how can I prepare for retirement with no state pension likely?

[tabbyoak]

Hi all,

im just wondering if anyone has any general advice regarding retirement planning!

I’m mid twenties and currently a trainee. The field I work in has very poor pay as a trainee but excellent money and prospects once qualified.

I’m of the impression that state pension is very unlikely for me, or it will be means tested etc.

As a result I’m already quite panicky about retirement! Sounds daft I know! I love my job, but I don’t want to be forced to work at 70 because I need the money.

Obviously at the moment my wage is not great, but I am aware once I qualify it will jump massively which will make things a lot easier.

I’m mainly worried that as state pension age increases, as does private pension age, so what if state pension age becomes 80 and I can’t even get private pension until 70?!

At the moment I do the following;
pay into workplace pension to get the employer contribution
pay regularly into a s&s lisa
pay regularly into a s&s isa which is earmarked specifically for retirement

I could pay more into the workplace pension but it would mean not paying into the isas. As mentioned above, I’m worried about the goalposts on pensions being changed and therefore am reluctant to go crazy on those contributions. Particularly on a lower salary.

I will admit I’m not the most clued up on retirement savings, so I’m wondering if anyone has any advice or anything they would do differently? Should I change my methods when my salary increases too?

Why won’t you get any state pension?

You are doing all the right things, and nice and early too.
Stop panicking.
As you earn more you can save a higher % if you wish to.

That all sounds great OP, do you own a home or have a plan to buy one?

The main focus on retirement planning is having income during retirement, but really planning on how to lower your costs during retirement can be just as important.

Also if you plan on having children and taking maternity leave factoring in the cost of making up missed pension contributions.

I don’t know why you have the impression the state pension won’t be around.

in any case, if you don’t like pension products then save using other things - ISAs and so on.

btw private pensions are not only accessible at state pension age. Many, many people use them to bridge the gap between when they actually retire and state pension kicking in.

Also a SIPP may be more beneficial than a LISA due to the tax benefits, it’s worth comparing the LISA bonus to this especially once you are a higher earner and potentially paying 40% tax.

ETA: I don’t think you are wrong to plan for no state pension, my DD is working on the same assumption.

The current state pension system is arguably unsustainable for the economy. In 50 years time the age at which you can receive it will either have had to increase majorly (meaning a lot of people will never get it!) the amount will be reduced (meaning less support in retirement) or it will be means tested (meaning only those with the least get it).

Of course, this might not happen, but I’d be amazed if I reached 60 and the state pension was available to me either at all or in the next 10 years!

OP, it's entirely reasonable in your mid 20s to wonder if the state pension will be around or means tested. So, ignore those who are questioning you.

You are doing great if you already have a pension, LISA and ISA. You might want to check what they are invested in so you can check if you could be getting better returns in a different fund.

I'd recommend watching Rebel Finance School which a free course on YouTube and great for getting your head around your finances. They also have a FB group where you can ask questions.

Currently own my home with my partner, small 2 bed house!

As time goes on and my salary increases we’d hopefully like to upsize, but obviously that depends on lots of things!

Mortgage as it currently stands is due to be paid off when I am 57, though we do make overpayments.

It sounds like you’re doing all the right things and you’ll be contributing for ages yet so you should build up some decent pension pots.

i think one of the best things you can do is try and own a property outright by the time you retire so you’re not having to pay rent or mortgage from your pensions.

i think workplace pensions can be taken at 65 or even earlier (I can take mine at 60 but obvs it will be less than if I took it at 65). So you just need to plan for bridging the gap btwn the date you can take your workplace pension and the date state pension kicks in. Perhaps by taking the tax free lump sum you are entitled to take if you don’t have enough to tide you over.

This is really helpful, thanks very much :)

You’re doing all the right things however you need short and long term savings. Your Lisa can only be used as a house deposit or for retirement otherwise there are punitive charges for withdrawal. I’d look at a general stocks and shares ISA now to build an emergency savings pot that’s fairly easily accessible without charge. As you’re young, stocks and shares will offer the best growth over the longer term.

If the state pension is withdrawn or they change to a means tested system (which is coming in by stealth as, due to the triple lock, pensions will be above the tax threshold from next year), then there will be a lot of notice. I think you’re right to plan on it not existing as it is at the moment.

if you are a higher rate tax payer you are better off paying into a pension than an ISA as you don’t pay tax on pension contributions - though you do pay tax when you take it out of the pension, unlike an ISA. So only worth it for higher rate tax relief

OP says she has an ISA

@tabbyoak I started work in 1986, and was of a similar view to you even then in that I expected the state pension to be so small it wouldn't be sufficient. I still think this.

I started what was, in those days, called an ABC (additional voluntary contribution) pension. In addition to this I developed my career in order to earn enough that I could pay things off more quickly and be less reliant on a pension. At times I worked 3 jobs simultaneously. It was wearing, however it has given me the option to get out of corporate life and spend more time with my late wife in her final years, and the ability to retire at 55 if I want to.

The sooner you start saving, the longer it has to grow. I started my AVC at 18, and it has turned out to be one of the best decisions I ever made.

You sound like you are doing all the right things! If you go into 40% tax bracket at some point it would be more attractive to put more into your pension.

it depends on how much you think you’ll need - I work for a pension scheme and had a high earner questioning (and genuinely worried!) whether £50k index linked pension would be enough. I will be retiring early on £20k a year and will supplement with savings. Mortgage is paid off and I’d like a couple of holidays a year - I only need £800 a month for household bills and love walking as my hobby so it’s cheap. So I think I’ll be fine then any state pension is a bonus.

Get a sipp open as well. Self invested personal pension open with 100 I think minimum 25 after

Just to add, I’d like the option to retire comfortably at 57 ish (when our mortgage is due to clear) though I may not actually want to at the time! I’d just like the choice :)

Also, I am currently on 25k per year (my fiancé earns similar and is also training in his field) and as we live up north this is more than enough for us to pay our bills, do a few fun things a month and go on a foreign holiday. So I do anticipate that to keep doing these things without having a mortgage, we wouldn’t need an insane amount of money to live off!

Compound interest will absolutely work in your favour. I don't know if you have any day in how risky your investments should be? Generally speaking the higher the risk the greater the return. I've changed my pension to high risk for the foreseeable future and have already seen the increased return it gives. But I don't know if that's a thing in the UK?

I think I can change my funds to high risk, I have always been wary of doing so as I am quite risk averse!

But I have seen that as it is so far in the future, it’s incredibly unlikely to lose money long term. I may look into switching to a higher risk fund!

Check what your workplace pension is invested in (I am assuming it’s not defined benefit).
Often they dump you in an auto fund which isn’t great performance wise.

Ask the pension provider for a list of funds that you can invest in and research the risk and performance. You are young so have time to take a higher level of risk to get growth and really build your pot. You also want diversification so your exposure is spread.

I would look in to additional voluntary contributions in to your workplace pension - even if you just do an extra 3% it all adds up.

Your plan looks really sensible and I would also assume no state pension in 50 years and pls on that basis.

you do need some short term accessible savings as well.

personally I like the mix of pension (have you maxed the employer contribution you can get as some match if you pay in more) with S&S ISA as the ISA income is (currently) tax free. While you’re a lower earner it makes sense to put into a vehicle which will give tax free income when your income is higher.

rule of thumb currently is you need C£300k of capital to generate £10k Pa of income so that will help you plan your savings goals.

I'd also recommend the Rebel Finance school. The next course starts on 1 June on YouTube (last year's course has now been removed while they prep the new one).

It's free, it's very extensive and it really is excellent - taking you from basic financial planning through to investing through to pension drawdown.

You sound to be doing fine.

Currently the retired get means tested Pension Credit if they don’t get the state pension, and it’s about the same amount of money. In the 1980s everyone said the state pension wouldn’t exist today, but it does.

Even if the state pension does eventually become means tested only - this would have to be some time after there is a replacement in the form of personal and occupational pensions, and even then there would still be the equivalent of todays Pension Credit.

Make sure you take advantage of any employer pension matching!

With investing it is risk that makes money, but if you get the choice stick to index trackers.

OP, I was told exactly the same thing at 22, that the state pension probably wouldn't exist for me, and therefore I should open a private pension. That line is the first selling tool of pension companies.

I am now 63. As it happens I will get a state pension, but I have saved 3% of my salary ever since 22, and now, after 41 years, have sufficient in my pension pot to pay me about £18k a year.

That's been through several recessions, the global financial crash and covid, as well as Gordon Brown helping himself to a chunk of it so I think it's as battered a pension pot as any other.

So my advice would be to definitely open a fund and stick with it, but stop panicking. You will be ok.