I'm f*&%ing clueless about pensions

[Koolbeans]

Hi, this is more a rant really I suppose. I just want to get this off my chest.

Does anyone really understand pensions or their pension scheme? I am a long way off retirement, but I've had a pension since I was 25. I can tell you that it is Defined Benefit and that the first 3 years of it where Final-Salary and the latter years are now Career Averaged.

That is the length and breadth of my knowledge. I'm ashamed to say this but I even went along to pension workshop at work last year and I still don't understand any of it. I can't be the only one, surely?

Haha this did make me laugh!! I feel your pain I have no clue either, there is so much small print and confusing language. I am trying to sort mine as I have a couple of deferred pensions from previous employment and I just do not know where to start.

I can’t fathom how you are supposed to know how much you will need to live on in 30 years time.. I can assume that I won’t have a mortgage by then, but how do you know how much all the essential bills will be, and how much money would be needed to sustain the lifestyle that I want.
I am just using the standard company scheme and assuming it will all work out ok, which isn’t very comforting!

I feel like people talk about investments and stuff and I just don't understand how they understand. How am I supposed to financially plan anything if I don't understand financial planning .

Hope you get sorted Elijay. If you do, could you fill me in?

Take the age you start your pension and halve it. Put this % of your pre-tax salary aside each year until you retire.

(According to what I've read)

What is it that you want to know that you don't understand? Maybe we can help

Generalising, but there are two types of private pensions, Defined Benefit (DB) and Defined Contribution (DC).

To start simply, DC pensions are just a pot of money that you have paid in directly over the years, often with an employer contribution as well. For instance, current UK laws are I believe 3% of your yearly salary put in by your company and 5% put in by yourself, but of course some employers are more generous than this. You can also opt out if you chose, but you would be losing whatever contribution your company was willing to make.

When you retire (you can start drawing down from your private pension 10 years before state retirement age, so currently 57yo) you have access to this money which over the years has also likely increased significantly due to compound interest.

Compare this to a DB scheme, in which you never really have your own 'pot' of money, but rather a guarantee from the whoever holds the pot that you will be paid a pre-defined amount of money. These are generally far more coveted as you get more and put in less and can be based on as you say either final salary or career averages etc. You build up and increase the amount you can get, so every year you are employed there you might get an extra x% in your pension.

Alongside these two types of private pension is the state pension, but who knows what sort of state that will be in when the younger people amongst us retire. it isn't much money at all and wont kick in until you are at least 67, so if you plan to retire in your 50's the only way to do this is to start really saving for yourself as early as you can.

I often visit UKPersonalFinance sub on reddit, they are full of useful information and can answer any specific questions you have.

You have a defined benefit pension. You are in an enviable position. You should get an annual statement estimating how much the pension will be at retirement, in today's terms. Have a proper read of that statement as a starting point.

If you're in the private sector, you should also receive an annual statement (or every three years if the scheme has less than 100 members) telling you about the funding level of the scheme. Most defined benefit schemes don't hold enough assets to meet the future pension payments, however they will have a plan in place to remedy this.

If you don't get these statements, check that your address is up to date.

So the final salary part means you accrued a certain % each year you were in the final salary scheme, and when you retire, your pension from that scheme will be the total % of whatever your salary is at the time you retire. So if it was 2% per year, then you'll have 6% of your salary at the time of retirement as your final salary pension (if you were in the scheme 3 years).

The career average part means you accrued a % of your actual earnings in each year. For example, if it was 2% accrual, and you earned £50k in the first year, then had a pay rise to £60k for year 2, then went down to part time £30k in year 3, you would get 2% of £50k, plus 2% of £60k, plus 2% of £30k and so on.

This all gets added up and you get the annual amount paid as a 'salary' when you retire ☺️

Thanks for all the replies. I guess this was a vague thread owing to the fact that I don't understand anything.

I think my quandary come a from hearing people talking about putting money in pensions and investments as opposed to say, paying off a mortgage. How do they know what they are doing is right?

I like knowing I have a pension for security - mine is career average too so at least I know what I'll be getting and am not worried about fluctuations in share prices etc.

Paying off the mortgage would also be lovely but I think the tax etc benefits of my pension (plus the fact that the company puts so much money in) outweighs the interest charges of my mortgage, so it's better for me to put money into my pension.

It could be worth speaking to a financial advisor if you want to check what's best for your circumstances ☺️

Torsz is correct, the benefits of the pension generally outweigh overpaying for a mortgage.

A mortgage is generally on a fixed term, say 2 or 5 years, at a specified rate, for example 1.99%. That means if you overpay your mortgage you are essentially getting a 1.99% interest savings rate. You should be easily able to beat this over the long term with a pension, which in the UK should average 5-7% a year, not to mention the fact that the pensions often come out pre-tax (so an instant 20/40% saving) as well as any contribution made by your employer.

It's also quite nice knowing that the money is locked away and can only be used when you reach a certain age, as opposed to money in a house which could have a localised crash, etc.

Pensions is one of those things I have never understood, no matter how much I try.

What happens when you've moved jobs a lot and have lots of 'bits' in previous employer schemes? E.g. I paid into a final salary scheme for 10 years. Then I changed jobs (more than once) and have had a few years in a couple of different DC schemes. Now I've changed jobs again and am in another DC scheme, with intentions to stay with this employer until I retire in about 15/16 years time, all being well.

How will whatever is in my final salary pot be worked out, given I no longer work there? Will it be based on my final salary at the point I left the company, or is there some other rule that applies?

Sorry if this has already been answered (I get panicky when the P word is mentioned)

Am I right in thinking:

You don't have to purchase an annuity now, you can take 20% of your pension pot tax free?

So, say, £100k pot take out £20k when you retire?

Now my equally clueless friend says you use the remaining £80k as a savings account, and are allowed to take money out each year?

Is that right?

Dh has a final salary pension. Every time we were asked for a pension review we pointed out who funds his pension, and were told not to meddle with it. We weren't proposing to.

I find this a dreadful worry, pensions and mortgages are the two most important financial decision anyone can make and yet apparently no one understands what they are signing up to.

I think my quandary come a from hearing people talking about putting money in pensions and investments as opposed to say, paying off a mortgage. How do they know what they are doing is right?

Presumably they have a financial advisor like normal people do, who wades through all this stuff.

Your pension will have a fraction attached to it.

So I'm in a defined benefit career average scheme. I know that the paperwork says for every year I pay in I will get 1/60 of my average salary as a pension.

So if I work 30 years I will get 30/60......which if my gcse maths serves me right is 50%. So if my average salary for my career is 40k, I will get a 20k pension.

Nope Unicorn, no financial advisor here. Maybe this stuff should be covered in schools/colleges etc?.

Mortgages are easy to understand. Pensions, not so much and for those who have only recently signed up to workplace pensions since they became compulsory, I'm assuming a lot of people don't really understand the inner workings of them.

Sorry, we're not all taught this stuff and when we do try to find out info it's just too confusing.

I'm in the same boat @TheTitOfTheIceberg

I don't have a clue what I do / don't have. It's embarrassing.

I don't know any "normal" people with a financial advisor though. Most of my "normal" friends and family couldn't afford such a luxury.

Also make sure if you or partner is home with children that there name is on the child benefit book as they get their ni contributions towards state pension that way.

I'm embarrassed about my lack of knowledge of pensions. I have made a note of the various meager pots that I've paid into but it's not clear whether I'd be better to combine them or keep them as is. We are concentrating on paying the mortgage off and then thinking about pensions.

Nope Unicorn, no financial advisor here. Maybe this stuff should be covered in schools/colleges etc?.

It is now, mortgages and credit cards and over drafts, and APR and compound interest. Not pensions, there are too many variables.

Pensions simplistically, your employer now legally has to pay in X% of your salary and you have to match it with Y%. Some employers choose to pay a higher rate. You may also choose to top it up with an additional payment. But lets not muddy the water.

X and Y add up over your working life until (minimum) you are 55 when you can draw down on your pension - and you can take 25% as a tax free lump sum.

So the remaining 75% you can leave in the pension pot until your natural retirement age or you can start taking a monthly income now. That income can flex. But that pot has to last you until your death, if it doesn't you are stuck with the state pension.

Does that make it a little easier?

I don't know any "normal" people with a financial advisor though. Most of my "normal" friends and family couldn't afford such a luxury.

Same here Raven. I looked into it once, precisely to get an idea of what to do for the best with my scattered pensions, and the fees quoted were way outside my budget. I absolutely respect their right to charge a fee commensurate with their expertise and training but I simply can't afford to pay for their services.

Most of my "normal" friends and family couldn't afford such a luxury.

Would you know how much one costs? no ? You'd be surprised, I wouldn't call financial security 'a luxury'.

Moneyadviceservice has some quite useful details explaining it all. Something many people don't seem to know is that putting money into a pension fund attracts tax back from the government- 20% or higher if you're in higher tax band. You pay tax on most of it when you take it out, but only if you're earning enough to be taxed by then. Once it's in, in private and direct contrib schemes it's just invested in whatever ways they or you choose, just like an isa or other investment. hope that helps a bit. If you've got a defined benefit pension, hang on to it - they are like gold dust because they offer the only guaranteed income even if it's tiny and they often are inflation proofed to a certain extent too.

To a certain extent, you don’t know if what you are doing is right - and you have to accept that.

In my case it’s simple. I am putting more into my personal DC pension and not overpaying my mortgage, because my mortgage interest is low, but I get 40% tax relief on my pension contributions. (I’m a higher rate tax payer)

So if I put £500 into my pension tomorrow, it will be topped up to £750. Then that £750 will hopefully grow via stock market investment. £125 is added automatically (20%) and a further 20% / £125 you can either claim in an annual self assessment, or ask up front to have your personal tax code increased.

I can use a mortgage overpayment calculator to see how much interest I will save on my mortgage from a one off £500 overpayment. £100K mortgage at 4% for 18 years - it’s about £180 saved.

I have to take a chance that the mortgage interest rate won’t spiral, or that the stock market won’t crash and decimate my pension.

But on balance I’ll take £750 and potential to grow over £680.

OP, the first thing you need to do is find out what your current DB pension is due to pay annually, and from what age.

You have 2 parts: Final Salary and Career Average.

Final Salary will not mean the salary you have when you retire. It will mean the salary you were on when they closed the FS scheme. Your company will have told you the exact rule - mine for example, used your highest earning year of the previous three. Then, you don’t get that full amount. You will have an “actual rate”. Example for mine, is 1/60th. This means, for every year I worked before they closed the FS scheme, I accrued 1/60th of my final salary.

Real numbers:
My salary when the FS scheme closed: £30K
How many years had I contributed for? 10
So I accrued 10/60ths. That’s 1/6th of £30K, which is £5K.

So currently, I’m guaranteed to get £5K per year pension. It’s not linked to the stock market - my benefit is defined, it is known.

Now, £5K might be worth very little in 20 years time. So my scheme rules also increase it each year, by the lower of official inflation (RPI in this case) and 1.5%.

So I don’t know fir sure what will happen with inflation, but I assume that in 20 years time, I’ll have the equivalent of today’s £5K.

Career average has some similarities. I also have an accrual rate (1/70th). But I don’t know what my average salary will have been, by the time I retire. But I assume that it won’t decrease. At the very least, I hope it will increase with inflation.

Let’s assume I stay on £30K and work another 20 years. 20/70th accrued. £30K / 70 x 20 = £8571

So when I’m 67, I’ll have £5K + £8571 + about £8500 state pension.

Is it enough? Only you can decide. Do a budget. You won’t have work commute costs, but your heating when you’re at home not working might be higher. You can make an estimate.

Important to note, is that your Career Average amount is a projection. What if you can’t work 20 years? That’s why I’m saving in a private pension too.

If you have a DC (contributions) scheme its much harder - you don’t know what it will be worth in years to come, you’re dependent on the stock market. But you can still use websites to give you a conservative estimate. Although the stock markets goes up and down, over decades there is a general upward trend. Often, when you come to your last few years before retirement you move to less risky investments - to avoid losing a large amount with no time to recover. There’s lots more I could say, but hopefully that’s demystified it a bit.

I would say - YANBU to be confused. But YABU if you don’t address that, because there are lots of excellent websites and forums that will talk you through it. It may seem confusing but it really isn’t as bad as you think!