Having two pensions (auto enrolled and stakeholder

Cloudane

Current age: 35. Full time employed but on a fairly low salary (fair bit higher than minimum but nowhere near national average either), I'm not much of a high flyer. Live with family, and can't see that changing any time soon.

At about 28 I saw the big fat warnings on MSE about starting a pension ASAP and that you're never too young, and making it $current_age/2. So I went to see an IFA and started a stakeholder pension at 14% of my salary. I was advised to also have it increase annually with inflation as it'd have a big impact on the final fund so the amount usually increases 2.5% or so.

Since then of course we have been landed with the auto enrollment pension. This hasn't really bothered me up til now as it's just been 1% which I don't really notice. It'd be minuscule at the end, but "every little helps"

In April however it's set to triple to 3%! And then in 2019 go up to 5%. And that's starting to become quite a large dent on an already fairly tight budget (I keep having to rein in my lifestyle and part of me is like "I want to live a bit now not just wait til I'm 70" :rotfl:)

How are people generally handling this double pension thing? Stop the existing one and increase the auto enrolled one to e.g. 14%? Lower the existing one to e.g. 11% and then 9% to offset the increases in the auto enrollment? Try to continue both as they are?

Imelda

Personally, I decided to contribute to my employer one just to keep it all in the same place.
Which pension company does your employer use? Mine is Standard Life which I am happy with.

Imelda

Ps I make my contributions direct to SL rather than via PAYE. I only work PT and so to ensure I get the 20% uplift I do it this way.

You may need specific advice if your contributions are via salary sacrifice or will take you below NMW/ the limit for NI contributions.

kidmugsy

Cloudane wrote: »

... Lower the existing one to e.g. 11% and then 9% to offset the increases in the auto enrolment?

That sounds a pretty sensible first thought to me. You want to contribute enough to the occupational one to ensure that your pension fund receives maximum employer contribution. You want to contribute enough to the stakeholder one to give you a good chance of comfort and security in old age. If your pension funds between them continue to receive 14% of your income you'll be doing well - better than most people, I'll bet.

Another thing, hinted at by Imelda. If your money goes into the occupational pension by salary sacrifice, it would probably be wise to direct even more of your contribution there, and less to the stakeholder. That's because you'd then be paying less in National Insurance contributions which would let you spend a bit more on living at the moment. As she said, there is a limit to the amount that's permissible to pay by salary sacrifice. There's also a limit to the amount that's sensible to pay by salary sacrifice

Now: more about extra money for living on. For example, suppose that you and your IFA were right when you decided that 14% of your income was a sensible contribution rate to pensions. So, roughly speaking, if your employer is going to contribute 3% it should be OK if you reduce your contributions to 11% of your income in total. Would that help?

Another alternative would be to cut back a bit more on the stakeholder contributions and instead put the equivalent amount into a Lifetime ISA ("LISA"). You can open a LISA before your fortieth birthday, and continue contributing into it each tax year until your fiftieth. You can withdraw money from it tax-free from your sixtieth. Then, cunningly, you could use that tax-free money to boost your pension contributions in the gap between your sixtieth birthday and stopping work.

If you take some LISA money out earlier than your sixtieth birthday there is a penalty to pay, which is enough to sting but isn't calamitous. (Unless you use the money for your first house purchase, when there's no penalty). Anyway, the point is that your motive is to save for old age, and pensions aren't the only tool for that. The LISA - which was invented long after your conversation with the iFA - might be a suitable tool.

Moreover if you do the sums you may find that by using a LISA you can expect to buy the same sort of post-tax income in retirement at lower cost. That's because all the money in the LISA will be available tax-free whereas the pension money has only 25% available tax-free: the rest is exposed to income tax. You might even decide that this extra value would let you reduce your total contributions to about 9% or10%, with the extra 1%-2% to be spent instead on the next idea.

To really complicate the picture, there's one more thing to consider. It's all very well worrying about old age but what if illness stopped you working long before old age? You can take out insurance so that after, say, six months off work for illness, the insurer would pay you an income of (say) half your normal earnings. Might that be a good use for the 1%-2% of income mentioned above? Here's a link.
http://monevator.com/do-you-need-income-protection-insurance/

xylophone

Had you considered transferring the stakeholder to the auto enrolled pension?

Paul_Herring

How are people generally handling this double pension thing? Stop the existing one and increase the auto enrolled one to e.g. 14%? Lower the existing one to e.g. 11% and then 9% to offset the increases in the auto enrollment? Try to continue both as they are?

I'm using pay rises to increase my auto-enrolment pension contributions - e.g. a pay rise of 2% means I increase my pension contributions from 2% to 4%, which results in no net-change to my net wages. And before 'I have to.'

But then I'm lucky in that I'm not on that tight of a budget (I also have the equivilent of a quarter of my salary going into another pension fund.)

For those on a very tight budget, and who want to 'keep those pay rises in their wallet,' I'd go with moving the percentages around. But only if you must.

Try for a middle ground perhaps? (To make up the 2%, take 1% off one pension and increase contribution from wages by 1% e.g.)

Cloudane

Thanks for the feedback all. Man, the options listed by @kidmugsy are dizzying (but appreciated)

I honestly don't know so I'm inclined to keep the stakeholder one and maybe just reduce it a little to offset the rise a bit, or maybe even do a more even split, as either way I'd have more than one thing on the go in the case one of them goes wrong. I've seen enough financial things "go wrong" (unrelated, but I remember a type of mortgage getting nasty a decade or so ago) that this seems a good idea to me. Perhaps even these LISAs. So many types of ISA these days..

Being this clueless is why I saw an IFA back then - it's just that the fees are such that seeing them again must eat like a year of interest. I remember it being £500 to set up and the conversation was pretty much "well what would you like to do and I'll help you do it" so I just cited the magic age/2 formula and that I'd heard stakeholders seemed a relatively safe bet and off rolled the ball.

Embarrassingly I'm not really sure if the People's Pension (auto enrol) one is "salary sacrifice" (I know the stakeholder one isn't, I pay that myself by direct debit then the government contributes). It had such a gentle start at such a negligible amount I was just like "yeah whatever I don't care, I've got a 14% over here".

Looking back at the documents, it says "contributions will be in the way of net pay, however you can elect to opt in to salary sacrifice to pay contributions to improve your take home pay if you wish"
So I'd say it's not. I've never opted into it. I automatically assumed this was a bad thing as my general rule of thumb in life is that more cash in my hand usually means someone is going to make me suffer for it more later

I think the main thing is no one said "no no you completely misunderstood, don't ever reduce your stakeholder one" so at least it means the flexibility will be there. I'm trying to carve off little bits off my budget... look after the pennies etc as we do around here... and having news that a big chunk of that work was about to be undone on an unsolicited rise in compulsory pension contributions was a bit frustrating!

Obviously I do know "more is better" as a general rule so will TRY to fit it in between now and then. You'd think it'd not be a problem fitting it in in the first place when living with parents and a paid off mortgage rather than alone, and having budgeting skills, but it all goes places (and I do try to make sure I pay my fair share and not be a burden. FYI I know it's controversial living with parents at my age but they want me there, we see living together as a family as a valid lifestyle and it's highly likely I'll be there to look after them as they get into the twilight years).

The state pension is shocking and would've been a complete no-go - I'm not relying on inheriting the house, for one thing if they fall ill beyond my ability to look after them (or if I'm too busy working my backside off) then it can get taken.. they've suggested signing it over to me early and I'd rather not do that just for my sake - plus from what I've been reading that can be reversed too and other little cans of worms. So basically I'll need to be able to pay rent at retirement age if need be, and £120/week seems like "shelter, food, or self-euthenasia, pick one" to me if you're not a homeowner It leans me more towards investing/saving as much as poss tbh.

kidmugsy

Cloudane wrote: »

we see living together as a family as a valid lifestyle

Quite right too.

Cloudane wrote: »

"contributions will be in the way of net pay, however you can elect to opt in to salary sacrifice to pay contributions to improve your take home pay if you wish"
... I've never opted into it.

You really ought to, you know. That way you not only gain by avoiding some income tax, you also avoid some of your National Insurance contributions. That may help release enough money to let you make the health insurance payments I mentioned above. If your health breaks down you will be in the soup and so possibly will your parents. So do consider the possibility seriously.

Look at it this way. The pension contributions are effectively insurance against insecurity and discomfort in your old age. An income protection policy is insurance against insecurity and discomfort in your middle age and also, thereby, insurance to protect your ability to help your parents in their old age.

Cloudane wrote: »

they've suggested signing it over to me early

Noooooo. Again and again on this site people report some daft do-it-yourself arrangement that has cost, or will cost, the family great chunks of money and cause them huge unhappiness and insecurity. Years ago I had to nearly strong-arm my father-in-law not to gift his house to us. Instead I got him to go and see his solicitor, to be advised on how to do something sensible.

xylophone

https://thepeoplespension.co.uk/help/knowledgebase/are-the-contributions-paid-net-or-gross/

It seems that your employer elected for what HMRC call "net pay" and what TPP call "gross pay arrangement".

It would appear that your employer offers "salary sacrifice" - this could be to your benefit, so check out what is on offer.

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/salary-sacrifice

And had you considered transferring the stakeholder into TPP?

https://thepeoplespension.co.uk/employees/joining-the-peoples-pension/transfer-other-pensions/