Should I pay into a pension at all?

itzmee

I do intend to increase my hours and maybe go full time in 2-3 years when my youngest is fully established in secondary school and able to let himself in the house, but my husband's shift patterns don't really allow for that just yet. Also next year when I have 10 years service my employer pension contribution goes up from 7.5% to 10% so that will also help a bit more.

grey_gym_sock

jbmadd wrote: »

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.

if you could buy this imaginary bond with money outside a pension, but only buy a FTSE tracker inside a pension, then you are correct: the extra 2.4% return per year would about double your money after 30 years, compared to the returns you could get inside the pension, which would make the pension and non-pension investments about even overall.

but in reality, the returns available inside and outside a pension are almost identical.

Intoodeep

bigfreddiel wrote: »

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

Yes indeed, as an Employer we pay in 10% for the Employees into the scheme...............and yes you have guessed there are people who don't join the scheme :santa2:

CompanionCube

I opted out of my pension scheme when I first started working for my current employer for the same reasons. I think for me it's a matter of trust, and control. On the one hand, I could have a smaller amount of money, readily available if I ever need it. On the other hand, I could have a larger amount of money dished out to me by someone else's rules.

The one thing I was worried about is that mine is a final salary scheme. I know there are provisions in place if your salary is reduced in later years due to sickness or other circumstances beyond your control, but I'm sure there are plenty of ways an employer can wriggle out of that. Also, I might not want the same level of responsibility as I get older, and I work with people who I can only assume by their behaviour, are clinging lifelessly to their position until they retire, just for the final salary... I don't want to be one of them!

BUT I've recently done some calculations, and under the current rules, I would get £8k per year more as a pension, than with savings (even assuming a decent interest rate) which would mean even considering the final salary scheme, if I've paid off my mortgage by the time I'm 50 I would be able to either drop to half my current hours, or a much more junior position, and STILL get a larger pension than if I'd used my own savings. So I'm sold

I don't know if that will help you - but I would advise looking at the rules for all your pension options, and working it out as if you're retiring today, imagining you are whatever age you hope to retire, how much would you get from each option. You can't do much about the rules changing, you can only make the best decision based on what you know now.

tell_it_how_it_is

I've never worked for any company where they've contributed to a pension in 25 years.

If I had, I'd have snapped their bloomin' hands off!

guymo

jbmadd wrote: »

- 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.

Others have explained this but it's not obvious that you accepted the argument so let me try! (Don't mean to be patronising. I just want to show you some numbers.)

Suppose you put £80 into your pension. This results in a £200 investment (20% tax relief plus employer match). Supposing your pension fund performs at 3% annually over those 30 years, you'll have £485 in the fund.

To obtain the same outcome from your £80 outside the pension, you would need to achieve performance of 6.2% annually.

The point is that the tax relief and employer contribution gives your £80 a huge head start. Indeed, to double in nominal terms by the time you retire, it has to lose money.

dunstonh

The one thing I was worried about is that mine is a final salary scheme.

ouch. opting out of a final salary scheme is a really bad move.

I know there are provisions in place if your salary is reduced in later years due to sickness or other circumstances beyond your control, but I'm sure there are plenty of ways an employer can wriggle out of that.

No there isnt.

BUT I've recently done some calculations, and under the current rules, I would get £8k per year more as a pension, than with savings (even assuming a decent interest rate) which would mean even considering the final salary scheme, if I've paid off my mortgage by the time I'm 50 I would be able to either drop to half my current hours, or a much more junior position, and STILL get a larger pension than if I'd used my own savings. So I'm sold

To get the same benefit, you would need to pay around 30% of your salary into the alternative.

guymo

CompanionCube wrote: »

The one thing I was worried about is that mine is a final salary scheme. I know there are provisions in place if your salary is reduced in later years due to sickness or other circumstances beyond your control, but I'm sure there are plenty of ways an employer can wriggle out of that. Also, I might not want the same level of responsibility as I get older, and I work with people who I can only assume by their behaviour, are clinging lifelessly to their position until they retire, just for the final salary... I don't want to be one of them.

I don't think I've come across that particular fear before -- that the employer will somehow try to reduce your pensionable salary to avoid having to pay pension. My own pension scheme is not run by my employer, so the incentive isn't there, but I don't think there is much if any history of that having happened, is there?

On the contrary, most final salary schemes are pretty generous in respect of reduced hours etc. In a typical scheme, if you reduced your hours to 80% of full time, your pensionable salary would remain unchanged but you would accrue years of service at 0.8 per year. So in a 1/80th final salary scheme, if you worked full time for 30 years and 80% for 10, you would receive 38/80 of your full-time equivalent salary. That's quite different from "you've worked 40 years and your final sally is 80% of your previous one, so you get 40/80* 80% = 32/80 of your full-time equivalent salary."

This is a bit off topic I'm afraid.

atush

CompanionCube wrote: »

I opted out of my pension scheme when I first started working for my current employer for the same reasons. I think for me it's a matter of trust, and control. On the one hand, I could have a smaller amount of money, readily available if I ever need it. On the other hand, I could have a larger amount of money dished out to me by someone else's rules.

The one thing I was worried about is that mine is a final salary scheme. I know there are provisions in place if your salary is reduced in later years due to sickness or other circumstances beyond your control, but I'm sure there are plenty of ways an employer can wriggle out of that. Also, I might not want the same level of responsibility as I get older, and I work with people who I can only assume by their behaviour, are clinging lifelessly to their position until they retire, just for the final salary... I don't want to be one of them!

BUT I've recently done some calculations, and under the current rules, I would get £8k per year more as a pension, than with savings (even assuming a decent interest rate) which would mean even considering the final salary scheme, if I've paid off my mortgage by the time I'm 50 I would be able to either drop to half my current hours, or a much more junior position, and STILL get a larger pension than if I'd used my own savings. So I'm sold

I don't know if that will help you - but I would advise looking at the rules for all your pension options, and working it out as if you're retiring today, imagining you are whatever age you hope to retire, how much would you get from each option. You can't do much about the rules changing, you can only make the best decision based on what you know now.

Completely Gobsmacked:eek:

Drp8713

atush wrote: »

Completely Gobsmacked:eek:

Yes, some people make really bad decisions for really bad reasons.

The 'I will have money there if I need it' argument is awful. You will need money in retirement, the same way as you will need money at other times. Thank god for pensions to stop people blowing their retirement funds before retirement.

Pensions are heavily protected by legislation, the 'my employer is going to run off with my money' argument is just ridiculous these days.