Parents think I don’t have enough money in pension

[Helena1985h]

Talking to my mum and dad about pension today. I’m 35 FYI.

They asked me how much I’d put away as were saying they wished they’d focused more on their pensions when young. I logged in and had a look and I have just under 55k.

They seemed to think that was way too small, and they’ve properly freaked me out TBH. Is that really not a lot at my age? I sort of assumed I was doing okay!

@SW1amp

The amount isn’t relevant on its own. What is it in relation to your current salary?

By 40, you should be targeting a pension pot of around twice your current salary if you want to be retiring with an income that’s around 60% of your salary

Your pot will double roughly every 12-15 years (say 15 to be on the safe side) and you want to have around 4-5 times your salary in there when you get to retirement age

So obviously £55k is good if you’re on £20k a year but less so if you’re on £40k

I'm not sure about the numbers here. Are you saying that a pot of five times your salary can provide you with a pension income of 60% of that salary? If my final salary was £50k and I'd accumulated £250k I could play safe and take an inflation-proofed guaranteed income for life of about £6kpa. Or I could go down the riskier draw-down route and take £10kpa (at 4%). At best I'd be getting 20% of my salary. To get 60% of it the pot would need to be 15 times the salary.

@AuntyBumBum

Thanks for your explanation *@Cocomarine*, and I do see the benefits of the balanced approach, and yours makes sense.

I suppose my main point was that a guaranteed, steady, inflation-proofed income is massively expensive to provide, and although the shift towards drawdown is temporarily and superficially attractive, at some point over the lifetime of the current cohort of pensioners it is bound to go badly wrong. It's another big expensive risk which has been quietly shifted from employers onto employees.

I think the “badly wrong” point is interesting. I know I’ve definitely thought, “but lots of stupid people will spend it all on a Ferrari at 55”!

The thing is though, although I have zero confidence in the temporary current government as individuals, I do actually have more faith in the more fixed civil service advising them. All a bit “Yes, Minister”, perhaps!

The trends for withdrawal are easily tracked, and they are tracked. If 95% of people were spending their entire DC pot in 2 years (and some will!) then the government would already know this. I read an article a while back that this wasn’t happening. I can’t find it now though, annoyingly!

But I also read and could still find this government qualitative survey on DC pension decumulation:

www.gov.uk/government/publications/pension-freedoms-a-qualitative-research-study-of-individuals-decumulation-journeys/pension-freedoms-a-qualitative-research-study-of-individuals-decumulation-journeys#conclusions

It’s an interesting read. But my point isn’t really the detail of it, but the fact that it exists! The government is monitoring behaviour. For example, one finding from that study was that people are more likely to just spend where they have multiple small pension pots and take advice when they have one large one.

So - I’m thinking aloud, this isn’t in the link! - just to illustrate - if you identify that people will burn through 5x £20K but make careful decisions about £100K, you could introduce legislation that limited the number of small pots at 55, with “forced” consolidation before withdrawal.

I don’t see an unexpected ticking time bomb, I see a situation that will be tracked and responded to.

We already know that people pay more attention to retirement needs when they’re older. The pension freedom age moves from 55 to 57 (actually SPA minus 10) from 2028. If data shows that too many people clean out their DC pot from 57-60, the government can pass laws to delay access longer. I am confident that the DWP has people modelling all sorts!

@VanGoghsDog
Pensions don't earn interest.

True, mine as a SIPP earns investment returns, but the return is expressed as an interest % rate compared to portfolio value. The returns are reinvested. So yes, it’s not technically interest, but the posters point about the returns generating more returns is still true.

I'm 35 too and have about the same. When I have compared with trusted friends and my DH it was more than they had so I considered it to be quite good.

It’s £54k more than I have at age 34 🙄

[quote EmpressCixi]@VanGoghsDog
Pensions don't earn interest.

True, mine as a SIPP earns investment returns, but the return is expressed as an interest % rate compared to portfolio value. The returns are reinvested. So yes, it’s not technically interest, but the posters point about the returns generating more returns is still true.[/quote]
Returns are expressed as a %, NOT as "an interest %".

Yes, returns increase the pot which increases the returns. There are two ways to get increased value in investments (pension is just a wrapper for investments) - growth, and dividends. Growth can be wiped out by a market change, or a change for that stock (see Carillon, for example), dividends are added usually as cash (though in my pension I buy accumulating funds so I don't have to worry about cash floating around) which can then be reinvested.

It's very misleading to talk about "interest" in any form. Partly because currently interest rates are very low so it will make people think pension income will be equally low. Also, interest tends to be guaranteed, once you earned it, it's yours. Growth in value of stocks and funds is not the same, it can be wiped out.

Also, the "miracle of compound interest" does not apply at all. Yes, growth on growth, obviously. But it's not the same mathematical principle at all.

Unless you are a child your finances are nothing to do with your parents

@BitterTits

I was going to say that this thread is dripping with privilege.

But I don't think it's that.

For those of use who grew up in poverty and / or whose backgrounds are solidly working class, not having this kind of knowledge (as there was never anything to save) could have been life-changing at the start of our own working lives.

My DF works a zero hours factory job. My mum was a cleaner. I'm a professional but will never be well off - perhaps my DCs will fare better financially.

I agree working class makes it less likely a person would have had financial education from parents. But I also think part of it is that women are less likely to have financial education than men.

My background is rural working class. My father was a farmhand and we lived in a cottage on the estate that came with his job. My mother worked for the local police force and lived through the integration of men and women in the 70s. My mum knew nothing about money, but she knew that a civil service pension was a golden ticket for retirement. Which is why she worked so hard to get in with the local constabulary.

My father gave me a basic financial education as he said times were changing and women have to look out for themselves now. His father, my grandfather was a farmhand too and we all watched him work himself into being a crippled old man who had barely two pennies and died young, at only 66. My father knew farming is physical and he opened his pension on his 18th birthday and put all he’d saved since he left school at 14. His goal was to save 10% no matter what and retire at 55 so he’d get at least a decade to be a “man of leisure”. He did it too.
Growing up, money would be short at times but he’d go get odd side handyman jobs to make up a shortfall rather than skimp on his pension savings. I’ve lived by his example.

@VanGoghsDog
Yes technically, by definition the returns are not interest but growth in value and/or dividends. But they are expressed as a +/- % return/loss, in the same way as interest is, and both are a % calculated against the same base. The concept of compound interest is roughly equivalent to the concept of compound earnings.

My point is that you can actually compare a pension fund with a ten year average return of 8% to a savings account with only 0.2% interest and think, hmm..yes there is risk that the fund may have an off year or two with a net loss, but you know what long term my money is definitely going to do much better in the SIPP than in a savings account.

The same applies to thinking about whether to prioritise pension or mortgage pay off. You shouldn’t compare the interest on your mortgage to the interest rate on savings, but the interest on your mortgage to the long term returns from a decent pension fund type.

I understand you are correcting terminology and have no complaint there. I hope I have explained myself better.

I'm 38 and have about £30k. Ill be a pauper in old age. I had to prioritise a roof over my head though and have my own place - eventually Im hoping I can downsize and use equity to top everything up.

If not, ill be wearing 5 layers of knit and go without heating ... and live off bread and water.

My company contribute the minimum so I doubt ill ever have 'enough' in my pot

About drawdown. Is it right that your kids can inherit the lump sum when you die? Based on the idea that you never actually eat into the lump sum but just live off the interest. Also if you die then your spouse gets the lump sum right?

If so that is way more attractive than an annuity. Though I know it's riskier and you may need that lump sum for care fees.

Many index funds are a little of everything or ones that replicate or follow the ftse 100 or s and p (us stock market) are self cleaning.

It's better than buying individual stocks.
Eg marks and Spencer fails it falls out of the fste and is replaced by anther company.

It's self cleaning and in the US only a couple of companies in index now where there 100 years ago.

Buying a little of everything doesn't give instant huge returns but it's steady and fairly stable.
It would take something like an asteroid hitting the world to wipe out fste or s and p 500.
You buy into innovation and creation, through s and p I have exposure to apple, tesla, alphabet and hundreds of other great companies.
But if one fails... I don't loose money it simply drops out.

Simple path to wealth jl Collins. He suggests just investing in one vanguard fund, the same fund Warren buffet has told his wife to put all their money in, if he dies!

It's a huge fund that has a little of everything.
My investments dropped considerably during covid but that would only be an issue if I had to draw on them.

Which is why we all need cash reserves as well or some bonds to balance it out.

They have been hovering around 25% since its been opened.

Lucy that's a great fgure at your age just make sure it's invested well and keep topping it up.

Imagine if the government did a push to get parents to open pensions for dc at birth!
What a monumental help to society that would be.
Even a tiny fraction of bday money going in from birth would reap enormous benefits. And what a relief gift to give to older children!

34 and have about the same as you (admittedly started late at 25). Ideally I'd put in more but....the cost of housing and childcare is too great for that to be affordable at this stage of my life! I'm focussing on making my mortgage repayments and hope that when my child is older I can contribute more, that's just life.

I think if there's one message I'd want to give to women about pensions, it's START EARLY. When I got my first grad job I wasn't earning much, but there was an automatic auggested % into pension and an employer top-up, and I had zero interest in pension at the time so I shrugged and left it as it was. That minimum percentage of a low salary for three years is now, fifteen years later, more than fifty grand, and it'll be more again by the time I retire. Just three years from the start of my career.

Start paying pension as soon as you have a job; don't wait until you're in your thirties or forties and have taken a massive step back and years out and there's always something the DC need that's easier to prioritise. Pay enough to get the max employer contribution if you can possibly afford it and STAY OPTED IN.

I told all

my DC to put in as much as they can before they have children because afterwards children are so expensive it just gets harder until they grow up and leave home. My dd has 2 young children and is now working 3 days a week so putting in less pension and less paid by her employer as well. This often happens to females who h is why they need to think ahead and put more in before children. You have a good basis but could up your contribution.

This thread is only going to make people feel worse.
The situation is so skewed nowadays that it's really unfair to start publicly assuming we are all on this journey of building a bountiful pension pot.... and then to pat oneself on the back for having had the privilege of being able to do so.
Many people on MN barely have a pot to piss in nowadays and these do not exclude educated and intelligent people.
Mine is OK, but who knows what the situation will be in 30 years. Nothing is guaranteed in this generation we are now in.

I think they are steering you the right way tbh.
Prioritise it for the next few years.

@united4ever

About drawdown. Is it right that your kids can inherit the lump sum when you die? Based on the idea that you never actually eat into the lump sum but just live off the interest. Also if you die then your spouse gets the lump sum right?

If so that is way more attractive than an annuity. Though I know it's riskier and you may need that lump sum for care fees.

Are you talking about the lump sum that you can take initially ? Most people do this ( take a lump sum ) because they want to do stuff with it eg holiday so it will become like any other savings - a part of your estate and therefore may be taxed depending on the overall value of your estate on death .

However an invested pension is not part of your estate and will pass on tax free if you die before you are 75 and possibly if after 75. No one would take a lump sum out of their pension to live off the interest unless they are investing it in a different pension plan .

Pensions don't earn interest

No they don't earn "interest" as such, as pension investments wouldn't usually be held in cash. Your pension contributions are normally invested into equities (and bonds, and probably a number of other asset classes) in which case they will grow over time. In other words, you might not benefit from compound interest, but you will still benefit from compounding.

My Dad worked in a factory all his life. Best not of advise he gave to his 5 dd was to start your pension as soon as you start work and pay in more than you have to. I trained to become a teacher and he told me take put a second stakeholder pension on top of Teachers pension. I did not know anyone else paying 2 pensions but followed that advise and really at the time it was not too hard before I married and had children. I retired early at 56. I am 60 now and get my TP every month but also have my extra pot I can drawdown from when I want to that I have been able to use to help my children with deposits. The earlier you invest the greater the rewards. I have absolutely drilled pensions into my children.

[quote EmpressCixi]@VanGoghsDog
Yes technically, by definition the returns are not interest but growth in value and/or dividends. But they are expressed as a +/- % return/loss, in the same way as interest is, and both are a % calculated against the same base. The concept of compound interest is roughly equivalent to the concept of compound earnings.

My point is that you can actually compare a pension fund with a ten year average return of 8% to a savings account with only 0.2% interest and think, hmm..yes there is risk that the fund may have an off year or two with a net loss, but you know what long term my money is definitely going to do much better in the SIPP than in a savings account.

The same applies to thinking about whether to prioritise pension or mortgage pay off. You shouldn’t compare the interest on your mortgage to the interest rate on savings, but the interest on your mortgage to the long term returns from a decent pension fund type.

I understand you are correcting terminology and have no complaint there. I hope I have explained myself better.[/quote]
I don't expect it was only you I was responding to. I agree with what you've said. But loads of people are referring to pension returns as "interest" and it's very misleading for the reasons I gave.

And it's this confusion which prevents people from really understanding money. Or wanting to.

My intelligent sister screeches like a banshee if I mention pensions to her. One sentence and she starts whining "it's all so complicated". It really isn't. I'm not (ostensibly) as intelligent as her, but I've taught myself about investments, pensions, tax. And I'm totally crap at maths, so it's not that!

Lump sum is the wrong term. So say you have 400k pot and decide to live off 4% so 16k a year (plus state pension). When you die the 400k could be more or less still 400k. This 400k can be passed to kids tax free?

@Daisydoesnt

Pensions don't earn interest

No they don't earn "interest" as such, as pension investments wouldn't usually be held in cash. Your pension contributions are normally invested into equities (and bonds, and probably a number of other asset classes) in which case they will grow over time. In other words, you might not benefit from compound interest, but you will still benefit from compounding.

Exactly.

But it's a different mathematical concept than the miracle of compound interest, which compounds at the same rate year on year. Investments are bumpy, good years and bad years.

One of my funds I bought in Feb 2020 is up by 130%. Meanwhile, my Shell shares........not doing so great!

Does anyone have a private pension who can point me in the right direction.... After reading this I must be clueless. I have one with work. Bit it's not very good. I don't know how to add to it. So must speak to them about it. Or is it better to have a savings account or isa. I'm 29 and it has really opened my eyes. That sounds stupid I know. But I've been concentrating on my kids and didn't think too much about it! Feeling quite a fool now