How screwed am I with Pension investment to date?

[theropod]

@resjudicata this one isn’t too bad. Be aware that the totals that these things generate are normally quite conservative, and it’s impossible to really know exactly if you’re looking well into the future.

For voluntary contributions, as an example of £10 a month. If you’re a lower rate tax payer, they’ll automatically add £2.50 to each payment (25%). So you’ll end up with £150 for the cost of £120 a year. Over ten years that’s £1500 for a cost of £10 a month. This is excluding market returns, just the contribution with tax relief.

Multiply that by ~7% for each year it’s invested (roughly the market return I like to use. It’s probably closer to 10%, but it’s nice to get a bonus!). For that first year, invested for ten years, works out to be £295 assuming 7% return, almost doubling the money. If the markets performed better (10%) then you’d be looking at £389 for your first years £120.

You’d easily hit £2k after ten years of £10 a month additional contribution. As you’re 40, you’ll be able to withdraw at 57 - so it’s more likely you’d have roughly £4k or more total for your £10 a month. It’s not a lot, but it would get you a very nice holiday when you come to retire.

If you could up it to £20 (£8k for retirement) or £50 (£20k!) it’ll build up even faster.

 

[resjudicata]

@theropod That's insane, I did always think by the time I'm 67 (thinking state etc that I'd be too old to do anything) is there a reason not to draw the pension from 57 other than to save even more etc? Or penalties etc? You're selling it more n more to me.

Edit: sorry I'm dense here but how are you doing the math for

"For voluntary contributions, as an example of £10 a month. If you’re a lower rate tax payer, they’ll automatically add £2.50 to each payment (25%). So you’ll end up with £150 for the cost of £120 a year. Over ten years that’s £1500 for a cost of £10 a month."

Where does the 25% come from? Are voluntary contributions different to my current 5% employer/6%salary sacrifice rates?

 

[theropod]

@resjudicata I’m no expert in these matters, but I believe what I’m telling you is correct. Please do check on the subs wiki and decent websites like Martin Lewis though!

I’ll start from the top. When you hit your “pension freedom age” which I believe would be 57, you have a choice. You can do nothing, and carry on saving as you were before. Or can choose to go into “drawdown” where you draw out the money, either in one go or a bit each month while leaving the rest invested (25% of this is tax free, the rest is taxable at your marginal rate). Or you can use some/all of the money to buy an annuity - basically you swap the money for a monthly income which lasts for the rest of your life. How much you’ll get depends on lots of factors at the point you buy the annuity. You can go into drawdown or buy an annuity at any point after your freedom age - you don’t HAVE to do anything but can continue to invest and see your money grow.

For your edit: your contributions are paid AFTER you’ve paid taxes. Assuming you’re a lower rate tax payer, you’ll get that tax paid back into your pension. Using the £10 example. If you put £10 into your pension, you’ll have to have earned £12.50 to get that £10, due to taxes. When you pay it into your pension you essentially get that extra £2.50 back. If you’re a higher rate tax payer, you still get that £2.50, but you’ll also get the additional tax back (but that’s a little more complex). This also applies to your portion of your workplace contribution, depending on how it’s calculated (it may come out of your pretax salary anyway, so it’s net effect the same)

Remember voluntary conts done have to be into your employers scheme. I personally pay my bits into a Moneybox pension, as the fees are less than my employers scheme.

Get some reading around done, and I’d recommend you make a post on this sub asking for help. This thread is getting a bit old and is unlikely to be seen by many more people so asking again is a great thing!

 

[kateee71]

@lifecouldbeeasier But note that the rule of thumb isn't particularly accurate. If you're 66, contributing 33% of your salary into a pension will not give you a comfortable retirement at 67.

 

[weare]

@lifecouldbeeasier This advice right here!

 

[meirin]

@weare Starting at 17% combined might be optimistic..figure out what you can afford and every time you get a pay rise up your contribution 1 or 2 %

 

[malachijah]

@lifecouldbeeasier On this would you mean 17% a year or per month? If based on half your age, I only ask as I’m 22 and do 4.5% per month (or 54% per year)