The State Pension

Including Financial Independence and Retiring Early (FIRE)
tjh290633
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Re: The State Pension

Postby tjh290633 » January 2nd, 2017, 11:58 am

My working career spanned many changes to the State Pension and I retired in the year when SERPs reached their maximum level of 20 years' entitlement. Company pensions were usually returned to you when you left, or you could leave them in situ as dormant pensions, to be taken when you reached retirement age. That meant that I was 35 when my effective company pension started, and I stayed with that company for almost 22 years. Contributions were 5% from me and whatever it took from the company, who were able to take pension holidays when the fund had sufficient funds behind it.

My final 8 years were in a company with a Defined Contribution scheme, 5% from me and 5% from them. I also had a freestanding AVC, which I used to avoid Higher Rate tax.

I decided early on, at the age of 25 (bear in mind that I did national Service and took a 4-year university course) that I needed to save about another 5% of my salary in one form or another, and those forms were endowment policies and unit fund savings schemes. It probably rose to about 10% as my career progressed. So, by the time retirement came, I had a fair amount of cash from one source or another, a Pension from the Defined Benefit Scheme, an Annuity and the State Pension with its Graduated Pension and SERP/S2P from the time contracted out in the DB scheme.

That gave me about 2/3rds of my Final Salary from the pensions and annuity, and the investment income contributed a further 23%, giving me 88% of the final salary. In the last financial year they were 105% and 85% of my final salary, which indicated how much following the HYP method has contributed. As far as I can see, anyone who is able to save about 10% of their salary from the age of 30 or 35 ought to be assured of a secure future. 15% might be better, but one has to take into account repayment of student loans and other considerations, not least paying for somewhere to live.

In my view, the State Pension should be disregarded when planning ahead for the future. Adopting a saving regime which will lead to financial independence at a suitable age is the way forward.

TJH

MaraMan
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Re: The State Pension

Postby MaraMan » January 2nd, 2017, 12:54 pm

I think that's very sage advice TJH and something everyone should aspire to, although I recall as a young parent during a time of high mortgage interest rates in the late 80's and early 90's saving 10-15% of my annual wage was just not feasible, so saving more when you can is a more realistic aspiration. I would also say that its best not to get fixated on achieving a % of your current or final salary, its more about that thorny question of how much you think you will need to live comfortably in retirement (something I struggle with). In my case i am lucky to currently receive a high annual income, to retire at 80% of this is just not in the realms of possibility, or in fact required.
MM

puffster
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Re: The State Pension

Postby puffster » January 2nd, 2017, 1:10 pm

Another thing to remember is that pensions are not subject to National Insurance so that is something like 12% (YMMV) saved when you go. Also if, like me, you are contributing a non trivial percentage of salary to AVCs in preparation for retirement then the percentage of final salary realistically required to live comfortably will be significantly less than for someone who is not saving into AVC/main pension schemes.

Regards Puffster

tjh290633
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Re: The State Pension

Postby tjh290633 » January 2nd, 2017, 2:43 pm

I agree that for someone just starting out, 10% or 15% may not be practical. For we grandparents, trickling down capital to the grandchildren has to be a priority. It may give them the deposit on their first home, they may use it to buy their first car, or they may use it to pay off loans. Maybe even to fund a gap year. The choice has to be theirs.

However, saving something, however small a proportion of salary, has to be a priority. Once you have the saving habit it doesn't go.

TJH

bionichamster
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Re: The State Pension

Postby bionichamster » January 2nd, 2017, 2:54 pm

puffster wrote:Another thing to remember is that pensions are not subject to National Insurance so that is something like 12% (YMMV) saved when you go. Also if, like me, you are contributing a non trivial percentage of salary to AVCs in preparation for retirement then the percentage of final salary realistically required to live comfortably will be significantly less than for someone who is not saving into AVC/main pension schemes.


It's a reasonable point, I currently have a compulsory payment into a DB scheme of close to 5% but I choose to spend extra buying added years which gives me a total contribution rate of around 12%, on top of that my mortgage is equivalent to around 13% of my salary. When I retire then hopefully both payments will be history along with the NI, suggesting I might be able to sustain current lifestyle on a little more than two thirds of salary. Assuming I stay in the same job and there are no changes to entitlements and etc then at full state retirement age a combination of two DB pension schemes, state pension and a HYP equivalent look to be amounting to just over 90% of current salary (all inflation ignored). I expect something will go wrong somewhere (state pension restrictions, DB changes or closure, leave job, have to spend some hyp funds on unexpected expense etc) but hope there is enough of a safety margin to ensure retirement is comfortably bearable. The fly in the ointment is that my original DB scheme has an age 60 end point but the new one is linked to state pension so I have a period between 60 and whatever the officialpension age is (bound to change) when I would have to survive on the old scheme and HYP income until the state and new DB pay out, unfortunately these former two combined probably amount to significantly less than half of salary so unless I can significantly up my investment in HYP I might have to keep working, at least part-time, for a few years when I'd rather not. But I still count myself as fairly lucky compared to many I know.

I could probably scrimp to find an extra 5 to 10% of salary to pump into the HYP, but I'd have to forgo on a significant amount of leisure spending and my other half thinks I'm tight enough as it is, and besides there's no point in putting off everything you enjoy until retirement as you might not be fit enough or live long enough to do it all.

BH

FredBloggs
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Re: The State Pension

Postby FredBloggs » January 2nd, 2017, 5:03 pm

tjh290633 wrote:I agree that for someone just starting out, 10% or 15% may not be practical. For we grandparents, trickling down capital to the grandchildren has to be a priority. It may give them the deposit on their first home, they may use it to buy their first car, or they may use it to pay off loans. Maybe even to fund a gap year. The choice has to be theirs.

However, saving something, however small a proportion of salary, has to be a priority. Once you have the saving habit it doesn't go.

TJH
Very valid points. I have earmarked my fairly modest (GBP 250k) SIPP portfolio to hopefully survive intact enough to leave the capital value to my 2 kids. As boomers, I and the missus have done quite nicely out of DB pensions (1 to 2% contributions), for me, from 1973 until I dropped out of normal employment to be a contractor in 2003. Mrs Bloggs is still contributing but now to a career average scheme. My 2 kids won't get what I did, those days are gone. One child puts 10% of salary into a DC plan and the employer tops it up with another 15%. I think that is maybe about as good as it gets for an employers DC pension plan? Child #2 pays into the civil service plan (5% IIRC) which I think is now a career average scheme, I think. Not as good as a proper DB plan but not too shabby either, I think.

bionichamster
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Re: The State Pension

Postby bionichamster » January 3rd, 2017, 12:30 pm

Very valid points. I have earmarked my fairly modest (GBP 250k) SIPP portfolio to hopefully survive intact enough to leave the capital value to my 2 kids


It's maybe useful when having these sorts of discussions to ensure a common point of reference. e.g it is arguably far easier to save 50% of one's income if that income is large, it is potentially very difficult if that income is based on a minimum wage. I have a strong suspicion that a disproportionate number (relative to the population as a whole) of people who think saving 50% is a practical goal are quite possibly in the higher tax bracket where there is far more spare money to divert and plenty of room to cut discretionary spending. Do we agree?

Also while for some a pension pot of 250k might well be considered 'modest' and might even be seen as an nice added extra, the reality for the majority of workers is that such a pension pot is a heck of a lot of money. As you can see from this linkhttp://www.thisismoney.co.uk/money/pensions/article-3326892/The-pension-pot-map-UK-revealed.htmlThe UK average of one pension provider's retiree pots was around £102k (and that of course doesn't include those who have no pension pot at all). I'm sure that many people could save £250k over a working lifetime if they tried harder, I'm also sure many just could not, well at least not without compromising for 40 years on many of the things that make life pleasurable, much easier for Calvinists than your average person! The question is how do we incentivise them to at least try? The current system certainly doesn't seem to do it...

BH

FredBloggs
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Re: The State Pension

Postby FredBloggs » January 3rd, 2017, 1:59 pm

Interesting commentary. Indeed I am fortunate to have a 250k pot that I don't need to depend on. It took me about 6 years to save that. I should add I have already taken the 25% tax free element out of it too. I put much of my situation down to being a boomer who was fortunate enough to have a skillset now much in demand. My kids won't be so lucky so I am helping them as much as I can. But am I lucky? In some ways yes, but honestly the harder I try the luckier I seem to get.

Urbandreamer
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Re: The State Pension

Postby Urbandreamer » January 3rd, 2017, 3:13 pm

bionichamster wrote:I'm sure that many people could save £250k over a working lifetime if they tried harder, I'm also sure many just could not, well at least not without compromising for 40 years on many of the things that make life pleasurable, much easier for Calvinists than your average person! The question is how do we incentivise them to at least try? The current system certainly doesn't seem to do it...

BH


I'm not sure that I totally agree. When I started work I was on a "good" pension, provided that I worked until 65. If I didn't, through choice or market forces, then I might not get the pension promised (though I was still promised the worth of the years served when I got to 65).

I didn't want to work until 65, so was incentivised to save hard. However I didn't increase pension savings. AVC's allowed the company to refuse access until 65! Of course I joined the scheme but knew its restrictions. Later FSAVC's were introduced, I saved a bit into them, but they still required me to buy an annuety so I stopped. Instead I put my money into a PEP, later ISA.

Finally the current system allowes me to "retire" at 55 and doesn't require me to buy an annuety. Any money left when I die can go to my children (the reason that I may now work far latter than I intended). I rolled up my old FSAVC's into the new money purchase scheme some time ago and increased my contributions when the annuety requirment was dropped.

The current system has its faults. Some would argue that it allows people too many freedoms. They can save as little as they want, while being penalised if they save too much. They can get at their pension from 55, but rebuilding it is limited once accessed. I still prefer it to earlier systems.

Ps, I'm not a higher rate tax payer but do currently contribute >50% of my take home pay.

Wuffle
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Re: The State Pension

Postby Wuffle » January 5th, 2017, 10:05 am

Article in the FT today sums the situation up nicely.
Won't put a link as they are usually blocked.

'Young Britons increasingly reliant on inherited wealth'

The state pension will be all many have (but they won't be on a finance website) or it will be hugely dependent on how fast the olds die (state pension is worth about £200,000 in capital) or you are loaded and it is irrelevant.

The poor have no choice.

I'm in the middle and it does grate to miss out now (and I would miss out on quality of life) to make sure I am OK later - and that is before we consider whether I die - only to have Mom and Dad keel over quickly.
If they hang on, yes, I'm stuffed but worth the risk.

If your rich, well, doesn't matter does it.

saechunu
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Re: The State Pension

Postby saechunu » January 5th, 2017, 6:10 pm

Rising wealth inequality, falling social mobility, and the Rise of the Machines negatively impacting the poorer and those without capital the most, and arguably you have the makings of some very big social problems.

The rich may well have a problem too, as if they persist unchecked, these situations have sometimes been resolved violently.

Lootman
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Re: The State Pension

Postby Lootman » January 5th, 2017, 6:53 pm

saechunu wrote:Rising wealth inequality, falling social mobility, and the Rise of the Machines negatively impacting the poorer and those without capital the most, and arguably you have the makings of some very big social problems.

The rich may well have a problem too, as if they persist unchecked, these situations have sometimes been resolved violently.

I never understand all this whining about inequality. And often it is laced with vague implied threats of unrest, violence or disorder, which I find rather distasteful and manipulative.

Pre-Thatcher our society was more equal, mostly because of very high tax rates and the resultant tendency of smart, successful, ambitious people to live elsewhere. Since Thatcher it has actually become possible to become very wealthy and I think most people are happy that opportunity now exists.

But it's inevitable that society will be more unequal as a result because outcomes will more closely mirror differences in ability and effort. But that's only a problem if you devote your attention to those with more than you rather than whether you have enough, which is otherwise known as "envy".

If Bill Gates moved into your town, your town becomes more unequal. But would anyone suggest that the result of that is somehoe bad or wrong, let alone motivation for a revolution? Constantly comparing yourself to those who have more is not healthy.

Dod1010
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Re: The State Pension

Postby Dod1010 » January 5th, 2017, 8:09 pm

To sum up all of this, it reminds me of a story when I lived in Hong Kong. The story was that the average taxi driver did not, say, on seeing a guy being driven past in a Rolls Royce, 'How can he have that?' He said 'One day that will be me'.

Anyone can make a million, all it needs is total dedication, and no sense of 'entitlement'. That is what is wrong with this country and much of Western Europe, but that is another thread altogether.

Lootman
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Re: The State Pension

Postby Lootman » January 5th, 2017, 8:38 pm

Dod1010 wrote:To sum up all of this, it reminds me of a story when I lived in Hong Kong. The story was that the average taxi driver did not, say, on seeing a guy being driven past in a Rolls Royce, 'How can he have that?' He said 'One day that will be me'.

The same has been said of the difference between American and British attitudes towards wealth and success.

In the US, people generally admire and respect those who are successful. They look up to them and see them as living proof that the American Dream can work. They want to emulate that and even when the person is rather odious, like Trump, they are still respected for what they have achieved.

In Britain there is still this nagging resentment and sometimes hostility towards the successful. People still look at a rich person and criticise them, even to the point of wishing to confiscate their money. The left in Britain have always tried to harness that unfortunate bias by trying to reinforce the notion that nobody deserves to have a lot when there is someone somewhere with a little.

There is a reason envy was considered to be one the seven deadly sins, and it's no less unattractive when dressed up in the ideological dogma of the politics of envy.

saechunu
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Re: The State Pension

Postby saechunu » January 5th, 2017, 9:13 pm

Oh dear, you've perhaps grabbed the wrong end of the stick! Having "made a million" at probably an earlier age than most here and being one of the fortunate capital owning cohort able to sit on my rump I can assure you my post wasn't motivated by envy but rather by concern over what I foresee as a potentially tricky social situation that may develop. Selfish concern for myself and compassionate concern for those whom it appears may be getting a rather rougher deal than I received. And I write that as someone from a humble background who with the good fortune of a few brains and a ladle of luck managed to thrive in the meritocratic environments I got myself into.

Of course, it may be that these matters will resolve themselves organically, with a larger share of the spoils accruing to labour than has been the case for a while now, reversing the trend for capital to benefit to the extent it has. But I'm not as confident about that as I would once have been, largely because of the direction technology is taking.

I'm familiar enough with history to understand that technology has been a great creator of jobs and, by liberating people from drudgery, has enabled many people to pursue much more interesting, healthier and more productive roles. However, much of this technology adoption was either about replacing muscle power or about aiding and thereby increasing the effectiveness of the human mind. The machine learning technologies emerging today are different to this, offering the prospect in time of completely replacing, not merely augmenting, the human element in entire processes on a scale not previously seen.

With the machines cheaper, smarter and more productive than the people, wearing my capital owner's (top) hat I welcome it, while at the same time wondering what exactly all the displaced will do exactly, as it's not clear what they'll have to offer.

This has all been seen and said before: throughout history, technology has opened up roles that no one could previously have ever envisaged, and so the default assumption would be that the same will of course happen again.

But I ain't so sure!

Like Hawking, I suspect that machine intelligence will turn out to be either the best or the worst thing to happen to humankind. Utopia or Dystopia.

Feeling lucky?

gbjbaanb
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Re: The State Pension

Postby gbjbaanb » January 7th, 2017, 4:53 pm

Lootman wrote:If Bill Gates moved into your town, your town becomes more unequal. But would anyone suggest that the result of that is somehoe bad or wrong, let alone motivation for a revolution? Constantly comparing yourself to those who have more is not healthy.


You could ask the good people of San Francisco or other towns around that way, where Bill Gates did move in (or tech companies roughly similar) and all the housing went through the roof as those highly paid tech workers were able to couch up loads of money, net result of this largesse is that nobody doing an ordinary job can afford to live there anymore.

Maybe it's like those Cornish villages where Londoners have bought up all the property making the places virtual ghost towns during the off seasons.

You see wealth inequality is a problem, and saying "that could be me" never solves the problem for those who will never become rich, the cleaners, bakers, carers, teachers, and other tradesmen in essential, but poorly rewarded, jobs. You may say that we need to pay them more, but you wouldn't like the massive inflation that comes with it. Rather those that complain about three wealth inequality have recognised that not allowing the wealthy to get so out of kilter with the rest of society would have been a better option all along.

The trouble is that the wealthy don't really want to listen, which is what caused the problems in the first place. Problems that are both going to be easy to solve now.

Lootman
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Re: The State Pension

Postby Lootman » January 7th, 2017, 5:19 pm

gbjbaanb wrote:
You could ask the good people of San Francisco or other towns around that way, where Bill Gates did move in (or tech companies roughly similar) and all the housing went through the roof as those highly paid tech workers were able to couch up loads of money, net result of this largesse is that nobody doing an ordinary job can afford to live there anymore.

Maybe it's like those Corgnish villages where Londoners have bought up all the property making the places virtual ghost towns during the off seasons

Actually I think that is a little different. (And BTW Gates and MicroSoft are in Seattle, not San Francisco). What I think is happening in the SF Bay Area isn't so much that Zuckerberg buys an expensive SF house and then buys the house on either side, for privacy. There is something a little excessive about that, but in the end it's only 3 houses that the average person can't afford anyway.

It is the tens of thousands of tech workers who have flooded to the Bay Area, and can outbid the locals for housing. The effect of them on the average home price can be significant, like any form of gentrification can be. But it's no longer a matter of the "inequality" of billionaires but rather of reasonably well paid middle-class workers - the average tech worker in SF probably makes $150K a year or so.

Also, SF has very strict zoning controls, limited space being bounded by water on 3 sides, great weather and a scenic location. Those are all factors too.

Likewise I don't think it is the existence of a few billionaires that drive up the price of London homes, so much as hundreds of thousands of skilled workers making six figure salaries, and that in turn is driven by the fact that the London economy is very good, which is surely desirable.

gbjbaanb wrote:You see wealth inequality is a problem

Actually I don't, but recognise that some do.

JohnB
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Re: The State Pension

Postby JohnB » January 15th, 2017, 9:30 am

You have missed the opportunity to take part in the government consultation on the state pension age (Its worth doing so, as they have low response rates so your comments have more leverage) which shows their thinking. I'm a little surprised no-one here had heard of it.

https://www.gov.uk/government/consultat ... -questions

I've included my response below (with the Festina Lente to cheer up the Classics graduates in the department):

Overall the current system where the NI contributions of those in work funds current pensions seems affordable into the future, given the cost reductions of the already announced SPA increases. There is no crisis of funding looming. The gradually rising cost should be curtailed by stopping the triple lock, and diverting the savings into means tested social security payments.

Life expectancy rises are not inevitable, as lifestyle diseases like obesity rise, and robotic job losses changes could change the NI take, so the uncertainly of the numbers is large even if the economy grows well.

Its is very important to keep state pension universal, and not means test it. Doing so would make a mockery of the concept of NI contributions during a working life. If means testing were necessary, then NI should be abandoned and income tax raised instead, with a winding down of state pension over 40 years as accrued NI contributions were spent.

The grey area between full-time work and retirement will grow as caring demands increase, and technological change makes the skill sets redundant. This is very evident in IT workers over 55, and will spread across the workplace. Such people in high skilled jobs will have been able to make alternative provision with private pensions, but it is important to keep the 10 year gap between SPA and private pension age to allow drawdown to cover the gap. Reducing the gap to 5 years would leave their planning in disarray, cash poor but with large pension savings hitting lifetime allowance limits and their punitive taxation.

The UK should be applauded for taking the initiative over SPA rises, while keeping the implementation timescale long. Pensions are long term prospects and need long term plans. The blizzard of changes to pensions over the last 5 years has increased uncertainty over pension provision, and leads to reduced pension provision, as no-one trusts the government to honour their commitments. This will lead to more people without adequate cover, and a greater state pension demand, so Festina Lente.

John

TopOnePercent
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Re: The State Pension

Postby TopOnePercent » January 21st, 2017, 9:33 pm

gbjbaanb wrote:Rather those that complain about three wealth inequality have recognised that not allowing the wealthy to get so out of kilter with the rest of society would have been a better option all along.

The trouble is that the wealthy don't really want to listen, which is what caused the problems in the first place. Problems that are both going to be easy to solve now.


The problem with equalising wealth is that you need to equalise a lot of other things too, such as effort level, hours worked, talent, intelligence, education, experience, professional development etc etc. If you don't, you simply create unfairness and destroy incentives. Currently additional wealth most often stems from one or more of the attributes on the prior list and so can be considered fairly acquired, fairly rewarded, etc.

Society doesn't really exist - as Maggie said: There's no such thing as society, there are individual men & women, and there are families. There seems little to be gained from fretting over what other more or less successful people think about each of us, and certainly no sense in forgoing opportunities to minimise taxes or increase incomes in case someone that can't be bother to make the effort feels sad about the disparity in our resulting purchasing options.

Those who spend less of their time educating themselves, developing their employment or income generating possibilities, they will have more free time to enjoy now. Unless we're equalising that first, then I remain puzzled as to why we should equalise the rewards without the work?

As an aside, Microsoft are in Seattle; the 'problems', or changes being more level headed about it, in San Francisco are driven by Google, Facebook etc. Apple to a lesser extent.

OZYU
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Re: The State Pension

Postby OZYU » January 22nd, 2017, 10:15 am

Well put, TopOnePercent.

An interesting way to put the parable of the talents in a modern setting, not that it needs it much.

Equalising wealth by policy will just create massive unfairness to those of us who have definitely earned the better resources they have through a lifetime of hard graft. I get very fed up to constantly having to contemplate the concept of increasingly forking out for people who are just lazy and careless with the little they have, just like we got fed up in A&E recently waiting for two hours while my wife was bleeding from a nasty fall which eventually needed many stiches, while being surrounded by a whole bunch of young drunks, who most probably are there every week, getting priority.

Ozyu


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