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Thoughts on pensions

(43 Posts)
CurrerBellend Sat 07-Nov-15 08:45:59

Need to decide whether to join our workplace auto-enrolment jobbie and would be interested to hear people's thoughts, I know there are some very financially savvy people on here.

This is my main job and I earn 9.5k per annum from it, so it's not automatic. Got a couple of other odds and sods that bring in a bit more on top, but no pensions from them and I try to bung that money into savings. My minimum contribution is 1%, as is work's. I think they would match what I put in. I'm just wondering if it's really worth it when the sums are so small?

I would really like a pension, especially as I'm now past 30. But have heard it's not very efficient to have little bits and bobs in different pots. Which realistically is what might happen- my current pot, from one job, stands at £1200. That's it! I really like this role, and would hope to stay at least for a couple of years, but it's probably not going to be a forever job: people tend to have to job hop in my sector as it's really insecure, plus I want to develop my sidelines anyway. So I'm conscious this might end up being another pot of a couple of grand tops. Will probably creep over 10k earnings there within a year, but not going to be more than about 12k in the near future due to being part time. I can afford to put something in, and even a 5% contribution would only be £40 a month.

OTOH, we're hoping to get a mortgage next year and while we'll be borrowing a pretty small and very affordable amount that will only be slightly over twice joint income, our household income still isn't that massive to begin with. We've recently reduced it a bit as a consequence of working fewer hours between us, to juggle childcare. So I don't know if I'd be better off minimising outgoings for that period. Would be interested to hear other people's views.

Cindy34 Sat 07-Nov-15 08:58:35

Have you had information about employer contribution and what that would be in future years?
With auto-enrolment the employer contribution increases over the next few years, if the employer is just starting to be involved in auto-enrolment pension. Currently though I don't think you earn enough to be auto-enrolled, so if you did voluntary contribution would your employer contribution still increase later on?

Given you are saving for a home, I would wonder if you would be better to put the money in to a savings product which you can access in the near future. An ISA product perhaps. As of April 2016 I think, we all get a higher allowance for tax free savings, something like the first £1000 of interest is tax free.

Wonder if anyone has a spreadsheet which does a better off comparison between pension and ISA.

CurrerBellend Sat 07-Nov-15 09:09:48

Thanks cindy. Yes, the information says the minimum I'd pay is 1%, rising to 4% by 2018, and employer contribution is 1% rising to 3%. That's standard I think?

I should've mentioned that my concerns about the mortgage relate to affordability rather than deposit. Thanks to a mixture of savings and some help, we're in the very fortunate position of only needing about 60-65% LTV. Of course it's always best to save more though. But we would be borrowing about 65k on a household income of about 34k (bit less if they don't include my odds and sods of extra income) with two small DC, so I want to make sure our expenses are lean.

Anomaly Sat 07-Nov-15 15:59:07

Pension without a doubt. Your employer is going to contribute towards it so if you don't pay in you're saying goodbye to free money!

purpledasies Sat 07-Nov-15 16:04:51

You can usually transfer a pension when you move jobs, which avoids ending up with lots of separate little pots.

I think it's generally worth putting in whatever your employer will match if you possibly can, or you're just turning down free money. Beyond that's more down to what you can afford comfortably.

CurrerBellend Sat 07-Nov-15 21:26:51

Yeah I get the free money part, just wondered if the costs of administering etc would swallow it all up, since we're talking quite small sums. I'll check out bunging them all in the same pot.

purpledasies Sat 07-Nov-15 22:32:09

I don't think you'll be charged any costs for administering it, other than a proportion that I presume they take from everyone's pension. Ie there's no standing charge as far as I know.

whooshbangprettycolours Sun 08-Nov-15 15:44:31

Admin should be covered by the investment growth

AnthonyBlanche Mon 09-Nov-15 19:08:07

I'm going to go against everyone else on this thread and say that while your earnings are so low it may not be in your interests to join. If you are making Pension contributions that may affect how much you can borrow for a mortgage and may also affect any benefits you receive now or in the future.

Although the annual charges which will be deducted from your pension pot will be capped (I think the maximum that can be taken is about 1%) this will have a noticeable effect on how much your pot grows. In addition, the minimum total contribution by 2018 is 8%, so if your employer pays 3% you will have to pay 5%.

I know you will be giving up "free" money from your employer if you don't join, but it may not be on your best interests to do so. Can you ask your employer for more info? They should at least be able to tell you what the charges deducted from your pension pot will be - in percentage terms.

CurrerBellend Mon 09-Nov-15 19:11:00

I'll ask them about that. Found out today that the max they'll match is 3%, so was provisionally thinking of that since it's only about £25 a month anyway. Does that mean if I'm still around in 2018, I then have to pay 5%?

AnthonyBlanche Mon 09-Nov-15 19:36:52

Yes, if you're still around you will have to pay 5%, so the maximum you will get from employer is 3% per annum. On £10K that would be £300.

AnthonyBlanche Mon 09-Nov-15 19:38:26

Just realised that last sentence sounds as if I think you don't know how to work out a percentage - sorry! What I was trying to say is that it's not much.

AnthonyBlanche Mon 09-Nov-15 19:42:23

Final thought, investment growth may be quite low. You could end up in a situation where you have quite a small pot of money which isn't worth more than the total amount paid in.

I think you'd be better off with an ISA.

Spidertracker Mon 09-Nov-15 19:52:26

For me it would depend on the type of pension. I earn 9k, my pension is defined benefit ( career average) so I pay in to it. If it was defined contribution I wouldn't.

CurrerBellend Mon 09-Nov-15 20:04:20

Final thought, investment growth may be quite low. You could end up in a situation where you have quite a small pot of money which isn't worth more than the total amount paid in.

I think you'd be better off with an ISA.

This is what I was wondering about, although I don't really understand it I think I've heard it before. Can you tell me how it would end up being worth less though?

Spider it's not career average.

LonnyVonnyWilsonFrickett Mon 09-Nov-15 20:08:59

Your pension pot is invested in the stock market and that can go down as well as up. The idea is that, over the long term, it will always rise, but that's not guaranteed. My ex-employers pension is worth less than I paid in to it, at the moment. And they don't let you take the cash out, so I can't transfer it...

A stocks and shares ISA works in the same way - it can go down too. A cash ISA is the only rock solid safe investment, but the interest rates on them are very low ATM.

CurrerBellend Mon 09-Nov-15 20:22:07

Yeah, DH has a cash ISA and the rate is like 0.2% or something!

MisForMumNotMaid Mon 09-Nov-15 20:33:08

If you can afford it i think the pension is a good long term consideration.

An ISA wont match fund your contribution plus your pension should get topped up 20% for tax (every ones first £2880 contributions working tax payer or not get topped up 20%)

So if you put £100 in the company put £100 in and the government put £40 in. So your £100 becomes £240. Even if it doesn't grow massively thats a better rate than any ISA is going to give you.

I'm not a financial advisor but if you google free pension advice i think theres a free government website advising on this.

LonnyVonnyWilsonFrickett Mon 09-Nov-15 20:57:07

Money Saving Expert and the Pension Advisory Service are both good. And of course Mis is right - not enrolling does mean turning down free money.

And money saved earlier is money which can be quietly increasing for longer, so it can end up 'worth more' in the long run.

In your circs I'd look closely at portability though. Having lots of little pots isn't the most efficient way to save as you pay charges on each individual pot. It may actually be better to look at a personal pension which you run yourself if you will move jobs a lot over your career.

AnthonyBlanche Mon 09-Nov-15 21:28:27

The main reason I think you should think carefully about joining the pension is because your earnings are low. To use an example, if a total of £100 (made up of your and your employers contributions and any tax relief - though Im not sure you will get tax relief unless you are actually paying tax) is paid into your pension pot and investment growth is low you could end up with less than £1200 in your pension at the end of the year due to the charges that are deducted. The charges are the slice that the pension provider will deduct as that is how they make their money. If you stop paying in to the pension because you change jobs, charges will continue to be deducted. Unless investment growth is much better than it has been in recent years the value of your pension pot will reduce over time.

AnthonyBlanche Mon 09-Nov-15 21:34:07

lonny it would not be better for OP to set up her own personal pension. What she is being offered is membership of the pension scheme her employer uses for auto enrolment. The only reason she is not being automatically enrolled into the pension scheme is because her earnings are below the threshold set by the government for automatic enrolment. She still has the right to elect to join the pension scheme and her employer will pay minimum contributions of 1% now rising to 3% by 2018 on top of the contributions OP decides to make. By 2018 she will have to make a minimum contribution of 5%.

MisForMumNotMaid Mon 09-Nov-15 21:52:21

Pension tax relief even if you don't pay tax on first £2880. I stumbled across this a couple of years ago.

AnthonyBlanche Mon 09-Nov-15 22:04:13

That's good to know MisForMum. Even with tax relief, I'm still not convinced that the OP should join the pension scheme.

MisForMumNotMaid Mon 09-Nov-15 22:04:40

its worth reading up on the help to buy ISA. Coming in on 1st December.

For each £200 you pay into your ISA as deposit savings the government will top it up £50.

Not as good as your pension top up but if you've already got those savings thats worth i believe up to an extra £8000 (thats a lot of £50 so you probably wouldn't access the full amount). Still its a free 25% boost on your deposit fund, which is not something to be laughed at. Its a bit more complex than that as you are allowed one per person and £1200 initial payment then £200/ month so it'd take a few years to reinvest all your pot but if your talking about a year plus anyway it'd be worth probably more than your pension contribution costs and that could mean the books balance and you get both your deposit boosted and a pension.

whooshbangprettycolours Mon 09-Nov-15 22:29:17

The maximum an AE scheme can charge is 0.75% MANY are less than that.

Not to save into a pension will mean very low retirement income as all top up benefits are being removed.

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