Pension worries from new member

NIMAN

I have been working for a large US multinational for 10 years, and have been paying into their pension scheme for approx 6 or 7 years.

I pay approx £80 per month (with tax relief) and my employer approx £100. Total going in each month probably around £190-£200.

I have recently got my end of year statement and it says that on my retirement date (in 20 years time), assuming my fund progresses as it has up to now, my pension will be £2500 per year.

This sounds pretty rubbish to me. Perhaps I am misunderstanding the figures. I always heard that pensions gather most money later in their life, but the wording of this statement made it sound like this was taken into account already.

Can anyone advise me on this?

This brings me on to my real question (sorry for being long-winded). I always heard that property was a good alternative pension. Would I be better taking my money out of the pension scheme and using it as a deposit on a house to let? Or perhaps buy property abroad? If I do buy property will I get taxed heavily in later life by the government?

Any advice appreciated.

MrChips

Niman, to me it sounds like the quote of £2,500 is based on what you have paid in so far (i.e. ignoring future contributions). Can you quote the exact wording on the statement? Also the statement is likely to have been prepared using prudent assumptions (i.e. experience is more likely to be better, although it still could be worse!).

How "rubbish" this is depends on what you earn now! I am guessing you are on 20-25k? If so maybe you should consider raising total contributions above 10% to boost your pension.

Don't forget you will get a State pension on top of your work pension. Have you got a pension with a previous employer?

You are not allowed to take money out of your pension Scheme.

dunstonh

Perhaps I am misunderstanding the figures.

Sounds like it. Projections use a couple of different methods depending on the type of scheme and then there can be different ways of showing it.

If your pension is investment backed, projections are either shown using monetary growth basis using 5,7 or 9% p.a. or SMPI basis using 7% but with a 2.5% deduction for inflation. If you are invested in low risk or low potential funds, the provider should use lower rates than those above.

If your pension is based on years of service, then it shows what you have accrued to date. 6-7 years in your case. Which isnt a lot.

Depending on the projection method and rate used, it could mean absolutely nothing when looked at in isolation. Your pension portfolio could be returning 10% a year but the projection being used could be just 5%. Equally it could be perfroming at 3% a year and the projection still be 5%.

This brings me on to my real question (sorry for being long-winded). I always heard that property was a good alternative pension.

Inaccurate. You are comparing cars and petrol. A pension is product you use to put investment in. Property is an investment and not a product. The return is based on the investment inside the pension and not the pension itself.

Would I be better taking my money out of the pension scheme and using it as a deposit on a house to let? Or perhaps buy property abroad? If I do buy property will I get taxed heavily in later life by the government?

Property goes down as well as up. Its not all one way, just as the stockmarket isnt. Stockmarket crashes have tended to happen at different points to housing price crashes. Stockmarket has just come off a crash in recent years whereas property is considered high.

I could write a ton on this subject as property and pensions are being linked together with options next year but I am going to ignore that at this stage as it will just confuse the issue. It may apply to you but lets get a few more posts going before we get into A day and the property/pension rules. No point going that route until we know what you want. I am guessing at this stage that you are not quite understanding what you have got and when you do, property may not be an issue.

Your employer is giving you free money. If you invest in property, you will not get the free money. With property, you will have capital gains tax issues on sale, income tax issues on rental income, risk of property price going down, risk of bad tenants, risk of no tenants for a period leaving you with just expenditure. You will also have periodic refurbishments/repairs/redecoration. Tenants generally do not look after property as well as owners. IMO, you have missed the boat. Buying to rent out should have been done at least 5 years ago.

Back to your pension, you need to look at where it is invested. We know nothing about where you have the money. That is the most important thing.

EdInvestor

NIMAN wrote:

This brings me on to my real question (sorry for being long-winded). I always heard that property was a good alternative pension. Would I be better taking my money out of the pension scheme and using it as a deposit on a house to let? Or perhaps buy property abroad? If I do buy property will I get taxed heavily in later life by the government?

No can do, I'm afraid

Once money goes into a pension it never comes out, except as taxable income after age 50 or when you retire.25% of the total can be taken as tax free cash (may be different with a company scheme.)

I assume you are buying a home to live in?If not, IMHO that should be your next strategy.If doing that already, consider investing directly (or within an ISA) in shares.

Give us some more details about what funds the pension is invested in and what "assumptions" the company is using to forecast your likely retirement income.

The regulator has told companies to use the worst possible assumptions, in an apparent effort to wake people up to saving more.In the event, it seems often to be having the opposite effect: making people think pensions are such rubbish they should be abandoned.

Almost certainly you should keep contributing to get the free money, but it may be that your choice of fund could be improved to get better performance.Also bear in mind that many funds are only just now recovering from the big stockmarket crash three years ago.