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?

You'd be surprised, I wouldn't call financial security 'a luxury'.

It is compared to mortgage, essential bills, food, travel costs to work and the additional costs associated with my DH's disability. Once all of that is paid I'm skint each month (and no I don't have Sky, expensive mobile contracts, holidays etc - our last holiday was three days in the West Country two years ago).

Nico and Ellisandra that's really helpful, thank you both.

@TheTitOfTheIceberg just ignore unicorn. I'm a mortgage advisor and I haven't got a financial advisor, mainly because I don't have the £600 per year it would cost to retain the services of one.

I also have a work pension and haven't idea either. I really should know better.

@Ellisandra that was really informative, thank you!

YANBU. Pensions are deliberately fucking labyrinthine and as soon as you think you know the score, the cunts change all the rules. The only thing you can be sure of is that Sir Bufton fucking Tufton will still be rich and you'll probably get shafted again (unless you are him or one of his rich Tory mates).

Also, if you're managing your own pension/retirement investments, I wouldn't recommend the "half your age" suggestion.

The biggest asset to investing is time. "Time in the market, not timing the market" as Jack Bogle would say. Ergo, the more you can save early, the more it will be worth at retirement. At 6%, 10k today will be worth 40k 24 years from now. So if your salary allows it, the more you can put away now the better.

Thanks Unicorn. I understand what you've said but I have no idea how/where the pots are invested and with mine being defined benefit, how can anyone guarantee the payment when I come to retire? Surely it depends how well the market does?

It just seems illogical to me, it's like saying everything the pension company invests in is going to (more or less overall) perform well. I work for a large organisation, there will be hundreds like me under the same scheme. So how can they guarantee the payment when you retire? For literally hundreds (thousands?) Of people.

How does anyone know what will make money and what won't? SIPPs baffle me

As you have a defined benefit pension, you really don;t need to do anything like get a financial advisor, put away a certain percentage etc. Poeple who will be relying on having a pot of cash to buy an annuity almost certainly need to do those sorts of things, but not DB folk - you're very lucky!

You can't really pay extra into your pension the way that some suggest in the hope that it'll buy you a bigger pot - yours doesn't buy a pot at all. If you did want to increase your pension you would have to talk to your scheme provider - you might be able to buy extra years which would be much better than using the extra to buy an annuity.

Pension statements you should get each year should give you a projection of how much you'll get, in todays; terms, based on your current salary, and assuming you continue to work for them till your scheme retirement age (probably 65). You'll have the same outgoings when you retire as you do now, except hopefully you'll have paid your mortgage off if you have one. You'll also (possible....) get a state pension if they still exist, and maybe benefits if you don;t have much occupational pension.

Defined benefit means defined benefit. It doesn't matter how the stock market does - that's the point! If you're in the public sector it's as safe as it can be. If you're private sector there is a risk the entire scheme could collapse, but there is a Pensions Regulator these days so you should be protected that way.

Ellisandra - that's such a great post, thank you

I kind have a better understanding now. I know my current scheme is 1/60 But I didn't actually know what that meant

I think given the way you've broken it down, it does make sense to invest more in pension than mortgage.

DB schemes are invested btw the same as other schemes, plus people curretnly paying their contributions (typically contributions are much higher than for DC schemes) will be contributing towards the liability of those who are now pensioners,

@TheTitoftheIceberg no-one can tell you the exact answer here, as different schemes have their own rules.

For your Final Salary scheme that you left - have they got your correct address and have you received a statement? That statement (annual for most schemes) will tell you the annual pension you will receive. You can contact the scheme administrator to find out if it gets increased each year.

There is no excuse - I mean that kindly! - not to do that. That will remove a lot of your confusion very easily!

As to having multiple pensions - that’s really common. I have 7 at the moment, 4 with the same employer! If they were all DB pensions, all it would mean is each month I’d receive 7 payments. Not much more difficult than getting my salary, then my child benefit. If it’s DC (so a pot of money, rather than a promise to pay a certain amount) that’s different - you decide how much to withdraw.

Should you combine them? Many pensions allow you to transfer money in and out between pensions with no charge. But it’s up to the scheme to decide. If it’s one set up by your employer, it might not. You need to ask. Often an employer one can have lower annual charges, they’ve got a “deal” for employees.

Start by making a list of all your DC pots. Make sure you have an up to date statement for each. If you haven’t, find out why! (change of address). Check the statement or call to find out the annual charge. It’s fine to have lots of them, but if one has a really high charge with no good reason for that* then you can move it.

*could be higher because the pension provider is more actively balancing investments for you, and is growing more than your others

But don’t be put off by the next layer of understanding investments! Don’t put off getting statements and understanding where you are now.

I think given the way you've broken it down, it does make sense to invest more in pension than mortgage.

No it doesn't!!!!! You're on a DB! If you can buy extra years it might be worth it, but not otherwise.

It just seems illogical to me, it's like saying everything the pension company invests in is going to (more or less overall) perform well. I work for a large organisation, there will be hundreds like me under the same scheme. So how can they guarantee the payment when you retire? For literally hundreds (thousands?) Of people.
Ultimately the organisation is on the hook for the liabilities if the pension fund can't find the money - that's why some organisations (like recently privatised ones) are trying to find a way to wriggle out of the commitments they have made. Ultimately it's now all underpinned by the Pension protection fund - if the organisation goes bust the PPF will pay out but at a reduced rate.

Was about to say investing extra in pensions isn't always worth it!

Yes, like the previous poster said if you have a defined benefit it's less likely to be worth it. Also worth considering is any children....anything you have in a pension is generally lost in your death (there may be spousal benefit but very unlikely anything can be passed to children, so if you die at 62 and you're not married/named a partner you've lost that money.....not that you personally care). If you have kids anything you have in savings, shares, property can be passed to them.

@Koolbeans don’t worry about how your work pension scheme can afford to pay out!

What you paid in, isn’t that closely linked to what you’ll get - and that is the company’s problem! You will have been paying x% and the company y% of your salary. Then, they take ALL the money and invest it, in order to meet their commitments. They know what these are, they have all the salaries and dates of retirement!

It is a legal requirement (and it is externally checked) that company schemes have to declare their deficit (or the excess!). If they haven’t got enough money, they can top it up. The money already in the pension is protected from the rest of the business. I’m simplifying it, but imagine the company owned 5 offices. If one was falling apart, they could borrow the pension money to fix it. But if the pension fund wasn’t big enough to meet commitments, they could sell one building and put the money from that into the pension fund.

Sometimes, companies go bust and there isn’t enough money in the fund. That is where PPF (Pension Protection Fund) comes in. All DB pension schemes pay into it, it’s like a giant insurance policy. If your company goes bust, it will pay 90% of your pension. (I’m not going into loads of fine detail though!)

You will hear terrible stories of lost pensions - but that’s why measures like PPF were brought in.

You can take (generally) 25% tax free - some occupational schemes have more than 25% but these tend to be older schemes. Then the other 75% can either be cashed in at the same time, you can buy an annuity, you can put into a crystallised pot like a flexible drawdown arrangement where you can flexibly access the money either like a monthly withdrawal or ad hoc. You possibly can take lump sums where each lump sum has 25% tax free and the rest taxable, this leaves some tax free cash behind. You can also take private pensions from age 55, not 57 like a PP advised. (I work in the retirements section of a big life and pensions company, not a financial adviser)

@titchy - agreed!

To be clear:
My example of mortgage vs pension was for me. It depends on a lot of factors. Not so many that anyone should be put off thinking it through!

For example, paying off mortgage saves interest, yes. But I have an offset mortgage - so I don’t pay (and wouldn’t save) as much interest as my example suggested. All my cash emergency fund savings are offset. That’s about personal attitude to risk.

Another factor for me is that I earn above Child Benefit threshold. That is calculated after pension contributions. So it makes sense for me to pay more into pension, and pocket CB, than it does for me to save mortgage interest.

Sometimes, it’s not even about hard numbers, but your personality.

Someone mentioned that if I die, I lost all but the spousal element of my DB pension.
But even if that happens, until that day I get a lot of piece of mind by knowing there is a death in service benefit, and that I have a guaranteed amount. For me personally, that piece of mind is worth more, than any concern about losing 50% from my estate if I die!

So it’s not just about money. Some people are far more motivated to be mortgage free. So even if that isn’t the best decision in numbers, it might bring them peace of mind AND keep them motivated not to just spend instead of save!

I would say - if you’re a bit frozen between mortgage and pension, the important thing is - do one! Any one! Because either is better (financially) than just spending it.

I understand what you've said but I have no idea how/where the pots are invested and with mine being defined benefit, how can anyone guarantee the payment when I come to retire? Surely it depends how well the market does?

Yes, you're right, but even with my works pension, that is invested according to my willingness to 'risk' - I am risk adverse, so I will not invest mine in the riskier markets, because I'm happy with a reasonable low return rather than play at chance. No amount of convincing would entice me to be anything other than ultra conservative .

That said, DH, we've just let his private pension trundle along with very little input, we let the advisor invest according to our aversion to risk, that's gone from around 35K to 200+K in the space of 15 years. That's quite small by most standards, if we drew 25% and started taking eg 10K per annum that would only last a minimum of 15 years. But we don't have longevity on our side. Neither of us could reasonably expect to live until our 80's

The way to work out what you need in retirement is to do a budget planner that is relevant for today and then cross off all of the things that will stop in retirement.

For example if you spend £2000 a month now including everything and these were the outgoings that will stop in retirement

Mortgage - £300
Life assurance - £20
Car loan - £150 (assuming you buy a car in retirement rather than lease)
Pension contributions - £130
Travel to work - £50
Lunches - £50

Then you will need £1300 in retirement.

Let’s say you want to join a gym though and do a couple of other things and these will cost £100

You will need £1400.

Find out what your state pension is - easily done. Let’s say in this case it is £750 a month.

You will then need £650 a month from elsewhere.

Realistically, to get this and to ensure it lasts in retirement you will need a pot of around £150,000.

However if you are in a couple then you will get two state pensions so you may have enough albeit one will die at some point so having some money saved for this eventuality is still adviseable.

Defined benefit is different of course. With this you know what you are going to get or thereabouts as you get a statement every year telling you.

If you have built up say £5000 a year then that is the equivalent of having a pot worth over £150k because it would cost you that to buy an income for life of £150k

That’s why defined benefit schemes are so valuable.

If you want to retire before state pension age then you will need more.

The vast majority of people in the Uk do not have anywhere near enough in their pension schemes.

This is very simplistic but it may help.

@IloveRubble it is currently 55. It’s worth explaining for those not familiar with pensions, that when it was set at 55, it was chosen as state retirement age minus 10. At the time, 65-10=55. There was a proposal that therefore it would increase as state retirement age increased. The next increase was to 67, and that’s where the 57 comes from. This has never been enacted, we have a different government now, it may never be enacted. But it was widely expected initially, and even some big pension providers have 57 on their websites!

My advice would be if you are currently under 45 (so 10 years away from 55) to build your plan based on your state retirement age minus 10 years.

Income for life of £5k not £150k

BTW - the pensions advisor, I think he takes around £800 per annum as his fee - seeing as he's made us 170K in 15 years, I'm not begrudging him his 10%

Child benefit book storynanny , that takes me back, as children we were sent to the post office with the book to get the child benefit with a letter from my DM. I wonder when that stopped

I'd say a financial advisor might be worth the money if you have a large enough income to have choices, most people are only able to afford the minimum contribution level is that, so realistically no options.

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

Well then you take it upon yourself to look at online forums and guides and chat rooms and books and all the resources out there and learn, just like you do with anything else you. Red to understand.

Just saying you can't afford a professional and that's that is a cop out. You can educate yourself to a pretty damn high standard independently - enough for most people's needs. This sort of inverse snobbery doesn't help you.