Pension won't be enough - realistic alternatives?

Arthien

Having recently done a pension calculator, I was horrified to see that it showed I would need to put nearly £500 a month into a pension for the next 42 years in order to have more or less the same standard of lifestyle as I do now and retire at 68. I take home between £1300 and £1400 a month depending on overtime, and I've been putting £105 (6%) away into a workplace pension every month for the last 18 months, with my employer matching it. The £500ish was in addition to the £105 provided by my employer, so I would need to up my personal contributions nearly 5-fold.

Worse still, I found out recently that the majority of the contributions I've already made have been eroded due to it being set to 'high risk' by default (which I was not aware of at the time!). I'm 26 and aware that a government-provided pension may not even exist when I come to retire, so I want to make the best possible decisions now, so I get into good habits early on.

If pensions are unreliable as guaranteed income, what alternatives are there? My husband and I already own a house and are making overpayments on our mortgage, but we'd like to spread the risk as much as possible. Also, having seen a number of people whose pensions plans disappeared when their provider went bust, I'm reluctant to put all my money into one basket.

After discussing the topic with similarly-minded friends, the only alternatives we could think of were high-interest savings accounts, which require constant monitoring to ensure a decent level of interest; stocks and shares, which seem like you'd need to really know what you're doing to make any money; or buy more property and become a landlord. Is there any other way to secure our financial future?

HappyMJ

Don't worry about those silly calculators. They sometimes assume you will get no basic state pension or whatever they want to call it when you claim it. You are also contributing to a state pension so take that into account too.

I personally don't like pensions so I put my extra money into paying off debt and saving into regular saver, high interest current accounts and peer to peer lending sites that I can access at any time.

Pensions though are very tax efficient so as long as you don't mind locking your money away for 42 years then they can show much better returns than my strategy.

Arthien

HappyMJ wrote: »

Don't worry about those silly calculators. They sometimes assume you will get no basic state pension or whatever they want to call it when you claim it. You are also contributing to a state pension so take that into account too.

The calculator I tried did include approx £7k for a state pension, but as I have my doubts whether it will even exist then, I'm even more aware of the need to consider my future, although I would still like to put some money towards enjoying life now! I'll have a look at peer-to-peer lending though, thanks for the suggestion. I'd heard of it but never considered it before.

ETA: the only debt we have as a couple (aside from our mortgage) is a car loan, which we keep an eye on to ensure the value of the car will still cover it when sold.

edinburgher

• Don't panic!
• Most people do not expect 100% salary replacement from their pensions - are you hoping for this? If so, expect to pay a lot to make it happen. Some costs will go down in retirement, some will go up, but the flexibility of not being on a schedule (holiday when/if you want, visit places on quiet days, catch bargains etc.) means that most retirees seem to spend a bit less than they did while working (from what I've read/experienced)
• Take responsibility - you may have been opted in to high risk options, but you will have been told, read everything you're sent on your pension. Also, it's highly likely that high risk is appropriate at this point, you're still young
• Pensions are just a wrapper - it's what you put in them that counts! If you want 'guaranteed' returns, you will be looking at very stolid options with unimpressive growth, which will expose you to shortfall risk (i.e. not enough in the pot) or force you to save much, much more
• 18 months is an inconsequential time when you're talking about 4 decades to retirement, I wouldn't fret about performance over that time
• Other options could include those mentioned by Happy MJ and S&S ISA (which may be invested in funds like those held in your pension, but can be accessed before retirement if needed). I personally couldn't be bothered being a landlord, but everyone is different.

Edit: wife is in a similar position to you (although a few years older). She pays the same amount into her pension (same employer match) and we also have SIPPs, S&S ISA and P2P lending going on in the background. We're hoping for a fair wind, but aren't panicked.

HappyMJ

Arthien wrote: »

The calculator I tried did include approx £7k for a state pension, but as I have my doubts whether it will even exist then, I'm even more aware of the need to consider my future, although I would still like to put some money towards enjoying life now! I'll have a look at peer-to-peer lending though, thanks for the suggestion. I'd heard of it but never considered it before.

ETA: the only debt we have as a couple (aside from our mortgage) is a car loan, which we keep an eye on to ensure the value of the car will still cover it when sold.

Don't forget when you're claiming the state pension you won't be contributing to your private pension any more and you will have lower commuting costs. The children have probably left home and your costs of living are reduced quite significantly. There may be no need to have a car any more. I don't have a car...everything gets delivered. If I wish to travel further then buses and trains are cheap enough and usually cost less than what I would have paid in petrol and parking. Although I'm hoping that in 42 years we all would have moved on from owning a car each which sits unused 95% of the time and use public and community owned transport.

They way I figure it out is Pension Credit currently pays £12,000 per year for a couple which between us is more than enough to pay for everything.

Primrose82

When you are using this calculator are you taking into account the fact that at retirement your outgoings will be lower? As a starting point you would no longer be paying a mortgage
Have you over estimated the amount you will need ?
Look at the amount that is the maximum match your employer will do and up it to that percentage

Linton

Arthien wrote: »

Having recently done a pension calculator, I was horrified to see that it showed I would need to put nearly £500 a month into a pension for the next 42 years in order to have more or less the same standard of lifestyle as I do now and retire at 68. I take home between £1300 and £1400 a month depending on overtime, and I've been putting £105 (6%) away into a workplace pension every month for the last 18 months, with my employer matching it. The £500ish was in addition to the £105 provided by my employer, so I would need to up my personal contributions nearly 5-fold.

Worse still, I found out recently that the majority of the contributions I've already made have been eroded due to it being set to 'high risk' by default (which I was not aware of at the time!). I'm 26 and aware that a government-provided pension may not even exist when I come to retire, so I want to make the best possible decisions now, so I get into good habits early on.

If pensions are unreliable as guaranteed income, what alternatives are there? My husband and I already own a house and are making overpayments on our mortgage, but we'd like to spread the risk as much as possible. Also, having seen a number of people whose pensions plans disappeared when their provider went bust, I'm reluctant to put all my money into one basket.
......

Pensions invested in equity (share) funds are as reliable as you ae going to get with a good chance of providing a reasonable standard of living in retirement. But you do need to accept that values will go up and down over time. The last 18 months have seen a large but not unusual drop in values. So it's not surprising that they look eroded at the moment. However look at this another way - you are adding to your pension when the units are cheap, so you are getting more for your money. The last thing you want is for fund units to be expensive when you buy them. Since you wont be selling for 40 years or so the smaller amount of money you would get for selling now doesnt matter. Over time there was been, since shares were invented, an underlying upward trend. If that were to stop then the value of your pension would be one of your lesser concerns as it would indicate global economic meltdown.

At this very early stage I wouldnt worry over much about the precise numbers coming out of the pension calculator, but I believe it is correct in suggesting that you are putting too little into your pension. Perhaps another £50-£100 per month could be justified if you can afford it. As to spreading risk, with pensions you can put money into business in any sector world-wide. So you do need to check that the funds you are using are suitably broad. As long as your are suitably diversified the use of higher risk funds at this stage is sensible, as higher risk (within reason!) tends to mean higher returns over the long term. And you have lots of long term.

One caveat - before you starting putting significant money into lng term investments ensure that you have an emergency instant access cash fund to cover say 6 months living expenses.

Thrugelmir

Arthien wrote: »

If pensions are unreliable as guaranteed income, what alternatives are there?

There's no such thing as a free lunch. What you save will be be reflected in the amount you get back later. The more you save earlier the better chance that you will have a decent pension to draw on. As it's compounding of investment returns (income in the main) that will do the heavy lifting. Even this is back loaded towards the later years. So don't become disillusioned if progress seems slow.

atush

Basically, you may have overestimated the income you require as:

You probably wont be paying a mtg
You wont be paying into a pension
You wont have to commute to work
You might not have to spend as much on clothing
You might be able to downsize your house, assuming you have increased the size of same over the years esp if you have children
You wont have to support any children

Basically, you need to work out your number. I am still doing so, but seeing that in fact we could probably get by with around 50% of our income w/o reducing our lifestyle. But with one still in university, and still running a huge 5 bed house, I am not 100% of my ongoing costs at this point.

dunstonh

If pensions are unreliable as guaranteed income, what alternatives are there?

If you want guarantees then take that £500 and make it £1500pm. Pensions are not unrealiable. It is just that investment returns are always an unknown. Whether they are held in pensions, ISAs, bonds or unwrapped, the returns will be the same. So, you find the calculators used nowadays tend to understate the likely outcome. They use "safe" assumptions. This is largely because in the past it was the other way around.

Also, having seen a number of people whose pensions plans disappeared when their provider went bust, I'm reluctant to put all my money into one basket.

Really? Can you name one provider where that has happened? I think you are mistaken.

After discussing the topic with similarly-minded friends, the only alternatives we could think of were high-interest savings accounts

That is the worst option for you (apart from doing nothing). That will give the lowest return and is guaranteed to suffer inflation risk and shortfall risk. A really bad idea. You would need to pay in around 3 times more than the pension using investments.

atush

Quote:
Also, having seen a number of people whose pensions plans disappeared when their provider went bust, I'm reluctant to put all my money into one basket.

Id like to know who these people are, who they worked for, and when this happened.

If you are talking about R Maxwell, that is a long time ago now, and that cant happen anymore

Companies with a DB scheme can fail. but then you would get a pension from the PPF. Which would mean 10% less (not 100% gone) and you would lose other things like some indexing etc.

Saving in cash is great for a lot of things, but not for long term/retirement.