Options if you cannot afford a Private pension.?.

ferry · 2 March 2007 at 3:49PM

Just thinking out loud really but what options do people have if they cannot afford to invest a percentage of their salary into a pension scheme.
We (some pals and I) were talking about pensions earlier and it became apparent that I was the only one out of the 4 of us present that actually invests for my retirement.The reason was that they felt that their salary just about covers day to day living expenses,large mortgages,some have kids,one was recently divorced,saving for a home,perhaps on a low income..even trying to clear debt were some of the reasons mentioned..
What are the options available to people who are say in their 30's who cannot realistically pay into a retirement planning plan as there just isn't any extra at the end of the month..?

I might be able to suggest something next time we meet up...

Cheers
Terry.

seven-day-weekend · 2 March 2007 at 4:42PM

Don't any of them pay into an Occupational Pension through their place of employment? I thought all companies had to provide them these days.

But maybe I'm wrong. The experts will hopefully be arounf later!

dunstonh · 2 March 2007 at 5:28PM

The basic state pension goes some way. If you are in your 30s, you are looking at a state retirement age of 67 (not 65) and currently the amount you would get is £4381 a year.

You may qualify for a slightly higher figure with SERPS/S2P but there are not guaranteed and the Govt could reduce them on a whim (which they have 3 times already and shortly will be again in effect with the increase in age from 65 to 66/67/68)

Even with increase, you arent looking any higher than around £9400 a year.

So, what comes down to is can you afford to live on £9400 in retirement?

The difference today is that people dont want to afford things as they are too busy living beyond their lifestyle (not aimed at you but a generalisation). They are willing to pay £50 a month to Sky and £20 a go at Mcdonalds but wont pay into a pension because it means they may have to give up something.

In 2012, the NPSS is being launched and employers will be taking money off you automatically to pay into a national pension scheme. The amount is (at present) pencilled in to be 4% a year. Every employed individual who is not a member of an occupational pension (or group personal pension) that doesnt provide at least the minimum equivalent will be auto-enrolled. You can opt out but you would be daft to. Many believe that the option to opt out will be removed in the years that follow.

So, its a probably a good idea to get used to paying something now, even if its low, and then build on it gradually each year in steps until you get there.

Otherwise start planning to live on £4132.

EdInvestor · 2 March 2007 at 5:36PM

Even with increase, you arent looking any higher than around £9400 a year

It's worth noting that you would have to save up approx 300k to buy this amount of income as an index linked annuity.

So the best thing to do is to make sure your state pensions are up to date and also make sure you buy yourself a home.

A private pension (where there is no employers' contribution) comes a distant third.

dunstonh · 2 March 2007 at 5:40PM

It's worth noting that you would have to save up approx 300k to buy this amount of income as an index linked annuity.

So?

Lets assume someone does nothing towards their retirement. A single person would get £5930 a year (after pension credit) and a married couple £9050 a year (after pension credit).

Thats an abysmal level of income to live on and you shouldnt be aiming to survive on that if you are in your 30s.

The simple fact is that if you do nothing, you are the only one that is going to suffer.

jamesd · 2 March 2007 at 7:28PM

ferry, you do what you can or you accept that you will be comparatively poor in retirement. Doing what you can may include things like not stretching for the biggest or best possible house to live in if that leaves you no money free for retirement planning.

With 30 years to go it only takes 100 a month to get an extra 400-500 a month in pension if you use high risk fund choices.

Those doing debt repayment have proved they can live on the lower income. Once the debt is gone, split the money in half, investing one half and keeping the other half for living with and that could be enough to make a big difference later.

exil · 2 March 2007 at 9:46PM

£9000 may be an abysmal level of income but many people in their 30s are living on that sort of income now! Why should they try to save to get a better standard of living as a pensioner than they have now? And of course, many current pensioners are living on this and less.

The S2P, as far as it goes, is going at least to ensure that people on low incomes get something above the basic pension (£3000 or so per year) as long as they have a reasonable work record. Doesn't help the self-employed or women who have taken career breaks.

Being retired is, let's face it, a lot cheaper than life in your 20s to 40s, when you are simultaneously facing the high costs of getting to and from work , buying a house, raising a family and saving for a pension. My own aged parent is managing fine on 800 a month, has enough left over for regular holidays even though rent for sheltered accomodation has to come out of this.

I'm not talking here about the enormous costs of care when you become incapable of living independently. This cannot possibly be met by any pension scheme.

I'm just trying to call for some sort of balance here. Obviously as I near 50 pensions are becoming more important - but I still have other things to pay for first (eg child to get through university).

jamesd · 3 March 2007 at 2:22AM

Exil, balance of course. I'm currently choosing to live on about 12,000 after tax a year (my full income is higher) but I would like the option to live on more than that when I'm older.

It isn't impossible to provide funds for nursing care. One way to do it if you can retire with 20,000 in income is to have 12,000 of that coming from ISA investments (plus 5000 from the state and 3000 from personal pension and/or SERPS/S2P). That income would be at about 6% of the fund value and that means a fund of 200,000. For a 70 year old man the likely cost of about 24,000 for nursing home care in the South-East can be obtained via an immediate needs annuity for about 105,000. That would leave investments able to provide an ongoing income of 5500. For a woman the cost at 70 would be about 163,000 leaving an income of about 2200.

Not everyone can afford to arrange a fund of 200,000 but it can be done for about 250 a month increasing with inflation if you start 30 years before you retire and have a fairly high risk profile.

Is 250 a month too much? For those who have the income, that's up to them to decide. For those on lower incomes, it may well be out of reach.

wotsthat · 3 March 2007 at 2:45AM

It's a simple fact that if you rely on the state as your sole means of income in retirement you are going to be skint.

Exil points out that some people are struggling to make ends meet now and of course retirement planning will be taking a back seat.

However, don't we know that in most cases where people say that they can't afford to save that they are in denial?

Surely the benefit system is there to help people who really couldn't afford to save rather than those who couldn't be bothered to make the effort.

There's some that say it's not worth saving because they may miss out on benefits but if you plan to fail then you are guaranteed to suceed.

AUNTMAGPIE · 3 March 2007 at 10:23AM

I have worked for years and been on an income of less than £12000 per annum. With 3 kids it all got spent. Now I'm retiring at 65 instead of 70 as I planned because my partner is suffering the after effects of cancer treatment and dreads being left alone.

I also have a Uge Bank Loan that is set to go on for another couple of years, so it's just as well we don't smoke, drink or run a car, isn't it? And the house is paid for.

I always thought that the deduction of NI from our pay was to pay for health services and pensions, so why are they intending to deduct something else?

Naive Nelly

EdInvestor · 3 March 2007 at 10:43AM

AUNTMAGPIE wrote:

And the house is paid for.

This should always be the priority IMHO , given the 2 state pensions are in the background. Having a house gives you considerable potential flexibility in retirement.

You may be able to:

*trade down to a cheaper property releasing cash for investment to top up income
*get a lump sum or ongoing income from an equity release lifetime mortgage or home reversion scheme
*rent out a room to a lodger for tax free income
*rent out the whole house and go and live somewhere cheaper (eg up a mountain in Spain) for a few years until pensions kick in...

Options if you cannot afford a Private pension.?.

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