Work place pensions

[Mercenary Keyboard Warrior]

For a bit of "fun" I knocked up a quick spreadsheet showing the effect of the tax on investment. I have assumed a salary deduction of £80.
I have assumed that the £80 is grossed up by tax making it £100 (current situation)
I have assumed a 4% return on investment (after commission) which is pretty reasonable even in current economic circumstances.
I have simplified the annual rates by using rate/12 rather than adjusting for compounding. Its not so far out for a calculation of this size to materially affect the result (it slightly benefits the calculation using the higher rate)

Person A saves £80 per month net into a pension scheme that achieves 4% growth per annum, after 10 years its worth £14,774 (the £80 is made up to £100 via tax relief)

Person B invests £80 per month into his investment portfolio. He is better than the market and achieves 6% growth. After 10 years his portfolio is worth £13,176

If you look at month 1 contributions after 10 years A has gone from £80 to £149, B has gone from £80 to £146. Within about a year B would overtake A as B would continue to earn at 6% and A only at 4%. I takes this long for B with 2% extra growth to negate the tax effect.

The total pot is lower for B overall due to it taking that long to negate the tax benefit, if you look at the last month. A £80 has gone to £100.33 due to tax, B has gone from £80 to £80.4.

In order over 10 years to make up for the tax break of pension contributions B would actually have to achieve just over 8% growth.

Looking longer term over 20 years A would achieve a total pot of £34,395 and B would achieve £34,306. This is using the original 4% and 6% returns and the same contribution rate.

If the pension fund achieved the same 6% growth it would be worth £42,883 after 20 years for person A, vs £34,306 for person B thats a farily marked difference.

 

[Mercenary Keyboard Warrior]

My only concern is that later on the government may try to punish those who opted out or have savings. For instance by cutting the state second pension hard.

Knew I had read it somewhere, note this is proposal at the moment, but its fairly likely to happen imo to lift pensioners above the means tested minimum income levels.

http://www.pensionsadvisoryservice.org.uk/future-pension-reforms/state-pensions

 

[grumpysculler]

Person A saves £80 per month net into a pension scheme that achieves 4% growth per annum, after 10 years its worth £14,774 (the £80 is made up to £100 via tax relief)

Person B invests £80 per month into his investment portfolio. He is better than the market and achieves 6% growth. After 10 years his portfolio is worth £13,176

That's a duff comparison. A pension is nothing more than a tax wrapper. There is little that you can invest in outside a pension that you cannot invest in within a pension and most of those are not conventional investments.

In the example you give, it is the choice of investments that has led to the difference, not the pension.



It is rarely a silly idea to contribute to a pension. NEST is one example of a poor pension (no transfers out).

Any pension with an employer contribution is likely to be a good idea because nothing beats free money.

If there is no free money, ISAs have some benefits and pensions have other benefits. The choice of wrapper isn't nearly so important as having ring-fenced savings - the alternative is to spend retirement living off the state pension and nowt else.

 

[Andrew_McP]

I was pretty sure the 2nd pension was likely to go, but for most workers (who are on below average earnings, with very small pension pots if they have any pension at all) the proposed system is fairly decent, and stops punishing those with savings so much.

There's some useful discussion after this article...
http://www.lovemoney.com/news/savin...no-you-cant-retire-on-50000?showComments=True
...which might help some people focus their thoughts and expectations.

There's no doubt that anyone in their 20's should be making the most of any pension scheme available, especially if they have a generous company scheme, but the older you get, the more tricky the equations get.

I suspect that the retirement landscape will look very different in 20 years' time when I finally qualify for a state income. In fact I fully expect the whole idea of retirement to have faded away for the average worker. We will return to the time when retirement was a short break before death. Not because we want to, but because we have no choice as the global average income is forced to even out by the market forces already squeezing the West very hard.

Only those in a position to save significant amounts of money, and with a generous employer, will continue to have a traditional retirement.

PS I was chatting to someone recently who retired sick from the Post Office at *40* on a final salary pension. He's 60 now and still going strong. That kind of thing is never going to happen again.

 

[sniffy]

PS I was chatting to someone recently who retired sick form the Post Office at *40* on a final salary pension. He's 60 now and still going strong. That kind of thing is never going to happen again.

Same happened to my Dad's father although he worked for the council. It's a joke that we need to finance pension schemes for those capable of working but expected to work into old age ourselves.

 

[realBabelfish]

As others have said, the no 1 benefit of a pension as a savings method is the tax benefits. For every £100 you put in, as a basic rate taxpayer, it only costs you £80. Show me any other investment that gives you an instant 20% return, followed by decent growth (if you've selected the right funds, as with any investment).

drug dealing?

 

[realBabelfish]

That's a duff comparison. A pension is nothing more than a tax wrapper. There is little that you can invest in outside a pension that you cannot invest in within a pension and most of those are not conventional investments.

In the example you give, it is the choice of investments that has led to the difference, not the pension.



It is rarely a silly idea to contribute to a pension. NEST is one example of a poor pension (no transfers out).

Any pension with an employer contribution is likely to be a good idea because nothing beats free money.

If there is no free money, ISAs have some benefits and pensions have other benefits. The choice of wrapper isn't nearly so important as having ring-fenced savings - the alternative is to spend retirement living off the state pension and nowt else.

i think many of us a a bit jaded of pensions.

i saw the company my dad worked for spend their pension pots and leave the workers nothing.

at my old company we found out that the pension pot was massively under funded. so, if the company is still existing when i get to retire (im 37) i might see my pension but i might either only get part or none at all.

that is if we arent worked to death anyway.

at the moment i cannot afford to put into a pension pot. i dont see the point in us being less well off now when young(ish) as opposed to be better off for a year or 2 before i die.

my dad started again to build up a nice pension pot but will most likely be dead within the next 2 years so wont get to see a fraction of what he paid in.

the way i see it now our house will be our retirement fund. i really dont care that much about when im older. im trying to give my son the best youth he can.

 

[Amleto]

As others have said, the no 1 benefit of a pension as a savings method is the tax benefits. For every £100 you put in, as a basic rate taxpayer, it only costs you £80. Show me any other investment that gives you an instant 20% return, followed by decent growth (if you've selected the right funds, as with any investment).

It just gets taxed at the other end, though (when you take it out, excluding 25% lump sum option).

The only decent thing about pensions is companies effectively double/triple/ * X your contribution.

 

[Stretch]

2.5% seems like next to nothing, I am having to put 7.5% in and that's a NHS pension

That's because you'll get something worth having at the end of it.

 

[grumpysculler]

i think many of us a a bit jaded of pensions.

Lots of people are, mainly due to media scaremongering. There is a lot of nonsense kicked around and a shortage of facts. There is a legitimate debate about pensions for basic rate taxpayers with no employer contribution but that is a debate about the best vehicle (mainly ISA vs pension) and not about the principle of investing for retirement.

i saw the company my dad worked for spend their pension pots and leave the workers nothing.

at my old company we found out that the pension pot was massively under funded. so, if the company is still existing when i get to retire (im 37) i might see my pension but i might either only get part or none at all.

Almost certainly couldn't happen now. A lot has changed in the financial industry in the last 20 years and there are a lot more protections for consumers.

at the moment i cannot afford to put into a pension pot. i dont see the point in us being less well off now when young(ish) as opposed to be better off for a year or 2 before i die.

An average man should live for a couple of decades after reaching retirement age. An average male reaching the age of 65 this year will live for 21.3 years. By the time I get there, that is predicted to be 25.3 years. 50% of them will live for longer. Not saving for a pension is simply stealing from your future self and committing to either working until you drop or living off the state pension (does £140 a week appeal as a lifestyle?).

 

[Mercenary Keyboard Warrior]

That's a duff comparison. A pension is nothing more than a tax wrapper. There is little that you can invest in outside a pension that you cannot invest in within a pension and most of those are not conventional investments.

In the example you give, it is the choice of investments that has led to the difference, not the pension.



It is rarely a silly idea to contribute to a pension. NEST is one example of a poor pension (no transfers out).

Any pension with an employer contribution is likely to be a good idea because nothing beats free money.

If there is no free money, ISAs have some benefits and pensions have other benefits. The choice of wrapper isn't nearly so important as having ring-fenced savings - the alternative is to spend retirement living off the state pension and nowt else.

What are you on about, I used two hypothetical savers and modelled the outcome, yes the pension is a tax wrapper (and a bloody good one at that).

I was demostrating how much more return you would need to be able to achieve outside a pension to be able to match the simple tax efficiency of a pension. And at the end I show you a direct comparison if they achieve the same return.

 

[Mercenary Keyboard Warrior]

It just gets taxed at the other end, though (when you take it out, excluding 25% lump sum option).

Its only taxed as income, just like any other ... income

So it completely depends how much you have (income) and what the basic state pension is in comparison to the tax free allowance at that point.
Ie the basic state pension could completely use up the allowance or may leave some spare. If some is spare then that part of your pension income would be tax free.

 

[Mercenary Keyboard Warrior]

Lots of people are, mainly due to media scaremongering. There is a lot of nonsense kicked around and a shortage of facts. There is a legitimate debate about pensions for basic rate taxpayers with no employer contribution but that is a debate about the best vehicle (mainly ISA vs pension) and not about the principle of investing for retirement.



Almost certainly couldn't happen now. A lot has changed in the financial industry in the last 20 years and there are a lot more protections for consumers.



An average man should live for a couple of decades after reaching retirement age. An average male reaching the age of 65 this year will live for 21.3 years. By the time I get there, that is predicted to be 25.3 years. 50% of them will live for longer. Not saving for a pension is simply stealing from your future self and committing to either working until you drop or living off the state pension (does £140 a week appeal as a lifestyle?).

Well said.
Unfortunatley a few (and its a very few schemes) had corrupt people on them. That can happen to any investment its not unique to pensions.

DB schemes can have issues with shortages, 20 years ago the life expectancy was quite a lot lower so with a sudden and fairly dramatic increase the amount schemes need to fund full DB schemes went up very quickly. Most companies will be liable for making up shortfalls, the big issue comes if the companies close down typically.

 

[lemonade]

Probably a stupid question but what happens if you opt out? I already opted of my companies pension scheme.

 

[Mercenary Keyboard Warrior]

Probably a stupid question but what happens if you opt out? I already opted of my companies pension scheme.

You do nothing, you have no extra pension when you get to retirement age.

In theory if you have no other provision you just have the basic state pension to survive on. Currently you would have some extra means tested benefits (probably), but the plans appear to be to take the basic pension to just above this level. Ive heard its about £150 per week in todays money.