Paying peanuts into a pension fund. Is there really any point?

Gra76

I work for a small private company and back in 2001 we were all told we should be taking stakeholder pensions out. At the time I was fairly young and not really that interested but I did it anyway and set it up to take out the minimum I could pay into it (£5 a week).

Fast forward 13 years (I'm now 38) and I'm still throwing £5 a week at it (no contribution from my employer and never has been until it becomes mandatory). I opted out of SERPS at the time if memory serves correctly. I'd no idea what that meant at the time and I still don't but if it makes any difference that's what I was told would be for the best.

Looking at my pension plan and projected pension makes for grim reading. The current value is just under £14k and if I want to get to my target pension (£12k per year) I need to be putting around £1,000 a month into it now, which in honest terms is money I simply don't have and certainly can't see myself being able to put anything like that kind of figure away until much later in life (we moved into a bigger house last year and we have 3 kids to support these days which we didn't have when I started the pension fund).

Another thing I think about is that I had 6 months of chemo to fix a bout of cancer around 3 years ago and it's playing on my mind that my life expectancy is likely to be shorter due to that. How much shorter obviously no-one knows but it's something that I think about every now and then. If I'm going to be making the effort to pay more into the pension pot I want to be around to make sure I enjoy it.

So. What would you advise all knowledgable pension people? I'm at a crossroads at the moment as to whether to carry on with it and start thinking about increasing the amount I put in, or whether I'm wasting my time with it.

Thanks in advance.

greenglide

it's playing on my mind that my life expectancy is likely to be shorter due to that. How much shorter obviously no-one knows but it's something that I think about every now and then. If I'm going to be making the effort to pay more into the pension pot I want to be around to make sure I enjoy it.

You have a spouse / partner? Pensions are for them as well. If you aren't around to enjoy it they likely will be with, probably, more need.

If this is all you and your partner have in the way of pension savings do you expect to spend your retirement having only the state pension?

dunstonh

Looking at my pension plan and projected pension makes for grim reading.

I can imagine it does!

The current value is just under £14k and if I want to get to my target pension (£12k per year) I need to be putting around £1,000 a month into it now,

That does not sound correct. I suspect you are using assumptions which are not realistic.

Another thing I think about is that I had 6 months of chemo to fix a bout of cancer around 3 years ago and it's playing on my mind that my life expectancy is likely to be shorter due to that. How much shorter obviously no-one knows but it's something that I think about every now and then. If I'm going to be making the effort to pay more into the pension pot I want to be around to make sure I enjoy it.

I know people that have have cancer that have lived normal life expectancy after that. However, is your plan to die and leave your wife with nothing?

Gra76

My wife has a good NHS pension but at the moment this is all I have. I'm at the point in my life right now where I'm realising I need to start to look forward a lot further than I had in the past. When I was in my mid 20's a pension really was the last thing on my mind but I know now that I really needed to have put a lot more into it to have made it worthwhile. To top it up to what I originally wanted is going to take more than I can afford at the moment and obviously the closer it gets the more I'll need to top it up with.

xylophone

Re state pension - (the legislation has now been passed).

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181237/single-tier-pension-fact-sheet.pdf
It is important that you and your wife should read this.

When is your employer's staging date? https://www.gov.uk/workplace-pensions-employers

https://www.gov.uk/workplace-pensions/about-workplace-pensions

You should certainly pay enough into your employer's scheme to ensure that you get the full contribution.

In the mean time, you should be increasing your contribution into the stakeholder by whatever you can afford?

Don't forget the tax relief and possibly eligibility for higher CTC?

http://www.hmrc.gov.uk/incometax/relief-pension.htm

https://www.gov.uk/tax-credits-working-out-income

Gra76

dunstonh wrote: »

That does not sound correct. I suspect you are using assumptions which are not realistic.

Those are the figures I'm reading directly from the pension statement, I don't know if it's realistic or not...and yes I plan on leaving something for my wife when I'm gone so topping up the pension is something I really ought to give more priority to. God knows where the money is going to come from though!

xylophone

Another thing I think about is that I had 6 months of chemo to fix a bout of cancer around 3 years ago and it's playing on my mind that my life expectancy is likely to be shorter due to that.

Possibly but possibly not - an acquaintance of mine had surgery for a malignant melanoma well over thirty years ago and is still with us at the age of 84.

Gra76

I remember my boss telling me that he had to start contributing next year to my pension although he didn't tell me exactly when. We're a small family run company so I guess we're one of the last to have to do it.

Looks like I'll be pouring over the numbers tonight to see what I can afford to put into the stakeholder pension in the meantime.

xylophone

pouring over the numbers

A stiff whisky?:)

http://www.dailywritingtips.com/poring-over-pore-and-pour/

jamesd

Gra76 wrote: »

I opted out of SERPS at the time if memory serves correctly. I'd no idea what that meant at the time and I still don't but if it makes any difference that's what I was told would be for the best.

It was a good idea at the time and you've benefited greatly from it. This is because the flat rate state pension will stop increasing the amount paid after 35 years of contributions for people who have been contracted in all the time. So nothing gained for paying in after a person reaches age 53 to 55 if they have been working full time since 18 or 20. But not for you. You get to keep the contracted out pension pot and continue to grow the state pension you'll get until you reach the maximum level, £144 when it was announced, increased a bit since then. So while others are paying in and getting nothing, you'll still be gaining.

You probably aren't sure where the contracted out state pension money went, though it might be that work-related pension. You can find out for certain by phoning the HMRC Contracted Out Helpline. They will tell you which firm got the money. Nothing special if it's the pension you already know about but if it's a different one you could be in for a pleasing surprise when you find out what that other pot is worth.

You're no longer contracted out. That was abolished for everyone doing it as you did a few years ago. This had no effect on the value of your pot, just means you were automatically contracted back in for future years but keep all the pots you'd accumulated at that time.

Gra76 wrote: »

Looking at my pension plan and projected pension makes for grim reading. The current value is just under £14k and if I want to get to my target pension (£12k per year) I need to be putting around £1,000 a month into it now, which in honest terms is money I simply don't have and certainly can't see myself being able to put anything like that kind of figure away until much later in life (we moved into a bigger house last year and we have 3 kids to support these days which we didn't have when I started the pension fund).

Is that £14k including the state pension, say £7,500 a year worth? Median average pensioner income is around £18,000 a year. Your wife will presumably get some state pension also, probably the same £7,500 if she's been working or getting child benefit for 35 years by state pension age. If not she can pay voluntary contributions that are cheap once she's no longer getting the CB.

Try the Hargreaves Lansdown pension tool and let us know what it says. Your projection seems too low. It's also artificially lowered by a requirement to use lower than historic investment returns and probably assumes that you'll buy an inflation-linked annuity, which is something that very few people really do. Usually people either buy a level annuity that starts out significantly higher but drops in real value with inflation or they use income drawdown to get an income from leaving the pension pot invested.

Gra76 wrote: »

Another thing I think about is that I had 6 months of chemo to fix a bout of cancer around 3 years ago and it's playing on my mind that my life expectancy is likely to be shorter due to that. How much shorter obviously no-one knows but it's something that I think about every now and then. If I'm going to be making the effort to pay more into the pension pot I want to be around to make sure I enjoy it.

When someone is diagnosed with a condition that causes their doctors to give an estimated life expectancy of one year or less they get full access to the whole pension pot if it's a personal pension like yours. If you instead get killed by a bus with no notice and haven't taken any money out your wife and children get the whole pension pot paid to them tax free as a lump sum. If you start taking an income then get hit by the bus your spouse gets to have the whole pension pot transferred into one in her name, no tax charge, she gets it all. Or she could take it outside a pension pot and pay a 55% tax charge instead.

Gra76 wrote: »

So. What would you advise all knowledgable pension people? I'm at a crossroads at the moment as to whether to carry on with it and start thinking about increasing the amount I put in, or whether I'm wasting my time with it.

Use the pension. It's a lot better at handling the things that worry you than you think. Tell us the numbers you put into a pension calculator and one or more of us will look those over to see why it's giving the numbers it's giving.

Gra76

jamesd wrote: »

Tell us the numbers you put into a pension calculator and one or more of us will look those over to see why it's giving the numbers it's giving.

Settings I put in were as follows:

Sex - Male
DoB - 12th June 76
Gross salary - £34,658
Existing pension fund - £13,492 (figure taken from most recent pension statement)
Retirement age - 65
Tax free cash - 0%
Personal contribution - £20.51 (rounds it down to £20. The £20.51 is NET on my pension statement if that makes a difference)
Employer contribution - £0