Pensions For Dummies

[platypus]

Or maybe they were never in the position to ever save, not that you ever thought about it did you

No I did think about that, but then in a lot of cases when people think they can't save, it's actually that they don't want to save.

There are some less fortunate who as IPB says spend their life on the breadline. And the government should rightly help them, no?

As SPG said however, "It means you have been a good a dutiful citizen throughout your life and done as told and when it comes to cashing in the goverment will give you ZERO.", it's simply not true that the government will give you zero, but what it will give you is often not enough.

 

[Destination]

Exactly, some people spend their entire life on the breadline unfortunately

Workplace pensions should actually help these people considerably, as with 18-68, fifty years of breadline contributions from automatic enrolment, from next year onwards, should afford a reasonably workplace pension to bolster the stat govt pension for old age.

National living wage etc will help.

 

[scorza]

My turn to ask a question now; yesterday I logged onto my pension provider portal. There was a link to see your projected earnings for when I retire which I clicked. The resultant page said something like "people like to retire with 60% of their salary and you need to put in an extra £X000 a year to achieve this".

Is this 60% guideline right? Yes, sure I'd love that but the whole point of moving everyone to Defined Contribution pensions was to stop people having good pensions. In any case I can't afford an extra £X000 a year so it won't be happening for me. Anyone else on a DC pension here aiming for that?

 

[Kemik]

My turn to ask a question now; yesterday I logged onto my pension provider portal. There was a link to see your projected earnings for when I retire which I clicked. The resultant page said something like "people like to retire with 60% of their salary and you need to put in an extra £X000 a year to achieve this".

Is this 60% guideline right? Yes, sure I'd love that but the whole point of moving everyone to Defined Contribution pensions was to stop people having good pensions. In any case I can't afford an extra £X000 a year so it won't be happening for me. Anyone else on a DC pension here aiming for that?

Depends on your salary but around 50% is right. Work out what you spend at the minute each month, then assume you won't be paying a mortgage. Adjust for anything else you'll stop or add (personally I'll be aiming to take an extra holiday a year...) and that gives you the amount you want each month.

I'm lucky to be on a 1/50th DB scheme for 8% contribution but when I move jobs I will be smashing up my contribution to try and ensure I hit my target income pot.

I find this tool is really helpful.

 

[platypus]

Yeah, we're both aiming for 50%.

 

[Pipe & Slippers]

These guideline things are ok, but they are very generalised

You need to work out how much you'd like to retire on, in your specific circumstances, eg will your mortgage be paid off? do you want to do lots or expensive travel when you retire, do you have kids you might want to help out financially

Work out how much you'd like and see whether it's affordable/you want to make it affordable

I have been in v good DB pension schemes (almost exceptional) all my working life, and I'll just about get around 60% which is my target for retirement at 60. However, even I've had to make very substantial extra contributions to try and reach this target...nothing comes cheap, especially with annuity rates as they are

 

[scorza]

Depends on your salary but around 50% is right. Work out what you spend at the minute each month, then assume you won't be paying a mortgage. Adjust for anything else you'll stop or add (personally I'll be aiming to take an extra holiday a year...) and that gives you the amount you want each month.

I'm lucky to be on a 1/50th DB scheme for 8% contribution but when I move jobs I will be smashing up my contribution to try and ensure I hit my target income pot.

I find this tool is really helpful.

Useful link thanks. According to that I'm on course for about 40% of my current salary. Food for thought...

 

[Pipe & Slippers]

As alluded to in one of the earlier posts, I wonder how many of us really think we are going to be able to carry on working until we can afford to retire

I have an office job and can't see me lasting beyond 60. I would imagine if you are in a manual job, you'll likely end up with a forced retirement well before your pension has reached your targetted amount

Seems to me the alternatives are then living off a low paid part-time job until your pension kicks in, or taking your pension early and suffering crippling commutation rates. Neither of these seems very palatable

 

[kaktus]

Most pensions are pretty dire tbh and you're usually better off taking the cash upfront and investing it yourself in equities or property. You don't have to be a financial guru to invest in indices and the more you learn the more comfortable you'll be taking small risks like futures and options which in a single trade can outweigh 5 or 10 years worth of 'pension annuities'.

 

[Psycho Sonny]

Then your family members weren't sensible enough to properly save for their retirement by paying into a private pension, for example.

Anyone relying on the state pension is utterly delusional.

JSA is what £70 a week?

The full new State Pension is £155.65 per week

If you manage to reach pension age and have been sensible during life and paid off your mortgage, etc. Saved a tiny bit or invested a tiny bit. I think you could live quite comfortably on £155 a week, especially if your married so that doubles to £310 a week.

You could also sell your house and downsize into a flat, etc.

I don't think the state pension is as bad as you make out plenty get by on it.

 

[Kemik]

Most pensions are pretty dire tbh and you're usually better off taking the cash upfront and investing it yourself in equities or property. You don't have to be a financial guru to invest in indices and the more you learn the more comfortable you'll be taking small risks like futures and options which in a single trade can outweigh 5 or 10 years worth of 'pension annuities'.

Awful advice. Imagine you are on a 5% matched scheme and pay 20% marginal tax rate.

Pension: £100 from you, £100 from your employer = £200
House saving: £100 less £20 tax and £12 NI = £68.

How do they even compare? Growth is much safer in the pension, less to deal with, 25% of it will be tax free assuming rules don't change.

 

[kaktus]

Awful advice. Imagine you are on a 5% matched scheme and pay 20% marginal tax rate.

Pension: £100 from you, £100 from your employer = £200
House saving: £100 less £20 tax and £12 NI = £68.

How do they even compare? Growth is much safer in the pension, less to deal with, 25% of it will be tax free assuming rules don't change.

I'd have to disagree with you there.

Even if you invested in the FTSE 100 index you'd achieve a historic 5.0% per annum *after* inflation. If you actively manage your portfolio well you can earn a return of 10-15% through equities, bonds and real assets. Add in leverage or derivatives and it's even higher.

Assuming you invested in a pension fund and as you say one where growth is 'safer' you're looking at between 2.5-4% growth after inflation and fees. It's managed for you, you save on tax upfront and you have to wait 50 years to get it.

If we use your numbers in the example above and apply a 5.0% growth rate on the pension fund (aggressive) a £200 monthly contribution (aggressive) and a salary growth rate of 5.0% (aggressive) we get to a total pot £735,000 in 50 years time, assuming one starts earning at the age of 20, retires at the age of 70 and starts on a salary of £24k as in your example. Pretty aggressive I think.

Now assume that same individual has zero pension contributions and has exactly the same setup but chooses to actively manage his or her cash instead and earns a pretty conservative 12% return per annum. Their portfolio is worth £3,084,000 by the time they're 70 (assuming growth to 40k salary, 20% tax deduction)

This assumes that the individual will benefit from having access to capital along the way during the 50 years to take advantage of opportunistic investments in equities or properties and in my experience is very conservative. I could give an example of an investment I made in 2014 which has yielded a 72% return to date if i were to sell it today. I wouldn't have been able to do that if I had been ferrying cash away in a pension pot for the last 10 years.

I'm not saying your wrong, I just don't agree with you that it's 'awful advice' to manage your own money. Pension funds are great for stashing cash tax free and waiting for it to grow and they worked well for a while but we are in an era of low growth and high fees and it's even more important to be an opportunistic investor that actively manages his or her own money imho.

 

[booyaka]

actively manage his or her cash instead and earns a pretty conservative 12% return per annum.

EHH?? Where in gods name are you plucking 12% growth a year from and claiming it conservative???

You might have made 72% on a particular investment (bravo to you) but there is no way on this planet you can tell me that 12% per annum growth can be achieved conservatively.

 

[Pipe & Slippers]

If you actively manage your portfolio well you can earn a return of 10-15% through equities, bonds and real assets. Add in leverage or derivatives and it's even higher.

Is your real name Neil Woodford? If you can achieve these returns, I hope you are a fund manager, else you are wasting your talents

 

[Gornall]

EHH?? Where in gods name are you plucking 12% growth a year from and claiming it conservative???

You might have made 72% on a particular investment (bravo to you) but there is no way on this planet you can tell me that 12% per annum growth can be achieved conservatively.

Exactly what I was thinking.

Very few would see growth of >10% a year (compounded I assume?) with nothing but their own 'management' involved. Sure, I can see you achieving >10% shorter term in some investments but all it takes is one of them to go pop and you've lost a great deal.

Naturally you can mitigate that by spreading investment across many, but then you'll never see that 10% as an average person.

 

[D.P.]

chooses to actively manage his or her cash instead and earns a pretty conservative 12% return per annum..

PMSL


You will never do better than the FTSE average long term, on average. The average hobbyist investors is most liekly to outperform the FTSE100, and the more highly they rate their personal predicative capabilities the more liekly they are too loose.

 

[The_Abyss]

I'd have to disagree with you there.

Even if you invested in the FTSE 100 index you'd achieve a historic 5.0% per annum *after* inflation. If you actively manage your portfolio well you can earn a return of 10-15% through equities, bonds and real assets. Add in leverage or derivatives and it's even higher.

Assuming you invested in a pension fund and as you say one where growth is 'safer' you're looking at between 2.5-4% growth after inflation and fees. It's managed for you, you save on tax upfront and you have to wait 50 years to get it.

If we use your numbers in the example above and apply a 5.0% growth rate on the pension fund (aggressive) a £200 monthly contribution (aggressive) and a salary growth rate of 5.0% (aggressive) we get to a total pot £735,000 in 50 years time, assuming one starts earning at the age of 20, retires at the age of 70 and starts on a salary of £24k as in your example. Pretty aggressive I think.

Now assume that same individual has zero pension contributions and has exactly the same setup but chooses to actively manage his or her cash instead and earns a pretty conservative 12% return per annum. Their portfolio is worth £3,084,000 by the time they're 70 (assuming growth to 40k salary, 20% tax deduction)

This assumes that the individual will benefit from having access to capital along the way during the 50 years to take advantage of opportunistic investments in equities or properties and in my experience is very conservative. I could give an example of an investment I made in 2014 which has yielded a 72% return to date if i were to sell it today. I wouldn't have been able to do that if I had been ferrying cash away in a pension pot for the last 10 years.

I'm not saying your wrong, I just don't agree with you that it's 'awful advice' to manage your own money. Pension funds are great for stashing cash tax free and waiting for it to grow and they worked well for a while but we are in an era of low growth and high fees and it's even more important to be an opportunistic investor that actively manages his or her own money imho.

You can invest in pretty much all those assets directly yourself via your own pension fund.

 

[platypus]

I don't think the state pension is as bad as you make out plenty get by on it.

I think its more that I don't believe it will exist when I come to retire, and so people certainly of my generation should not be relying on it.

 

[the_worrier]

I'll be mighty annoyed if the state pension is gone by the time I retire given my contributions even thus far!

 

[Aloreth]

I'd have to disagree with you there.

Haha that post made me giggle. The matched pension contribution will always be a better option