Pension won't be enough - realistic alternatives?

Arthien

Thanks everyone for all the contributions, I've read them all with interest and taken it on board.

It seems likely that the calculator was over-estimating, which is a relief! I think it was Martin himself who recommended putting away a percentage equal to half the age age when the pension was started, so I had previously thought my 12% was actually about right, so I was really surprised to see how much higher the £500 estimate was. The calculator just said 'if you want a similar level of lifestyle then you'll need to save X', but it must have been assuming higher outgoings than I'm likely to have.

Either way, the suggestions to up the contribution are fair and I'll certainly consider how much extra I can spare. I think our mortgage is probably still the priority though for now, as it's currently over 5% interest (the fix is up at the end of this year). Fortunately it allows us to overpay and then use that fund towards our regular payments if we need to (therefore covering us for emergencies).

Just to clarify, when I said I was looking for 'guaranteed income', I'm certainly not looking for a goose laying golden eggs, I think that was really just my dislike of risk talking, as I mentally equate it to gambling with my money, and I can't help thinking I'd rather save or put the money towards something else if there's a chance it could end up down the pan. But if high-interest accounts are likely to be not worth the hassle for little (if any) long-term gain, then I'd best start getting used to the idea of risk, and just making sure I'm happy with the investments that are being made, rather than letting it just run as I've done so far!

Regarding the pensions going bust, in particular I was thinking of my father in law. Perhaps I've misunderstood the finer details, but all I know is he was expecting a decent pension from many years of contributions, and ended up being offered a VERY small amount in compensation after it all disappeared. Pensions were also being discussed at work yesterday and a colleague said the same happened to her mum, so I aware it has happened in the past, for whatever reason, whether or not it's still the case.

To those who said I'm being over-dramatic, I appreciate the contribution, and I'm very much aware that I'm in the minority already as a large percentage of my generation (not to mention older ones) have little or no pension plan at all. However, this being MSE and all that, I thought that getting my finances in order early on, before kids and other expenses make an appearance, might be a good move. Thanks again for all the helpful posts, plenty of food for thought

jamesd

Arthien wrote: »

Just to clarify, when I said I was looking for 'guaranteed income', I'm certainly not looking for a goose laying golden eggs, I think that was really just my dislike of risk talking, as I mentally equate it to gambling with my money, and I can't help thinking I'd rather save or put the money towards something else if there's a chance it could end up down the pan.

Sorry, all we can really do is tell you that you have to accept it to get good results.

It's uncomfortable at first but you do get used to it. Really.:) These days it's quite normal for me to see monthly changes in investment value that are as high as a quarter of my annual basic pay. Would have been scary when I started, now with more money invested and more experience i know it's just normal.

Costy wrote: »

I'd best start getting used to the idea of risk, and just making sure I'm happy with the investments that are being made, rather than letting it just run as I've done so far!

Good move. There's always more to learn about investing.

Costy wrote: »

Regarding the pensions going bust, in particular I was thinking of my father in law. ... so I aware it has happened in the past, for whatever reason, whether or not it's still the case.

Yes, it did, there were a couple of big scandals that caused the rules and protections to be changed. You get the benefit of their suffering.

AnotherJoe

Just to clarify, when I said I was looking for 'guaranteed income', I'm certainly not looking for a goose laying golden eggs, I think that was really just my dislike of risk talking
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It's your dislike of risk taking that's also got you lumbered with a 5% mortgage so don't equate low risk with certain outcomes. When you took that mortgage out ?4 years ago? you presumably wanted to protect against rates rising but there's no such thing as a free lunch and the cost of that certainty has been probably 50% higher mortgage payments than you could have paid.

The same thing applies to investing in the stock market within your pension, if you don't take the risk then the downsides (a certainty over decades) are very low growth and probably actual loss of money once inflation is taken into account.

dunstonh

Just to clarify, when I said I was looking for 'guaranteed income', I'm certainly not looking for a goose laying golden eggs, I think that was really just my dislike of risk talking, as I mentally equate it to gambling with my money, and I can't help thinking I'd rather save or put the money towards something else if there's a chance it could end up down the pan. But if high-interest accounts are likely to be not worth the hassle for little (if any) long-term gain, then I'd best start getting used to the idea of risk, and just making sure I'm happy with the investments that are being made, rather than letting it just run as I've done so far!

The problem with savings accounts is that you are increasing the risks. Not decreasing them. That can seem strange to some people as cash savings cant go down as well as up like investments. However, cash savings suffer different risks. They suffer inflation risk and shortfall risk. Investments suffer that as well. However, cash savings WILL suffer that whereas investments MAY suffer that. So, whilst investments zig zag on their way and you feel uncomfortable about that, at least the zig zags tend to keep you with long term growth above inflation. Cash won't make you uncomfortable with zig zags but it's value will be going up, typically less than inflation meaning its actually going down in real terms. So, you would have to pay in much more to compensate.

Every option there is has risks. It is about taking sensible risks.

Regarding the pensions going bust, in particular I was thinking of my father in law. Perhaps I've misunderstood the finer details, but all I know is he was expecting a decent pension from many years of contributions, and ended up being offered a VERY small amount in compensation after it all disappeared. Pensions were also being discussed at work yesterday and a colleague said the same happened to her mum, so I aware it has happened in the past, for whatever reason, whether or not it's still the case.

It is extremely rare. There has never been a failure on a money purchase scheme using unit linked funds. There was a very high profile failure in the 80s with Maxwell and the Mirror Group which lead to significant and valuable protections coming in. Equitable Life had a failure in their With Profits fund but since then, FSCS protection came in and the solvency requirements of With Profits fund was significantly increased. Which is in part why most are no longer viable as investment options (as they invest for their own liability as a priority over investment returns).

You have a money purchase scheme. So, there is no concerns about failure for you.

You also need to be wary of third party stories. Most get modified as they get passed on. Many beyond all recognition. A common one is people getting less than they expected and blaming the pension. However, it is usually unrealistic expectations and too high assumptions in examples. For example someone starting a pension in 1988 at £30pm would have been given very good examples of what their fund would be. Problem was that assumed people would top it up to keep up with inflation. Many did not and kept paying £30pm. So, inflation eroded their contribution value. Projections used growth rates seen in the 70s and 80s which did not get repeated in the 90s and 2000s. Annuity rates fell from 15% to 5% as people lived longer and actuaries failed to predict it.. So, a fund of £50k could have produced £7500 a year upto around the mid 90s but now that £50k would produce around £2500 a year.

atush

[/Regarding the pensions going bust, in particular I was thinking of my father in law. Perhaps I've misunderstood the finer details, but all I know is he was expecting a decent pension from many years of contributions, and ended up being offered a VERY small amount in compensation after it all disappeared. Pensions were also being discussed at work yesterday and a colleague said the same happened to her mum, so I aware it has happened in the past, for whatever reason, whether or not it's still the case.QUOTE]

Who did your father work for?

kidmugsy

AnotherJoe wrote: »

if you don't take the risk then the downsides (a certainty over decades) are very low growth and probably actual loss of money once inflation is taken into account.

Except perhaps in the last couple of decades? I wonder: has cash - in the forms available to the retail investor - yielded more than the inflation index (say RPI) since 2000? For anyone stocking up on interest-paying current accounts and regular savers at the moment, it certainly does. How about people who have saved in fixed term ISAs? I imagine they've beaten inflation too, as inflation rates and interest rates have sunk over those years.

I agree that holding lots of cash for the future might be dicey, but then cash has the advantage that you can transform it into equity at the click of a mouse.

bigadaj

kidmugsy wrote: »

Except perhaps in the last couple of decades? I wonder: has cash - in the forms available to the retail investor - yielded more than the inflation index (say RPI) since 2000? For anyone stocking up on interest-paying current accounts and regular savers at the moment, it certainly does. How about people who have saved in fixed term ISAs? I imagine they've beaten inflation too, as inflation rates and interest rates have sunk over those years.

I agree that holding lots of cash for the future might be dicey, but then cash has the advantage that you can transform it into equity at the click of a mouse.

I wouldn't agree with holding large amounts in cash over any significant period but I get the impression that the comparative cost of doing so is probably over played in financial literature.

Barclays equity gilt study is oft quoted for comparative returns and this doesn't ascribe any thought behind holding cash, just look at what the average couple could hold in current accounts,mellow in excess of £100k achieving more than 3% which isn't bad if inflation is close to zero.

kidmugsy

My crystal ball tells me that people holding cash paying 3%-6% p.a., and then piling into equities after the great crash of 2016 - 17, might do very well. But that might prove to be crystal b@lls.

bigadaj

kidmugsy wrote: »

My crystal ball tells me that people holding cash paying 3%-6% p.a., and then piling into equities after the great crash of 2016 - 17, might do very well. But that might prove to be crystal b@lls.

Could be worse, it might be ed balls?

27col

All the recent headlines about people losing their pension/pots have mainly referred to those idiots who drew out their money early, and then proceeded to fall for various get rich quick schemes like the infamous storage unit scam.
To compound matters further, some of them put all their money into these schemes. No question of spreading the risk.
As they say, "a fool and his money are soon parted".
However, the op sounds like a sensible type, so hopefully will make a decision, based on intensive research