Pension pots.. how much is too little?

[drawboy]

We are all doing it wrong! What you need to do is leave school at 16, sign on. Do absolutely nothing..apart from a bit of porridge here and there, under no circumstances contribute anything to anyone then claim a full state pension until you die and get buried on the state too. Then see how much your pension pot or annuity drops, chances are not very much. Anyone who does anything differently is merely paying into the ones mentioned before who will be lapping it up for 60+ years or more.

 

[Doon frae Troon]

I always remember when I was 35 I had done 20 years of work.
A neighbours daughter had qualified as a teacher and done a BSc by her 25th birthday without doing a days work.

Drawboy..........you have not been paying attention.

 

[SwingsitlikeHogan]

...and however much my projected pension is - state pension plus projected personal pension - I must not forget that it is taxed. So to have £20k a year spending power I must have an annual pension of say £23k (assuming £13k of taxable pension income).

 

[richart]

Some great advice.. esp Ricarht...

Richart.. i agree with you that you gotta look at where the pension pot is invested at a regular basis. How would that work if one is in a company defined contribution schemes. Would somebody like that benefit from going to an IFA? Most pensions do allow you to choose funds, but I am assuming these are limited options.

If you are in a final salary scheme, you are very lucky ! These schemes are like gold dust, and whatever you do don't transfer out ! Most are now closed to new employees, and even existing employees are having their terms changed. Companies are struggling to afford them, and would much prefer to run a Money Purchase Scheme.

Money Purchase Schemes are where your contributions are made into your own pension plan, and you invest your contributions according to the risk you wish to take, and the funds you are offered Your final pension will depend on how much is contributed, how your funds perform, and annuity rates at the time you purchase an annuity. Bearing in mind the amount of money that is held within these type of pension plans, you need to get the right funds that suit your risk and the term you are investing for. Pensions are complicated and it may be worth getting a professional to look over any plan you are not sure about. Don't wait until you are just about to retire, as if there is a problem it will be too late to sort out !! I can only give very general advice, and nothing specific. I would also mention that I do not take on new clients, so I am not looking for business, just advising you all not to ignore your pension until you retire.

An excellent "out of bounds" topic, and thanks to Richart for his input. My wife and I intend to retire in 4 years at 56 and 57 repectively. My wife has a teachers pension but to supplement years missed she has a stakeholder which she has paid the maximum into now for many years. I find it interesting that Richart reccomends taking a 25% tax free lump sum, is that just because you pay no tax on that ammount or are there other factors?
I also find it quite interesting the suggestion of saving for a pension in an ISA, I presume this to be a cash ISA, taking that into account it isn't going to make much of a pension pot after 30/40 years considering at present you are looking at best 2% interest on a maximum anual ammount of £5760. I feel nowadays if you want to end up with a decent pot to retire on some risk (i.e investing in equity) is essential up until the latter years with annuity rates being so low.
Richart do you see any potential increase on the horizon in annuity rates?

Personally think that annuity rates are bottoming out, so short term could fall slightly but medium term may increase but not necessarily by much. There are a lot of reasons why rates have dropped so much, including actuaries simply miscalculating how long we will all live. Also a point that a lot of people don't realise is that there are now impaired life annuities. This means if you have had a stroke, heart attack, cancer etc, you will almost certainly qualify for a much higher annuity rate. Actuaries calculate that your life expectancy is lower. Interesting to note that a healthy male aged 65 is likely to live to nearly 90 on average, and for a women it is higher still.

Before impaired life annuities were introduced, everyone bought their annuity on the same terms. Those that died early basically were funding those that lived to a ripe old age. Now that all the 'unhealthy' people are taken out of the equation for rate calculations, we are left with healthy people looking to purchase an annuity, with the likelihood that they will live to 90 odd. Annuity rates then fell accordingly. Good news for those that are in poor health, but not for the healthy majority.

Re tax free cash. If you have a guaranteed annuity rate written into your plan and you want income then you may be best advised not to take the tax free cash. If you do not have a such a plan, and are just buying your annuity on the open market, you may be prudent to take the tax free cash. You could invest the sum for income, but still retain the capital, and even at a later date buy a purchase life annuity if you so wish. You are keeping your options open. Remember once you have purchased an annuity you can not change your mind. Everyone is different so these comments are very general, and you should seek advice. The good news is you do not have to make any decisions now, only at retirement.

 

[SocketRocket]

I think that will mean lots of very poor people in 2044.
A good incentive to get a job.

It's not as bad as it sounds. People can get something like pension Credits that top up their income if its below a certain weekly amount.

 

[MegaSteve]

As someone on the cusp of retirement I've found this thread has given one or two things to think about before I take the step...

One thing that is important in later life is your health and sadly not something you can 'save' for...

 

[Rooter]

I am 35 years old next year and not really given all this a second thought. I have 2 pensions from 2 employers past that have a fairly decent sum in each, but currently i am not paying into any pension pots. I don't know what to do, I have started to think that just filling up ISA's would be better. i really should go and see an IFA me thinks...

 

[SwingsitlikeHogan]

Whilst we are on this - just a refresher question for me from those who know - as I ask this question to of my own advisor then forget.

Where my final salary deferred benefits tell me that my total deferred pension is say £5K a year - is that in todays spending power? So assuming inflation etc will the actual amount be - say - £7.5K a year - that amount being equivalent to £5K today.

Similarly where my 'money purchase' plan says 'at the age of 65 your yearly pension could be 5K' is that the same as above.

If yes, then if I add these together at the moment I have plans amounting to spending power of £10k a year in today's money. That make sense? To which I'd add the state joint pension of about £12k (basic - must check if contracted out - I did at one point but may hacve contracted back in - I can't remember). So my total pension exc. wife's would be £22k per annum?

 

[duncan mackie]

Where my final salary deferred benefits tell me that my total deferred pension is say £5K a year - is that in todays spending power? So assuming inflation etc will the actual amount be - say - £7.5K a year - that amount being equivalent to £5K today.

Similarly where my 'money purchase' plan says 'at the age of 65 your yearly pension could be 5K' is that the same as above.

normally/generically etc

the FS pension will be including an assumption regarding inflation, and increases in deferment, to provide such a figure.

the MP one will be projecting a growth assumption and guessing (on similar assumptions) an annuity rate available at the time to come up with the possible pension available at that future date.

so no, you can't look at them in the same way as you seem to have done above. you can consider the FS one in todays terms plus an element of inflation proofing but not the MP one. All and any efforts to put MP projections into todays terms (since first introduction with money purchase contracting out in the late 1980's) have, IMO, simply managed to confuse the hell out of anyone bar the actuaries.

if you want some good news, some people don't realise that you don't (currently) pay NI on approved pensions - the bad news is that when on a pension, if you get part time work you can have one hell of a marginal tax rate on relatively low earnings!

 

[G.U.R]

A really good thread with some good points made and raised. I have been paying into various pensions since I was 18. Our works final salary pension was frozen some years ago because of the points raise above I transferred my previous pension pot into it before it was frozen so I get a statement saying the works one will pay me X and my transferred one will pay me Y. I was also miss sold a Plan so have £2K or so just sat with Abbey Life which i'm not sure what to do with. I am now paying into a Standard Life Pension where the company match my contributions into it...have gone for the average risk funds as I know very little about these things and am working on the basis that the retirement age will be about 70 when I get there so have 24 odd years to go yet. Don't know what this will bring me on retirement but I can't say I haven't tried to put something behind me.

 

[SocketRocket]

normally/generically etc

the FS pension will be including an assumption regarding inflation, and increases in deferment, to provide such a figure.

the MP one will be projecting a growth assumption and guessing (on similar assumptions) an annuity rate available at the time to come up with the possible pension available at that future date.

so no, you can't look at them in the same way as you seem to have done above. you can consider the FS one in todays terms plus an element of inflation proofing but not the MP one. All and any efforts to put MP projections into todays terms (since first introduction with money purchase contracting out in the late 1980's) have, IMO, simply managed to confuse the hell out of anyone bar the actuaries.

if you want some good news, some people don't realise that you don't (currently) pay NI on approved pensions - the bad news is that when on a pension, if you get part time work you can have one hell of a marginal tax rate on relatively low earnings!

When on a state retirement pension you no longer have to pay NI on your earnings. You do pay tax though and if this takes you into the higher rate including your pension then your pension gets cut proportional to your higher earnings.

 

[SwingsitlikeHogan]

the MP one will be projecting a growth assumption and guessing (on similar assumptions) an annuity rate available at the time to come up with the possible pension available at that future date.

Thanks for that Duncan. I understand that there is nothing guaranteed about the MP - whilst the FS one is much more predictable (assuming it continues as it is going today).

But with the MP scheme there is still surely something indicative about the amount they give. So what I think they are not saying is that (given their fund growth assumptions etc) you might get something of the order of £5K a year when you retire at 65. Clearly were that to be the case then in today's money the amount would be 'worth' a good bit less in buying power due to inflation. IN fact if we had very high inflation that £5K might actually be worth diddly squat when I retire.

I'm thinking by way of helping in my understanding of this of the couple of £5 premium bonds my folks bought me back in the 1960s. Worth £5 in the '60s - worth £5 today - but buying power VERY different back then compared with today.

 

[duncan mackie]

But with the MP scheme there is still surely something indicative about the amount they give. So what I think they are not saying is that (given their fund growth assumptions etc) you might get something of the order of £5K a year when you retire at 65.

any illustration will state the basis for the projection; they certainly won't 'project' the possible pension in today's terms alone, but my last understanding was that they had generally moved to inflation adjusted acrual rates.

don't know what basis you have your current figures but the industry was looking at them (again) and I think we are in yet another interim phase! for point of sale material the intermediate accumulation rate was 7% which was nett 4.5% after a 2.5% inflation, and the FRC, consulting with the FSA and industry providers, was heading for 5% / nett 2.5% (upper and lower rates can also be used) last time I discussed it.

all of which I why I suggested you should assume you could look at the MP figures in the same way as the FS ones - but I can't be definitive on exactly what you are looking at, and therefore how you can make them comparable!

 

[duncan mackie]

When on a state retirement pension you no longer have to pay NI on your earnings.

You do pay tax though and if this takes you into the higher rate including your pension then your pension gets cut proportional to your higher earnings.

you don't pay NI on approved scheme pensions even when you aren't on a state retirement pension, but once you reach state retiremement age ie do get your state pension, you don't pay NI on any earnings, as you say.

I don't understand your comment re "...then your pension gets cut proportional to your higher earnings." Te Pension Service (who pay the state pensions) advise HMRC (who collect tax) of your state pension and they will collect any tax (basic or higher rate) through your PAYE tax code - so effectively you will see the total tax deducted from your other earnings (whether pension or earned income).

 

[SocketRocket]

you don't pay NI on approved scheme pensions even when you aren't on a state retirement pension, but once you reach state retiremement age ie do get your state pension, you don't pay NI on any earnings, as you say.

I don't understand your comment re "...then your pension gets cut proportional to your higher earnings." Te Pension Service (who pay the state pensions) advise HMRC (who collect tax) of your state pension and they will collect any tax (basic or higher rate) through your PAYE tax code - so effectively you will see the total tax deducted from your other earnings (whether pension or earned income).

I admit my previous comment was a bit vague there. Your Personal Allowance reduces by £1 for every £2 of income above £100,000. If your income is very high, your Personal Allowance can reduce to zero.

 

[Liverbirdie]

Is it only me who is waiting for Richart's next post to be " My father is the interior minister in (insert failed state) and he is trying to extract £30 million pounds and just needs your............

Only joking - well done for taking time out to give general advice.

My conundrum is whether to pay an extra £100 into my pension from next year, or overpay £100 a month on the mortgage. I've seen some of the projected figures for overpayments, and I would love to pay it off by 55 (I'm 43 now) and I've been paying the mortgage for 6 years.

Then I could pay the extra £ 6-900 mortgage payments into pensions for the remaining 10 years before hopefully retiring at 65, if not earlier.

 

[Doon frae Troon]

Is it only me who is waiting for Richart's next post to be " My father is the interior minister in (insert failed state) and he is trying to extract £30 million pounds and just needs your............

Only joking - well done for taking time out to give general advice.

My conundrum is whether to pay an extra £100 into my pension from next year, or overpay £100 a month on the mortgage. I've seen some of the projected figures for overpayments, and I would love to pay it off by 55 (I'm 43 now) and I've been paying the mortgage for 6 years.

Then I could pay the extra £ 6-900 mortgage payments into pensions for the remaining 10 years before hopefully retiring at 65, if not earlier.

I would say pension every time......especially with 0% interest rates...[but I aint too smart]
I think I have been lucky rather than clever.

 

[G1BB0]

I never thought about pensions or retirement for years. Since hitting 40 its definitely something I am more aware of. I have a small army pension (7 years service), will have 'hopefully' 30yrs BT pension by the time I retire + I am in a sharesave which I plan to withdraw each year (will have 3x 3yr plans & 3x 5 year plans running at all times) & put into isa's etc or possibly hold in shares aslong as they are going upwards lol.

Hopefully once the kids are all at work in 4 or 5 years time I can increase my monthly pension payments even if its only by a couple of % will at least put a few extra sheckles in the bank each month. No doubt I will retire, get the lump sums and drink myself to death within 6 months

 

[Doon frae Troon]

Hopefully once the kids are all at work in 4 or 5 years time I can increase my monthly pension payments even if its only by a couple of % will at least put a few extra sheckles in the bank each month. No doubt I will retire, get the lump sums and drink myself to death within 6 months

Don't forget the Uni fees, cars, weddings, and help with the mortgage deposits.

 

[vkurup]

This post seems to have taken a life of its own.... Happy to start it considering the heat I got for starting the debate about the impact of inconsistent length of Orange tees and how to tie a shoe lace (both topics continue to be as important as pensions)

PS: At the next forum meet, i am expecting Richart to put up a stall and provide independent advice. Please book now..