Should I pay into a pension at all?

jbmadd

@grey gym sock - Yes, you understand what I mean! My point was really that generally savings bond rates are higher the longer you lock your money away. So, if pensions didn't exist, would people take the option of a 30 year savings bond for an extra 2.4% above what the market would normally pay? Put this way, it doesn't sounds as attractive as "double your money overnight"


I was never intending to pull out of my pension altogether. My employer does pay in without me contributing anything and I would never pull out of that.

I'm just considering whether to start topping this up. I think I will probably start contributing up to the maximum that my employer will match. What do they say? Age 26, so I should pay in 13% for the rest of my working life?

ViolaLass

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!

As I understand, my final salary pension scheme isn't quite literally what it says it is - in that it takes the average of the best three years out of the last ten. So if I want to spend 5 years winding down, it won't matter. Yours might do something similar. Worth checking at least.

Triumph13

guymo wrote: »

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.

And if that still hasn't convinced you, try this. Let's say you manage to get an average return of 5% pa on your investments. If you invest your £80 outside a pension it will take 19 years to reach the £200 figure that you could have started with inside a pension. Even if you allow for 20% tax on 75% of it meaning the £200 is 'really' only £170 that still takes 16 years.

That basically means you will have to keep working for well over an extra decade to get the same retirement income if you don't take advantage of the pension.

guymo

jbmadd wrote: »

would people take the option of a 30 year savings bond for an extra 2.4% above what the market would normally pay?

I am confident that any product that guaranteed an annualised return 2.4% greater than the total return of the FTSE (or whatever) over 30 years would be extremely popular. Actually, whoever was offering this would probably attract quite a lot of criticism and investigation on the grounds that it is "too good to be true" etc.

That's why for the vast majority of people, contributing to a pension at least up to the level of the employer's matched contributions is a no-brainer.

Beyond the matched contributions there is a lot more to think about. The tax relief might be valuable or might not, and that largely depends on what the tax situation will be once you retire, as you've identified. If your marginal tax rate in retirement will be the same as now, there's no difference between paying tax now and saving in an ISA, or paying no tax now and paying it on withdrawal in a pension. The lump sum rules complicate this a bit.

There are advantages to having access to your money at any time. From a purely financial point of view it is always better to have access -- but from a behavioural point of view, perhaps not, because one might be tempted to use retirement savings for other important things like a house deposit, kids university fees, and so on.

Thrugelmir

jbmadd wrote: »

I don’t even think I would take a savings bond which was 2.3% + FTSE tracker over 30 years.

Sticking your money under the mattress won't be worth much after 40 years of inflation.

dunstonh

jbmadd, i noticed you thanked one of the worst posts in this sections for a long time from CompanionCube. Someone opting out of a defined benefit scheme with bad justification should not be thanked and you shouldnt consider them a good example. In 20 years of giving advice, I have only seen one person who was better off not being in their defined benefit scheme.

If you are thanking someone for encouraging you to opt out then it says a lot for your frame of mind. In your case, it would be a crazy decision. Possibly the worst financial decision of your life. Here is another way of looking at it....

If your pension contribution is £100 then the cost is £80. Employer adds £100 so total amount going in is £200. I think you get that from earlier posts.
£200pm over 42 years at 5% p.a. is a final fund of £333,278. I havent included inflation as your income would go up and therefore the contribution would go up as well. So, consider that a real terms (todays spending power) example.

If you decide not to join and put the money in something else and lets say you manage the same rate of return that would be
£80pm over 42 years at 5% which would give you a final fund of £133,311.

So, for exactly the same outlay (£80) which would you prefer. £333,278 or £133,311

guymo

dunstonh wrote: »

jbmadd, i noticed you thanked one of the worst posts in this sections for a long time from CompanionCube. Someone opting out of a defined benefit scheme with bad justification should not be thanked and you shouldnt consider them a good example. In 20 years of giving advice, I have only seen one person who was better off not being in their defined benefit scheme.

Useful post as ever dusntonh, but I think you misunderstood CompanionCube's conclusion. He/she said that the "final salary" part of the pension scheme was worrying (!!) but that on performing detailed calculations it turned out to be better to stay in the scheme.

(At least, I think that's what the post says. It's not completely clear.)

jbmadd

@dunstonh - I thanked CompanionCube for three reasons:

- he (or she) acknowledged that it’s a choice between less money now or more money a long time in the future.
- he concluded after doing calculations and reasoning it out
- he advised me to look a the rules of my scheme, think about when I plan to retire and I think the line “you can only make the best decision based on what you know now” is quite helpful

The bit about opting out of final salary is not so relevant to me as mine is not final salary.

Also, I don’t see a problem with thanking people for advice I would disagree with - it still might help me make a decision. I fully understand all the calculations, which I've done numerous times, and it comes down to risk and return. The low risk low return option is to take cash now and not put into pension, and putting into a pension is higher risk but much higher returns so probably worth it in the end.

It would be interesting to hear from someone who has taken the low risk low return option of not paying much in, as I get the impression that anyone who has already paid a lot into their pension is (understandably) slightly biased.

somethingcorporate

Scroll back through the forums, there are plenty of the low risk, low returns people that post when they get their light bulb moments realising that they have not put enough aside in their pension and will have to work well into their 70s to live a reasonable life.

If it's an all or nothing debate then pension wins hands down.

In the real world most people sensible enough will have a range of investments and options (of which I am sure pension would be a significant one) as a provision for old age. For instance, if you want to retire (very) early then pension alone will not allow that.

PensionTech

putting into a pension is higher risk but much higher returns so probably worth it in the end

This is a spurious argument. You are talking about the difference between short term and long term savings - not risk. Risk is the same whether you are investing inside or outside of a pension. If you want to save the money for retirement then it is best done in a pension because you get - you guessed it - a lot of free money.