I turned 40 last year and so pensions have certainly been on my mind recently. One of the things you are never sure about is what good a pension is for you. You know you have* a government pension, but what about a separate pension to that? Should you get a pension? Should you make more payments into your pension? Is a pension right for you? Hopefully I can help answer some of these questions. There is a massive caveat in this post – everything I’m writing is personal experience and from discussions with friends. It really is worth having a chat with a Independent Financial Advisor where you can talk about your personal situation and they can work out what fits your needs.
Dictionary.com defines a pension as;-
- a fixed amount, other than wages, paid at regular intervals to a person or to the person’s surviving dependents in consideration of past services, age, merit, poverty, injury or loss sustained, etc.: a retirement pension.
- an allowance, annuity, or subsidy.
Most people are aware of the first definition however some people aren’t aware of the second. There is a small difference but it is this that can help you understand how you can have a Pension without having a ‘pension’.
If you are in the UK and have paid up all your National Insurance then you will qualify for a State Pension. It used to be you could claim this from when you turned 65 however this has now changed and is currently 68. Lets say you work from the time you turn 16 until your 68th Birthday, you will have worked for 52 years and your state pension will grant you a mind-mindbogglingly small £168 a week or just under £9k a year. £728 a month might cover your rent and perhaps some household bills but don’t expect to be drinking champagne or eating caviar as you while away the twilight years.
The UK government has introduced auto-enrollment work pensions. This has been due to realising that the government pension, that most people have qualified for, no longer covers the actual cost of retirement. By encouraging workplace pensions and the auto-enrollment of employees into them, the concept of a private pension being a ‘requirement’ and not ‘optional’ is firmly engrained in people’s minds.
Do you need a pension?
Short answer ‘Yes’. Long answer ‘Yeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeees’.
People are living longer and we all want to be able to enjoy a period of ‘not working’ as we get older. The important question is not “do you need a pension?” but “Do you need a ‘Pension’?”
Do you need a ‘Pension’?
By this I’m actually asking, “do you need to enroll in a financial saving instrument called a ‘pension’ where from a certain age you can release the funds held in this instrument with 25% tax free?” The answer to this question is ‘no’. This may seem at odds to the last question’s answer but really the important thing here is whether you need to have an actual ‘pension’ or could perhaps something else work better for you?
No ‘Pension’ – So What Are My Options?
Looking at a pension as being something to support you through your retirement, you realise that it is just the government and the financial services industry that want to sell you a ‘Pension’ so that they can either absolve themselves of supporting you in old age (Government) or charge some healthy fees to justify their existence3 (Financial Services Industry). There is no reason you can’t sort yourself out a pension while ignoring those who are trying to sort you out a ‘Pension’.
In chatting to my friends were are a mixed bag of people when it comes to having ‘pensions’. I’ve got older friends who contracted out of SERPS and now even have a reduced State pension. I’ve got friends my age who didn’t take a work pension when they started work at 21 as they wanted all their cash for enjoying life. Other friends of mine wanted all their cash to help save for the deposit for a house. I’ve even got friends who had a work pension but then cashed it in after 18 months as they wanted to go on a great holiday. Thankfully I also have friends who, like me, have paid into work pensions all their working life.
A Couple of Scenarios
In my immediate friendship group I have different people with different ‘pension’ situations. However, that is not it. Let me tell you about other friends of mine.
I’ve got a chum who is a builder. All his life he has only known being a builder. During the 80’s he was advised, by a guy in a suit to get himself one of those private pensions. My friend decided not to and put every spare penny he had into buying a house. He then did that house up and sold it on for a profit. After doing this a few more times he had enough cash to buy a plot of land to build 2 houses on. One was sold on and the other was kept to rent out. Before you knew it, my friend had built a couple of dozen houses and each time, a house (or two ) was kept back for rental. He still does the odd bit of building work but he has been able to create an income stream from rental houses and so he does the building jobs he wants to, not the ones he needs to. When he finally decides to hang up his trowel, the rental properties will give him an income he is happy with that he has literally built off his own back with no-one else’s support. And no guy in a shiny suit making ££££ from his hard-earned cash.
Another mate has lived for his ISAs. For over 20 years he has paid his money into the tax-free instruments know as ISAs (and PEPs before that). Certainly not super sexy but a decent place to put your money and have it generate tax-free interest. With his stocks and share ISAs he could have paid in (only £300) a month for 20 years and after those 20 years his £75k investment would be worth just under £200k. That’s if he hadn’t increase his monthly payment into his ISAs. You can currently pay £20k a year into an ISA and with an ok return from the stocks and shares you could see this investment of £420k be worth nearly £1.1million. Sure, not everyone has £20k a year they can save, but if you can, and you ‘only’ need to do it for 20 years, you could have over one million pounds in the bank. Tax free. If you started at 40 years old putting £20k in a tax free ISA, and you chose to work for another 21 years, you could stop work at 63 and your ISAs would be paying you £107k a year in interest – this works out at nearly 9k a month or the equivalent of an annual salary of £180k! It also gets interesting that you only have to pay £20k for 9 years to get about £20k a year in interest.
Finally, an old friend of mine doesn’t have a work pension. They have a reduced state pension due to contracting out of SERPS. They don’t have any savings or ISAs or anything like that. I spoke to them about their situation and they were quite frank and honest about it. “I do have a pension” they explained, “My mum lives in a house worth £1million and I’m an only child.”. Taking on face value that they’ve had a conversation with their mum and are the sole beneficiaries of the will, and overlooking the macabre-ness of this option, my friend DOES have a pension and it involves no payment by them and at some point they’ll get £1million (minus any IHT/Death Duty) and they are relying on this to fund their retirement.
What About Me?
I’ve been working since 16 so have paid towards National Insurance since then. I got my first full time job at 21 and paid into a pension with that company. This was a Defined Contribution pension where I paid in 3% and the company contributed 6%. My next job had a company contribution of 10% regardless of what you contributed (I contributed 4%). I was essentially giving myself a 6% and 10% pay rise in those role by receiving those company contributions. My next job was a bit interesting as it still offered a Defined Benefit pension. Instead of me paying x and them paying y into a pot which was invested, I paid in x and for every year I worked there I received 1/60 of my salary as pension when I retired.
This is the golden-goose of pensions as you are guaranteed a minimum payout level (the ‘Defined Benefit’) and so you know how much you will get from that pension when you retire. I had hoped to have quite a career at this business however a major restructure happened and the whole of the global arm of my business was axed! Time for another job and back on to a Defined Contribution pension again.
Although you may have seen my post on how to get a free share, I also own shares that I’ve purchased . Recently I’ve also started buying shares through my company as they have an advantageous share purchasing scheme. These share pay dividends (like a non-guaranteed ‘interest’ payment) and so should provide me regular amounts throughout the year.
I’ve also blogged about these. More like a savings account that I want to build up to the max holdings. Once I hold £50k (which will take a while!) I should start seeing a regular return on these. They are also tax free and there are no penalties/fees for withdrawal, however they are not really instant access.
More of a future desire than current situation. I live in a flat at the moment and I really want to buy a house. As you get older you maybe don’t want the costs or even the inconvenience of owning a large house. Based on this, while I’m still working, I want to get as high up the property ladder as I can. When the time to retire comes, downsizing will certainly be a way to free up funds to help pay for my retirement.
A crazy one when we are talking about retiring, but hear me out. If I can find a job I enjoy, and I’m able to do it, and it doesn’t interfere with my retirement, then why shouldn’t I do it. Perhaps I’ll become a jeweler. Maybe a writer. Or a Podcaster. I could become a YouTube Star. Or maybe I’ll just keep blogging and see if I can get an income from this. There are lots of options when it comes to supporting yourself in retirement and this is always there.
Passive Income Streams
I’ve got a huge post on Passive Income Streams so I’m not going to repeat all of them here. Just to say that the Rent-A-Room Scheme and Renting out your Parking can get you a considerable income for no ‘effort’ on your part. The money you could get from the RARS would be more than the current State Pension payment and is received both tax-free and outside of any income tax calculations.
To paraphrase the proverb,
“The best time to start a pension is when you start earning money. The second best time to start a pension is today.”
Now whether it is a pension or a ‘pension’ it is worth making sure you are planning for your future, financially. Not everything needs to be expensive but you can make sure your retirement is more comfortable by starting something today.
Think about how the government treats the old and the frail – do you really think they will maintain a state pension to make old people comfortable? I don’t and that’s part of the reason why I continue to build up my pensions so that I have something available to me when I give up work – that might be tomorrow or could be in 40 years time.
The Reverend’s Final Thought
This was a long old post so congratulations for getting here. Pensions and ‘Pensions’ can be a boring thing but there is no need to be scared about them. A bit of planning and thought now can really make a difference later on. ‘Maybe you’ll have a trust fund, maybe a rich spouse – you never know if either one will run out’ so taking control of YOUR finances, including YOUR financial future.
And I still buy the occasional lottery ticket…just in case!