Confused about Pensions

NJL1969

I am a 46 year old female. I am not currently paying into a pension although I have two very small policies which have been dormant for years: one was when I contracted out of SERPS about 20 years ago (subsequently contracted back in) and another small policy I took out but have been unable to pay into for about 7 years due to a wage cut. One has a fund value of about £4500, the other a fund value of about £8500.

I am concerned about my future when I retire but am aware that I would need to make a significant monthly payment into a pension scheme to have a retirement income which was actually worth something. I could probably reasonably only afford about £50 a month currently.

My question is, is it worth paying £50 a month in or not? Having done a website calculation today which said that to have an income of £10,000 per year when I retire, I would need to pay over £1000 a month, my meagre £50 seems not worth it!

xylophone

Re new state pension

https://www.gov.uk/new-state-pension/overview

Presumably you would like to supplement the above.

You are not currently employed or are self employed? ( No occupational pension? Remember that all employers will have to provide a Scheme within the next couple of years.)

Perhaps you could transfer your existing into a stakeholder and contribute your modest amount ( even increase it) for as long as possible?

http://www.cavendishonline.co.uk/pensions/stakeholder-and-personal-pensions/

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

NJL1969

Hi, I am employed but we do not yet have a workplace pension. The larger of the two pensions I have is a Stakeholder pension - presumably it is preferable to transfer the smaller one to this?

Thank you for your help.

xylophone

Have a look at the costs on your existing stakeholder and compare with other offerings.

princeofpounds

I think you need a more general understanding about pensions. You have to solve a trilemma (i.e. balance three decisions)


a) your expected lifestyle on retirement
b) how hard/long you work
c) how much you save


The only reason a £50pm pension looks worthless is because your contribution is, as you say, meagre. It's a bit like saying there is no point going for a walk because if you walk five metres you are only going to see the bins at the end of the driveway.


So try to make a start by working out what your desired income is. Realise you will get a state pension so you don't have to save for the entirety of it.


Use a pension calculator to figure out what you need to save per month to get there. If the number looks too large, adjust your three assumptions and settle on something that might work.


Typically, it is worth saving into a pension if you pay tax simply because you put the money in before tax is taken off, and when you draw it out it is quite likely you will pay less tax on it, maybe none at all if your income is low.


So let's assume for now that gives you 20% more money (I don't know what tax band you are in). Let's also assume you have 21 years left until you take your pension and your investments grow at 2% above inflation (not unrealistic, some would even say conservative).


Doing some maths...


Basically, every £50 you spend now, is the equivalent of taking £91 (in today's money) off your 67 year old self.



There is another level of complexity for low earners around benefits entitlements and so on, but we can leave that for now and it's always going to be guesswork given rules can change.

Anyway, play around, give us more detail about your circumstances and objectives and you will probably get better answers.

stubtoe

It's a tricky one, especially if you can only afford to save a (relatively) modest amount due to the interaction with state benefits, in particular pension credit (as princeofpounds notes).

In the simplest terms, unless you can build up a pension sufficiently large enough to provide you with more than what you would have otherwise got from state benefits at retirement age, you're right, on the face of it it hardly seems worth saving into a pension.

However, 20 years is a long time and a lot can change; you may be able to save more in the future, investment markets might be extremely favourable, state benefits could be reduced etc. In short, assuming you can afford it today, even modest savings should not see you any worse off at retirement and could be seen as a form of insurance against future uncertainty.

Might be worth you reading up a bit about pension credit here http://www.moneysavingexpert.com/savings/pension-credit and here https://www.gov.uk/pension-credit/overview and maybe finding out how much entitlement to state pension you have already accrued/are likely to accrue by retirement age.

greenglide

It's a tricky one, especially if you can only afford to save a (relatively) modest amount due to the interaction with state benefits, in particular pension credit (as princeofpounds notes).

But once the nSP starts next year the normal rate of pension credit will be less than the full rate of new state pension.

Assuming that the OP will get the full pension the chance of any pension credit would seem to be low?

atush

Yes it is worth doing, unless you plan to work until you die.

Find out your company's staging date. they have to start a pension soon. when they do, it will boost what you pay in.

MSE all your outgoings and cut back on waste. Add this money to your 50/m to make it more worth it.

stubtoe

greenglide wrote: »

But once the nSP starts next year the normal rate of pension credit will be less than the full rate of new state pension.

Good point, although the difference should be marginal.

greenglide wrote: »

Assuming that the OP will get the full pension the chance of any pension credit would seem to be low?

Agreed, assuming OP entitled to full state pension. The fact that OP was contracted out (doesn't say for how long) suggests would be some reduction in NI record. I'd start by getting state pension statement to understand my likelyhood of getting full state pension: https://www.gov.uk/state-pension-statement

greenglide

Agreed, assuming OP entitled to full state pension. The fact that OP was contracted out (doesn't say for how long) suggests would be some reduction in NI record. I'd start by getting state pension statement to understand my likelyhood of getting full state pension:

With 20 years to go the OP certainly has plenty of opportunity to get the maximum nSP as things are at the moment.

In 20 years time I also assume the Pension Credit would be long gone?