Pensions? Are they even worth it?

Allumis

I'm not the best when it comes to fully understanding my financial future but I'm at that stage again where I'm being re-enrolled for a pension and tying to understand is it even worth it or "what's the point"

I have what I would consider a very good salary and contributing 4% of that per month would give me an annuity of £2,009 PA, my rent PA is £8,160, CT is £1500 sooo I'm investing into something that wont even cover a roof over my head never mind electricity, water, heating, food etc?

What's the point? I can't understand why I would invest into a pension when the returns are not even enough to cover living costs...... 

comeandgo

Well, if you are only contributing 4% there is your problem, you need to saving a lot more than that.  How much does your employer contribute?  That is free money for you.

Allumis

comeandgo said:

Well, if you are only contributing 4% there is your problem, you need to saving a lot more than that.  How much does your employer contribute?  That is free money for you.

Hi comeandgo, 

My employer contributes the same which is reflected in the figure above. 

If I were to increase my contributions to 7.5% which is the maximum my employer will match I would get an annuity of £3,768/£2,711.

Age	State Pension	Defined Benefit	Other Income	Pot Income	Estimated Income	Shortfall/Surplus
55	£0	£0	£0	£3,768	£3,768	Shortfall: £19,032-£19,032
68	£9,339	£0	£0	£2,711	£12,050	Shortfall: £10,750-£10,750

Again significantly short of my living costs not even accounting for the "luxury" of electricity or food.

ex-pat_scot

Where to even start!

Frankly- if you are not going to save for when you are no longer working, where do you think the money is going to come from?

You should be saving a significant slug of your salary, split between employer and employee contribution. If you don't contribute then you are losing the employer contribution.
You should be saving at least 15% and ideally more.
You have a very good salary yet are baulking at the notion of saving 4% into a pension.
The more you save, the more you will have to retire on, and the earlier you might be able to stop working.
The money you save will be tax free until retirement, so it will cost you less than 4% of your take home pay.

The growth projections are required to be pessimistic.
Using your pension savings to buy an annuity is an incredibly poor value ./ risk averse option for most people.
The £2009 pa annuity would normally equate to a realistic much higher real value. 
The long run average return on a diversified equity portfolio is 8%, with 3% inflation.  That's a more realistic broad planning assumption.

Your current costs of rent and CT - are they really going to be the same in retirement? Are you going to move or buy?

You need to take a long hard grown up think about all of this. Now.
You can throw your hands up in the air, as you seem to be doing, with "it's too hard" or "pointless". Good luck, because you will need it if you are not saving anything.

LV_426

How old are you? Contributions in the early years of employment make a huge difference. If you can afford to stack away 10% of your gross salary then even better.
And you mention annuities. These are generally considered poor value at the moment. There are other options, and most people use a flexi-drawdown strategy from their accumulated pension pot.
I reiterate the value of making early contributions - I made a modest AVC contribution to supplement a DB scheme in the early part of my career. That fund alone is now worth about £130k.

So, yes contributing to a pension fund is most definitely worth it.

Allumis

I can barely afford to save anything, with the cost of living being so high I'm pretty much living pay cheque to pay cheque at the moment (electricity is over £110 a month and I can't change suppliers ) I would be having to contribute what? 20+% of my salary to even come close to covering basic living costs, how has it got to this? That's certainly not what my mum had to contribute to retire at 55 on a single modest income.

As for my current costs, I expect these to increase not decrease and am never likely to be in a position to buy due to the cost to do so and even if I did I would have to take a 25 year mortgage which would push the monthly cost to higher than the cost of rent. 

I'm not sure how you mean I should have been contributing more during the early years of my career, I spent most of my years after university unemployed, working 0 hour contracts etc due to the trashed state of the economy. The cost of private renting is phenomenal a 1 bed studio local to me usually rents out for £900 PCM

dunstonh

I have what I would consider a very good salary and contributing 4% of that per month would give me an annuity of £2,009 PA, 

Multiple issues here:

1 - A 4% contribution is low.  

2 - And why would you buy an annuity?  

3 - You are probably not reading the projections correctly.  For example, that £2009pa is in todays terms (not in future money terms). and assumes one of the most expensive annuity types that hardly anyone buys.       you don't mention the growth rate but it's likely to be pessamstic. 

my rent PA is £8,160, CT is £1500 sooo I'm investing into something that wont even cover a roof over my head never mind electricity, water, heating, food etc?

So how would you pay for those things in retirement?   Your state pension would cover those but not food or utilities.  So, what is your plan to pay for those in retirement if you dont use a pension?

I can't understand why I would invest into a pension when the returns are not even enough to cover living costs...... 

If you pay in peanuts, you get back peanuts.  Pensions are not some magic bean

Silvertabby

The idea has always been that your State pension will cover the very basics, with the rest being paid for by savings/ other pensions.

LV_426

Allumis said:

I can barely afford to save anything, with the cost of living being so high I'm pretty much living pay cheque to pay cheque at the moment (electricity is over £110 a month and I can't change suppliers ) I would be having to contribute what? 20+% of my salary to even come close to covering basic living costs, how has it got to this? That's certainly not what my mum had to contribute to retire at 55 on a single modest income.

As for my current costs, I expect these to increase not decrease and am never likely to be in a position to buy due to the cost to do so and even if I did I would have to take a 25 year mortgage which would push the monthly cost to higher than the cost of rent. 

I'm not sure how you mean I should have been contributing more during the early years of my career, I spent most of my years after university unemployed, working 0 hour contracts etc due to the trashed state of the economy. The cost of private renting is phenomenal a 1 bed studio local to me usually rents out for £900 PCM

Apologies if I misunderstood your living costs, and ability to save, you did mention that you have a very good salary so I assumed you had scope for saving.

Your Mum is probably benefitting from a DB (final salary) pension, as is my Dad, who retired from the civil service at 60. DB schemes are pretty rare these days.
The unfortunate fact is that levels of debt and cost of living today are higher than ever, and if you can't afford to make a decent contribution into a pension scheme, then sadly you'll have to work until you're older, and rely on the state pension. If you're married, then both people get this so your income is doubled.

But still, anything you can contribute into a pension scheme is better than nothing. And with an employer scheme, you get the tax benefits too.
Those numbers you have are for annuities, which as mentioned, are generally not the best way of providing a pension income.

Allumis

What type of person would be best to speak with about this? Contributing almost 20% of my salary can't be "the only way" to afford to just exist come retirement.

Yes my mum has an old NHS pension and had the luxury of buying a 3 bed detached property in the 80's for just under £7,000. The dream of having a monthly mortgage of £142 a month! 

MACKEM99

The dream of having a monthly mortgage of £142 a month! 

At 15% interest.