Savings vs pension

[Buddy Bradley]

I'm 47, and have a workplace pension into which I currently pay the minimum allowance, and my employer does the same.

If I can afford to not need to touch the money for another 8 years, it seems to me that - compared to an ISA or other savings account - I would get far and away the most financial benefit from sticking as much of my salary as I can into my works pension plan. Since I can access it at 55, it's effectively just an 8-year-long inaccessible ISA with extra tax relief and reduced NI payments (at least as far as I am understanding things).

Is there anything wrong with this as a plan (aside from the usual risks of pension providers going sideways)?

 

[A380]

I'm 47, and have a workplace pension into which I currently pay the minimum allowance, and my employer does the same.

If I can afford to not need to touch the money for another 8 years, it seems to me that - compared to an ISA or other savings account - I would get far and away the most financial benefit from sticking as much of my salary as I can into my works pension plan. Since I can access it at 55, it's effectively just an 8-year-long inaccessible ISA with extra tax relief and reduced NI payments (at least as far as I am understanding things).

Is there anything wrong with this as a plan (aside from the usual risks of pension providers going sideways)?

If you pay income tax and NI put aa much as you can in your pension now.

 

[pseudonarcissus]

You will be able to pull 25% out tax free at age 55, anything on top of that is taxed as income.
The tax-defered nature of the pension, with the employer contributions, means it should always beat a CGT exempt, tax-paid, ISA.
You can have both, an ISA for stuff you might need before retirement, and the pension to live on in your dotage.

 

[tommers]

The thing that always puts me off pensions is you pay in say 150k over your working life and that gets you 500 quid a month. And then you die 5 yrs later.

 

[Hollis]

The thing that always puts me off pensions is you pay in say 150k over your working life and that gets you 500 quid a month. And then you die 5 yrs later.

That's only how it works in defined benefit pension schemes - which are mainly public sector now. Even then some schemes will have payout to spouse or some payout if you die within so many years of retirement. And the public sector schemes usually have other benefits - like being guaranteed and inflation proof!

In defined contribution if you do drawdown, then you keep the capital, and when you die it is passed onto whoever you've nominated. It only works as you say if you've bought an annuity, and even then there may be clauses so the annuity gets passed to someone else.

 

[Riklet]

The government tops up contributions, I pay a bit into a non workplace pension monthly and it's topped up like 25% I believe? def worth looking into if you can afford to each month.

Stocks and shares ISA does make sense if you want tax free accessible savings with a good return. Fixed rate if you need the security. Both pensions and stocks and shares ISAs can go down as well as up... this is the major difference compared to paying into a regular savings account or ISA. It def depends on your financial situation and whether you have any savings at all already.

FWIW over the past 2-3 years my ethical (I know...) Royal London pension has gone up about 40% due to the stock market craziness. Btw, in your situation I would probably pay a financial advisor for an hour to talk it all through and get proper advice and options on paper.

 

[The39thStep]

When I decided to take early retirement in two years time I maxed out on an AVC (think it was tax free ) paying in a s much as I could in those two years .My logic was I'd have less income when I retired so rather go from full salary to pension I might as well go to a reduced income over the two years and have a nice lump sum and pension.

 

[Buddy Bradley]

The government tops up contributions, I pay a bit into a non workplace pension monthly and it's topped up like 25% I believe? def worth looking into if you can afford to each month.

I doubt that would apply to me, I'm ridiculously overpaid. I do need to see what my employer contributions might match though.

 

[girasol]

I paid 10k into my pension last week, thinking I was being smart, as it turns into £12.5k instantly, but then war broke out, and now pensions are fucked for the foreseeable future and I am planning on getting it in 5 years... Moral of the story, maybe I should have kept that money as savings instead. But then again inflation is high, interest rates are still not keeping up. It just feels like it's a lose lose situation.

 

[Puddy_Tat]

The thing that always puts me off pensions is you pay in say 150k over your working life and that gets you 500 quid a month. And then you die 5 yrs later.

but what if you don't bother and then live to be 90?

ultimately a pension scheme is you and the provider gambling on when you're going to snuff it.

when i got a regular public sector job in 1991, i didn't think it was worth joining the pension scheme (as a gay man in my early 20s, i didn't really expect to get anywhere near retirement age) - i only ended up joining a few years later to get the death benefit when i wanted to buy a place to live - getting life insurance wasn't all that easy then...

in hindsight, i'm starting to wish i'd joined earlier, or done something to buy the missing years (don't think you can do that now)

 

[ATOMIC SUPLEX]

Oh my god I should really get in on this. I don't know what to do at all.
I'm 48/49 and for the first time am in a position to start putting away money.
Where do I start with a pension? I have no idea whatsoever. Do I need to talk to someone?

 

[tommers]

but what if you don't bother and then live to be 90?

ultimately a pension scheme is you and the provider gambling on when you're going to snuff it.

when i got a regular public sector job in 1991, i didn't think it was worth joining the pension scheme (as a gay man in my early 20s, i didn't really expect to get anywhere near retirement age) - i only ended up joining a few years later to get the death benefit when i wanted to buy a place to live - getting life insurance wasn't all that easy then...

in hindsight, i'm starting to wish i'd joined earlier, or done something to buy the missing years (don't think you can do that now)

Yeah i get it but people are saying to use it as savings account. Ok, you get all the tax stuff (well at least until you take it out) but it's savings that you can access 25% of. The rest buys a monthly amount, that you might never see the majority of. I dunno, I'm probably missing something but, for me, I'd rather keep as much as i can of what i have and decide myself what i do with it.

I went through all my pensions a while ago, i might check how much that would get me if i retired today. It's not a huge amount in there for 20 odd years.


If I took the amount in the pot and rationed it out for 20 years then it would be about the same. And, let's face it, I'm probably not making it to 85.

 

[tommers]

Plus, im also paying for a national pension that suddenly isn't going to be enough or something.

 

[Puddy_Tat]

The rest buys a monthly amount, that you might never see the majority of.

yes, according to the forecast things i get now and then, i think i'd need to live about 40 years after retirement to turn a profit on the deal if i go for the monthly pension option.

meh

Where do I start with a pension? I have no idea whatsoever. Do I need to talk to someone?

without wishing to ask too many questions, are you in employment? if so, think it's broadly compulsory for employers to have a pension scheme and make some contribution towards it, and generally speaking it's worth joining employer's pension scheme (even though it's not worth as much as when employers mostly had decent pension schemes)

if you're self employed, it gets more complicated (and may also be worth establishing what sort of national insurance you're paying and what your state pension forecast is)

this appears to be a government funded source of pensions advice (looks as though actual appointments are only available if you're over 50 but there is a phone / webchat service open to all

 

[smmudge]

Yeah i get it but people are saying to use it as savings account. Ok, you get all the tax stuff (well at least until you take it out) but it's savings that you can access 25% of. The rest buys a monthly amount, that you might never see the majority of. I dunno, I'm probably missing something but, for me, I'd rather keep as much as i can of what i have and decide myself what i do with it.

I went through all my pensions a while ago, i might check how much that would get me if i retired today. It's not a huge amount in there for 20 odd years.

You're describing a defined benefit pension (or buying an annuity with a defined contribution). People are saying it's good to use a defined contribution pension as a savings account - which it basically is, and then you do get to keep all of it minus tax and decide what to do with it.

 

[Sue]

You're describing a defined benefit pension (or buying an annuity with a defined contribution). People are saying it's good to use a defined contribution pension as a savings account - which it basically is, and then you do get to keep all of it minus tax and decide what to do with it.

Yes, with a defined contribution pension, you've essentially got a pot of money that includes free money from both your company and the tax man. You can do whatever you like with it at retirement. And if you die, it passes to your partner or whoever you want to get it.

 

[tommers]

.

 

[tommers]

Yes, with a defined contribution pension, you've essentially got a pot of money that includes free money from both your company and the tax man. You can do whatever you like with it at retirement. And if you die, it passes to your partner or whoever you want to get it.

Ah, that's what I want. How do I find out which one my pension is?

 

[Sue]

Ah, that's what I want. How do I find out which one my pension is?

Unless you're public sector, it's most likely defined contribution. I'd ask your HR/payroll people for further information.

 

[Puddy_Tat]

but with a defined benefit scheme, there's usually an option to take some of it as a lump sum (and have a reduced pension) at retirement

and there's usually a widow's pension (although you have to be legally married or civil partnered for this) and / or a lump sum payable on death.

generally speaking, defined benefit (final or career average salary based) schemes are a lot better for most employees - that's why most employers have closed them...

 

[tommers]

Unless you're public sector, it's most likely defined contribution. I'd ask your HR/payroll people for further information.

They're useless, our contributions have been wrong for the last two years . I'll check the website. Thanks!

 

[smmudge]

Ah, that's what I want. How do I find out which one my pension is?

Do you know who it's with? As Sue says chances are it is defined contribution. Also called 'money purchase'. To make things more confusing, they have to with your annual statement give you an illustration, ie 'how much income would your pension give you per year' if you bought an annuity with it, which like most projections are not worth the paper it's written on, and doesn't mean your pension automatically gives you a regular income. But might be why you think your pension does that though it might not necessarily.

 

[urbanspaceman]

Oh my god I should really get in on this. I don't know what to do at all.
I'm 48/49 and for the first time am in a position to start putting away money.
Where do I start with a pension? I have no idea whatsoever. Do I need to talk to someone?

Yes, you do need to talk to someone. I'm a bit of personal finance nerd, and have been putting way (initially very small) amounts into mainly pensions and Isa for a long time. As a result, I was able to crytallise an eye-popping tax free sum (thanks Elon !) from my SIPP last November. And so I will not have to worry about bills ever again, and in fact can live quite a comfortable life, free of financial worries.

I am deliberately being candid here, rather than hide behind the customary coyness about financial matters, for a reason. And the reason is: this stuff matters. If you can do a bit of planning and organise yourself, the payoff is well worth it. So many people don't deal properly with their financial affairs; but although sooner is better, it's never too late to start sorting things out.

 

[MickiQ]

Another vote for bung as much in it as you can, it's tax free and if you are in the 40% band (even if only just) then the tax saving on it is at 40%. You can get a quarter of it back as straight dosh when you retire. It is a gamble based on how long you live but it should pay your spouse a (smaller) pension should they survive you.

 

[tommers]

Do you know who it's with? As Sue says chances are it is defined contribution. Also called 'money purchase'. To make things more confusing, they have to with your annual statement give you an illustration, ie 'how much income would your pension give you per year' if you bought an annuity with it, which like most projections are not worth the paper it's written on, and doesn't mean your pension automatically gives you a regular income. But might be why you think your pension does that though it might not necessarily.

Yeah, I didn't even know you could get all of it. Any time I’ve ever heard anybody talking about a pension it's buying an annuity and whenever I look at my statement that's what it is talking about.

 

[Sue]

Do you know who it's with? As Sue says chances are it is defined contribution. Also called 'money purchase'. To make things more confusing, they have to with your annual statement give you an illustration, ie 'how much income would your pension give you per year' if you bought an annuity with it, which like most projections are not worth the paper it's written on, and doesn't mean your pension automatically gives you a regular income. But might be why you think your pension does that though it might not necessarily.

Yep. It's also worth keeping in mind that if it is a defined benefit, there are a load of advantages to that as well. Typically employers put in a lot more than they do for DC ones, it means they're taking all the risk and they're inflation linked.

And it may be possible to convert a DB into a DC one though that does require proper advice and must clearly be in your best interests to do so.

 

[ATOMIC SUPLEX]

Is there a recommended starting point for a novice? Free pension advisor? I have to admit to not knowing a single thing about how it works and what I would need to put away.
I was fairly successful at putting money into my interest only mortgage as fast as I could and paying that all off. . . .but this appears to be less straightforward. . . .

 

[Puddy_Tat]

And it may be possible to convert a DB into a DC one though that does require proper advice and must clearly be in your best interests to do so.

maybe - some employers offer the choice, but i'm struggling to think of any circumstances where a DC is going to be better. definitely get independent advice (not someone who wants to make money by getting you in to their scheme)

 

[Supine]

After a bit of research i went for a sipp pension with hargreaves lansdown. Not convinced my research was spot on but happy with it so far. Just need to put more money in!

Its value dropped lots this week probably due to war.

 

[Sue]

maybe - some employers offer the choice, but i'm struggling to think of any circumstances where a DC is going to be better. definitely get independent advice (not someone who wants to make money by getting you in to their scheme)

Some companies were offering very inflated transfer values but not sure if that's still a thing. Some people may also want more flexibility than is offered with DB pensions -- like taking out more when they're younger and reducing that as they get older which you can't really do with a DB one.

I believe you need to get it signed off by an IFA whatever and the rules are pretty strict.