To not understand the point of pensions unless you're on a high salary?

[koolkidsss]

My salary is below average, and the 3% contributions are nothing. I know employers have to match it, but I just don't see the point as the sun at the end will probably last less than five years. I know some companies offer excellent pensions but the bog standard ones seem so pointless.

I also dread to think what the retirement age will be for me. I have grandparents who died in their 60s so the gloomy part of me wonders if I'll even live to retirement.

Unless you're going to stay in one job for years, which offers an excellent pension I don't see the point. AIBU?

OP, YABU.

The matched contributions are basically free money from your employer and form part of your overall remuneration package. Your pension is also tax efficient.

Pensions are not what they used to be and in an ideal world you should be saving money away for a rainy day in other places and not relying on a sole source of income in retirement. (You might want to think about opening a Lifetime ISA, where you get similar tax relief and a free contribution from the government. But that should be in addition to, rather than instead of, your pension.)

The power of compound interest should also not be underestimated. The younger you are when you start saving for retirement, the better off you will be.

I didn't make the full contributions I could have done to my first pension and I am kicking myself now, as it would have made a big difference.

TalkinPeece at a minimum their 10% investment would give them 14% total contributions, assuming that their employer puts the absolute minimum of 2% in (will be more next year) rather than any contribution matching, and they are lower rate tax payers.

You then have to allow for growth of the investments, which is on average running at about 5% which is much higher than inflation. Pensions are usually invested in medium risk funds which also means medium growth, and tend to be invested in funds which are in a wide range of investments rather than in individual company shares, thereby reducing the risk.

I've heard of people trying to move very large pots who haven't been able to, because the rules require a financial advisor to sign off that it's in the best interest to do this, and advisors won't, because they are afraid they will be liable later on if the person changes their mind about it being a good idea.

It's not quite like that in fact.
You have to take financial advice if the transfer value is over £30k (I moved one a couple of years ago that was 'only' £9k and that was fine).
But the advice doesn't have to say it is in your best interests to move it - the law only says you have to take advice, not that you have to follow it.
The IFA would get you to sign a waiver if you didn't want to follow their advice.
It costs about £2.5k for this advice, or more, so it's pointless if you have any value less than a few hundred k to be honest.
And, even then, very few IFAs can be bothered doing it - there are only very limited times it might be a better bet than staying in.

My current employer has salary sacrifice which means I also pay no NI on the payments I make, so an additional boost to what I pay, what they pay and the tax. BUT, they also rebate 50% of their employER NI saving. Employer NI is 13.8%, so I get an extra 6.9% - can't get that sort of boost to savings anywhere else.
If you can persuade your employer to do that then it would help.

It's a no-brainer for me and I pay in 20%. I have no mortgage though (own my home) and am 50. Currently my pensions would pay me about £8k pa, and saving would pay about £3k.

allegri
I'm talking about a total 10% pension contribution
and AE will not rise much above that

You then have to allow for growth of the investments, which is on average running at about 5% which is much higher than inflation
Yeah right
the market might be growing at that but after costs, pension pots are running at about 3.6%
and the inflation rate used for Student Loans is 3.1%

so a 0.5% rate of growth ahead of inflation ......

for a person just above the AE threshold, their pension will buy a weekend in a caravan in Wales each year
not much more

Anybody getting lump sums on sickness etc is in a DB schemeas there are no such things in DC schemes

Errr yes there are. Loads of employers offer a range of benefits alongside the DC pension.... death in service, PHI, orphan pensions etc

Under AE basic rates ?

THe employer might offer benefits but they are not part of the DC scheme
as they are with DB (eg the LGPS)

Lump sums on sickness on most DB schemes are very hard to get. You have to have a very serious illness that means you will never work again such as muscular dystrophy.

Average life expectancy at the moment is 79 for men and 82 for women. Retiring at 68 means an average retirement of 11 years for men. Pension ages will increase as life expectancy increases.

The problem here is that life expectancy is increasing faster than healthy life expectancy. Three of my four grandparents lived around 10 years longer than life expectancy, but they weren't fit to work for 10 years longer than average.

"Alongside" #titchy, yes, but they are not PART of the pension scheme, they are separate, usually insured, benefits.

I cannot actually work out how any DC scheme could pay out such lump sums that are greater than the amount paid in by the individual - which has been common in DB schemes
(hence why the remaining ones are generally in deficit)
oh, except the directors' scheme at BHS which was fully funded all the way

I cannot actually work out how any DC scheme could pay out such lump sums that are greater than the amount paid in by the individual

Well, they pay out more than you paid in because:

1. the employer also pays in
2. investment growth
3. tax (and NI) relief

and also, maybe if you buy an annuity rather than go for drawdown (or a partial annuity or something) then you end up getting more if you outlive their expectations - that's the risk the annuity provider takes.

But, no, on balance - DB schemes are worth far more. There is no set employer contribution as such, the employer just has to make sure the scheme is funded to meet the liabilities. Of course, with the increase in life expectancy and poor management of the schemes, they have had to close.

Savings aren’t better. You are missing out on free money from the company, plus tax and NI savings and investment growth

You need some accessible savings as well, but pensions are really important.

Well - you need a mix really.

I invested years ago in paying down my mortgage, which is how I am now mortgage free. I have emergency cash savings and long term cash savings (in a fixed rate, fixed term ISA), then I have investment savings (in stocks and shares ISA - some in individual company shares, some investment trusts, some ETFs and one fund) and then I have several pensions - one SIPP, one DB and the rest DC, the SIPP I invest myself, the others are in default funds but will be moved to the self invested one when I get around to it.

I put £1k pm into the current work pension and £500 into cash savings (I currently work part time and can't do more).

I cannot actually work out how any DC scheme could pay out such lump sums that are greater than the amount paid in by the individual

My employer's DC scheme does. It must be magic! Or maybe it's because, oh just a wild guess, there's an insurance element factored into it.

I put £1k pm into the current work pension and £500 into cash savings (I currently work part time and can't do more).

You do realise that your monthly investment money alone is more than many people earn to live on? And I'm talking about FT work here, not PT...

The sad thing is that though I understand why the government is mandating pension schemes, I know people who have come out of their company scheme because 3% per month is the difference between whether they can afford their bills or not.

I cannot actually work out how any DC scheme could pay out such lump sums that are greater than the amount paid in by the individual - which has been common in DB schemes

Because the money is invested in the stock market, which as well as growth has the added benefit of paying dividends every year. So for everything you have invested you get an extra amount added each year which isn't paid as income but just gets added to the pot. When you compound this, it grows at a pretty decent rate. e.g. if you put £10k into something earning compound interest at 4% (not unusual dividend rates) after 10 years it's worth nearly £15k.

" I know people who have come out of their company scheme because 3% per month is the difference between whether they can afford their bills or not"

Exactly. And saving for regular emergencies has to come first.

@Allergictoironing

Yeah. I'm not fucking stupid.

I wish I’d paid more into my pension when I was younger. I only started paying into a pension when I was 30.

These days I save 15% per month into my pension, and another 10% into an ISA.

I’m already saving into pensions for both my DC. I can’t imagine how hard it will be for their generation to afford retirement.

allergic
In a DB scheme like the LGPS, the "death in service" pay out is three times annual salary
regardless of how much has been paid in by that individual

please explain to me under what circumstances a defined contribution scheme would EVER pay such a benefit.

I know how annaities work
a family member bought a £200,000 annuity and died 36 month later before a single monthly payment had come out
= money down the pan

People seem to be conflating discretionary employer benefits with aspects of DC schemes

I'm an accountant and have a DB scheme from my old public sector role and a decent DC one in my private sector job. Our death in service benefit is four times pensionable salary.

a decent DC one in my private sector job. Our death in service benefit is four times pensionable salary.

Nope. Your employer has bought a separate insurance scheme that pays out 4x salary (and it's not necessarily 'pensionable salary', the employer can define it how they like) - it's not connected to your DC pension at all.

I know this, because in my job I arrange all the pensions (and have done for several different types of schemes) and all the insurances. Our pension is with Aegon and the insurance is with Canada Life - completely separate.

It's not split in our pensions policy, both done by L&G so never considered that they weren't linked! Every day's a school day, eh?

TalkinPeece I wasn't suggesting that a DC scheme is likely to be any better than a decent DB scheme, just answering your question I cannot actually work out how any DC scheme could pay out such lump sums that are greater than the amount paid in by the individual.

The death in service benefit isn't actually related to your pension as such, I've had decent death in service benefits (3x salary seems pretty standard) in jobs where the pension was DC (with minimal amounts paid in by either party) - it's an insurance policy taken out by the company.

I think maybe the OP gets it now.