may be silly to even ask), how safe is pension? Specifically NHS pension. With pension schemes changing so much, will the pension still be safe. I feel weird handing over my hard earned money to someone who promises to essentially give it back once I'm retired .... What if they go bankrupt (or private) or change the plans such that they give me a lot less than agreed or anything really!

Conversely, what about funds that we invest in? What happens if they go bankrupt or stop the fund.. What happens in that case?

Linton

In your calculations have you taken inflation into account??? Your salary and therefore your NHS pension will increase with inflation, your investment returns wont necessarily.

I strongly suspect your calculations are wrong.

CLAPTON

yatinsardana wrote: »

Well I have a few thoughts on the pension scheme:
Advantages - it's fairly safe and secure (I hope!), it's guaranteed income after retirement, tax benefits as it's taken out before pay, NHS contributes 14%

Disadvantages - the contribution proportion by the NHS staff seems to be increasing. In fact for 2014/2015 the maximum contribution will be over 14% (14.5%).
Saving 40% tax right now or paying tax later doesn't really make much of a difference to me. It appears that in all likelihood I'd still be paying 40% tax on my annual pension!
The NHS contribution doesn't seem to make much of a real difference to me as as far as my understanding goes NHS pension (2008 scheme) is based on the reckonable pay (average of 3 highest consecutively paid years in the last 10 years of working), number of membership years and 1/60th value. If the scheme was the kind where all the contributions were being invested into a pension fund and over long term it would grow, then yes the 14% NHS contribution would make a lot of difference but here, I already know how much I'll be getting as long as I remain in the pension scheme (I know thre advantage of this is the security of knowing).
Lastly the lump sum that you get tax free (according to the 2008 scheme, roughly 4.28*annual pension) is great but if I wanted to invested that money then I'd have to pay taxes on it as I won't be able to put all that money straight into an ISA.

So, alternatively if I invested my "pension" money (albeit after tax it would be a smaller amount pa) into ISA funds and stocks and cash and with dividends re invested I get a 7% return on average over 40 years, not only would my investments be much higher by retirement age, I would be able to live off dividends and capital growth every year whilst preserving capital. I won't have to pay any tax! So my equivalent " lump sum" if I wanted to invest would already be in an ISA.

My thinking may be naive or even wrong but any thoughts would be appreciated

the NHS don't pay 14% into your pension

they give you a GUARANTEED return which is massively valuable

you haven't answered my question about inflation

give us the detailed calculations and assumptions