Advice for a Newbie

Munchie

Afternoon everyone

I am new to this site and would like some advice as to a pension.

I am in my 40's and have an old company pension which I no longer contribute to.

I have been working for another company for 4 1/2 years now. I can join their Stakeholder Pension scheme if I want to.

I would like to ask how much I should be realistically saving in order to achieve a decent pension pot at age 60. I have been told approx £300-400 but there is no way I can afford to save this amount each month.

Can anyone help me please?

dunstonh

I would like to ask how much I should be realistically saving in order to achieve a decent pension pot at age 60. I have been told approx £300-400

Depends on how much you want to earn at 60. If you assume £15k a year, then you need a pot of £300,000 in todays terms.

18 years at 3% above inflation growth means you need a gross pension contribution of £525 per month which is about £410 net. (increasing annually to keep real terms value)

but there is no way I can afford to save this amount each month

Which probably means you wont be retiring at 60 then. that sounds blunt I know but an saving or investment is only as good as what you pay. You cannot expect to pay £100 a month for 18 years and get an income of £1200 a month in pension for 25 years.

Munchie

Thanks for your speedy response.

Would it be worth having a pension if I can only contribute what I can afford or would it be more financially savvy for me to try and save as much as I can in a high interest savings account and also to pay a little extra in order to finish off my mortgage as early as possible.

dunstonh

Would it be worth having a pension if I can only contribute what I can afford or would it be more financially savvy for me to try and save as much as I can in a high interest savings account and also to pay a little extra in order to finish off my mortgage as early as possible.

A savings account over 18 years would typically perform worse than an investment. A pension is just a container for an investment that gets tax relief.

So, using that same example pot of £150k, on that £500pm contribution, the Govt pays £100 for you at basic rate relief. So you only have to pay £400. And that assumes 3% above inflation which should be achievable long term with a low/medium risk spread.

A savings account on the other hand would typically match inflation so you would have to pay around £694 into the savings and you wouldnt get tax relief on it outside of a pension. So, the pension costs you £400 net but the savings account £694 just to get the same amount built up. (again assuming that you increase contributions annually to keep real terms value).

Your problem is that by retiring at 60 you have no state pension until 66 (state retirement age is going up between 2024 and 2044 in stages to 68). That state pension is £4700 a year in basic form but you may also get some SERPS and second state pension which may account for a few thousand pounds more a year. So, by retiring early you have to make up for that whereas retiring at state pension age means you dont have to pay as much in. Plus, you give yourself another 6 years of contributions and growth.

Aiming to get a pension pot of £150k at 66 drops the monthly cost from £400 net to £285pm net but you wont need £150k in the pot to give you the same income as state pensions will cover 1/3 to possibly half of it.

So making contributions towards your retirement is never a bad thing. However, your expectation of early retirement is probably a no go because you are not going to be able to afford it. Even if you clear your mortgage, what income are you going to have between 60 and 65 if you dont put money aside?

Munchie

I see what you mean - looks like I won't be retiring at 60 - unless I win the lottery of course.

Thank you so much for your help and advice - trying to talk to some people about pensions is sometimes very confusing.

I am grateful for your honest opinions.

No doubt I will be asking further questions in the future.

EdInvestor

Get a forecast of your state pension here after October:

https://www.thepensionservice.gov.uk.

whiteflag_3

Question- If retirement @ 60 is out the question now, surely a Self Invested Personal Pension (SIPP) will be able to sort that problem?

For anyone that doesnt know, SIPPS have low charges, are suitable for everyone and are available from the UKs largest Independent Financial Adviser (IFA)- Hargreaves Lansdsown. They specialise in keeping things simple;)

johnllew

EdInvestor wrote: »

Get a forecast of your state pension here after October:

www.thepensionservice.gov.uk.

I've just tried it and it's working NOW!

EdInvestor

johnllew wrote: »

I've just tried it and it's working NOW!

Is it indeed? You're not due to retire before 2010 are you? It has always worked for people in that group.

johnllew

EdInvestor wrote: »

Is it indeed? You're not due to retire before 2010 are you?

No - 2016.