Pensions - is it worth it? Questions

[no49]

So this is very much a genuine thread. I have found it you try to ask about this on MN there are lots of sarcastic responses and I’m not here to goad but I genuinely think there’s some things I’m missing or not fully understanding.

So from Googling I can see that the basic state pension is now £230 a week. I am 44, so I can claim this from 2048, when I am 68. I realise I may wish to stop working before this and I do have a pension I’ve paid into since I started work although this will have reduced as I’m part time now.

But, £230 seems reasonable to live on, especially working on the assumption that things like the mortgage is paid off. (I do understand that doesn’t apply to everyone.)

What I’m asking about is the advice on here about not forgetting your pension, to avoid part time work or make it as close to full time as you can for as short a time as you can because of your pension, pay extra into your pension.

To me that does seem risky because if you die before you can get it, or only a couple of years into retirement, it’s gone. Whereas if you invest your savings into ISAs or things of value like property or similar, it can go to your spouse or children if you do die.

I know that sounds very morbid but it isn’t just that; I suppose I don’t see the point of exhausting myself at 44 to be wealthy at 64, especially as for all I know I might never reach 64. But the advice here is the opposite of that so if anyone could say if I’m missing something to at would be good. Otherwise it might just be differences in opinions which is obviously fine too.

Answering this to give a completely different perspective to your question.

I live on state pension alone, this was by choice. However, I'm now in my late 60s and so have benefitted from the assumption that things wouldn't change; I guess this is no longer the case these days. I was also lucky that all my NI contributions were paid as I was a SAHM at first (child benefit paid) then a carer until I went to work much later in life.

The best job I ever had was after I divorced and once the children had left home. I used my excellent salary (then) to travel the world and do all sorts of things others might wait for retirement to do, rather than putting it into a pension pot. I'm glad I did it that way round for several reasons: 1) I had more energy then 2) These days I have some health problems and if I'd waited to travel round the world until now, I just wouldn't be able to go and 3) I genuinely have less inclination to do things these days. Being older, I'm much more content with family, friends, local events and so forth.

You have to think about what suits you.

I don't own a property, I rent a very beautiful but reasonably-priced place in the countryside. I have everything I need....over the years I've bought all the decent furniture I need, kitchenware, clothes by the dozen, I really need very little. I've always had lease cars but I did manage to buy the last one for a knock-down price - I will give it up as soon as it gets expensive to run. As I don't own a property I don't have any expensive repairs to factor into my costs. Healthcare is free including prescriptions now I'm over 60, and I've just received my bus pass for when the car no longer exists. Foodwise I don't need much, I tend to batch cook and freeze things, I'm not keen on takeaways and suchlike anyway.

I'm sure many wouldn't be happy with my sort of life but I'm so content and feel very lucky. It IS possible to live on state pension alone and not all of us are having a miserable life with no treats because of it.

A state pension is not much money to live on. It means no holidays, meals out new glasses, the ability to buy your family gifts, no evening at the pub, no new clothes and on and on unless you have another private pension or a lot of savings or investments. The Weslyn have a guide stating a single person needs about £15k for a very basic life. That is well over how much state pension is.

That sounds fine to me. Property is a pain to manage but a good diversifier of assets and is generally uncorrelated to equities.

I don't understand why on here when somebody comes into a windfall they're told to put it into a pension? You don't save tax on it as it's not earned income, you're tying up money for goodness knows how many years and can't get hold of it in an emergency. The only thing is, you can take out a tax free lump sum when you do retire.

You might as well put it in an ISA

I'm maybe in a similar situation to you OP, in that I have two rental properties and have decided against additional contributions to my workplace pension as the maths just doesn't seem to add up to me if I will continue to have income from them, as is my intention.

I ran the numbers for LGPS defined benefit scheme for a lump sum additional pension contribution of 10K in the present year (I am roughly same age as you) ...£10k contributed now would get me £839 of additional annual pension assuming I take pension at the age of 68. That seems to be with no lump sum taken on retirement.

So firstly I would have to live 12 years to make that 10k back again...but the reality is that 10k invested now at say averaging 4% annual interest accumulating would be worth £24,000 +by the time I am 68, so 28 years worth of £839 annual pension payments 🤷‍♀️ I would be signing a contract for £839 agreement so I don't see that that would go up in line with inflation etc but maybe there is something there I'm not aware of.

Obviously there is the tax relief initially (I arrange my work so I stay just under higher rate tax so not as dramatic a saving there), but I will still have to pay tax on the pension when I receive it, it will be a slice on top of state pension and rental property income...whereas money saved in an ISA will not be taxed when I start drawing down from that in retirement.

Plus, if I don't put money in the pension I am keeping it readily available for the upkeep and improvement of rental properties.

So yeah, I thought I was doing the right thing as everyone goes on about putting more into pension if possible but in my situation and possibly your own, it just doesn't seem to add up.

Unless I'm missing something, which I could well be 😆

230 a week doesn't feel.like enough to me. But clearly you will have far.more than that so this is a bit of a silly post! Property income.and potential equity will.put you in a far better position than many! I'm.not sure why you left this crucial piece.of information out?

Yes, that’s what I was wondering really. Or there was a thread a while ago that suggested starting a pension for your children rather than saving more conventionally for them.

@Wisenotboring its not a silly post because I’m hypothesising … sorry if that wasn’t clear.

Many people on here have urged me and anyone who works part time to put more into their pensions; if you can’t then you’re told to go full time. The message seems to be that there’s nothing more important than your pension. I’m just querying that, really.

@MeanderingGently state pension is £11,500 - do you pay rent out of that or are you claiming housing benefit? Rent prices where I am would completely eat up state pension before any other bills are paid.

I agree to some extent that people shouldn't be paupers during their younger years just so they're good for retirement, and different investment vehicles work better for some people than others. But overall, i'd rather put that extra £50 in my pension each month that I can afford over buying or doing something just in case I live until I'm 100 or I need to stop work at 60 because im knackered/redundant.

You have a TPS defined benefit pension where the government will pay you an index linked pension no matter what it costs.

The vast majority of people don’t have such an arrangement because every non public sector employer closed DB schemes because they were too expensive. DC schemes only pay based on the amount saved in the pension.

So firstly I would have to live 12 years to make that 10k back again...but the reality is that 10k invested now at say averaging 4% annual interest accumulating would be worth £24,000 +by the time I am 68, so 28 years worth of £839 annual pension payments 🤷‍♀️ I would be signing a contract for £839 agreement so I don't see that that would go up in line with inflation etc but maybe there is something there I'm not aware of.

just inflation.

the extra pension would be index linked. The investment wouldn’t.

Anyone opting out of the TPS has a screw loose. My DD contributes 10% of her pay, which in turn saves her paying some 40% tax, the TPS adds another 20% - that’s £18k a year going into her pension that costs her £5500.
Even someone self employed paying into a pension gets an immediate 25% uplift due to the tax relief.

Thanks, that makes more sense 😊 Still not convinced it's right in my situation but certainly a more attractive prospect that way.

You can only put in an amount equal to earnings up to £60k anyway. So advice to put windfalls in pension is just wrong.

But when you do put in, within the earnings limit, you simply tell the provider that it came from earnings (because you have to have had earnings to cover it anyway) and you DO get the tax relief.

Pensions are a good way to avoid higher rate tax specifically. I always stay below the higher rate limit by using pension contributions. 25% tax free when I want it (I'm already over 55) and I can use it for income when I'm ready to do that, which will also be at the basic rate.
If you would otherwise be a higher rate tax payer, both of those tax advantages are significant.

Realistically, it's not a "pension vs ISA" question.

You can do both. I do. I have (currently) five pensions (one is active, one needs moving, one is DB so being left alone, the final two are the ones I want ready to draw down from), cash ISA, investment ISA, cash savings bind, normal savings account and premium bonds. Spread it out to get the picture that suits you now and suits your retirement aims.

I plan to work part time for a while more. Firstly use un-tax-sheltered savings, then live on my non taxable ISA money. Then start drawdown of the pension(/s) probably early 60's, then claim my DB pension at 65, state pension at 67. My DB is only c£5k pa, so it's not going to be a case of the other money being zero by age 67 anyway (I'm 57 this year and I'd struggle to spend all that in ten years!). But that's because I saved in my thirties and forties.

Mix it up!

I am 68, live alone, and after the single person reduction my council tax for 2024-25 was £214 a month (for 10 months). State pension was £221.20 a week. Think about that: about a quarter of my state pension goes on council tax alone.

I have a small work pension of £283 a month, and some savings in a SIPP that I’m hoping will cover replacing my 38 year old boiler, 17 year old car, and repairing the chimney. Because I have a small amount in savings, and my income is about £14k, there are no benefits available. All bills get paid on time, I’m mortgage and debt free, but there’s no escaping the fact that I’m poor.

Hi OP
Just to recap. And recognising that you have a DB pension. That does make a difference.
Most of the pushing pensions you hear about is because most people have a DC pension
It's also true that you can lose all your DB pension if you die without a partner or kids. But this isn't true for you? Also average life expectancy is in the 80s now
But also, being a DB, its a very good scheme, ie the (guaranteed) proportional return you get from paying towards that rather than property is v large.
Also there are other taxes payable on property if you sell them, pensions are v tax efficient
Now this could all change of course, and as people have already said, ideally you pay into a pension, and pay off mortgage, have isa savings etc. But again they are currently incentivised to be v tax efficient. Don't waste it!

@sleepwouldbenice but if I die when the children are adults and not in education I’d lose it anyway? There are death in service benefits but AFAIK these don’t apply if you’re already drawing the pension. So if I was to retire at 60 and die at 66, that would be it, gone.

It is interesting reading though; DH doesn’t have a DB pension (not public sector) so I have to assume his won’t die when he does, if he dies before me!

@EliflurtleAndTheInfiniteMadnessi think the OP means regarding the rental
property that the mortgage will be paid by retirement age so the rent will
be additional income at that stage. Regardless of the market value, there will always be people needing to rent homes.

OP I have a friend who is a financial advisor. He’s just retired in his early 50s and I remember years ago he bought rental properties so that they could be paid off in full and the rental income would be his retirement pot. He’s done just that and get income from about 5 properties.

We try to invest in both our private pensions and property and should have 3x rental properties by the time we retire to supplement our income as well as downsizing our current property to release some funds. We would like to retire at 60 if possible.

I’d ideally lie to retire then but I’ll still have a child at university then (assuming she goes) so 62/63 may make more financial sense.

And yes that is what I mean re the properties!

Pensions never seem worth it when you’re younger, I remember having similar discussions about putting money in an ISA rather than pension etc.

Now I’m a few years off retirement it definitely DOES seem worth paying into a pension. Thankfully the person I had the discussion with many years ago convinced me to pay into a pension and I can now retire at 58 with a decent lump sum and annual pension.

Pensions are free money. The government gives you 20%+ as tax relief and if your employer has a scheme they contribute to it too. It’s mad to turn down free money unless you absolutely have to. Plus, the state pension is not a guarantee and is coming under increasing pressure to change/reduce so best not totally bank on it if you can afford not to. Plus, older age sometimes comes with addition costs such as paying someone to clean or garden or redecorate when you cannot do it any longer. So £1000pm is not that much to live on.

The government do not contribute to you buying a house, they do to a pension. For every £0.80 you put in the government top it up to £1.00.

OK so your state pension you can't take until you are 68 but a private or workplace pension you often can. I started to get a pension because I was not able to work in my first occupation. Now the government take that amount of my UC at the moment but once I get my state pension they won't.

Because it was for ill health they doubled the years 'service' so I got more money.

I also have a SIPP and pay in to NEST.

You can access a private pension form your 50s - I think the dates are changing but you might want to slow down your work to even more part time.

Also you don't need to buy an annuity, you can just take chunks out and leave the rest invested.

If you want to leave money to your children starting a pension scheme for them is a good way to do it.

It is probably worth talking to pensionwise.

Having money in retirement is the main objective really - someone can do the minimum into their work pension and invest elsewhere, or put additional into their work pension. If you were to be on your own (breakup/other) the £1000 a month SP becomes harder to manage on once you consider all bills (and their potential to rise over next 20 years), food, and the fact you may like money to live on. However with 2 property rentals and a 3rd potential one that would likely provide your additional income as well as being a better inheritance option vs private pension scheme

In all likelihood you don't need to worry about putting extra into your pension because you've got a decent pension in any case.

If you're in the teachers' pension scheme you likely get 1/57th of your salary added to your pension each year. Now that doesn't sound like much but if you earn e.g. £28.5k per year, that is an extra £500 per year for the whole of your retirement for each year that you work. This is worth the equivalent of about £10k a year's worth of contributions to a defined contribution scheme.

The minimum statutory contribution is 3% for employers if an employee pays 5% so many people would only be saving £2.3k if they were earning the same, and their employer would only be paying about £850 of that.