How do you save money for retirement
June 1, 2016 3:39 PM Subscribe
[UK finance filter] I'm terrible with money and come from a long line of people terrible with money. I have a colleague who the is the exact opposite, and today she told me something regarding our pension that has me wondering if I should be doing what she's doing. Difficulty filter: we're civil servants and have pretty good pensions under the Local Government Pension Scheme.
My colleague, unlike me, has parents and siblings who are all Good With Money. She and her husband, despite being under 30, own lots of properties, have big savings accounts, and yet still manage to live well. Today she told me that because our government pension keeps undergoing changes, she no longer trusts how things will be when we're of retirement age so she's opted out and has instead been putting the monthly equivalent into an ISA she has has to physically go to the bank to withdraw from. She said her dad, who retired a couple of months ago and used to be one of my managers, actually ended up being worse off than what he expected because of the changes to the LGPS.
I know so little about how these things work that I can't decide if this idea is brilliant or terrible. Our pension is pretty good, but whilst I've been at my job we've had a lot of changes to it, including now having to pay NI on it. I know an ISA only lets you save so much tax-free, but at least she'll have the money as a lump sum and won't worry about losing it, especially if our LGPS ends up going a US-like route and becomes reliant on the stock market?
My question to financial gurus: Should I be doing what she's doing, or am I safer keeping my pension as it is?
My colleague, unlike me, has parents and siblings who are all Good With Money. She and her husband, despite being under 30, own lots of properties, have big savings accounts, and yet still manage to live well. Today she told me that because our government pension keeps undergoing changes, she no longer trusts how things will be when we're of retirement age so she's opted out and has instead been putting the monthly equivalent into an ISA she has has to physically go to the bank to withdraw from. She said her dad, who retired a couple of months ago and used to be one of my managers, actually ended up being worse off than what he expected because of the changes to the LGPS.
I know so little about how these things work that I can't decide if this idea is brilliant or terrible. Our pension is pretty good, but whilst I've been at my job we've had a lot of changes to it, including now having to pay NI on it. I know an ISA only lets you save so much tax-free, but at least she'll have the money as a lump sum and won't worry about losing it, especially if our LGPS ends up going a US-like route and becomes reliant on the stock market?
My question to financial gurus: Should I be doing what she's doing, or am I safer keeping my pension as it is?
Your LGPS looks like a defined benefit pension - the kind that defines the exact benefit you'll get at the end, usually by saying that you'll get a percentage of your final or average salary after you retire. The other kind of pension is a defined contribution pension - one where only what is put in is guaranteed, but then it's invested in the markets and could grow but not at a guaranteed rate.
Defined benefit schemes are really, really expensive to run. So expensive that some companies have gone bankrupt just trying to maintain them. That's why it looks like they're changing the LGPS for new people coming in to an average salary - because it's less money and easier to afford.
I think it's unlikely that they would make retrospective changes but these sorts of changes are why people start to think about other ways to invest - people are realising that these schemes may be ultimately unaffordable in some cases. Personally, if I was on a government DB pension I would thank my lucky stars and then hedge my bets with some outside savings just in case (I would worry a bit more if I was on a private DB pension). It's not a bad idea to look at the upcoming lifetime ISAs that are coming in as they are really tax-efficient. Property works for some people but it's not your only option and doesn't have the built-in tax savings that pensions and ISAs give you.
It's totally worth doing more reading on this so it's great that you're looking into this. Hopefully this gives you a few more terms to help you do some research. There's no right answer - it's more about what works for each person's own circumstances and comfort with risk.
posted by ukdanae at 4:24 PM on June 1, 2016 [2 favorites]
Defined benefit schemes are really, really expensive to run. So expensive that some companies have gone bankrupt just trying to maintain them. That's why it looks like they're changing the LGPS for new people coming in to an average salary - because it's less money and easier to afford.
I think it's unlikely that they would make retrospective changes but these sorts of changes are why people start to think about other ways to invest - people are realising that these schemes may be ultimately unaffordable in some cases. Personally, if I was on a government DB pension I would thank my lucky stars and then hedge my bets with some outside savings just in case (I would worry a bit more if I was on a private DB pension). It's not a bad idea to look at the upcoming lifetime ISAs that are coming in as they are really tax-efficient. Property works for some people but it's not your only option and doesn't have the built-in tax savings that pensions and ISAs give you.
It's totally worth doing more reading on this so it's great that you're looking into this. Hopefully this gives you a few more terms to help you do some research. There's no right answer - it's more about what works for each person's own circumstances and comfort with risk.
posted by ukdanae at 4:24 PM on June 1, 2016 [2 favorites]
The other thing: unless you are quite young, you are going to need not merely to put the money in an account and let it sit, but rather to invest it. Otherwise inflation will eat away much of the value. So by investing the money privately, you, too, will become exposed to the vicissitudes of the stock market...and could, in fact, lose it.
It sounds like your colleague is not necessarily so much "good with money" as "good being born into a family with money."
posted by praemunire at 4:25 PM on June 1, 2016 [5 favorites]
It sounds like your colleague is not necessarily so much "good with money" as "good being born into a family with money."
posted by praemunire at 4:25 PM on June 1, 2016 [5 favorites]
Best answer: I have a LGPS pension and the recent changes are not ones that I would worry about (nb. I am risk adverse and not a pensions expert) - we (assuming you are roughly in my age cohort) were never going to get final salary pensions (but I assume this change probably did hit your coworker's dad) so that change doesn't really matter, the additional NI payments now that we're no longer contracted out are annoying but ultimately contribute to state pension and the employer matching into a LGPS is basically free money that you don't get if you just use an ISA.
Its worth looking into an ISA anyway because it never hurts to have additional sources of savings. I also do additional voluntary contributions (AVCs) to my LGPS pension but they're in the low risk fund because see above re:risk adverse. You could also talk to the money advice service Or just use their online resources.
posted by halcyonday at 11:59 PM on June 1, 2016
Its worth looking into an ISA anyway because it never hurts to have additional sources of savings. I also do additional voluntary contributions (AVCs) to my LGPS pension but they're in the low risk fund because see above re:risk adverse. You could also talk to the money advice service Or just use their online resources.
posted by halcyonday at 11:59 PM on June 1, 2016
Best answer: I'm in the NHS pension scheme, also in my thirties. I would assume that they'll close the schemes down before we retire, and I would also expect changes worsening your benefits over the next few years. But they can't take away what you have already put in. So we were forced to move onto an average salary scheme last year, which will pay me 25% less than I would have got if they hadn't moved me, but my previous contributions are still locked safely in the old scheme.
Despite how shit the new changes are, private sector schemes are substantially worse. To match my pension benefits, my husband would have to pay more than half of his salary into his private pension scheme. I pay 13.5%. It's definitely worth having a financial backup as well, but don't move your money out of your existing scheme.
posted by tinkletown at 12:10 AM on June 2, 2016
Despite how shit the new changes are, private sector schemes are substantially worse. To match my pension benefits, my husband would have to pay more than half of his salary into his private pension scheme. I pay 13.5%. It's definitely worth having a financial backup as well, but don't move your money out of your existing scheme.
posted by tinkletown at 12:10 AM on June 2, 2016
I can't predict the future, but you're currently in a defined benefits scheme, so my advice is don't look a gift horse in the mouth. The rules may well change in the future, but it's very unlikely to be retrospective. Sure, start looking at alternatives, but please don't do anything to jeopardise what you're already entitled to! (Fellow LGPS person here)
posted by finding.perdita at 12:57 AM on June 2, 2016 [1 favorite]
posted by finding.perdita at 12:57 AM on June 2, 2016 [1 favorite]
If your employer contributes to your pension then contribute whatever it takes to get that. Extra investments for retirement could either go into a stocks and shares ISA or a personal pension. The first is made with taxed income now and is untaxed when you withdraw. The second is made with untaxed income now and taxable when you withdraw. It's easier to access ISA money before you are 55, but otherwise the two products have similar effects. What matters is where you invest the money inside your ISA/pension. Hint: cash is a poor idea if you are a long, long way from retirement.
posted by plonkee at 8:42 AM on June 2, 2016
posted by plonkee at 8:42 AM on June 2, 2016
Her having a lot of money is also a big difference between you on this. If she takes a risk with her pension money and ends up losing, say, 20% of it - she still has her other investments and properties.
posted by Lady Li at 4:52 PM on June 2, 2016
posted by Lady Li at 4:52 PM on June 2, 2016
This thread is closed to new comments.
posted by ambrosen at 3:55 PM on June 1, 2016 [2 favorites]