To not understand pensions?

[Malcolminthemiddle2]

I’m 24 and am wanting to start a pension. I haven’t been enrolled on one at work yet but have recently asked to be and I think my employer will enroll me on a workplace one but I would also like a private one. I would like to save as much as I can as I have quite a few relatives who didn’t save much when they were younger and now really regret it. I really don’t understand though that you can save for years and at the end your pension might not be worth much. Are you almost better off to just have normal savings accounts and just try and save as much as possible because at least then the risk of losing it won’t be as much. Apologies if I have completely misunderstood them

If you just had savings, the value of your pension would fall. So you pay a pension company to invest the money, and to manage the investments. Over the long term gains should offset any losses. Unfortunately, this isn’t always the case and unscrupulous people can run off with your pension pot.

Also, I don’t think you have anything to apologise for.

You're not alone, pensions are complicated!

There should be some information on your workplace pension. You may have the opportunity to pay extra into it or you may prefer to start a private one.

Do you have rainy day savings in an instant access ISA or other tax free savings account?

Have a look here

www.moneyadviceservice.org.uk/en/categories/pensions-and-retirement

There’s a helpline you can call as well.

You are better off saving into a pension. You will get tax relief on it too, so it is a very tax efficient way to save.

I have been putting £80 per month into my private pension. Tax relief from the government makes it up to £100.

The advantage of a pension is that you can save without paying income tax. Even if you are below the threshold of paying tax you will get a top up on a certain amount by the government (I think 25%). So that is worth it. The other problem with just using a savings account would be the interest rate in the bank would at the moment be less than 2% when the rate of inflation is probably at least 3% normally so your savings would not keep up with inflation and in real terms would lose money. So this is why pensions invest in more risky investments like stocks and shares, to hopefully get a better return. The other advantage of a pension if it’s a workplace pension is that your employer has to contribute too. Good places to look for more info are money saving expert or money advice service. Have you considered a LISA?

@Twaddledee I’ve looked at a LISA and I did quite like the look of it. Is it more secure than other personal pension accounts?

You’re often better off in your workplace scheme as they may match your contributions, for example my employer will match my contributions up to 12%. So if I pay in 12% of my salary, they will also pay 12%, meaning I get 24% whilst only paying 12% myself.

Your pension company will invest your contributions into a mixture of (probably), shares (high risk/high return), bonds (medium risk/medium return) and cash (low risk/low return).

Since you are young, there will probably be a high proportion of shares in your portfolio, to maximise returns and because you have time to ride out the highs and lows. As you get older, the mix will shift more toward bonds and cash to protect the value of your fund.

When you retire, the amount in your fund can be used to buy an annuity - a bit like an insurance policy that you pay you an income for life. The price of annuities goes up and down, so say for a pot of £100k, you can buy an annuity which will pay an income of £6k PA. When you retire, the same pot could buy an annuity paying out £10k PA or £3k PA. Saving just into ISA’s is unlikely to give you the pot you need as interest rates are low, plus of course (at the moment) there are still tax advantages to paying into a pension. You’re doing the right thing starting one now

You have to think of the LISA as like a wrapper and within that wrapper you can invest in different options. The safest would be a cash Lisa but that would have low returns. A stocks and shares Lisa would be more risky but hopefully have better returns. If you invest in a blend of different stocks and shares over a long period of time the risk becomes much lower than if you were for example investing in the stock of one single company. The general advice is to invest a for more than 5 years to ride out ups and downs so the long term approach of a pension works well at smoothing out the risks potentially. There will be different providers such as Hargreaves lansdowne and different blends of investments available or ‘funds’ such as the vanguard life strategy funds and other ones that are designed specially to be used for pensions

I am not qualified to give financial advice.

Pensions are generally considered a good investment because (a) you get tax relief and (b) your employer contributes, in addition to what you put in.
However, it's just another form of investment and the No1 rule in investment is "don't put all your eggs in one basket". Also, because of the tax relief, the Government make it very difficult to get your hands on the money pre-retirement; you want some other savings that are easy access. What will you do when you want a house deposit and all your money is tied up in a pension? (house ownership is popular because it is another tax-efficient way of amassing funds)

The benefit as well of house ownership is that you don't need to pay rent in your retirement and also you have a large investment which can be used if you need care. Ideally aim for a property and a good pension.

OP you have asked about the security of pensions a couple of times. Unless your employer is dishonest or staggeringly incompetent your workplace pension will be highly regulated and the chances of anything fraudulent happening to it will be very small indeed.

Pensions fraud/scams tend to happen when people are convinced to move their pot out of a regulated scheme into a dodgy arrangement (often overseas) with promises of "guaranteed returns" and the like.

It's always possible that the investments (shares for example) that your pension pot holds lose some of their value but that's not to do with fraud or lack of security, it's simply that investments are not guaranteed to always go up in value.

Op, I wish at your age I had been able to save in a personal pension... Set up a sipp.

What ever you put in the gov paysa %not sure how much this will carry on..

You can put 50 quid in..
After 2 years research and going round in circles.... Most people seem to put money into a range of index trackers. With some gamble funds or shares thrown in...

Read Mr money moustache.

Vanguard funds are extremely popular, read about their founder Jack bogle.

Wow, if you open up your own private pension now with the minimum... 100? Not sure... Then add 25 a month.... You'll be in a very happy position when you retire because you have time on your side.

Also. If you switch and change jobs.. You can transfer your bitty pensions into your own sipp and have it under your control.

• one more thing... Vanguard for instance has life stragety funds.

They buy a bit of everything but they are weighted for stocks and shares and bonds.

I have a long term stragety fund called 100 life stragety. That means 100 stocks /equities...

I also hold a 80% which is 80%stocks, 20 bond.. They go to 60 stocks, 40 bonds... And so on. The idea being, the closer you get too retirement, the more you switch from volatile stocks to more steady bonds.... Which don't fluctuate as much...

• sorry one more point at your age you don't need to use up all your money in a pension. If you simply get one going and preferably one under your control... Your already ahead of the game. You will only need to put small amounts in. For other life needs use stocks and shares isa or Lisa's etc. . Get one going.. Pension then forget about it...

I would definitely have a LISA - that’s capped at £4K per year so that’s a nice little goal to fill every financial year. Then you can use it for a pension or buying your first home.

Others have answered your pension question brilliantly. I’m in my 30s and only started my pension this year because I couldn’t afford it any earlier so I feel really proud of you!

First of all, it's great you are thinking about pensions at 24.

Depending on your earnings, you should have already been automatically enrolled into your pension. If you haven't, be clear to your employer that you want to opt in, if you do. They will have to contribute too. It's unlikely (although not impossible) that they will pay into a private pension if you set one up.

Why do you want a private pension instead of a workplace pension?

There are governance bodies which have a duty to ensure that the pension your employer offers is a suitable workplace pension (for eg, invested appropriately & relatively low charges).

Can you afford to get advice? And even if you can, you are probably better off paying that money into your workplace pension.

I was lucky enough to be encouraged by my first proper job to take out a pension and I’ve got a good stash behind me

As PP have said if your employer is offering you a matched contribution scheme take it

Are you almost better off to just have normal savings accounts and just try and save as much as possible because at least then the risk of losing it won’t be as much.

There's huge inflation risk in a 'normal' savings account. Plus you are guaranteed to have less money on day 1 in a normal savings account (as opposed to a workplace pension) as you are missing out on tax relief and employer contributions.

If there's one thing you need to understand about pensions (especially vs any other form of savings) it's this: IT'S FREE MONEY

Firstly, you get the tax relief. And secondly, with a company pension, you get your employer's contribution. This can be in the order of 100s of pounds a month, dependent on what you earn and the generosity of the scheme. I have always paid the maximum into my pension to get the maximum contribution from the company - it's better than most pay rises!

A standard savings account or ISA will never give you that free money. BUT - it allows you to take money out, which a pension doesn't.

So, get into the habit of contributing the maximum you can afford to your pension to maximise your employer's contribution. You don't miss it from your pay packet that way. After that, a LISA is great, the easy access savings to get you a buffer if you need it quickly. Then investments as a back up to your pension - that you're in for the long haul.

If you are earning over £10k pa you should have been enrolled into a workplace pension scheme. If this hasn't happened you need to raise this with your employer.

You can have a private one at the same time but your employer will only pay into one. When/if you leave that employer the money you paid In will still be yours. If you think you will have a number of jobs you could have a private pension and transfer your workplace schemes into the private one when you leave so that at retirement you have one big pot.

While you are younger your money will be held in riskier finds so that it increases throughout your life. This means that as the cost of living rises so will your pension fund. To put simply, say a loaf of bread costs £1 now, when you get to retirement it might cost £2. If you invest in a pension your £1 will increase to £2. But if you put into a savings account that £1 might only increase to £1.50 meaning you can buy less when you get older.

As your funds are held in riskier funds when you are younger the idea is that your pension fund will be going up and down. If it goes down (which it did do with COVID) it doesn't matter so much because you have 30+ years for the market to recover. As you get closer to retirement age your pension fund will move to safer funds to protect you from the market going up and down (basically so that if Covid happened as you retired your funds are invested safely so the value doesn't fall right when you are about to retire).

You can ask your pension provider to put your money into safer funds but you won't get the increase in market value over time.

When you retire there's a number of things you can do from cashing the whole fund in or buying an annuity so you get a regular income.

If you are paying in through your work place then the minimum is 5% from you and 3% from your employer. You also get tax relief meaning that you pay, for example, £80, you get £20 tax relief and £60 from your employer. So £160 goes into your pension but it only costs you £80. So that's doubling your money.

There's no right or wrong way to save for your retirement so long as you do (unless u are happy to live on the state pension of £170 per week)

Even if you only paid into your pension for a year you will have £1,920 (160x12) but it's only cost you £960 (80x12).

OP.

Some things to think about:

1. Some employers don’t just contribute to your workplace pension scheme (3% is the minimum) but they will ALSO “match” any extra contributions you choose to make. In other words, if you choose to contribute 6% your employer might contribute the basic contribution of say 3% PLUS another 6% So you end up with contributions of 15% of your salary, all of which gets tax relief. That’s a really good start aged 24, and it can be boosted even more if your employer offers “salary sacrifice”. If you decide to pay into a personal pension scheme or LISA instead of contributing into your company scheme however, your employer probably won’t offer matching or salary sacrifice - so you are essentially missing out on lots of free money. It’s usually better to max out your matching contributions in your workplace scheme before starting to pay into a personal pension scheme or LISA.

2. Fees and charges. Pension schemes HATE talking about how much they charge you to look after your money. (I just got a 35 page annual statement in the post from Scottish Widows which didn’t say a single word about how much it was costing me. I looked online and there wasn’t a word about it there either.) The truth is, one of the reasons why people’s investments don’t grow as much as they might expect is if they are being charged high fees. High fees basically eat away at your savings, particularly when markets aren’t doing well. So make sure you ask your workplace pension administrator about charges. SIPPS also attract charges of course - you will pay a basic fee every year to the company holding the SIPP, plus charges for each of the funds you hold in the SIPP (if you choose to hold funds rather than individual shares), and you may have to pay more charges to get your money out.

3. in terms of security: if you go with a reputable pension provider you should be OK - even if the pension provider goes bust, your money should be protected. There are, however, no guarantees that the value of your investments will always go up. When you invest money, there’s always a risk you might lose some or all of it. However, you are only 24, so even you have a couple of bad years where your pension loses value, there is lots and lots of time to catch up.

And there are some things you can do to manage risk that your pension might lose value:

• most importantly spread your money between different types of investment (this is called diversifying) - so if one investment goes wrong, you don’t lose everything. Most pension schemes offer you the option to pick a selection of different funds which invest in different parts of the world, or different types of company for example.
• make regular monthly contributions rather than investing a lump sum in one go. This reduces the risk that you might be unlucky with timing.
• if you are really really worried, you could invest in a managed risk fund, which offers lower risk in exchange for a lower return. To be honest though, these are usually more suitable for older people much closer to retirement than you, who don’t have so much time to make up lost capital if the markets have a bad year.

4. You might also want to think about what your money will be invested in - do you care if it’s invested in tobacco, or oil, or gambling, or evil regimes etc. Increasingly pension schemes will have some options which allow your to either avoid “bad” investments or to deliberately invest in “good” investments, like green energy. They might be labelled “ethical” or “sustainable” or “green” or “ESG”. Worth thinking about.

If you want more info, then I really recommend www.boringmoney.co.uk. Also, www.moneysavingexpert.com is very reliable - it’s got good info about LISAs, and makes a strong case for why for most people, a workplace pension scheme is a better bet than an LISA.