Pension Advice for 20 Year Old Newbie

Haushinka

Hello everyone! My names Dannie, my Aunty recommend this site to me a long while back and ive been using the resources regularly.

Anyway as my first post i could really use some advice on pensions.

I'll be straight with you. I haven't got a clue what is going on with pensions, i don't understand state pensions or anything.

What worried me was my pension meeting at work today. Recently my company has withdrawn from Zurich.

I have no idea what it all means but ill give you some information on my current situation.

I have this pension with Zurich which will stop as of October 1st with the changeover. I have a previous pension with my old company but I'm not sure of the name because i didn't really pay much attention as i was only 17 at the time. I have all the forms at home.

Ive also been offered membership to a group stakeholder pension provided by AXA sun life.

I don't understand what a state pension is either.

Maybe I'm to young to be worrying about this but id like to know what's going on with all this money. I haven't paid anything into my pension myself but i know my current employer and my previous employer had.

I have no idea how you claim your pension when you retire.

This is all information id like to know because I'm becoming quite frustrated not knowing what it all means.

Is there anyone i can see to go sort all of this out? I'm lost.

I'm sorry if ive confused you, ive confused myself.

Dannie x

MrChips

It's good to see a 20 year old thinking about pensions. The important thing to know about pensions is if you leave retirement planning until you are in your late 30s or 40s, it is probably too late by then to generate a reasonable pension without huge contributions so it is definitely something to start thinking about asap. Anyway, here is an (admittedly long) bit of info/background/waffle about pensions.

When you retire, your pension will be made up of potentially three sources - a pension from the State, a pension from your employer(s) and a possibly a personal pension (which I won't talk about here, but is basically like an employer's DC Scheme but set up and run by yourself as a top up).

Based on the current State system (which of course could change by the time you are 65) you would receive a Basic State Pension from 65 which is currently about £4,200 per year regardless of how much you earn (receiving the full amount depends national insurance contributions every year, but on the assumption you will be employed most of your working life I'll ignore this technicality). On top of this is a State 2nd pension which is earnings related and depends on the amount of national insurance contributions you make over your lifetime.

However you have the option of waiving your right to this 2nd pension, and instead paying less national insurance (this is called contracting-out). In theory you can invest this national insuarance rebate in your own employer pension in the hope of generating a higher pension than it would have purchased from the State. Most people these days believe that the amount of the rebate isn't big enough to be worth the lost State pension, so it is generally recommended to contract-in (I have no comment on this and don't make any recommendation either way).

Anyway, you shouldn't expect the State to be able to fund a comfortable retirement for you so you need to top up this State pension with more money. The best way you can do this is with a generous employer pension.

Traditionally, companies would fund a defined benefit (also known as "DB" or "final salary") pension for their employees. This would give them a predictable pension at retirement which was proportional to the salary at retirement and their length of service (typically pension = service x final salary / 60 ). To fund these predictable pensions costs about 20-25% of salary for each member every year. In the golden days of high stock market returns, companies could get away with paying in a lot less than this (or nothing) because the investment returns they got on the Scheme money was more than enough to cover the contributions needed. However when the stock market wasn't doing so well, companies suddenly realised they couldn't afford to pay the full contributions necessary and many closed their DB funds to new employees. Instead they opened Defined Contribution ("DC") Schemes (which is basically what it sounds like you have). These work on the basis of you and/or your employer putting money in each month, investing in shares/bonds and seeing what you have accumulated when you retire. You then pay this to an insurance company who will exchange it for a pension for life.

These are generally seen as not as good as the DB schemes, chiefly because of the unpreditability - if the shares you invest in do badly, you will not have much money to buy a pension with. However, they are also substandard because employers are being far less generous with them. In most companies these days, there are DB Schemes for the members who joined before they were closed and DC Schemes for those who joined later. The company will in all liklihood be paying 20-25% of salary into the DB member's fund, but only 5-10% (if that) into the DC members fund. You don't have to be Einstein to realise that DC members should expect a much smaller pension (unless they make up the difference themselves). Most employees don't realise this, and the fact that they are effectively being paid 15% less than an equivalent colleague who happened to join a few years before them.

Anyway, I digress, onto your situation. It sounds like your employer set up a DC Scheme with Zurich (an insurance company) but for one reason or another has decided to switch the Scheme to Axa. This shouldn't concern you too much really. The Funds contributed to Zurich will probably stay there and continue to be invested in whatever they were before. Your new contributions will now be invested with an Axa fund. Assuming you don't stay with your current employer for life, you will no doubt have another pension provider when you join a new employer. When you retire you can add all your different pension pots together (another alternative would be to transfer them all into one place if you wanted to for convenience).

It would be interesting to know what sort of contributions your employer makes? Working in the pension industry, I can tell you if they are relatively generous or not. If they offer matching contributions (i.e. whatever you pay, they will match) I would recommend paying as much as you can afford to take advantage of this.

A lot of people don't think much about the pension package on offer when taking a new job, which I just can't understand seeing as the difference between a good and bad pension can be as much as 20% of your remuneration.

As an afterthought, how long were you at your previous employer? If you were in the Scheme for less than 2 years, they can terminate your pension and refund any contributions (and you say you didn't pay any so they would have just taken their money back!) - best to check this.

Finally as for claiming your pension, the State will write to you before you reach 65, and you should keep records from all your previous employer schemes so you can let them know when you want to retire (you can't retire before 55). You should let them all know when you move address.

If you have any more questions, fire away.

EdInvestor

Hi Haushinka

How much is your employer contributing to this company pension of yours?This "free money" is the important bit. If the answer is nil, then the pension is probably not worth bothering about if you pay basic rate tax.

The important thing to know about pensions is if you leave retirement planning until you are in your late 30s or 40s, it is probably too late by then to generate a reasonable pension without huge contributions so it is definitely something to start thinking about asap.

This will no longer be the case from next year for most people.

Midas

Great post Mr. Chips. Dannie, the only thing I would add to what Mr. Chips says is that pension planning isn't just about pensions. As Mr. Chips says you will have a state pension and company pension, and possibly a personal pension aswell. Consider also some other forms of long term investments (e.g. a stocks and shares ISA) which you will be able to 'cash in' on retirement rather than converting to a pension.

EdInvestor

Midas wrote:

Consider also some other forms of long term investments (e.g. a stocks and shares ISA) which you will be able to 'cash in' on retirement rather than converting to a pension.

Good point Midas.:)

I'm continually astonished by the number of people who don't realise that once you put money in a pension, you can't get get it out - except as a taxable income when you're over 50. :eek:

max2002ad

I am 25 years old and have been planning for my retirement for the last three years.

For our Generation i think there are some realistic assumptions to be made.

The first is that the State pension whatever it maybe will not be enough to give us the standard of living we enjoy now let alone when we are 55+.

The second is that serps although a good idea appear to be best opted in than out as the pension companies just seem to be wasting the money.

The Third assumption is that we will have to work harder and for longer than our parents and grandparents until at least 75.

All these assumptions means that in my opinion to get the best possible retirement everyone no matter who should be paying in to pensions especially if the company contributes to.
This FREE money on top of your small contributions won't be missed today but can make a big difference in the future.
However putting all your eggs in one basket is likely to be unwise so when you can afford it invest in savings accounts, shares and other investments such as property.

Because in this day and age it's better to be safe than sorry no one wants to live a miserable retirement that could last 30+ years.

dunstonh

This will no longer be the case from next year for most people.

People still have to save for retirement. That part cannot be put off.

MrChips

Midas wrote:

Great post Mr. Chips. Dannie, the only thing I would add to what Mr. Chips says is that pension planning isn't just about pensions. As Mr. Chips says you will have a state pension and company pension, and possibly a personal pension aswell. Consider also some other forms of long term investments (e.g. a stocks and shares ISA) which you will be able to 'cash in' on retirement rather than converting to a pension.

Thanks - I have my pensions exam on Monday so have been swotting up recently.

Personally I am following the strategy of paying contributions at a rate of half my age (just about affordable now, I'll see what the fund is like when I hit 30 and reassess).

dunstonh

Thanks - I have my pensions exam on Monday so have been swotting up recently.

Pensions exam? Is that G60? in which case, you are brave doing it at this time. With A day coming in and the exam likely to cover both regimes it would be a scary time to be doing it... Good luck.

MrChips

No, I am sitting ST4 (paper set by the institute of actuaries). Is quite a general paper and doesn't go into the details of UK legislation thank goodness, that's the paper I will be sitting next year ;-)

oceanblue_3

Well, good luck my friend - your post was well worth reading, and shows you have the vision to convert all the technical stuff into relevant and, I hope, meaningful advice - there are too many contributors to these sorts of threads who fail to see the human aspect...........