The argument against "Dont bother saving for retirement, just claim pension credit"

Grumpy_chap

Kaizen917 said:

I tried to find similar discussion through the vast number of threads but unsuccessfully, particularly interested in the opinion of people in their 50s,early 60s that are way more ahead in their planning journey.

In a nutshell,its about the balance between making some effort to plan for retirement OR living it to the fullest and then let the state take care of us if we have next to nothing saved.

I tend to be the type to take the first route. At least where it stands now, being in my 30s, I have ok sized SIPP(older small pots combined), LISA(topped for the last 2 years) + current employer pension with fairly decent level of contributions (employer pays 18% of salary, I do 8% so total of 26).

As it happens however, some of the friends I would discuss the topic over a drink are basically at the polar opposite and thinking that I shouldnt put a penny towards any such pension. In general, their argument goes along the lines 1) Either we dont contribute enough over the years so we would be better off just getting benefits for about 200-300 per week 2) We contribute enough but all sorts of risks such as capital loss, inflation etc end up making this long term effort not worth it.

Im not a big fan of the idea of relying on the state for this so normally I didnt put much thinking into strict planning, just did my contributions thinking its the right thing to do. But do they have a point that the effort isnt worth it?

Kaizen917 said:

Im currently on around 55k but thats not reflecting my lifestyle which is modest enough to be saving the majority (circa 40-70% of the income, depending on season or one off expenses). My vague goal was therefore for retirement income of 10k at worst and 15k at best, on top of the state pension(assuming current prices). In a way, even if I really really wanted to opt for more lavish lifestyle now to keep myself below certain pension credits threshold in future, I would be forcing myself to spend rather pointlessly.

But thanks for bringing this up on the phasing out of the pension credit. I suppose if thats on the roadmap, so to say, then its a good enough argument not to stand by and rely on the government to fill the gap. Then again, who knows what the landscape will be like in the 2050s when Im due to retire..

Looking at this as the simple question - to save for the pension or not?
The OP has income £55k, so the 8% contribution is about £4.4k
If not saved into a pension, that money would be subject to income tax and NI, total deductions at source 42% (higher in some parts of UK), so that £4.4k into the pension has only cost the OP £2.6k of nett income.  The gain here would be even greater if the OP was subject to HICBIC.
The employer also contributes 18% which is £9.9k.  It is common that employer pension contributions are linked to the employee contributions being made.  It is also common that if the employee opts out of the pension, then there is no alternative remuneration to compensate for that value.
So, on the simple assessment, the OP suffers about £2.6k per year of nett income and gains £14.3k into their pension savings.
The OP does not desperately need that £2.6k in the here & now, so that pension saving is something that the OP's future self will be most thankful for.

Then, look at the OP's wider savings.
Income of £55k, less the pension contribution £4.4k, so £50.6k.
Take home will vary depending where in the UK and student loans and such like, but it will be typically about £3k per month, so £36k per year.
The OP is saving about half of that, £18k per year.  Some of that goes into a LISA, so a possible indication that the OP aspires to buy a house at some point in the foreseeable future.
As the OP progresses through life-stages, it is quite plausible that the OP will find their spending proportion increase.  The OP 's future self will be grateful to start those phases with some financial resilience that this current saving will provide.
Either way, with the OP's current income and spend profiles, there is little likelihood that the OP will qualify for pension credit when they reach that point in life.

It is quite possible that the friends with the more spend-thrift approach earn less and have less capital but then see the OP, know the OP has a good job, even if they do not know the OP's actual salary, and then are confused by the OP's prudent life-style.  The friends. meanwhile, appear to be enjoying a slightly more affluent lifestyle in the short term even if their earnings might well be lower (if prospects of pension credit retirement are real for them).

The OP may wish to consider the balance between spending and saving.  There is some importance to living for today when that can be at no risk of penalising the future.

The OP may also consider that, if they don't pay into the pension, the extra £2.6k nett earnings will simply add to the £18k annual savings.  Given this £2.6k is going to be saved, the pension is quite likely the best return that can be achieved when the tax and employer contributions are considered.

Albermarle

One important point not mentioned so far, is that you will most likely be able to retire early, whilst the 'spend it all now' brigade, will have to work probably until they are 70. When you retire 10 years earlier than that, they will be very jealous/envious.

In addition to my previous comment ( above) having built up some assets, even if you do want to retire early, you can always walk away from a bad, stressful job. However if you live day to day, you probably can not.

Nebulous2

Albermarle said:

One important point not mentioned so far, is that you will most likely be able to retire early, whilst the 'spend it all now' brigade, will have to work probably until they are 70. When you retire 10 years earlier than that, they will be very jealous/envious.

In addition to my previous comment ( above) having built up some assets, even if you do want to retire early, you can always walk away from a bad, stressful job. However if you live day to day, you probably can not.

As I've said repeatedly, I'm sure some of the regulars must be fed-up reading it by now, I was fairly unhappy at my work, ran the figures realised they added up, retired and took a DB pension at 59. I quickly decided I wasn't ready to retire and took a part-time job, but that is a different story. 

I regularly meet people around my age, who either hint, or outright ask, how I could afford to stop at 59. Many of them have or had much more extravagant lifestyles than me, but repeatedly tell me they cannot afford to stop until state pension age (67) I was never a big earner, keeping under the higher rate tax band, at Scottish rates. 

Having that flexibility was great. Those 8 years, if people spend them in good health, could be priceless. 

Rattusnorvegicus

£10k well invested in 2009 , returns 100% of the investment every year in divdends i.e. £10k/year , because the current dividend is higher than the buy price on certain things from back then.

I'm on benefits because ill so i understand what being poor is like. Buying in market capitulation events is what pensions are for. I cant even access my pension for at least another decade of dividend reinvestment and growth. But i am fairly sure i'll be better off than pension credit.

My advice to anyone would be to save, invest widely, and buy big at the right moment. You dont need big dollops of cash in a pension pot to benefit. Just buying at the right time, and sitting for 2 ,3 or 4 decades on it.

A £10k yearly income from a 4% drawdown. is a £250k pension pot by comparison.

I think the just claim pension credit argument comes from a lack of financial education. I taught myself pattern trading to get myself started, and over a decade in the market has got me the beginner badge. If the worst comes to the worst, i can use the pension to set myself up a pot, and trade e-mini s&p 500 contracts, and if i cant beat pension credit on a 3:1 profit/loss ratio then i'll eat my shoes.

Eldi_Dos

Kim1965 said:

You might be onto something with that dinghy idea! 

Especially if you can find a spoons with a landing quay.