The Student Room Group

Reue's Pension FAQ

With many people starting their graduate schemes this time of year you may be offered entry into the company pension scheme and confused by the minefield of options and terminology used. Please post any questions you may have about pensions in this thread.

What is a pension scheme?


A pension scheme is a form of saving for your retirement. You will normally save a set percentage of your salary each month which then gets invested and (hopefully) grows. When you come to retire, this is then used to provide you with income so you no longer need to work.

State Pension

Most people will be eligible to receive some form of state pension. The amount you recieve will depend on the number of years you've worked and your national insurance contributions. Most people will currently receive about £151.25 a week, £7,865 per year (adjusted for inflation) from the age of 68. Both the amount and state pension age are likely to change. If you think £7,865 isn't much to live on, it's not! You need to be saving into another pension scheme also.

Defined benefit vs Defined contribution

There are the 2 main types of company pension schemes. Defined benefit means that when you come to retire you will receive a pre-defined pension amount each month. Defined contribution means that all of your money is put into a pot like a savings account with which you can then choose how much and when to withdrawal. Defined benefit schemes are becoming very rare as they often pay out far more than you put in, you're unlikely to be offered one of these schemes unless you work in the public sector. All the advice below is based off of a Defined Contribution scheme.

Why should I join?

There are 2 main benefits for saving in a pension scheme.
1: Your employer will often contribute some money. This is usually matched up to about 5%, so if you put in 5% your employer will put in another 5% to give you a 10% total.
2. Your contributions are before tax. This means that anything you put into a pension scheme is not taxed, saving you 20% or more depending on your tax bracket. Some schemes also offer your pension as Salary Sacrifice which means it is taken before National Insurance as well, saving you another 10%.

How much should I put in?

A general rule of thumb is to put in half your age that you start at as a percentage. So if you're 22 when you join the scheme, you should be putting in at least 11%. If you wait until you're 30 to join, you should be putting in 20% etc. The longer you wait before joining, the more you'll need to put in each month to catch up!

How much will I get?

Many people vastly over-estimate how much their pension will pay out! If you are on £30k and start putting in 11% from age 22 you'll eventually have a pension worth about £7k a year from age 68. Add this to the state pension and your total income will be about £15k.. half of what you were previously earning.

AVCs

Additional Voluntary Contributions are extra payments you make into your pension above what the company matches. So if you want to put in 15% total; you put in 5%, your employer puts in another 5% and you'll then put in another 5% of AVCs. This money is treated the exact same way as the other 2 contributions.

Why are pensions in the news so much?

Pensions are in the news so frequently because changes can have a big impact on people's lives for many years to come. In the past, some schemes have lost money either through mismanagement or criminal activity. Fortunately this kind of thing has almost entirely been eliminated so don't believe any older work colleagues who may try to convince you that all pensions are a scam.

Unfortunately the UK has a big problem with it's ageing population. As the population grows, the state pension budget is growing ever larger and many are predicting it will be reduced long before any of us reach an age to receive it. It is therefore so important that young people understand and start saving into pension schemes so they do not have to rely on the state pension to survive.


*Note: I am not a professional financial advisor. All the information here is to the best of my knowledge and belief to be true. You should always do your own research into any financial product. Most companies will offer free pension advice and have a recommended investment option which tends to be pretty good for inexperienced investors.
(edited 8 years ago)

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Original post by Reue
It is therefore so important that young people understand and start saving into pension schemes so they do not have to rely on the state pension to survive.


and actually vote.
Reply 2
Original post by ChaoticButterfly
and actually vote.


I can't see any political party being able to reverse the increase in state pension age or relative decline in amount.
What age would you recommend starting your own pension?
Reply 4
Original post by Queen Cersei
What age would you recommend starting your own pension?


As in starting contributions? As soon as you're eligable to join the company scheme. Even if you only make the minimal contributions; it will still be matched by the employer (currently only 1% but will eventually raise to 4%). This is literally doubling your money before applying any tax relief.

No other investment or savings account comes anywhere near this return!
Maybe include a paragraph about when you're able to draw from your pension, the recent changes in terms of taking a cash sum vs. buying an annuity and explaining how it is drawn as income so will be liable to income tax when you take out of the pension?
Reply 6
Original post by Zerforax
Maybe include a paragraph about when you're able to draw from your pension, the recent changes in terms of taking a cash sum vs. buying an annuity and explaining how it is drawn as income so will be liable to income tax when you take out of the pension?


If I were to go into all that the FAQ would be pages long and far too complicated. I've instead focused on the setup & contribution stages as they are the most relevant to TSR's young audience. The information relating to actually taking the pension money out is almost certainly likely to change once we reach that age anyway, better instead to just focus on the accumulation.
i am steiring clear of company pension as they will lose alue over the 50 years before i will see it
so i am going for sovergins as they increse the gold value is estimated to rise 12 fold so 200 now is 2400 for the future and if i buy a 100 or 200 say 240k-480k
What sum of money would be required to provide £700/month income for life as a pension?
Reply 9
Original post by unruly1986
What sum of money would be required to provide £700/month income for life as a pension?


That's £8400 a year. State pension will give £7,865, so you only need another £535. This can be generated by a pension pot of about £15k.
Reply 10
Original post by jamesthehustler
i am steiring clear of company pension as they will lose alue over the 50 years before i will see it
so i am going for sovergins as they increse the gold value is estimated to rise 12 fold so 200 now is 2400 for the future and if i buy a 100 or 200 say 240k-480k


You do realise you could invest in precious metals from within a company pension scheme?

Also please let me know which stock index has lost value over any 50 year time period.
Original post by Reue
That's £8400 a year. State pension will give £7,865, so you only need another £535. This can be generated by a pension pot of about £15k.


Apologies, I mean £700/month for life, outside of the state pension. And from age 41.
(edited 8 years ago)
Reply 12
Original post by unruly1986
Apologies, I mean £700/month for life, on top of the state pension. And from age 41.


Ah okay. At least £210k then.
Original post by Reue
Ah okay. At least £210k then.


Thanks. Makes me determined to stay in my current job as that is what they are offering. 11 years left.
Reply 14
Original post by Reue
Unfortunately the UK has a big problem with it's ageing population. As the population grows, the state pension budget is growing ever larger and many are predicting it will be reduced long before any of us reach an age to receive it. It is therefore so important that young people understand and start saving into pension schemes so they do not have to rely on the state pension to survive.


^this!!!!!!

(One small extra thing, I'd recommend having more than 1 pension provider - just in case...)
Reply 15
Original post by Queen Cersei
What age would you recommend starting your own pension?


ASAP... compound interest is a thing of beauty. The earlier you start the better.
I've been very surprised at how many people at my work opted out of the scheme as they felt it was better to just take all their money home now. I've been topping up my contributions for 6 months.

Might it be an idea to include information on the tax relief you can receive?
Reply 17
Original post by SirMasterKey
I've been very surprised at how many people at my work opted out of the scheme as they felt it was better to just take all their money home now.


It's bonkers. They're missing out on the company contribution and the tax relief. For example if you're a basic rate tax payer and on salary sacrifice; you pay around £70 to get £200 into your pension. What other investment is going to make that much instantly?!
Invest in a pension and play the lottery game of will I get ripped off?, will the company go bust?......

Or invest it in some bricks and mortar


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Original post by Reue
You do realise you could invest in precious metals from within a company pension scheme?

Also please let me know which stock index has lost value over any 50 year time period.


i like the idea of holding my own sovereigns more if i need some urgent cash of to the pawn brokers to release some at any age

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