Pensions confusion AIBU

[TheTimeToChange]

AIBU to ask you all a question about pensions please?

I’m in my mid-twenties and about to start a new permanent job where I’ll be able to save into a workplace pension.

I’d like to start saving towards my pension, but there are so many different things to consider when saving for a pension and so many pension schemes available that I’ve found it a bit confusing.

At the moment, I’m planning to have three separate pension pots:

1. Workplace pension
2. State pension (paid by National Insurance contributions)
3. Personal savings (I’m not sure where to invest this or how much to save. I’ve heard that it’s a good idea to halve the age when you start your pension and then put that percentage of pre-tax salary aside each year until retiring. I wouldn’t want to put it into a risky investment though).

Does this sound alright? Could you give me any advice please?

Get to know your employer pension scheme. These can be best if employers contribute. If between your contributions and theirs you can contribute half your age as a percentage then that's a good start.

I would not rely on a state pension being available in 45ish years.

Don't neglect your shorter term goals. Home ownership etc.

To get any sort of decent gains you will need to put it in some sort of ‘risky’ investment otherwise inflation will eat away at it in the fifty odd years until you retire. During those years there will be stock market crashes but as you get closer to retirement your investments will become more conservative and less risky and invested in things that won’t lose half their value overnight. Your workplace pension (or a self invested pension plan) utilise great tax advantages so I would skip the savings account plan (unless you are thinking about a lifetime ISA which gives you 20% on top of what you pay each year - akin to your tax advantage. this does come with very hefty penalties for withdrawing early if not purchasing your first house or using it for retirement so if you think you’re likely to ‘dip in’ a lot then I’d just go workplace pension.

They say you should pay in half of your age in years as a percentage when you get your pension so if you’re 26 then pay 13% of your salary for the rest of your life.

Agree with above, by the time l get to retire in the 2040s there will be no state pension for those who have worked and paid into an employers pension, and a teeny tiny payment for those who have not/been unable to work.

Contribute as much as you can to your workplace pension now. Its tax free and hopefully your employer will contribute too.

Then look at having 2-3 months wages in (easily accessible)savings.

Take a look at the Help to Buy ISA if you aren't/haven't been a home owner. This is an ISA where the Gov. will contribute to your ISA when you buy a home.

Don't bank on a state pension.

I started my pension at 21 and honestly I wish I'd paid in as much as I could have back then. I paid a basic amount because whilst I knew I needed it, I saw it as a bit of a hassle. Now fast forward over a decade and nearly 3 children later I can only afford to contribute a very small amount. So my advice would be to pay in as much as you can to an employers pension (and also find out how much they contribute). Since starting my pension I've never not had one but this is definitely the least I've ever paid in, but at least it's something. I don't envisage the state pension being there when I retire in the 2050's so I know I need to up my game.

Thanks, everyone. What do you think will happen to state pensions? Do you think they just won’t be an option anymore because they cost too much (because of the ageing population)?

Also, could you help with this too please?

A PP advised not focusing on pensions so much that I neglect more short-term goals like home ownership, for example. I completely agree with this.

I’m renting (in London) at the moment, and would probably need to look at buying a house/flat in or very close to London, because my job is in London.

Obviously, London house prices are extremely high, so I’ll need to save a lot of money for a deposit and for all of the other costs involved in buying a house.

My question is: what’s the best way of saving money to buy a house in an expensive area and of saving for a pension? I want to work towards both, but am not sure how to do it. I think investing in property still seems like a fairly good idea though, and could be a sensible way of saving for my retirement.

It's impossible to predict what will happen to state pensions in the future. We baby boomers are creating a one off blip. As we die things will normalise again. Whether the current generation of 20/30 year olds get a state pension will depend on how many children they have.

1. Have a look at your employer's pension scheme - will they match your contributions? If they do maximise what you can.
2. Save up a rainy day fund - I think the advice is 3 months' salary.
3. I would also look at the LISA - for saving towards property/ retirement.

I think if you can get used to paying into a pension when young it helps massively. There are online calculators which show the beauty of compounding.

Thanks Fleurchamp :)

It looks like the employer contribution rate will be 20.9% - does this sound reasonable? It’s a public sector pension.

I’m looking into the LISA and think it would be a really good idea.

The only thing is that I don’t think I’d be able to use the LISA for buying a first home. I think I’d have to use it towards a pension, as it only covers saving to buy a property that costs £450,000 or less, so that probably wouldn’t be suitable for properties in London.

Bump :)

If it's a public sector pension don't bother having a separate pension plan. There is no way on earth that will be remotely comparable. Far better to buy extra years, (AVCs) in your employer pension.

However, in your mid 20s wanting to get on the property ladder in London that has to be your priority.

So just pay expected amount into employer pension, and save what you can in instant access savings - 3 months worth, then anything extra into a LISA. To buy even a studio in a shit part of London miles from anywhere you'll need £30k+ deposit.

What's your salary if you think a £450k house is achievable short term?

titchy it’s not really that I think buying a £450k house is something that I can do short-term - I certainly won’t be able to afford it.

My worry about taking out a LISA is that, if you’re using it for home ownership, you can only use it to buy a house worth up to £450k, and I don’t know which way the London housing market is going to go in terms of prices.

one year AVC in my pension plan costed like £15k. About half a year's salary. Very not worthwhile.

Workplace pensions usually mean employer contributes something and there's a larger pot so more shared risk. Those things make them better deal than most others.

I find the scaremongering about future state pensions to be ridiculous. Pensioners & their pensions, income, have been the most protected group in the recent financial crisis (last 10+ years). Lots of reasons to expect this favourable policy to continue.

The lifetime isas look good. I'd investigate those. I believe there's only one cash version so you would more than likely have to put up with an element of risk (stock market).

It's great you're thinking about this already - I wish I'd started mine sooner.

@TheTimeToChange It looks like the employer contribution rate will be 20.9% - does this sound reasonable? It’s a public sector pension.

Bite their arm off and go back for more! That is not just reasonable, it is incredible! Is it also final salary?

(for comparison, all of my [not final salary] private sector pensions have only ever contributed a max 5%, and only then as a match, not fixed)

employer contribution rate will be 20.9%

Wow, that is quite something. Is it a defined benefit scheme, where they tell you what your pension will be as a percentage of your (current/future) salary? Or a defined contribution, where you and they add money to a pot and you get to decide what to do with that pot?

Defined benefit schemes are much less risky...

Either way, make sure you take the full employer contribution, thats like a 20.9 on top of your salary.

If the employer contribution is a fixed amount, that implies it HAS to be defined contribution, surely?

I've never worked for anyone who contributes more than 3%

I have no advice to give, was curious myself

A 20.9% employer contribution definitely sounds like a defined benefit scheme. This means the scheme promises to pay you a certain amount of pension based on your salary and service. You pay the set contribution rate - e.g. 5%, 7% - and the employer pays the remainder that is expected to be needed, so 20.9% currently. I would request copy of the membership booklet as that will explain how it works.

If it is defined benefit, bite their hands off! The employer's contribution is generally quite a bit higher but more importantly, they take on all the risks as your pension amount is set.

ThePants But 20.9% is such an odd figure to fix the employer contribution at! Plus it's considerably more than any employer contribution to a defined contribution scheme that I've ever seen.

Defined benefit schemes do a valuation every 3 years to see how things are going. So the employer rate is usually set for a 3 year period, then it's reviewed again and adjusted. The 20.9% could well be what they're currently paying. Anyway, OP needs to request details of how the scheme works as we're all just speculating.

The lifetime isas look good. I'd investigate those. I believe there's only one cash version so you would more than likely have to put up with an element of risk (stock market).

Given that savings interest is lower than inflation, chucking your money in the bank is a guaranteed way to have it devalue in real terms. A tracker fund has historically outpaced inflation considerably and many pay dividends similar to the interest rate on top of their growth. You have 40 years of stock market ups and downs to weather, and at the end of it you'll almost certainly have more than if you'd saved in the bank. Read up on the stock market and find an online stockbroker like Hargreaves Lansdown www.hl.co.uk/investment-services/lifetime-isa

And yes, snap up any employer contributions to a pension but especially when they're that high!

20.9% is the correct range for a public sector employer contribution. This is exceptional in comparison to any private sector employer contribution. The only weighing up is that the public sector job might be paid less than ‘market rate’ in comparison to private sector.