Is my pension contribution "worth it"

gadgetmind

mgdavid wrote: »

I'm calling troll and won't be responding further.

Yes, I really do suspect you're right.

agarnett

jamesd wrote: »

There were two typos in my original post. One was 7224 instead of 7244 and the other was writing "month" instead of "year" as the last word, though I correctly used year and 7244 in the body text. Thanks for mentioning those two errors, I fixed the year/month transposition yesterday and just fixed the 7224/7244 one.

£603.70 is 1/12 of the 4% annual drawing rate of £7,244. £7,244 is the result of investment returns of 5% plus inflation for the 43 years on £100 a month gross then taking 4% of the resulting lump sum as annual income. 5% plus inflation is the long term historic UK stock market return. Because all of the numbers used are after allowing for the effect of inflation - like saying increase the monthly payment with inflation or using the after-inflation growth - all numbers are in today's money.

It wouldn't really cost £80 a month for a young person for long, though. That's because from 2018 the auto-enrolment rules change are set to require a split of 3% employee, 1% tax relief and 4% employer contribution. So the employees will more than double their own contribution and getting £100 a month gross in the pension would only cost £37.50 net. So it'll be £37.50 monthly paying in to get £603.70 monthly out.

That £37.50 a month would be the auto-enrolment amount for a person on £15,000 a year, 3% of that.

You've suffered from all sorts of past flaws in the system but defined contribution pensions eliminate most of those.

Sorry jamesd, I was rushing out to catch a plane when I last posted. I do see exactly now where your figures come from but they are not persuasive are they?

I had credited you with some corrections (scaling down) of the £7,244 annual drawdown starting in 43 years to give an estimate of what it might be worth in today's money. At 5% inflation over 43 years, the spending power of £7,244 per year will be sadly worth in the region just £890 in today's money. Or £74 per month. I thought your £603.70 was that figure and that is why I asked where it came from. But we have cleared that up now but it means Your suggestion that all your figures are in today's money is surely ambiguous?

I said earlier that I struggled to see the value of investing £80 of one's own money now to achieve money's worth of less than £80 In 43 years.

In the past, I too have been an advocate of the "no brainier - it's free money" view, but it is much harder to justify when the tax relief part of the argument (your £100 pm investment from £80 pm actual personal investment) doesn't even add up.

agarnett

gadgetmind wrote: »

Yes, I really do suspect you're right.

He's alright, jack, but sadly that doesn't make him right.

So we know about compounding, but have you smarts anything to say about the wonders of reverse compounding when inflation erodes the spending power of your tax-relief grossed-up compounded savings faster than it grows? That is unless your savings interest rate is notably more than inflation ... Or have I got the maths wrong? (I do make mistakes so feel free to correct the maths or the politics if you can!)

AlanP_2

Ad86 wrote: »

Our JOINT gross is less than 2k a month.

I would think the OP has lost the will to live TBH as the thread has gone off in a variety of philosophical directions

Can I just check Ad86 (if you are still reading this) whether either you or your OH are working part time, or on a Casual Hours basis?

The reason I ask is that the National Minimum Wage (Age 21+) is £6.50 per hour at the moment, which equates to £240.50 per week (based on 37 hour week) or £12506 per year or to put it another way a gross of ~ £1042 per month.

If either of you are being paid less than the NMW I would look into it what can be done to improve your hourly rate.

I realise that whether your combined gross is £1985 per month or £2085 per month will not make a significant difference to your dilemma but it would be worth having.

For what it's worth I would go with the Pension option if I possibly could.

jamesd

agarnett wrote: »

I had credited you with some corrections (scaling down) of the £7,244 annual drawdown starting in 43 years to give an estimate of what it might be worth in today's money. At 5% inflation over 43 years, the spending power of £7,244 per year will be sadly worth in the region just £890 in today's money. Or £74 per month. I thought your £603.70 was that figure and that is why I asked where it came from. But we have cleared that up now but it means Your suggestion that all your figures are in today's money is surely ambiguous?

Why ambiguous? With the UK stock market returning 5% plus inflation and the £100 being increased by inflation everything is in today's money so there's no scaling down needed.

agarnett wrote: »

I said earlier that I struggled to see the value of investing £80 of one's own money now to achieve money's worth of less than £80 In 43 years.

That's perhaps because I already allowed for inflation.

agarnett wrote: »

In the past, I too have been an advocate of the "no brainier - it's free money" view, but it is much harder to justify when the tax relief part of the argument (your £100 pm investment from £80 pm actual personal investment) doesn't even add up.

It's not really free money because you do pay the cost of having the money unavailable until 55 or 57 or later and the whims of politicians.

It works even better than that sometimes. I'll soon have enough in a pension to pay off my mortgage just from tax relief. No MIRAS for me but investing via a pension doesn't do too badly.

Lets consider a person at a firm I've worked at. The employer will match 6% of contributions, so you get double the gross cost. It's salary sacrifice so you also save 12% NI in the basic rate tax income range (roughly, not quite technically perfect) or 2% in the higher rate. So the net cost to have £100 in the pension is half that for the employee match then the NI and income tax saved, dropping it to either £29 for higher rate tax range or £34 for basic rate. So roughly three times your money into the pension.

The scheme I'm in now also adds half of the employer NI saving so here are the reliefs I get for money I put into the pension, beyond any initial 6% matching range:

1. 48.9% (40% IT, 2% employee NI, 6.9% employer NI)
2. 58.9% (50% IT, 12% employee NI, 6.9% employer NI)
3. 38.9% (20% IT, 12% employee NI, 6.9% employer NI)

The 2 case is because I have investment income so for some money I get to save higher rate income tax while at work the pension contributions are getting basic rate NI saving through salary sacrifice. Even without any full employer matching I get to roughly double my money when I pay it in to the pension.

Pensions have their issues but they are a really good tool for what they are designed for, compared to the alternatives.

agarnett

jamesd wrote: »

Why ambiguous? With the UK stock market returning 5% plus inflation and the £100 being increased by inflation everything is in today's money so there's no scaling down needed ...

That's perhaps because I already allowed for inflation.

Oh so you are saying that the actual fund at 43 years will be the result of 10% compounded not 5%? And the thisismoney calculator with those £100pm/43 years/10% inputs will actually read £856k?

Bearing in mind what in real life happens to the conservative funds that most savers get steered into, and since I have I think 6 different DC plans which all struggle to keep pace with inflation I think you are setting far too much store by an arbitrarily selected equity past performance index.

I wonder if you are more clever than the trustees of the only DB pension I have left who under the advice of JLT have moved lock stock and barrel out of UK equities?

Pensions have their issues but they are a really good tool for what they are designed for, compared to the alternatives.

The first part of your sentence is a massive understatement. The second should only be stated with a qualifier that says an individuals pension must be constantly and cleverly reviewed and managed by trusted people with skills far beyond the ordinary investor.

I also think that in an effort to bolster the tax relief part of the argument you have strayed into areas not relevant to a new pension wannabe/wonderifshouldbe.

atush

agarnett wrote: »

I beg to differ, so perhaps I should repeat the list that Friends Life and Aviva are all mixed up in (not exhaustive but all of which I have experienced as part of DC and DB shenanigans. They are not nice people.

It is not key when you have barely two beans.

And I still would like to know from Jamesd how that £7,244 (43 years future money) is going to last beyond two years of retirement.

You can repeat your list ad nauseum, but every single point has been debunked. So please get over it.

atush

I realise that whether your combined gross is £1985 per month or £2085 per month will not make a significant difference to your dilemma but it would be worth having.

At the very least that means 100 a month could go into pension?

jamesd

agarnett wrote: »

Oh so you are saying that the actual fund at 43 years will be the result of 10% compounded not 5%? And the thisismoney calculator with those £100pm/43 years/10% inputs will actually read £856k?

If you assume 5% inflation for those years then yes, it'd be 10% growth and you'd scale the resulting pot size down. Easier just to use the after-inflation growth rate.

agarnett wrote: »

Bearing in mind what in real life happens to the conservative funds that most savers get steered into, and since I have I think 6 different DC plans which all struggle to keep pace with inflation I think you are setting far too much store by an arbitrarily selected equity past performance index.

I'd agree with you that default funds are often not the best choice for long term investing. They have to be a compromise between the needs of those close to retirement and far from it.

agarnett wrote: »

I wonder if you are more clever than the trustees of the only DB pension I have left who under the advice of JLT have moved lock stock and barrel out of UK equities?

I don't know when or why that was done. One of the conflicts of interest for defined benefit pensions but not defined contribution is the effect of possible shortfalls on the results of the company, which may show large fluctuations based on estimates of future demands. Using bonds may be to reduce those fluctuations if the resulting higher company contributions on average are preferred by management to volatility.

agarnett wrote: »

an individuals pension must be constantly and cleverly reviewed and managed by trusted people with skills far beyond the ordinary investor.

For people not close to retiring I tend to suggest a core global growth fund holding. A simple tracker fund that is often available in pension plans.

atush

agarnett wrote: »

Not very likely either!



On paper, yes. But it might be interesting if you could deign to explain how the OP can get his hands on it at 25 or 26 or at all when he packs up the low paid job or if he needs it before he finds time to work out how the hell he might truly control it. Some governments can't even control their own gold reserves yet you are suggesting that an ordinary worker controls his own pension savings once he has tipped cash into it?
Immediately? Are you sure about that?

The OP isn't meant to 'get their hands on it at 25/26".

It isn't a savings account, but a pension for retirement. Savings for emergencies (you know, to get your hands on it) should be kept separately.

And yes, I am sure about that. More or less immediately.

Say your employer matches the funds you put in. You put in 80, it gets grossed up by tax relief to 100. The employer matches the 100. So 200 into the pension costs you only 80.

Tax relief and employers contributions can be put in exactly the same time as your money, or within a month.