What is the point of a pension?

[Dystopian]

Hi,

I'm 19 and I'm sorting out my financial plans long term. I intend to save up 70% of my wages per month and eventually invest in solid stocks + bonds, I can save that much up because I live at home and will be for atleast another 6 - 12 years.

Anyway, I'm seriously confused by the actual function of a pension. Everyone seems to say "You should put money in a pension".

Why on earth would I do that? That's basically giving money to some company, that siphons money off it anyway then tosses down the morsels left at you every week. Then you probably die before you've got back the remaining value (after their fee) anyway.

Surely it's better to put your money into a decent savings account and budget it over your retired age. Further, you earn interest on the savings throughout your life instead of someone else.

Apart from catering for those with poor impulse control, what is the point of a pension?

Do not start identical threads in multiple forums.

[shadron]

The pension was perhaps the first attempt at providing for a retirement; it predates social security. I have a pension from one of my first employers, but that was the last time it was offered. It was not optional, but rather mandatory. After that it was 401k, IRAs and, stock purchase plans. Surely it is better to manage it yourself, but when I started out (in the early 70's) you had to have about $25,000 to even begin to think about entering the stock market; it was a rich man's game. About the only investment available to most people is the interest bearing savings account.

I rather doubt a pension is even an option anywhere anymore.

By the way, be a real person and offer to pay your room and board while you're socking so much away.

[Horatius]

.... because I live at home and will be for atleast another 6 - 12 years.

....
Apart from catering for those with poor impulse control, what is the point of a pension?



Well, not everyone has remarkably tolerant parents.

[Hokulele]

I do not know how it works in the UK, but where I live, money put into retirement plans is often pre-tax, and depending on the plan and how/when I withdraw money, the interest isn't taxed either (and yes, I do get to keep the vast bulk of the interest earned). This nets me much more than the fees charged to administer the plan over the long haul.

Of course, you have to learn how to pick a plan in the first place.


ETA: To the OP, did you mean pension plans specifically, or any type of retirement account?

[Dystopian]

The pension was perhaps the first attempt at providing for a retirement; it predates social security. I have a pension from one of my first employers, but that was the last time it was offered. It was not optional, but rather mandatory. After that it was 401k, IRAs and, stock purchase plans. When I started out (in the early 70's) you had to have about $25,000 to even begin to think about entering the stock market; it was a rich man's game.

I rather doubt a pension is even an option anywhere anymore.


Most employers don't have an added pension apart from armed forces and the and emergency services but I'm talking about private pension firms.

[Dystopian]

By the way, be a real person and offer to pay your room and board while you're socking so much away.

I do pay keep :boggled:. Nice assumption there.

[Dystopian]

.


ETA: To the OP, did you mean pension plans specifically, or any type of retirement account?

Well they're all the same basically. Anything that you invest money in and get some of it back in retirement over time.

[Dystopian]

*********** hell, I pay keep and wether you get on with your parents has nothing to do with the logic of a pension.

[Hokulele]

Well they're all the same basically. Anything that you invest money in and get some of it back in retirement over time.


In which case, for me it is all about avoiding paying taxes on my money. From what I have experienced, the rates charged by the plan managers are far less than the income tax rates where I live.

[Dystopian]

In which case, for me it is all about avoiding paying taxes on my money. From what I have experienced, the rates charged by the plan managers are far less than the income tax rates where I live.

Well you pay income tax anyway, better to put money that's already yours into a bank and earn interest on it.

[Brainache]

In Australia, Superannuation (pension funds) is actually compulsory. If you don't contribute you get into trouble. That is the point.

[thaiboxerken]

I have a pension plan AND a 401K. The pension is automatically paid for by my company.

[The Central Scrutinizer]

Hi,

I'm 19 and I'm sorting out my financial plans long term. I intend to save up 70% of my wages per month and eventually invest in solid stocks + bonds, I can save that much up because I live at home and will be for atleast another 6 - 12 years.

Anyway, I'm seriously confused by the actual function of a pension. Everyone seems to say "You should put money in a pension".

Why on earth would I do that? That's basically giving money to some company, that siphons money off it anyway then tosses down the morsels left at you every week. Then you probably die before you've got back the remaining value (after their fee) anyway.

Surely it's better to put your money into a decent savings account and budget it over your retired age. Further, you earn interest on the savings throughout your life instead of someone else.

Apart from catering for those with poor impulse control, what is the point of a pension?

I'm not sure, but maybe "pension" is used differently in the UK than the US? Over here (US), a "pension" is something the company puts money into (pre-tax) for their employees. I think they've pretty much been displaced by 401(k)'s.

You're not talking about an annuity, are you?

[ksbluesfan]

My company just phased out their pension. I should still get benefits when I retire (emphasis on "should") even though it is now closed.

I paid 3% of my income into the pension, and my company matched it. If I would not have enrolled, I would have been walking away from money.

[The Central Scrutinizer]

Do your parents know you're going to live with them another 12 years?

Also, why did you start this thread in multiple forums?

[Malerin]

Hi,

I'm 19 and I'm sorting out my financial plans long term. I intend to save up 70% of my wages per month and eventually invest in solid stocks + bonds, I can save that much up because I live at home and will be for atleast another 6 - 12 years.

Anyway, I'm seriously confused by the actual function of a pension. Everyone seems to say "You should put money in a pension".

Why on earth would I do that? That's basically giving money to some company, that siphons money off it anyway then tosses down the morsels left at you every week. Then you probably die before you've got back the remaining value (after their fee) anyway.

Surely it's better to put your money into a decent savings account and budget it over your retired age. Further, you earn interest on the savings throughout your life instead of someone else.

Apart from catering for those with poor impulse control, what is the point of a pension?

You trade the risk of investing your retirement for a guaranteed percentage of your income for life. In California, there is a huge concern over pensions. Cops can work for 30 years, retire at 52, and make 90% of their salary for the rest of their life. Are you saying you would turn that down?

My own profession (teaching), is a little more realistic. After 32 years, I can retire at 55 with about 65% of my highest yearly pay. My pension costs me 8% of my salary, but I don't have to pay into S.S. because I won't be receiving any S.S. benefits.

Do any companies even offer pensions anymore?

[TubbaBlubba]

The point is that you shouldn't be sitting at 66 with no money and being forced to leech off society.

[Hokulele]

Well you pay income tax anyway, better to put money that's already yours into a bank and earn interest on it.


Not on my pension money until I withdraw it, and then only based on the withdrawal "normal income" tax rate, not the capital gains rate or other types of ways the government (federal and local) can get at your interest income. I can't remember the exact numbers, but I know when researching this for myself, the difference between saving $10,000 for 20 years in a retirement plan (pre-tax) and putting it in a savings account was about $23,000 in my favor. In other words, at the end of 20 years, my retirement account would be worth almost $65,000 (since all of the interest would be put back to work for me), and paying taxes on withdrawing that amount would leave me with about $48,000. The equivalent savings account (assuming same interest rate and terms) would be worth only $25,000.

I can assure you, my plan manager isn't making over $1000 per year of my retirement plan. I read the fee schedule before signing up.

[Last of the Fraggles]

Well you pay income tax anyway, better to put money that's already yours into a bank and earn interest on it.

Generally pensions contributions are not taxed. In a company pension plan the company will generally contribute also.

So for example, if you are paid $1000 you might contribute £300 to your pension and the company also throw in $300.

If you wanted to do the same personally you'd pay tax at say 30% and have to pay the whole thing yourself.

So you can save the same by paying 3% of your salary to a pension or about 10% after tax to private investments.

[Brainache]

It all seems so straightforward when you are 19.

What happens to your 12-year-plan when you meet and fall in love with someone? Will your folks be OK with you guys shacking up at their place?

Will you always be in work?

What about if you find yourself at 21 being presented with a giant key and Mum and Dad saying: "Our work here is done, now nick off, get your own place and don't forget our birthdays! Seeya!"

[Dystopian]

Do your parents know you're going to live with them another 12 years?


I live with my Mother, my grandmother and my little brother. My mum want's me to stay anyway..

And I don't intend to ever be in a relationship. Already been in love, sent me off the rails, hurt hard. **** that. I'd rather have no ties and be able to travel the world and persue my hobbies/interests. I have absolutely no interest in starting a family.

[Dystopian]

The point is that you shouldn't be sitting at 66 with no money and being forced to leech off society.

Did you even read the OP or are you just gormless?

[SimpleIrony]

Yeah, I don't know it is like in the UK but in Canada pensions rock beyond all belief. Most employers that offer pensions (usually unionized jobs) put in half of what you put in. Plus they pay a good rate of return.

Also, there are a lot of poor people who invested in "solid" stocks and bonds.

[TubbaBlubba]

Did you even read the OP or are you just gormless?

No. As I said, pensions are a societal benefit as it prevents people from being forced to live on welfare past retirement age.

Granted, it makes more sense if it is actively enforced.

[Dystopian]

No. As I said, pensions are a societal benefit as it prevents people from being forced to live on welfare past retirement age.


I've already said the intention is not to be living off welfare.

[Dystopian]

Also, there are a lot of poor people who invested in "solid" stocks and bonds.

Property development is hardly a particular risk especially as we begin to come out of recession, given it is a fixed asset anyway that can be rented if needs be.

[TubbaBlubba]

I've already said the intention is not to be living off welfare.

Yes, and? What's your point?

[Dystopian]

Yes, and? What's your point?

That there was no point to your previous post.

[The Central Scrutinizer]

Also, there are a lot of poor people who invested in "solid" stocks and bonds.

There are a lot of rich ones too.

[The Central Scrutinizer]

Property development is hardly a particular risk especially as we begin to come out of recession, given it is a fixed asset anyway that can be rented if needs be.

Let me guess - you're going to "fix up" houses and sell them at a profit?

[TubbaBlubba]

You do realize you're not the only person in the entirety of society, right?

[SimpleIrony]

Property development is hardly a particular risk especially as we begin to come out of recession, given it is a fixed asset anyway that can be rented if needs be.

Sorry, how is property development the same as stocks and bonds?

Oh, you mean you plan to invest in property development companies. Safer bet than most, I guess. Not quite as safe as investing in property yourself though.

[Dystopian]

Let me guess - you're going to "fix up" houses and sell them at a profit?

Well that's one potential avenue, "Fix up" is a bit incredulous though.

[Thunder]

the point of a pension is hopefully to not have to work after you turn 63. you can spend the rest of your life traveling, playing bocci, or whatever you want.

you can even volunteer, doing what you love..which i couldnt do when you needed a paycheck cause the work doesn't pay enough.

[Dystopian]

Sorry, how is property development the same as stocks and bonds?

Oh, you mean you plan to invest in property development companies. Safer bet than most, I guess. Not quite as safe as investing in property yourself though.

I'll need about £50,000 to get on the low rung of the property ladder by the time I come to persue this. You can expect £4,000 - 10,000 profit on an investment of that size if you do it properly and your research.

It would take me 5 years to save up £50,000 on my current sallary and expenditure. It'd be better if I had capital working before I do it to give me a boost and some extra money.

[SimpleIrony]

I'll need about £50,000 to get on the low rung of the property ladder by the time I come to persue this. You can expect £4,000 - 10,000 profit on an investment of that size if you do it properly and your research.

It would take me 5 years to save up £50,000 on my current sallary and expenditure. It'd be better if I had capital working before I do it to give me a boost and some extra money.

Oh, right... I forgot how expensive it is to get into property in the UK. Sounds like you have a plan, then.

[bluesjnr]

The function of a pension is quite simple. Whether it is in the UK or anywhere else on the planet is immaterial (up to a point). You need to understand,young whippersnapper, that there will come a time when you are not so able and you will not be able to work to provide an income for you to live on.

In the UK you might qualify for a government funded pension but I would not hold out a lot of hope of getting that and even if you did it is very likely that it will not be enough for your lifestyle. So if you want retire with no income and live the lifestyle of somebody that earns (lets say) £30,000pa at TODAYS rates, you need to start laying the foundations of that lifestyle now. The longer you have to prepare for this the better.

You might want to spend a little time to work what kind of investment is required to provide an income of the equivalent £30k per annum (in todays money) that will see you through your retirement which is predicted to last at least 30 years.

As you go through life you will find that you tend to spend what you earn and unless you put something aside for old age, a rainy day, emergencies, whatever you are going to be caught short.

You are young and all this seems so very far away. Don't find yourself approaching 50 with nothing in the retirement tank.

[shadron]

I do pay keep :boggled:. Nice assumption there.

Great. I'm really happy for you.

[bluesjnr]

I'll need about £50,000 to get on the low rung of the property ladder by the time I come to persue this. You can expect £4,000 - 10,000 profit on an investment of that size if you do it properly and your research.

It would take me 5 years to save up £50,000 on my current sallary and expenditure. It'd be better if I had capital working before I do it to give me a boost and some extra money.

Are you seriously expecting me to believe that you have an income that allows you to save nearly £850 per month AFTER expenditure. You are barely out of school. Unless you have formed your own company selling something everybody needs you are talking *****!

[Brainache]

I live with my Mother, my grandmother and my little brother. My mum want's me to stay anyway..

And I don't intend to ever be in a relationship. Already been in love, sent me off the rails, hurt hard. **** that. I'd rather have no ties and be able to travel the world and persue my hobbies/interests. I have absolutely no interest in starting a family.

Good luck with that.

Just out of curiosity, how much "keep" do you pay?

Who does the laundry and other housework?

Who pays the bills?

[Malerin]

The function of a pension is quite simple. Whether it is in the UK or anywhere else on the planet is immaterial (up to a point). You need to understand,young whippersnapper, that there will come a time when you are not so able and you will not be able to work to provide an income for you to live on.

In the UK you might qualify for a government funded pension but I would not hold out a lot of hope of getting that and even if you did it is very likely that it will not be enough for your lifestyle. So if you want retire with no income and live the lifestyle of somebody that earns (lets say) £30,000pa at TODAYS rates, you need to start laying the foundations of that lifestyle now. The longer you have to prepare for this the better.

You might want to spend a little time to work what kind of investment is required to provide an income of the equivalent £30k per annum (in todays money) that will see you through your retirement which is predicted to last at least 30 years.

As you go through life you will find that you tend to spend what you earn and unless you put something aside for old age, a rainy day, emergencies, whatever you are going to be caught short.

You are young and all this seems so very far away. Don't find yourself approaching 50 with nothing in the retirement tank.

I don't know how it is in UK, but in America it used to be not that hard to land a $30K+ job out of college. If you had no bills and lived frugally, you could sock $10,000 away a year. Of course that was before the bottom fell out of the economy.

[NewtonTrino]

I almost get the impression that he's talking about an annuity and not a pension from a company.

In that case I agree, most annuities are ripoffs that generate high commissions for financial planners.

My recommendation for saving for retirement is at least 15% of your gross income should be saved. Put it:
1) Max out any retirement plans with matching funds (e.g. 50% up to 3% match in 401k)
2) Max out your Roth IRA is this is the best deal imho.
3) Go back and fill up your 401k with any nonmatched funds
4) Possibly put money into a tax free fund for kids education
5) brokerage account (you pay taxes on this)

Diversify your holdings across as much of the market as possible. Buying property can be a nice win just don't overextend yourself. Move money into safer investments as you get older so that by the time you hit retirement age you have no real exposure.

I'm fairly aggressive with saving and try to save 66% of the net of any bonuses I get as a minimum.

[The Central Scrutinizer]

Diversify your holdings across as much of the market as possible.

No

[Dystopian]

Are you seriously expecting me to believe that you have an income that allows you to save nearly £850 per month AFTER expenditure. You are barely out of school. Unless you have formed your own company selling something everybody needs you are talking *****!

I'm not talking ***** I earn £1,100 a month after tax as I work 46 hours a week. I work in Domiciliary Social Care which is a fast growing industry as people are living longer. I have a monthy expenditure of £400 (£250 on keep) and the rest goes into savings. I'm never short of work, I get called up on my one day off in the week (Today) being asked to go in and I could work in excess of 55 hours if I wanted to, but I need a rest because I work all day every other day of the week walking.

No car (Monthly bus pass bought/Walk when working) and frugal on luxuries. This job keeps me very physically fit too, and is a rewarding line of work. Excellent experience for the CV too and I'm working toward an NVQ level 3 in Social Care which is an extra qualification equivilant to 3 A-Levels paid for by my agency (But I already have A-Levels). Hoping to get into the Police eventually though.

Don't ******* patronise me.

[pipelineaudio]

*********** hell, I pay keep and wether you get on with your parents has nothing to do with the logic of a pension.

Welcome to the JREF

Derailing is an art form around here

[Dystopian]

Welcome to the JREF

Derailing is an art form around here

It's also entertaining that people see my age and begin refering to me as "Young whippersnapper" (:confused:) and assume I know **** all.

[bluesjnr]

It's also entertaining that people see my age and begin refering to me as "Young whippersnapper" (:confused:) and assume I know **** all.

You don't come across to me as somebody who knows "**** all" - quite the reverse actually. Anybody of your age who is taking the time to even consider retirement and the inherent costs and the need to do something about it now is far from being dumb.

I'm sorry if the "whippersnapper" label upset you, it wasn't meant to. Compared to me you're a kid, I'm sorry if my looking at you as a kid offends you but it doesn't change the fact that you are very, very young.

Glad to see you're kept entertained. Don't ******* patronise me.

[SimpleIrony]

I almost get the impression that he's talking about an annuity and not a pension from a company.

In that case I agree, most annuities are ripoffs that generate high commissions for financial planners.

That makes sooo much more sense! I think you are right.

My recommendation for saving for retirement is at least 15% of your gross income should be saved. Put it:
1) Max out any retirement plans with matching funds (e.g. 50% up to 3% match in 401k)
2) Max out your Roth IRA is this is the best deal imho.
3) Go back and fill up your 401k with any nonmatched funds
4) Possibly put money into a tax free fund for kids education
5) brokerage account (you pay taxes on this)


The only problem with this advice is that it doesn't really translate outside of the U.S. For instance, I've heard of 401k, but only a rough guess as to what it is. It sounds a little like an RRSP. I've never even heard of a Roth IRA.

[Kestrel]

That makes sooo much more sense! I think you are right.


The only problem with this advice is that it doesn't really translate outside of the U.S. For instance, I've heard of 401k, but only a rough guess as to what it is. It sounds a little like an RRSP. I've never even heard of a Roth IRA.

A 401k is a retirement account set up by employers, typically at a brokerage house. The employee contributes some percentage of salary. Often the employer also contributes by matching the employees contribution up to some amount. Contributions and investment gains are not subject to income tax until they are withdrawn at retirement.

A Roth IRA is a retirement account set up by individuals. Contributions are subject to income tax, but withdrawals after retirement are not taxed.

My advice to younger employees is to take advantage of the free money. Contribute whatever percentage is being matched by their employer. If their employers is not contributing, put in the minimum. Maxing out retirement contributions doesn't make sense for someone still paying off college loans and establishing a household.

[Last of the Fraggles]

Property development is hardly a particular risk

I think a number of people would disagree with you on that one. Don't go into anything thinking 'it's not much of a risk'

[Dystopian]

I think a number of people would disagree with you on that one. Don't go into anything thinking 'it's not much of a risk'

That's the recession. If they keep hold of their investment and wait for the market to pick back up they'll be fine. Further, you can't really loose too much on property, because you still have the property. Also you always have the option of renting out.

[zooterkin]

Well, you might do better asking on another forum with a much higher number of UK based members.
Well you pay income tax anyway, better to put money that's already yours into a bank and earn interest on it.

Actually, I believe you don't pay income tax (http://www.thetaxguide.co.uk/PersonalPensions.html) on money that goes into a pension fund. However, because I'm incredibly ancient, I'm fortunate enough to have a final salary company pension, and can't really advise on what the options to someone starting out now would be.



That's the recession. If they keep hold of their investment and wait for the market to pick back up they'll be fine. Further, you can't really loose too much on property, because you still have the property. Also you always have the option of renting out.
Far be it from me to attempt to dent the certainty of youth, but you could be losing money all the time you're waiting for the market to pick up to the point your property is worth more than you paid for it, if the rent doesn't pay the mortgage.

[Last of the Fraggles]

That's the recession. If they keep hold of their investment and wait for the market to pick back up they'll be fine. Further, you can't really loose too much on property, because you still have the property. Also you always have the option of renting out.

Again, no its not just the recession. If property developing was a sure thing then everyone would be doing it.

I'm not saying its not a good idea and I've even considered it myself however, I am saying go in with your eyes open and realise that its not a sure thing.

As with everything, don't risk more than you can afford to lose.

[Mister Agenda]

I have a pension plan AND a 401K. The pension is automatically paid for by my company.

Mine, too.

[lomiller]

I have the following:
1) Money paid into a pension plan by my employer on my behalf. It’s tax free but deducts from my RRSP contribution limit.
2) Registered Retirement Savings Plan (RRSP) also pre-tax income for with a contribution limit based on how much I earn. As noted above higher pension contributions reduce how much I can put in here.
3) TFSA (Tax Free Savings Account). I contribute after tax $, but any earnings within the account are tax free until I withdraw them. Has a $5K yearly contribution limit
4) Ordinary investments mostly weighted to stocks since I didn’t get an early start and want growth. With another 20 years to go I can probably accept the volatility. This is of course after tax income and subject to capital gains tax.

[Dystopian]

Far be it from me to attempt to dent the certainty of youth, but you could be losing money all the time you're waiting for the market to pick up to the point your property is worth more than you paid for it, if the rent doesn't pay the mortgage.

I'd never get a mortgage on it. As I said, I intend to start on the bottom rung of the property ladder and work up. I'd save up 3-5 years and buy outright a cheap property £50k and make improvement's/extenstions.