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  • FIRST POST
    • mossmanian
    • By mossmanian 8th Aug 18, 12:54 PM
    • 12Posts
    • 4Thanks
    mossmanian
    Should I rely on my company pension?
    • #1
    • 8th Aug 18, 12:54 PM
    Should I rely on my company pension? 8th Aug 18 at 12:54 PM
    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?
Page 1
    • kidmugsy
    • By kidmugsy 8th Aug 18, 12:57 PM
    • 11,740 Posts
    • 8,263 Thanks
    kidmugsy
    • #2
    • 8th Aug 18, 12:57 PM
    • #2
    • 8th Aug 18, 12:57 PM
    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.
    Free the dunston one next time too.
    • sandsy
    • By sandsy 8th Aug 18, 1:17 PM
    • 1,389 Posts
    • 846 Thanks
    sandsy
    • #3
    • 8th Aug 18, 1:17 PM
    • #3
    • 8th Aug 18, 1:17 PM
    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
    • By DairyQueen 8th Aug 18, 1:30 PM
    • 509 Posts
    • 829 Thanks
    DairyQueen
    • #4
    • 8th Aug 18, 1:30 PM
    • #4
    • 8th Aug 18, 1:30 PM
    ... 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.
    Last edited by DairyQueen; 08-08-2018 at 1:31 PM. Reason: Sandsy beat me to it :)
    • Dox
    • By Dox 8th Aug 18, 1:32 PM
    • 974 Posts
    • 760 Thanks
    Dox
    • #5
    • 8th Aug 18, 1:32 PM
    • #5
    • 8th Aug 18, 1:32 PM
    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.
    Originally posted by mossmanian
    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
    • By El Torro 8th Aug 18, 2:19 PM
    • 310 Posts
    • 283 Thanks
    El Torro
    • #6
    • 8th Aug 18, 2:19 PM
    • #6
    • 8th Aug 18, 2:19 PM
    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
    • By Thrugelmir 8th Aug 18, 2:28 PM
    • 60,072 Posts
    • 53,416 Thanks
    Thrugelmir
    • #7
    • 8th Aug 18, 2:28 PM
    • #7
    • 8th Aug 18, 2:28 PM
    I have no plans to leave this company and wish to still be here come my retirement age.
    Originally posted by mossmanian
    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!
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • mossmanian
    • By mossmanian 8th Aug 18, 3:13 PM
    • 12 Posts
    • 4 Thanks
    mossmanian
    • #8
    • 8th Aug 18, 3:13 PM
    • #8
    • 8th Aug 18, 3:13 PM
    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
    • By MallyGirl 8th Aug 18, 3:17 PM
    • 3,004 Posts
    • 8,006 Thanks
    MallyGirl
    • #9
    • 8th Aug 18, 3:17 PM
    • #9
    • 8th Aug 18, 3:17 PM
    generally, the more you can get in as early as possible, the better it is as growth will compound over the years.
    • Thrugelmir
    • By Thrugelmir 8th Aug 18, 3:18 PM
    • 60,072 Posts
    • 53,416 Thanks
    Thrugelmir
    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.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • Linton
    • By Linton 8th Aug 18, 3:25 PM
    • 9,820 Posts
    • 10,073 Thanks
    Linton
    .......
    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?
    Originally posted by mossmanian

    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.
    • Thrugelmir
    • By Thrugelmir 8th Aug 18, 3:38 PM
    • 60,072 Posts
    • 53,416 Thanks
    Thrugelmir
    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.
    Originally posted by Linton
    All things being equal. The gain computes to 6.25%.

    There are also the other tax advantages and implications for benefits to be be considered when weighing up the options. Likewise the use of the funds as a form of life insurance pot.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • mossmanian
    • By mossmanian 8th Aug 18, 3:41 PM
    • 12 Posts
    • 4 Thanks
    mossmanian
    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.
    Originally posted by Linton
    Really great information, thank you so much. Very easily and simply put.

    I do have an emergency fund, although this sits in an ISA at 3 months of my wage.

    I feel it's probably more pertinant to reinvest into my pension, as commented above numerous times, it's now absolutely clear to me compounding should be my priority at this stage.
    • twotonealex
    • By twotonealex 8th Aug 18, 6:21 PM
    • 51 Posts
    • 14 Thanks
    twotonealex
    Have you considered that you'll want to stop working long before 70?
    • kidmugsy
    • By kidmugsy 8th Aug 18, 6:30 PM
    • 11,740 Posts
    • 8,263 Thanks
    kidmugsy
    OP, also consider the attractions of using your bonus to fund an S&S ISA now (or even an S&S LISA) with the possibility kept open of withdrawing the capital later in life and contributing to a pension then. This preserves flexibility at, potentially, trivial cost.

    It will seem an excellent strategy if the tax relief rate is increased for basic rate taxpayers. On the other hand it will seem a poor strategy if your employer suddenly makes the terms of its scheme less attractive.
    Free the dunston one next time too.
    • JoeEngland
    • By JoeEngland 8th Aug 18, 6:47 PM
    • 153 Posts
    • 202 Thanks
    JoeEngland
    Really great information, thank you so much. Very easily and simply put.

    I do have an emergency fund, although this sits in an ISA at 3 months of my wage.

    I feel it's probably more pertinant to reinvest into my pension, as commented above numerous times, it's now absolutely clear to me compounding should be my priority at this stage.
    Originally posted by mossmanian
    It might be worth building up a bigger emergency pot than maxing out with the pension by putting your bonus in that too. 3 months wages is not a lot if you had a big emergency.
    • Zorillo
    • By Zorillo 8th Aug 18, 8:02 PM
    • 391 Posts
    • 241 Thanks
    Zorillo
    I work for the largest Insurance company in the UK. It's very very safe to claim they will be around by retirement age.
    Originally posted by mossmanian
    I've been in the same industry the same length of time as you. I've been At Risk of redundancy five times. I admire your confidence.

    I had aimed to reach the 9% over my next two pay rises (which I get yearly of c2.5/3%.)
    Originally posted by mossmanian
    Get it to 9% sooner, you're giving up free money. Enjoy your bonuses a little, and consider upping the risk level on your investments while you're young.
    Last edited by Zorillo; 08-08-2018 at 8:47 PM.
    • FIRSTTIMER
    • By FIRSTTIMER 8th Aug 18, 9:28 PM
    • 397 Posts
    • 61 Thanks
    FIRSTTIMER
    I am in exactly the same situation as you actually but aged 34/5 - I have reviewed my pensions which both happen to be defined benefit schemes, the first from when I graduated and joined private sector and then left and the second now the TPS/USS scheme. I decided like you this month that I am now putting in the absolute maximum in my pension monthly until my NPA which is set at 65 for both schemes. That is now costing me 17.8% of my pre tax salary a month from April - which I think I can live with to be honest.


    However I DO NOT want to be working past age 60 as the absolute maximum - so have opened a S&S ISA and LISA and I'm drip feeding around 250 monthly to pay for the gap between 60 and 65 to be honest in addition to me probably cashing in the first pension at this time too.


    I would DEFO advice you to top up your pension if you are looking at it as a long term thing and can live without the cash - I have always found if its taken out of my salary - I have never really felt I have lost it.


    The risk of redundancy is always an issue in any industry - I think if you're paying into a pension - its going to be ok long term - the issue is if the company pension fund goes bust - but again I think you're protected with this.


    Insurance industry is very secure - but having been a finance/accountant guy previously - I know redundancy to save money is USUALLY to get rid of people who are actually long termers that are costing the company double the amount of money compared to new starters due to increased holidays/pension costs/salaries/company ni and ultimately the cost of such a big redundancy package. There is a very fine line that needs to be crossed in order for whether or not its more efficient to get rid of an employee or not due to costs. its not pc but its reality.
    • Lorian
    • By Lorian 8th Aug 18, 9:35 PM
    • 4,547 Posts
    • 2,607 Thanks
    Lorian
    >Over the next couple of years, I plan to increase my pension to the maximum employers contribution which hits me at 9%

    Personally I'd be contributing the 9% to get the companies 14% as soon as possible, I love free money.

    Remember the extra 5% will feel less in your take home pay because of the tax relief.
    • Anonymous101
    • By Anonymous101 9th Aug 18, 8:30 AM
    • 1,153 Posts
    • 558 Thanks
    Anonymous101
    I agree, increase your contributions up to 9% as a matter of urgency.

    I'd also suggest you do some reading and scenario planning to understand the effect of compound interest and increasing your payments. As others have mentioned the growth over 35+ years is likely to be larger than your contributions. Its also important to get your head around the tax implications of any additional payment. I was amazed at the amount of tax I paid once I looked into initially and now contribute way over my employers matched percentages just to prevent the taxman getting his hands on my earnings.

    If you're a higher rate tax payer you're getting almost double what it costs out of your net pay into your pension so it really is worth doing. Since I've been reading about it I've now lowered my expected retirement age from 68 to about 50. Although I really think it'll be earlier than that.

    This might also be worth reading, https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
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