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Pension - is it a no brainer to invest to the max where your company matches your contributions?

(24 Posts)
mulranno Sun 09-Jun-13 14:29:44

I have been self employed for 10 years and made no pension arrangements. Prior to this I had a pension with my former employer which is now worth £100k. I am 46 and now will go back to full time work with a large company on higher rate tax. Should I be investing to the max (what is this?) for the next 20 years of my career in a company pension? I have heard so many bad things about poor returns - and read somewhere that at my age pension contributions are likely to just be just a saving scheme rather than an investment IYSWIM.

maillotjaune Sun 09-Jun-13 14:49:34

You can make contributions of £50,000 pa before attracting a tax charge I think. I am not a pensions expert but I have always thought that the fact that your employer is matching contributions makes a pension a better idea than just putting it into a savings account.

Obviously you can't get the money until retirement so whether you can invest to the max depends on whether you can afford to part with the money until then.

Earlybird Sun 09-Jun-13 15:01:00

I worked at companies where you could contribute up to a certain % of your annual salary (rather than a specific £ amount).

IIRC in my last company job (am self employed now), the maxiumum allowable % contribution was 6% of total salary, and employer would match up to 4%. I contributed 4% and took their 4% match - it seemed silly not to as it was 'free money'.

Also made a point to monitor the various funds the money was invested in, and moved money out of underperforming funds.

specialsubject Sun 09-Jun-13 15:30:39

what you will be doing is investing for 20 years in the stock market, with tax benefits, and someone doubling what you put in. Sounds well worth a go to me.

as others note ; monitor what is going on and revisit the situation 10 years before retirement, then more frequently after that. And keep accessible savings to cover you for six months should you lose the job. Hope not, but no-one has a secure job except the Queen. :-)

mulranno Sun 09-Jun-13 16:37:19

just had a look at the company "deal" they pay in 5% and then match up to a further 5% - so for 5% from my salary - there is a 15% total contribution. Do you know if this 5% is from pre or post tax salary?

Earlybird Sun 09-Jun-13 16:56:12

Are you sure you read it correctly? If so, that is extremely generous, and you'd be mad not to do it. IMO.

Also, my experience is that the % is based on pre-tax salary.

caroldecker Sun 09-Jun-13 17:24:50

Based on pre-tax because the other benefit of pension contributions is that they are tax free, so your taxable pay is calculated after the pension contribution.
Most firms also offer salary sacrifice, where you reduce your salary by 5% and they increase the pension contribution. This saves you and the employer NI payments

CogitoErgoSometimes Sun 09-Jun-13 17:36:33

If that's the deal, it's definitely a no-brainer. smile

Talkinpeace Sun 09-Jun-13 17:56:51

Is it a DC or DB scheme?

I have absolutely no faith in any DC schemes.
A £100,000 pension pot will pay around £6000 a year : not a lot

mulranno Sun 09-Jun-13 20:02:15

DC sadly - can you use money from the sale of your home to buy an annuity? If so would I not be better maxing up my mortgage to buy a bigger property to invest in. Would I just be better to save my £100k myself and take £6k out for 20 years?

Talkinpeace Sun 09-Jun-13 20:06:44

personally I'd avoid annuities like the plague.
Current return rates mean you have to be retired for 38 years to get your capital back.

My aunt bought a £100,000 annuity. She died before the first monthly payment came in.

I'm filling my ISA allowance each year and plan to use that capital and a couple of other investments to live on when I cut down my working hours.
I'll never retire fully.

mulranno Sun 09-Jun-13 20:07:43

DC sadly - can you use money from the sale of your home to buy an annuity? If so would I not be better maxing up my mortgage to buy a bigger property to invest in. Would I just be better to save my £100k myself and take £6k out for 20 years?

Tiredemma Sun 09-Jun-13 20:08:40

I contribute 9% and my emloyer contributes 14%.

mulranno Sun 09-Jun-13 20:11:15

whoops sorry posted twice....looks like it would still be worth getting the "free 10%" from my employer by contributing 5%?

Talkinpeace Sun 09-Jun-13 20:19:06

If your company is paying standard %ages of your salary and you are 40% taxpayer, make use of it, but do not put all your other money into it : make sure you spread bet on savings and investments

specialsubject Sun 09-Jun-13 21:01:03

no-one will get a defined benefit (DB) scheme now.
DC (defined contribution) is a risk, but inflation destroying saving is a certainty.

as others say - spread your bets.

Talkinpeace Sun 09-Jun-13 21:04:10

Lots of employers still operate DB schemes that employees are allowed to join.
Not just in the public sector
John Lewis for example ....

caroldecker Sun 09-Jun-13 21:12:22

Very few employers still offer a DB scheme to new joiners, even the Post Office don't for example.

On annuity rates, the average life expectancy of a 65 year old woman is 20 years, so £6k guaranteed is not a bad return.

Also, doing sums based on £100k pre-tax salary. Your contribution is £5,000 pre-tax, ie you are giving up £3,000 that you could invest outside a pension.

For this, you are saving £10,000 a year in your pension pot (£5k you and £5k employer). Therefore any other investment needs to grow over 3 times as fast to be equal.

Notmadeofrib Wed 12-Jun-13 14:45:18

talkingpeace out of interest do you use your Stocks & Shares ISA allowance or just the cash element?

I ask as I'm always surprised at your very anti pension position. I'm afraid I don't think the picture is quite as simple as you paint it, not for the manner in which pensions can be taken, nor the charges that you feel are always much higher than other investments.

Talkinpeace Wed 12-Jun-13 15:33:05

I am currently just using my cash allowance - until my mortgage is paid off. THen I'll start pumping money into some specific shares.

I'm not sure where I said that the charges for pensions are higher than for other investments.

What I do say is that the charges for pensions are higher than people realise : because as well as the percentage fund management fee there are transaction fees and the like which make the fees significantly higher than the headline rate.

When I review share trading certificates from brokers, the net amount banked is less than the multiple of the share price by up to 3% because of fees that are on the trading document but not brought to the attention of investors.

I'm a spreadsheet nut and when I check the movement in the market - even allowing for smoothing with the bonus rates paid out - on things like my endowment policies, there is a shortfall of up to 2% a year - ie half the potential growth in the fund over 25 years.

I meet lots of people in the course of my work.
I'm yet to meet a single one who is living on the returns of a DC pension alone.

Notmadeofrib Wed 12-Jun-13 17:10:13

TER's (total expense ratios) are the first thing that we look at - AMC's are as you suggest misleading (if viewed without the other 2 key cost indicators). PTR (portfolio turnover rate) being the other measure that matters as turnover eats performance. It’s easy to think the headline rate from ‘star’ managers is great and throw money down the drain in hidden charges.

I'm not sure where I said that the charges for pensions are higher than for other investments.

Not overtly, but by suggestion it appears that you think pensions charge more than other investments which isn't the case (you often slate pensions on cost but don’t really say what the alternative is – cash ISA saving over the long term would not be considered suitable advice for most people by the former FSA). However compared to direct ownership of shares you are right the charges are MUCH higher, but then the risk and returns compared to collectives are frankly on another page and not suitable for most people.

Costs with endowments are only part of a very fuzzy picture. Endowment policies (by name) are rarely worthwhile (as a way of accessing the stock market) these days as the base investment is usually (not always) no longer held in stocks and shares, they are no longer the focus of providers and they represent too high a risk for them ('smoothing' proved to be part of their downfall). If you mean endowments as in a qualifying policy – often recently sold as Mips, but it applies to endowments – well they were/are very very tax advantageous, but that has been stopped for new entrants. Investment return was only part of the bigger picture for these products and people still hold them for the other advantages.

As for living off a DC pension, well that's often because people who have retired now have a small/part DB scheme. However retirement provision is all about accrual of capital, be that pension, ISA's, savings, property etc etc. The most important thing is to save over the long term and because of the timescales involved ensure that inflation is considered - that is a silent killer in my opinion, it looks like you've lost nothing, but your spending power has been quietly eroded. A pension, when there is a tax benefit (HR or AR payer), or an employer contribution, should be part of the picture. The rules for taking pension income are relaxing slightly and the tax rules are also becoming slightly more favourable – well in part, and I think this will continue to be the case.

The best advice is always, mix your assets, reduce your costs, spread your risk, stick to a long term sensible plan (don’t panic over every economic cycle), REBALANCE your portfolio (I cannot believe how many people don't do this), ask questions even if they seem daft and don’t do anything you don’t understand.

Talkinpeace Wed 12-Jun-13 21:16:49

You and I know to spread bet

there are lots and lots of people swanning around at the moment on index linked DB pensions (many of which are unfunded) and the financially illiterate just do not "get" that those days are not only over, they were never affordable.

I was working today with a chap who got his full final salary index linked pension at 51 shock

and if you listen to the government "pronouncements" about stakeholder / opt in / auto enrollment
many people believe that 3% of their money and 8% of the employer's into a DC scheme will actually pay for three cruises a year when they are 55

and the government will not disabuse them of that notion as they would get lynched.

Notmadeofrib Thu 13-Jun-13 11:16:43

Indexed at 51, can you imagine the value of that fund! ! ! ! If a transfer value were put on that it would be several hundreds of thousands (and possibly a decent 7 figures if the annual income were reasonably good).

People expectations do indeed need recalibrating.

All that said a lifelong pension plan, or a long term savings plan that is inflation proofed, suitably risk adjusted for age (when you’re in your 20's & 30's and even 40's risk is needed in a portfolio) and given some proper housekeeping, would not be too shabby if 11% were put in from age 22 until state retirement age - think 70+ within 30 years. If you want to retire before that you need to save more than that.

OP sorry for hijacking, but basically yes, take their money and insist the provider/servicing IFA gives you advice annually. They've taken a fee so make them earn it.

Talkinpeace Thu 13-Jun-13 15:56:51

his pension puts him in K codes for other earnings ....

but yes, OP,
the point is that for anybody who is NOT part of a good final salary scheme (MOD, LGPS, Teacher, Nursing, Teacher, MP, Civil Service, Waitorse) then a pension is not a start and forget matter
its something you should review every year ....

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