Should I rely on my company pension?

LW7 · 8 August 2018 at 12:54PM

Hello,

I'm wanting some advice on my Pension and how much I should rely on it moving forwards.

I'm 32 years old, I have been at my current employer for 13 years. I have only been paying into a Pension for the last 7 or 8 years (from memory)

I pay £103 per month (4%)
My employer pays in £257.50 per month. (10%)

Total: £360.50 per month.

My current plan value is only £15,904.

I have no plans to leave this company and wish to still be here come my retirement age.

Over the next couple of years, I plan to increase my pension to the maximum employers contribution which hits me at 9% (£231.75)

If I put in 9% (£231) my company put in 14.10% (£363£ making a total contribution of 23.10% (£594).

On the basis I retire at 70, I have 38 more years working.

At those increased levels (say from today)
I work it out as

£7128 PA
x38 yrs
£270,864
+ current plan value £15k)
£285,864

£285k doesn't seem a lot of money to live on for the rest of my life, if I lived another 20 years, it's only £14k PA!

Does this seem a logical step?
is 70 too young to plan to retire in the current climate?

I could aim to pay more into my pot, however from 9% onwards for ever 05% I increase it, my employers contributions drops to 0.05% so the benefits seems neglegable.

I have not factored in any state pension (8.5k) (currently age 68), as who knows if they'll even exist in 40 years time?

kidmugsy · 8 August 2018 at 12:57PM

The chance of state pensions still existing in forty years time may well be greater than the chance of your capital undergoing no growth over forty years.

sandsy · 8 August 2018 at 1:17PM

You haven't factored in any investment growth. Remember that all the contributions are invested.

Thank about next year's contribution of £7,128. It can grow with investment returns for 37 years until you are 70. If it grew at, say 4% after charges every year (to keep the numbers simple), that one contribution will be worth £30,423. Now it's not quite that simple as inflation will wipe out some of the benefit of the growth. So say inflation was 2.5% every year, your contribution of £7,128 would still now be worth £12,202.

The more that investment growth (after charges) exceeds inflation, the greater the value that will be available to your future self.

DairyQueen · 8 August 2018 at 1:30PM

... and no pay rises.

You need to compound your contributions. Easiest thing would be to assume your contribution rises with inflation each year (i.e. assumed annual pay rise).

Take your current pot. Add your inflation-linked annual contribution. Assume investment growth of 3 or 4% annually (commonly used net of charges values). Compound the values.

Hey presto!

Even if you had zero pay rises over 38 years you would have a pot of £624000 at 3.5% return. I'm sure a competent maths person will be along soon to factor in the annual increases in contributions.

Dox · 8 August 2018 at 1:32PM

mossmanian wrote: »

I could aim to pay more into my pot, however from 9% onwards for ever 05% I increase it, my employers contributions drops to 0.05% so the benefits seems neglegable.

This doesn't sound right. Why does your employer contribution reduce if you pay in more? Taking it to extremes, how would they meet their auto-enrolment obligations if you personally contributed so much that their contribution dropped below the minimum employer contribution?

El_Torro · 8 August 2018 at 2:19PM

I suggest you play around with a Pension Calculator to see what the future state of your pension could be. There are plenty out there, one I like is https://www.hl.co.uk/pensions/interactive-calculators/pension-calculator

Don't forget to play around with the Advanced Options as well.

By my rough calculations your pot should be worth over £450k in today's money by the time you're 70.

Thrugelmir · 8 August 2018 at 2:28PM

mossmanian wrote: »

I have no plans to leave this company and wish to still be here come my retirement age.

What's the likelihood of your employer being around in 38 years time?

Make hay while the sun shines. Life is a roller coaster where the only certainty is uncertainty. Maximising your employer contributions while you are able seems the best route to a comfortable retirement. Possibly before 70 as well!

LW7 · 8 August 2018 at 3:13PM

Thanks all, that's really valuable insight.

To clarify, as I had a few typo's in my original post.

After 9% for every 0.5% I increase my contributions, my employer will increase 0.05%.

I work for the largest Insurance company in the UK. It's very very safe to claim they will be around by retirement age.

I currently have my investments at low risk and mid risk. I hadn't factored in any returns on that, as I wasn't and am not aufait with how that works, so thank you for the explanation regarding after inflation, I would see additional return.

I had aimed to reach the 9% over my next two pay rises (which I get yearly of c2.5/3%.)

Another side question I guess is, I often get a yearly performance bonus of c6-8%. My employer offers the ability to reinvest this into my pension pot rather than taking it in my wage, which some tax relief benefits.

Is this generally a recommended action?

MallyGirl · 8 August 2018 at 3:17PM

generally, the more you can get in as early as possible, the better it is as growth will compound over the years.

Thrugelmir · 8 August 2018 at 3:18PM

The more you invest and the earlier you invest are both factors that are likely to produce a better long term outcome. Majority of investment return comes from reinvestment of income not capital growth. Compounding is your friend.

Linton · 8 August 2018 at 3:25PM

mossmanian wrote: »

.......
Another side question I guess is, I often get a yearly performance bonus of c6-8%. My employer offers the ability to reinvest this into my pension pot rather than taking it in my wage, which some tax relief benefits.

Is this generally a recommended action?

If you want to invest the bonus rather than use or save the cash you have two main choices - pension or S&S ISA. As you would seem to be a basic rate tax payer the tax gain of paying into a pension comes from the 25% tax free yet get when you take your pension. So 25% X 20% = 5% benefit. But you cannot access the money until you are 55.

If you put the money into an S&S ISA, with possibly the same investments as the pension, you dont get this 5% benefit but you can access the money whenever you want. So which is most important to you, 5% extra or flexibility?

One thing to check- do you have a cash emergency fund of say 6 months living expenses? If you lose your job or have a major unexpected expense you dont want to have to sell your investments, possibly when prices are low. So you need a cash buffer before you start serious investing.

Should I rely on my company pension?

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