Pension - Help!

Mint1955

Wow this is the most easily understandable explanation I have ever seen. For those starting out it is superb.

I only started to look on this pension board recently as stupidly me and other half have nothing much sorted and every time i have read anything it literally goes straight over my head. I seriously don't understand and I just keep putting of dealing with things.

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.

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.

kidmugsy

First of all I'll remove any need to make detailed guesses at price inflation rates, investment growth rates, and rates of increase in your income, by making the swingeing assumption that you'll want your pension to keep up with the rate of earnings inflation, and that investment growth after charges, and your own growth rate of income, also keep up with earnings inflation. So all the arithmetic below involves sums of money index-linked to earnings.

Now suppose you retire at 70 and live to 90: you need a pension for 20 years. Suppose also that you want it to be 25% of your own annual income, which you assume will be enough if you have a full state pension and own your own house. (I suspect that this implies a frugal life: change the assumptions to suit your position.) So you need, roughly, to accumulate 0.25 x 20 = 5 years of annual income. You've got 40 years to do it in, so you need to save 5/40 = 12.5% of your annual income into pensions, NISAs, or whatever. If you can get your employer to pay 5%, then you need to save 7.5% yourself.

To check this sum, I compare it with an old-fashioned final salary scheme promising to pay out 50% of earnings as a pension. On my logic, to get 50% of annual earned income as a pension you'd need to save 25% of income. That's pretty close to the way those funds operated, with (for example) the employee paying in 6% and the employer 18%. In other words, my approach makes a decent approximation to past reality. Personally I much prefer this sort of overview to fiddling about with spreadsheets that too easily disguise the gist of the matter.

Mimi_Arc_en_ciel

OHH my head hurts now lol

I've asked work to contribute £54 by salary sacrifice... but they said i cant do salary sacrifice because the scheme isnt set up?!

Will £54 a month be enough, for now?! work contribute 2%

I earn £10440 a year (I work part time) so work will add £208.80 and my contribution will be around 6% of my wage meaning a yearly total contribution of £856.80 (And then I've started to save money which will be around £1200 a year)

bigadaj

Mimi_Arc_en_ciel wrote: »

OHH my head hurts now lol

I've asked work to contribute £54 by salary sacrifice... but they said i cant do salary sacrifice because the scheme isnt set up?!

Will £54 a month be enough, for now?! work contribute 2%

I earn £10440 a year (I work part time) so work will add £208.80 and my contribution will be around 6% of my wage meaning a yearly total contribution of £856.80 (And then I've started to save money which will be around £1200 a year)

It's a start but won't lead to a fortune. Rough and ready figures would suggest 15% into pension at age 30, if this is unachievable then fair enough but gives a guide of what you should ideally be contributing.

Mimi_Arc_en_ciel

So £15000? Yeah not gonna happen, i turned 30 this year

Dammit why didnt i do this sooner!

dunstonh

I've asked work to contribute £54 by salary sacrifice... but they said i cant do salary sacrifice because the scheme isnt set up?!

It is up to the employer whether they do it or not.

atush

Mimi_Arc_en_ciel wrote: »

OHH my head hurts now lol

I've asked work to contribute £54 by salary sacrifice... but they said i cant do salary sacrifice because the scheme isnt set up?!

Will £54 a month be enough, for now?! work contribute 2%

I earn £10440 a year (I work part time) so work will add £208.80 and my contribution will be around 6% of my wage meaning a yearly total contribution of £856.80 (And then I've started to save money which will be around £1200 a year)

54 a month is better than nothing or 20. It is a start.

but if you put in peanuts forever, you'll only get peanuts back in the end. So increase that year on year, work more hours if not full time, or get a better job.

jamesd

54 is a good start, yes. Not great long term but considering your current circumstances it's sufficient.

A salary sacrifice scheme does need assorted arrangements from the employer. The employer gets to save some of their NI as well as the employers saving all of their own NI so it is of benefit to both employer and employee to use salary sacrifice.