Pensions...maybe not for me

nsr1200

I have had a meeting with a Pensions representative today, in order to understand how how pensions work and to get a bit of background about the whole wealth management thing.

I have to say the guy was very good at explaining the pensions to a newbie like myself and he was not giving me the hard sell in any way.
After all his semi impartial information that he dispensed to me, I couldn't help thinking that pensions were really that good a deal.

I think the tax incentive is a big plus, but in order for me to obtain any kind decent life style upon retirement I need to be paying in around £240 per month! I am 33 years old now. That is a lot of money, and its a lot of money that I am giving to a company to look after and supposedly grow, but I can't touch it until I'm at least 55. I'm not sure I like the fact that I can't get to the money. I don't feel I have the control I would like.

I would love to know what the other comparable options are that give me more control on my money, I want to invest £150 in something and start compounding any returns I may get, but where do I start?

Thanks

dunstonh

I think the tax incentive is a big plus, but in order for me to obtain any kind decent life style upon retirement I need to be paying in around £240 per month! I am 33 years old now. That is a lot of money, and its a lot of money that I am giving to a company to look after and supposedly grow, but I can't touch it until I'm at least 55. I'm not sure I like the fact that I can't get to the money. I don't feel I have the control I would like.

£240 at age 33 is not a lot. it is a direct debit of £192 (Assuming basic rate tax relief. You have lots of control over modern pensions. However, what sort of control would you want?

I would love to know what the other comparable options are that give me more control on my money

Seeing as a pension has the same cost and investment options as ISAs and unwrapped holdings, there is no difference other than tax and maturity method.

I want to invest £150 in something and start compounding any returns I may get, but where do I start?

A pension is a good start. £150pm net is not far off your target contribution of £192 net.

Remember that the amount is a red herring. If you put £150 into any option it is going to leave you short in retirement. Every option is only as good as what you pay into it.

atush

I think the tax incentive is a big plus, but in order for me to obtain any kind decent life style upon retirement I need to be paying in around £240 per month! I am 33 years old now. That is a lot of money, and its a lot of money that I am giving to a company to look after and supposedly grow, but I can't touch it until I'm at least 55. I'm not sure I like the fact that I can't get to the money. I don't feel I have the control I would like.

No one said to put every penny into a pension. Yes at 33 you are starting late so should put in a fair bit. If you dont exactly what will you retire on? Or will you work til you drop?

Access at age 55 -57 should not be a dealbreaker for you, as you should have an emergency pot of money in cash to access, plus a S&S isa from the medium to longer term.

So, scrape together every penny you have each month to save. Put half in a pension, a quarter inc ash and a quarter into S&S isa. once our cash pot gets large enough, up the pension.

redbuzzard

You are right, the tax treatment of pensions is favourable but you have to set that against the fact that they are locked up until you reach the specified age (which will be more than 55 for you as I think the plan is for it to rise by the same amounts as the state pension age).

As to how much you need to save...however much it is, the net amount will be less in a pension if you consider the tax free lump sum. If you can get higher rate tax relief, then pensions will be cheaper still if you get higher rate relief on the way in and only pay standard rate on the way out.

If you are a standard rate taxpayer now, you could use ISAs for a while and reconsider if and when you find yourself paying higher rate tax.

Other questions for you to consider - do you have some easy access savings for emergency use? Is an employer's scheme available to you, with contributions from the employer? If so, join that before doing anything else.

Back to how much you should save...saving during your working life to provide yourself with an income for 20 or 30 years afterwards isn't cheap however you do it - it's not the pension wrapper that makes it expensive (it tends to make it cheaper) but the earlier you start, the less your contributions need to be.

nsr1200

A great set of answers, and quickly, thanks.
The conclusion of it is that I have come to the party a little late and I need to make some time up by paying more in.

It's not that I didn't want to start a pension earlier, its only now that it has become affordable, financial circumstances have made it very difficult in the past, but better late than never.

redbuzzard

nsr1200 wrote: »

It's not that I didn't want to start a pension earlier, its only now that it has become affordable, financial circumstances have made it very difficult in the past, but better late than never.

Yes - don't be an ostrich

nearlyrich

55 comes around very quickly I am very pleased I salted some of my income away for the future there is always something more important than "the future" but you are borrowing from your own future wealth if you don't save now.

jamesd

nsr1200 wrote: »

I think the tax incentive is a big plus, but in order for me to obtain any kind decent life style upon retirement I need to be paying in around £240 per month! I am 33 years old now.

Using a regular savings calculator and the historic growth of the UK stock market less 0.5% for fees, which comes to 4.5%, I see that this could produce a pot size of £244,258 in today's money after 33 years, a state pension age of 68. A common guideline for drawdown income is to use 4% of the pot size, so that would be £9,770 a year. The adviser is probably using lower numbers, assuming you're buying an annuity and not using mostly shares.

If you were to want it at 57 instead the pot size could reach £124,079. At 4% that would pay £4,963 a year.

At state pension age you'd also get around £8,000 in flat rate state pension. In the state pension age case that would take you to around £17,770 total. To put that into context, it's roughly the median average for pensioner households today. About half more, about half less.

Also note that it's prudent to add a 50-100% safety margin.

nsr1200 wrote: »

I can't touch it until I'm at least 55.

The age is set to increase to 57 by 2028 so that's the earliest age for you.

nsr1200 wrote: »

I'm not sure I like the fact that I can't get to the money. I don't feel I have the control I would like.

You're not alone. That's the price the government charges for the tax relief, locking the money away until it's at least credible that it really is going to be used on retirement income. You do get considerable control over the money in a pension, being able to invest in a huge range of funds, shares and other things.

nsr1200 wrote: »

I would love to know what the other comparable options are that give me more control on my money, I want to invest £150 in something and start compounding any returns I may get, but where do I start?

S&S ISA is the main alternative. You'll be handicapped by the lack of tax relief so your after tax cost will be lower, taking more of your money to get to the same goal.

To get started, sign up for any pension offered at work and pay in enough to get full employer matching.

Beyond that you have more flexibility that you could use. if you are not a higher rate tax payer you might want to use the S&S ISA option for any other money until we know how the election goes, since some parties have said that they would increase the basic rate tax relief for pensions. So you might invest in the ISA now and switch to the pension if the tax relief goes up, or you become a higher rate tax payer.

david78

You can always save and/or invest outside a pension for a few years to get used to saving that amount each month. Then move your money into a pension later, perhaps once you become a HRT if you are not already. There are contribution limits though so don't leave it too late.

nsr1200

Okay, so maybe pensions are for me after all, I think I just lacked the knowledge to be able to progress, and I took what the media has fed me about bad pensions to heart, that in turn made me fear this form of investment.

It really has been an eye opener this evening and you are all so well informed, I'm chuffed with it all so thank you very much for all your help, I feel much more confident about pensions now.

:j

princeofpounds

Most of the bad things the media writes about pensions relates to four things.

1) old types of pensions that have basically nothing to do with the simple defined contribution pensions that most people take up now.

2) overly high fees. Which are very easy to control as long as you are paying attention to the product you buy.

3) people doing really stupid things with their pension money, basically handing it over to cold-calling scammers.

4) poor rates on annuities.

Which is partly just whining about economic conditions (after all the low interest rates that hurt annuities generally boost investment values, so it is still the case that if people aren't getting enough it's because they didn't save enough)

and partly much less of an issue these days as you don't have to buy one.