Pension won't be enough - realistic alternatives?

westv

How did the Equitable Life disaster pan out in the end?

missbiggles1

Primrose82 wrote: »

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

Not a good assumption - over a million pensioners are still paying a mortgage after retirement.

HappyMJ

missbiggles1 wrote: »

Not a good assumption - over a million pensioners are still paying a mortgage after retirement.

Why would the OP in 42 years of saving not paid the mortgage off?

The comment was aimed at the OP not everyone in general.

Alice_Holt

As others have said don't panic.
Your costs in retirement will be lower.
Sounds like you are well placed in having been able to make mortgage overpayments.
As you suggest high interest current accounts can be a good place for your emergency / shorter term funds.
Personally I'd steer clear of BTL - it's a business not an investment. To work it needs good tenants, a good property, no more taxation changes (don't forget CGT), and a housing market that only goes up (remember negative equity anyone?).

I'd look at doing some research, opening a low-cost SIPP, and feeding money (and associated tax reclaim) into a good global investment trust such as Witan, Scottish Mortgage, etc.
I'd feel happier that these would deliver a more constistent long term return than an insurance company product.

greenglide

I'd feel happier that these would deliver a more constistent long term return than an insurance company product.

But these days pensions aren't "insurance company products" any more. Investments in funds these days is far different to the old with profits policies of the past.

bigfreddiel

atush wrote: »

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.

And don't forget no national insurance to pay, 12%+ increase in take home pay straight away!

Cheers fj

kidmugsy

Good grief, what hysterical rubbish. If you are going to put 12% of income into a pension for 42 years, and are already overpaying your mortgage, and will receive a full state pension, you will be fine.

jamesd

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.

Most pension calculators deliberately overstate the cost in two main ways:

1. Unduly pessimistic rules by the FCA that are aimed only a 10-15 year time period and deliberately also understate the returns for that period.
2. By assuming that you will buy an inflation-linked annuity instead of doing something sensible instead. Even when annuities were required ten years ago only a small percentage of this type of annuity was sold.

To get something more realistic long term use a regular savings calculator and put in these values: Monthly payment 210, duration 42 years, interest rate 4.5. Answer is £313,376 in the pension pot in today's money. This uses the just over 5% long term return of the main UK stock market with about 0.5% deducted for charges.

A somewhat old fashioned ballpark rule for pension income in drawdown suggests 4% of a pension pot can be taken as income. That's £12,535 a year on top of a likely £8,000 state pension, all in today's money.

More modern drawdown methods can go to 6% or more and still be safe. That's £18,800 plus £8,0000 state pension.

Arthien wrote: »

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.

You're doing fine, it's just the daft assumptions used by the calculators that scare people into believing it's impossible.

Arthien wrote: »

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!).

High risk in pension scheme descriptions tend to mean something completely routine like a UK stock market tracker fund. That's exactly the sort of thing that a person of your age should be using.

Part of the problem is that they tend to just say high risk without explaining what they mean. It doesn't mean high risk. It means high volatility, that is, high short term ups and downs. For the main UK stock market you'd expect to see one or two drops of 40% every decade and two or three drops of 20%, while still delivering over 5% plus inflation as the long term average. All that happens is that after a drop it recovers again and your money put in during the dip has been buying at sale prices. This is all completely routine and experienced investors know it's just normal investing life.

Where the high volatility can matter is closer to retirement if you were to plan to buy an annuity. Then if there was a big drop just before or after retiring it could be a problem. For drawdown it could be a problem if there downturn was much longer than usual. For those reasons it is common to suggest that people decrease the higher risk portions around retirement time, often a few years before and after. that way a short term blip won't have any long term consequences.

Arthien wrote: »

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

Pensions are only unreliable as guaranteed income because of how the word guaranteed is defined by insurance companies to mean only an annuity can be considered guaranteed. It doesn't matter if you have ten times the money you need for income, if it's not used to buy an annuity they will still say it is not guaranteed income. People doing that sort of thing also tend to compare the worst case drawdown results with the best case annuity results, then claim that annuities offer better guaranteed income levels. Which is only because of how they defined guaranteed and picked the worse case drawdown result. More normal drawdown results would pay twice the amount of an annuity unless you did happen to live through the worst case situation. If that happened the modern rules would gradually reduce your income to the level that's needed for whatever you're living through. Until then you'd get the higher income level.

The 4% and 6% guidelines I've used above are for close to worst case drawdown situations, but not quite the worst case. What you do to improve them further is buy more state pension by deferring, assuming that option is still available. Deferring pays almost twice as much as the comparable inflation-linked annuity at the moment and it's a great way to increase the certainty of the result. By reducing he worst case result it also increases the amount that can be taken from the rest of the drawdown pot.

Arthien wrote: »

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.

You'll find that those are old schemes that led to changes in the rules. Things like the Maxwell case that led to setting up of the Pension Protection Fund to protect defined benefit pensions like the final salary type. That now protects at least 90% of the first over £30,000 of pension income. For the types that are available now in the private sector the money is yours from the day you and your employer pay into it so such things can't happen anyway. For the common insured pension funds the money is protected by the financial services Compensation scheme. For non-insured funds (the types normally offered by non-insurance firms in pensions) the money is in trust for you.

Arthien wrote: »

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?

High interest savings accounts long term tend to just about keep up with inflation, losing you compounded growth on your money. Bad idea long term. Stocks and shares are one of the major things that pension money is normally invested in, so you're doing this already. Just not with direct holdings of shares, instead via investment funds. property long term is a bit less good than shares but quite decent.

Keep on making the pension contributions and don't be put off by the daft assumptions used by pension calculators or descriptions like high risk that sound bad but aren't really bad. Buy to let property is higher risk than what is normally called a high risk fund inside a pension.

With what you're doing now you're really setting ourself up for early retirement, not in danger of not getting a good income after state pension age. Having an early retirement target is a good thing because then all that happens if you're not quite there is you wait a little while, or if not on track, bump up the pension contributions a bit.

If your employer will match higher contributions, now's a pretty good time to be increasing them and cutting back on the mortgage contributions for a little while. That's because the really great stock market we've had for most of the last seven years is due for a biggish dip and that will be a great time to put in more money. I set myself up for this back in 2008 after the initial drops, all the way down to minimum wage pay level, and ended up buying at a high rate all through the worst of the downturn while the great sale prices were running. If you do this you do need to brace yourself not to be worried when all the press and TV is describing doom and gloom for share prices. That's how sale prices are announced in the financial world: for the current owners, not for the buyers who are jumping in to buy cheap.

mrsp1987

You want your current pension lot to be invested in high risk as it's going to be in there for a long term. Higher risk is generally a good earner over longer periods of time. As you get closer to retirement age your money will be moved to lower risk areas so that it won't be "eroded".
Stop panicking and just keep paying into your pension in the mean time. Don't rely on high interest savings accounts. They are not high interest really and are much more likely to get eroded due to inflation than your pension savings.
I'm 28 and I'm not panicking. I too am aiming at paying off my mortgage earlier so once that's done I can add more to by pension contributions.

missbiggles1

HappyMJ wrote: »

Why would the OP in 42 years of saving not paid the mortgage off?

The comment was aimed at the OP not everyone in general.

An awful lot can happen in 42 years and life is rarely plain sailing.