Pension - Help!

Mimi_Arc_en_ciel

Hi!

I am looking for information on pensions and what I should / shouldn't be doing

I haven't saved for a pension and at 30 I REALLY should have done this sooner (I know!)

I have a savings account (Been on the savings board already today) and a work based pension but this is 2% of my wage (Less than £20) and I work part time currently (Young children) I do not contribute to this.

I know that I should be going to work full time - and believe me this is something I am working towards with my employer.

But what else should I be doing? Are personal pensions better than work pensions?!


How much am I actually going to need when I'm a little old dear?
Thanks!

atush

The most important thing is to save into a pension, and 20 per month isn't really going to cut it.

I would for a start put in at least 20 of your own money alongside. then investigate what the costs are of the work pension (ie % charge annually) and the costs of the alternative. Also look at the funds available.

jem16

Mimi_Arc_en_ciel wrote: »

I have a savings account (Been on the savings board already today)

Good - you certainly should have cash saved for emergencies etc.

and a work based pension but this is 2% of my wage (Less than £20) and I work part time currently (Young children) I do not contribute to this.

You are contributing if the 2% comes from your wage or are you saying your employer pays the 2% on top of your wage?

But what else should I be doing?

Certainly trying to contribute more to a pension. £20pm isn't going to go far.

Are personal pensions better than work pensions?!

Not usually. Work pensions often come with an employer contribution whereas personal pensions don't. Work pensions can have better charges but not always.

How much am I actually going to need when I'm a little old dear?
Thanks!

The depends on how much you would like to spend and need to live.

atush

Basically you need to work on your Number ie the amt you need to live (in todays money) when retired. Then use a pension calculator to see how much that will take a month.

Search this forum using the word Number, there is a thread here about just that very thing.

jamesd

Work pensions tend to be the best deal for those starting out, so probably best to use that.

When it comes to how much you will need in retirement, that's really for you to decide. In much of the country about £12,000 a year will be enough, though not in the south-east. The median average pensioner income is a bit under £18,000 at the moment. The flat rate state pension is likely to be about £8,000 a year.

Expenses tend to be lower for those who own their own home so arranging to do that is also a key part of retirement planning. It doesn't have to be a fancy home, just a place that meets your minimal needs. That could be a one bedroom ground floor flat to give you easy access at older ages.

Once you have picked your target income subtract the £8,000 for the state pension. The remaining part is how much you need to provide for yourself. To get the pension pot size you need for a particular income level, start out by multiplying by 25. This is because 4% income from a pension pot, increasing with inflation, is quite widely accepted as a suitable long term amount without an excessive chance of running out of money in old age.

Say you set the target at £18,000 gross, that median gross pensioner income level. The state pension will be £8,000 of that, so you would need to provide for £10,000. Multiply by 25 and you get your pension pot target size of £250,000 in today's money. Subtract any existing pots from that, I'll assume that you have none here.

Next step is to use a regular savings calculator to estimate how much you'd need to pay in to reach your target. Use 5% as the interest rate because this is about right for the average long term historic growth of the UK stock market. For the number of years, start out with the number of years from now until you reach state pension age. I'll assume that this is 38 for you. Now adjust the monthly payment until the projected value of the investment at the end is a little over your target pot size. When I put in a monthly payment of £185 by experimenting), 38 years and 5% interest rate that gets a pension pot size of £251,284, just over the target pot size.

Now, pick two more income targets. The minimum and a desirable amount that's a good deal more than you really need. Do the same pot size and contribution calculations for them and you'll get a range of three different monthly gross pension contribution values.

Those monthly targets won't be your net cost because they ignore employer contributions and tax relief. Subtract the amount of employer contributions from the target payments. Then multiply what is left by 0.8 to allow for the effect of basic rate tax relief.

With a £185 initial amount and 2% of £12,000 a year employer contribution the employer contribution reduces that by £20 to £165. Basic rate tax relief reduces it again to 0.8 * £165 = £132. So £132 would be your target monthly pension contribution to get to £18,000 total income.

Now, it appears that you may be living on around £12,000 at the moment, so I'll recalculate with that as the lower target. £12,000 - £8,000 = £4,000 you have to provide for yourself. £4,000 * 25 = £100,000 target pot size. No existing pot to subtract. Regular savings calculator, adjust the monthly amount until you get to a little over £100,000. That's £74 a month. Subtract the employer £20 leaves £54. Multiply by 0.8 and you get to a net cost to you of £43.20. That's much more affordable than the £18,000 target.

So for now I suggest that you consider a gross pension contribution of £54 of your own money on top of your employer contribution. If that is too much, consider half of it, which would get you to perhaps £10,000 total income, not great but an OK target for now while your income is low and you have the children's expenses.

Ideally you would also want to add 50%-100% as a safety margin and use your middle income target as the goal. Then bad market performance might drop you to the low level or normal take you to the high target level or higher. Given your current circumstances and that they are temporary it seems OK for now not to do that, knowing that you will need to do some catching up later. That catching up will happen if you redo these calculations later with fewer years to go and the pot you have accumulated. The pot will not be enough to compensate for the lower initial payments so the calculation will give you a higher monthly payment than today. not a lot higher if the delay isn't many years but it can be far higher if you wait until ten or twenty years to retirement.

Once you have done all of these things you can also start to consider what it would take to be able to retire earlier than state pension age.

Mimi_Arc_en_ciel

jem16 wrote: »

You are contributing if the 2% comes from your wage or are you saying your employer pays the 2% on top of your wage?

2% on top of my wage at the moment

jamesd wrote: »

Work pensions tend to be the best deal for those starting out, so probably best to use that.

When it comes to how much you will need in retirement, that's really for you to decide. In much of the country about £12,000 a year will be enough, though not in the south-east. The median average pensioner income is a bit under £18,000 at the moment. The flat rate state pension is likely to be about £8,000 a year.


Expenses tend to be lower for those who own their own home so arranging to do that is also a key part of retirement planning. It doesn't have to be a fancy home, just a place that meets your minimal needs. That could be a one bedroom ground floor flat to give you easy access at older ages.


I've inherited a house and will be moving into it soon

Once you have picked your target income subtract the £8,000 for the state pension. The remaining part is how much you need to provide for yourself. To get the pension pot size you need for a particular income level, start out by multiplying by 25. This is because 4% income from a pension pot, increasing with inflation, is quite widely accepted as a suitable long term amount without an excessive chance of running out of money in old age.

Say you set the target at £18,000 gross, that median gross pensioner income level. The state pension will be £8,000 of that, so you would need to provide for £10,000. Multiply by 25 and you get your pension pot target size of £250,000 in today's money. Subtract any existing pots from that, I'll assume that you have none here. sheesh! Thanks for the explanation though - very helpful

Next step is to use a regular savings calculator to estimate how much you'd need to pay in to reach your target. Use 5% as the interest rate because this is about right for the average long term historic growth of the UK stock market. For the number of years, start out with the number of years from now until you reach state pension age. I'll assume that this is 38 for you. Not yet! only 30 but that gives me 8 more years to play catch up lol Now adjust the monthly payment until the projected value of the investment at the end is a little over your target pot size. When I put in a monthly payment of £185 by experimenting), 38 years and 5% interest rate that gets a pension pot size of £251,284, just over the target pot size.

Now, pick two more income targets. The minimum and a desirable amount that's a good deal more than you really need. Do the same pot size and contribution calculations for them and you'll get a range of three different monthly gross pension contribution values.

Those monthly targets won't be your net cost because they ignore employer contributions and tax relief. Subtract the amount of employer contributions from the target payments. Then multiply what is left by 0.8 to allow for the effect of basic rate tax relief.

With a £185 initial amount and 2% of £12,000 a year employer contribution the employer contribution reduces that by £20 to £165. Basic rate tax relief reduces it again to 0.8 * £165 = £132. So £132 would be your target monthly pension contribution to get to £18,000 total income. This is a lot better than the £350 then the company who provides our work pension advised!

Now, it appears that you may be living on around £12,000 at the moment, so I'll recalculate with that as the lower target. £12,000 - £8,000 = £4,000 you have to provide for yourself. £4,000 * 25 = £100,000 target pot size. No existing pot to subtract. Regular savings calculator, adjust the monthly amount until you get to a little over £100,000. That's £74 a month. Subtract the employer £20 leaves £54. Multiply by 0.8 and you get to a net cost to you of £43.20. That's much more affordable than the £18,000 target.

So for now I suggest that you consider a gross pension contribution of £54 of your own money on top of your employer contribution. If that is too much, consider half of it, which would get you to perhaps £10,000 total income, not great but an OK target for now while your income is low and you have the children's expenses. I should be able to afford the £54. At the moment, when I have looked at my budget I can put away £151. I've been contemplating putting £100 into a savers account for me, as well as keeping my kids savings going. That leaves me with £51 "left" for my pension.

Ideally you would also want to add 50%-100% as a safety margin and use your middle income target as the goal. Then bad market performance might drop you to the low level or normal take you to the high target level or higher. Given your current circumstances and that they are temporary it seems OK for now not to do that, knowing that you will need to do some catching up later. That catching up will happen if you redo these calculations later with fewer years to go and the pot you have accumulated. The pot will not be enough to compensate for the lower initial payments so the calculation will give you a higher monthly payment than today. not a lot higher if the delay isn't many years but it can be far higher if you wait until ten or twenty years to retirement.

Once you have done all of these things you can also start to consider what it would take to be able to retire earlier than state pension age.

Thank you so so much for your advise, I really appreciate the time and effort you put into this for me.


Answers above in red

PensionTech

I'll assume that this is 38 for you. Not yet! only 30 but that gives me 8 more years to play catch up lol

Don't get complacent! You've said you're only 30 so the number of years until State Pension Age will indeed be 38 - jamesd is right, so unfortunately you don't have more time than he says to catch up.

Mimi_Arc_en_ciel

PensionTech wrote: »

Don't get complacent! You've said you're only 30 so the number of years until State Pension Age will indeed be 38 - jamesd is right, so unfortunately you don't have more time than he says to catch up.

AHH I read that bit wrong didn't I! I'm still going to put the amount that was suggested away but thanks!

Mimi_Arc_en_ciel

Is there a "better" way for me to pay into my pension?


Salary sacrifice?


Currently I get both WTC and CTC - How will my pension payments affect these?

bigadaj

Mimi_Arc_en_ciel wrote: »

Is there a "better" way for me to pay into my pension?


Salary sacrifice?


Currently I get both WTC and CTC - How will my pension payments affect these?

Salary sacrifice is good, take advantage of it if you can as it gives a big boost particulalry where you aren't a higher rate taxpayer.

Contributions to pension normally reduce your income, so shouldn't affect and may slightly increase in work benefits.

lejog2003

jamesd wrote: »

The median average pensioner income is a bit under £18,000 at the moment. The flat rate state pension is likely to be about £8,000 a year.

The median average??????

The median HOUSEHOLD income for pensioners was £19,300 in 2011/12. IIRC the median pensioner income was £11,900 at that time.