Should I pay into a pension at all?

jbmadd

As background info, I am 26. My employer pays a percentage of my salary into my pension and will also match my contributions up to a certain level. Payments into my pension only started 6 months ago, so there’s not a lot in there at the moment.

I’m struggling with whether or not to contribute anything into my pension. The main issues I have with pensions are:

- the government of the day can change the rules as they see fit and the rules are very likely to have changed by the time I retire, so I don’t really know for sure what I’ll get out of it (e.g. they could abolish the 25% tax free cash, raise the age at which you can take your pension or reduce the lifetime allowance)

- the long timescale is unnerving. I know that I need to save for retirement, but the idea that I have no access at all to the cash in case of emergencies is worrying.

- any money invested in a pension is money that could be invested in, say, a property. So even if my employer matches my contributions, is it worth having a smaller deposit and paying a higher interest rate on the mortgage? At the very least, any money I don’t put into my pension I could use to overpay a mortgage and save interest.

- I am not entirely convinced by the “free money” argument. To illustrate, the doubling of money over 30 years only equates to an annual interest rate of 2.3% per year. If a bank were offering a 30 year savings bond at 2.3%, I wouldn’t take it. I don’t even think I would take a savings bond which was 2.3% + FTSE tracker over 30 years.


So, in summary, I just don’t feel comfortable giving up control of my money for such a long period of time, even if it means giving up some “free money”.

I know there are tax advantages also. But, assuming you are currently a basic rate taxpayer, once you’ve put enough into your pension to start paying basic rate tax on retirement, then you will simply pay the tax you had saved when you take the money as pension so there’s no net gain (except maybe NI?).

My main worry is that I am too risk averse. I know this is my nature and it may not work well for me in the long term.

Any thoughts?

DigForVictory

Free money, invested in bulk by professionals.
No matter what the government du jour does it cannot afford to p!ss off the next generation of pension payers so while it may annoy you it daren't scare the hosses.
Especially for the risk averse, let the pros handle it, & enjoy the free money when you get there.

dunstonh

My employer pays a percentage of my salary into my pension and will also match my contributions up to a certain level.

Excellent. Free money. Nothing beats free money.

- the government of the day can change the rules as they see fit and the rules are very likely to have changed by the time I retire, so I don’t really know for sure what I’ll get out of it (e.g. they could abolish the 25% tax free cash, raise the age at which you can take your pension or reduce the lifetime allowance)

Same goes for anything. However, the tax free cash has not been reduced since it was introduced but increased over time. The age range for retirement has been set as 10 years prior to state pension age. The lifetime allowance reductions impact only on a very small number of people.

However, none of that matters as the free money and tax relief make up for it.

- the long timescale is unnerving. I know that I need to save for retirement, but the idea that I have no access at all to the cash in case of emergencies is worrying.

at 26 that is a naive but common view. You will say the opposite in 10 years time.

- any money invested in a pension is money that could be invested in, say, a property.

Although £200 going into a pension would equate to £80 if taken as cash instead. So, the property is going to be way behind before it even starts. Property is subject to CGT on sale and income tax on rent.

At the very least, any money I don’t put into my pension I could use to overpay a mortgage and save interest.

Your interest rate on the mortgage would have to be well into double digits to make that a better option.

- I am not entirely convinced by the “free money” argument. To illustrate, the doubling of money over 30 years only equates to an annual interest rate of 2.3% per year. If a bank were offering a 30 year savings bond at 2.3%, I wouldn’t take it. I don’t even think I would take a savings bond which was 2.3% + FTSE tracker over 30 years.

A doubling of your contribution is a 100% gain overnight. That free money is then invested. You are not thinking about the money correctly.

My main worry is that I am too risk averse.

No, you are just lacking understanding of the benefit of having £80 turned instantly into £200 and how quickly time flies. It gets faster and faster as you get older. You will really regret not paying into the pension. You are already a little late with you starting at 26. Don't make things worse by pulling out.

bigfreddiel

Some people don't want free money! Strange but true!

fj

jbmadd

@dunstonh Thanks and I take all your points, apart from one on the doubling of the money. It's not really a doubling overnight if you can't access it for 30 years. What is the difference between having the money in your pension (say invested in a FTSE tracker, for the sake of argument) and taking out a 30 year savings bond at 2.4%+FTSE. I know such a savings bond may not actually exist, but I'm just trying to imagine whether it would seem as attractive if it were packaged like this.

But generally, yes I am starting to think I should put some in. That's probably why I started the thread in the first place.

atush

Yes, it IS doubling it overnight if you can have access or not (you can't have access to a non pension 5 yr bond either?). Then you have the Compounded Growth of that extra money over time. Could double it yet again.

You are also forgetting about the Downsides of Access.

Means testing (you get laid off and want to claim benefits or get sued/go bankrupt). In a pension your money is safe. Outside it isn't.

Yorkie1

jbmadd wrote: »

@dunstonh Thanks and I take all your points, apart from one on the doubling of the money. It's not really a doubling overnight if you can't access it for 30 years. What is the difference between having the money in your pension (say invested in a FTSE tracker, for the sake of argument) and taking out a 30 year savings bond at 2.4%+FTSE. I know such a savings bond may not actually exist, but I'm just trying to imagine whether it would seem as attractive if it were packaged like this.

But generally, yes I am starting to think I should put some in. That's probably why I started the thread in the first place.

Because the 'capital' value of the pension, if I can describe it as that, is double the FTSE tracker from the outset.

So you invest £80 into the FTSE tracker. That grows at the rate described for 30 years.

However, if you put the same amount into a pension, the government would immediately put in another amount to allow for the tax relief - say £20, and your employer puts in some too - say another £80. [I am not an expert in figures, this is just to illustrate the point.] That's £180 invested in similar investments for a similar period.

£80 invested vs £180 invested, for the same initial outlay by you, and similar returns. That's the point the others are trying to make, I think.

R_P_W

I suppose if you want to work until you drop....then don't bother paying anything in. Rely on the state pension that may not even exist when you reach retirement age. Even if it does you probably won't be able to retire.

Annie1960

jbmadd wrote: »

- the long timescale is unnerving. I know that I need to save for retirement, but the idea that I have no access at all to the cash in case of emergencies is worrying.


My main worry is that I am too risk averse. I know this is my nature and it may not work well for me in the long term.

Any thoughts?

The long timescale - you can also put some money into an ISA so you have this available if you need to access it.

Too risk averse? Failing to provide a pension for yourself is a very high-risk strategy. You are assuming you will be able to live on the state pension, and you will have no control over when you take this (unless you chose to delay it). With your own pension, you get options to take this early (I know these change over time, but the principle is unlikely to change).

At 26 you still have time. I started my pension at 28, and took early retirement aged 51 (with a scheme that allowed this at the time). Now, of course, 55 is usually the earliest retirement age, but you still get control over your choice.

With the new pension changes, you will have even more options as you will not be forced to buy an annuity.

Pensions are a very good way of saving for your future, but you should balance this with having some accessible money (such as an ISA).

itzmee

jbmadd wrote: »

I am 26.

- the long timescale is unnerving. I know that I need to save for retirement, but the idea that I have no access at all to the cash in case of emergencies is worrying.

Any thoughts?

I am 46 and only started my work pension 9 years ago, with me adding extra contributions only 2 years ago. I work part time so my pension pot isn't very much - will probably be only worth around £2.5k per year when I retire. I wish I had done something about it when I was much younger but it wasn't important to me then. Now I think otherwise. I am trying to top up my contributions by as much as I can afford and plan to increase it every year. Retirement age may be 40 odd years away for you but its only 20 odd for me, and too late for me to build up a decent pension. Our mortgage will be paid off though so that something we don't have to worry about. I will have to rely on the state pension and my husband's pension (which also isn't as good as it should be) so that we have a somewhat decent income in retirement.

atush

Although it isn't too late to build up something decent in 20 years -IF you can work full instead of part time at some point. that will give you more to save.