Pension Choice

[Kompany Car]

That doesn't make sense. Say typically you pay in 4% and the employer matches it at 4%. You also get tax relief so your 4% becomes 5%. So you actually paid in only 4% of your own money for a return of 9%. You have more than doubled your money. In fact 9/4 = 2.25.....A whopping 225% return. It's very short sighted to miss out on this free money.

And you might live to be 90.

If you were born in the early 80s you have about a 20% chance of living to 100.

 

[Bill Walker]

A pension company has made an offer to convert one of my annual pension into a one-off lump sum.
This is only a small pension of £900 paid annually (fixed for life) and the offer is for 10x (tax at 20%).
I am 73 and reasonably fit for my age except for Type 2 Diabetes which is under control.
This pension is not regarded as part of my budget as such and is used just to treat myself.
I am single, no dependents, own my home and do not owe a single penny.
There is no negotiation, a one-time take it or leave it deal.
Take it or leave it?

I had a similar offer two years ago with a small pension.
I took it. Legal and general UK.
I got 17,000 quid. Paid 400 quid UK tax then bought a new Mitsubishi Outlander with it.
Something tangible.
Haven't hardly used the car since covid. It's done 12,000 kilometers in 2.5 years. We now use public transport mostly.
It's still like new and is now worth more than the new price. Due to them having a long waiting time. I'm sure that will change.
I'm happy with my choice, it felt like a sort of free retirement car.

 

[trumpton]

That doesn't make sense. Say typically you pay in 4% and the employer matches it at 4%. You also get tax relief so your 4% becomes 5%. So you actually paid in only 4% of your own money for a return of 9%. You have more than doubled your money. In fact 9/4 = 2.25.....A whopping 225% return. It's very short sighted to miss out on this free money.

And you might live to be 90.

Each to their own.

It's only free money if you live long enough to get back anything more than what you put in.

I'd rather bung the money against the mortgage and clear it down quicker.

 

[denislawsbackheel]

…and live in penury from the age of 66….

 

[Tommy_Catons_Perm]

Each to their own.

It's only free money if you live long enough to get back anything more than what you put in.

I'd rather bung the money against the mortgage and clear it down quicker.

Currently it's free money if you live to the age of 55 and you draw it down instead of buying an annuity. It sounds like you are confusing the value of the annuity with the value of the pension pot...hence why you mentioned the age of 90.

 

[trumpton]

Currently it's free money if you live to the age of 55 and you draw it down instead of buying an annuity. It sounds like you are confusing the value of the annuity with the value of the pension pot...hence why you mentioned the age of 90.

Probably am confused!

It implies I can take a tax free lump sum at retirement of a maximum of 25% of the value of the pot. The remainder is used to buy an annual pension. That lump sum is less than what I have contributed.

Not contributed this financial year and value dropped by 5%. Personal choice to get rid of the debt first and owe nobody anything when I hit 50 in a few years time.

 

[RobMCFC]

It implies I can take a tax free lump sum at retirement of a maximum of 25% of the value of the pot. The remainder is used to buy an annual pension. That lump sum is less than what I have contributed.

You are correct about the 25% tax-free.

However, you can then leave the other 75% invested and "draw-down" what you need each year.
So, for example, you could take out £10K a year and it will all be tax-free (providing you don't have any other income or state pension).

The theory is that you can take what you need to top up your state pension and whilst leaving it invested, it will last a lot longer than handing over all your money and buying an annual pension.

FWIW, I agree with you paying your debts first.

My view is that people have had it drummed into them to save, save, save for your pension without considering that you will need way less money in retirement than you do now (whilst paying a mortgage, paying for family holidays etc.) This is why I prefer the balanced approach of putting a small amount in your pension whilst making sure you do the big things now (whilst you are fit, able and have all your marbles!)

 

[Tommy_Catons_Perm]

Agreed about the balanced approach.

Don't put all your eggs in one basket.

Try to pay off debts but keep at least the bare minimum pension payment going that attracts the free employer payment.

 

[Tommy_Catons_Perm]

Probably am confused!

It implies I can take a tax free lump sum at retirement of a maximum of 25% of the value of the pot. The remainder is used to buy an annual pension. That lump sum is less than what I have contributed.

Not contributed this financial year and value dropped by 5%. Personal choice to get rid of the debt first and owe nobody anything when I hit 50 in a few years time.

You don't have to buy an annuity. You can draw it all down.

Now or the next few years could be a good time to contribute whilst markets are down. Units are cheaper and you will get more for your pound. Compounding is your friend and your older self (55 !!!) might thank you one day.

 

[M18CTID]

You are correct about the 25% tax-free.

However, you can then leave the other 75% invested and "draw-down" what you need each year.
So, for example, you could take out £10K a year and it will all be tax-free (providing you don't have any other income or state pension).

The theory is that you can take what you need to top up your state pension and whilst leaving it invested, it will last a lot longer than handing over all your money and buying an annual pension.

FWIW, I agree with you paying your debts first.

My view is that people have had it drummed into them to save, save, save for your pension without considering that you will need way less money in retirement than you do now (whilst paying a mortgage, paying for family holidays etc.) This is why I prefer the balanced approach of putting a small amount in your pension whilst making sure you do the big things now (whilst you are fit, able and have all your marbles!)

It's a tough balancing act isn't it? I certainly wouldn't advocate putting nothing into a pension but no point in ploughing all your disposable income into one either. As you say, you could end up having a big fuck off pension fund but not be fit or healthy enough to really enjoy it. Plus you can't get it out all at once, unless you fancy giving the taxman a nice pay day ;) Don't get me wrong, pensions are much more accessible these days - about the best thing Osborne ever did - compared to back when you had to buy one of those shitty annuities but the issue will always be there as to whether one will live long enough to truly enjoy whatever pot they've built up.

I've got this dream where I buy a property abroad - preferably the Canaries - and that my pension fund is large enough to at least part-fund the mortgage on it if I can't afford to buy it outright. At the moment that dream is just a pipe dream when looking at what my portfolio is currently worth! I've seen about 40% wiped off the value of my SIPP since January 2021 (bizarrely, most of my funds performed really well during the pandemic) but I suppose it could just as easily bounce back at some point. Now if I'm in a position to work until I'm 65 - 13 years away - and keep paying into my SIPP and NEST workplace pension throughout that period plus try and save some into a Stocks And Shares ISA along the way, I ought to be in a good enough position to buy that property abroad, perhaps even outright. However, do I want to be leaving it that long? Even if I'm still around then, I might not be in a position to truly enjoy it because even if I stay relatively healthy there's no way I'll be as fit at 65 as I am at 52. Ideally, if I'm still around I need to be doing this in the next 5 or 6 years, even it means slapping part of the value on my domestic mortgage. That vision looks a way off reality as things stand but if my NIO shares finally take off then I might be in luck!