Hi all
My 19 year old son has just started a degree apprenticeship with the police.
The pension and retirement age is no longer as attractive as it was, and he has been auto enrolled into a career average revalued earnings (CARE) pension scheme which is a defined benefit scheme which one would assume is better than a defined contribution pension?
However, he needs to give up a fair chunk of his salary to fund this, something like 12% to get 1/53th of his salary plus CPI and a 1.25% top up each year as an annual salary. I did some quick calculations in excel with some basic assumptions on inflation and salary. (basically salary lags 1% behind inflation for duration) and 40 years service gives him something like a £20k annual salary in todays money. Is that a good deal? He'd be 8 years or more from state pension if he finished at 60.
The question I'm looking for an answer, is where does a young lad go for advice on this pension v investing for retirement independently or alongside the Police scheme. He will of course be looking to put some money aside for a house deposit etc in time so I'm really looking for all round advice....her will be wasting the rest on enjoying himself whilst the can!
Any advice, thoughts appreciated
Thanks
Just because it's not as attractive as it was is pretty meaningless TBH as "as it was" isn't available therefore it could still be "attractive" compared to the alternatives.
The 12% is before tax.
How much does he earn currently, and what percentage is £20k of it?
Bottom line though is 'risk'. The Police pension is pretty much as risk-free as you going to get, and anything outside isn't. IMO he should take the Police pension and if he's any spare, invest it into something else.
Also there'll be benefits he wouldn't get outside without paying extra - spouse pension, life/early retirement insurance etc.
(basically salary lags 1% behind inflation for duration) and 40 years service gives him something like a £20k annual salary in todays money. Is that a good deal? He’d be 8 years or more from state pension if he finished at 60.
Long term I'd assume that salary will have to track inflation.
And when discussing workforce payrises that doesn't include promotions, i.e. it's the difference between him now and his replacement in 12 months. Any promotion would be over that. His career average won't be his starting salary + inflation.
And another thing ....... unless there's a equally good DC scheme on the table that you can either leave in the Forces pension scheme or take elsewhere then it's a moot point unless he wants to do a different job.
Having been offered a huge chunk of extra cash to withdraw from my deferred final salary scheme I can state that anything with a defined benefit and any index linking is worth its weight in gold. The cash offer I received was £300k off being able to match the scheme benefits. I have stayed put.
Possibly my best financial decision ever at 20.
His staring salary will be £23.5k rising to £47k within 7 years at current rates. I'd assume that would increase alongside any annual increases?
Clearly I understand one is a defined benefit which is risk free, you know what you will get and it will be index linked of sorts. I'm hoping for more than £20k pension from my 40 years of service and investment in DC schemes, but if the stock market does nothing or badly in next 5 years maybe I won't....so I get your point. Thanks
+1 for paying into his work scheme!
On the stock market front my scheme went from a £600 million hole to surplus between valuations. All one has to hope is that another Trussterphuck doesn't happen just as the lad retires. Cost averaging is a wonderful thing if the sums of money used are large enough.
As much as he can afford from as early as possible.
Mine put some into the Heathrow pension when he worked as a security officer after school. He has about £1500 in there. I have told him that it will remind him every year of the value of compound interest as he ages. I have the same from my first postdoc and it's quadrupled in value in about thirty years.
All one has to hope is that another Trussterphuck doesn’t happen just as the lad retires.
Defined benefit innit, so the stock market won't be a factor. If it was a defined contribution (i.e. stock-market based) scheme, it would be a tougher question...
Ahh, my error, I thought you were trying to calculate it based on a sallary that was (effectively) always going down.
As much as he can afford from as early as possible.
^ that. I should have started 10 years before I did.
And also, +1 for a forces pension first, then top up if you feel the need to.
Join now; when he's settled he can look at options for alternative/additional savings.
With a CARE scheme, what is the employer contribution - or is that covered by the annual CPI based revaluation and 1.25% supplement?
You also need to factor in the employer contributions which will match employee contributions up to a certain %age.
That in itself is worth more than any investment returns in his salary sacrifice.
The other point of view is dont pay into a pension when young and prioritise other investments.
Invest in yourself to move up the paygrades quicker
Use the cash to save and buy a house vs renting
(in effect you're trading short term benefit over a something you wont receive for 40+ years)
Yes, there is the benefit of compounding from paying into a pension from a young age.
However its going to be a small amount at a time in life when cash is scarce.
Once your career matures and you have spare cash then maximise any workplace pension/tax benefits.
The other point of view is dont pay into a pension when young and prioritise other investments.
Invest in yourself to move up the paygrades quicker
Use the cash to save and buy a house vs renting
(in effect you’re trading short term benefit over a something you wont receive for 40 year)Yes, there is the benefit of compounding from paying into a pension from a young age.
However its going to be a small amount at a time in life when cash is scarce.Once your career matures and you have spare cash then maximise any workplace pension/tax benefits.
No. Just, no.
Start early and enjoy the compounding effects. My pension I had from a part time job I had as a student for a couple of years is on track to buy me a pretty tasty new yacht* when I retire.
*Pension pot may end up being used for more boring purposes, but it's illustrative.
How long is he planning on living? If he drops dead @ 60 it might not be the best way to spend his money. If he lives to 100 it will be the best 12% he ever invests. CARE is still 'better' than DC IMHO.
Lots of stuff on youtube like Meaningful Money which he can watch and learn from.
It's worth noting that the 12.44% is the starting rate. As his pay increases so does the percentage he needs to pay in. He will be up to 13.44% quite quickly.
He also needs to consider how long he will be in for. If he leaves before 55yo he will only get his pension from state pension age which may well be nearly 70yo by then.
Good luck to him, I hope he has a great career.
Best advice I've heard was for a friend who retired at 55.
Her dad said always overpay. Pension, mortgage, ISA etc
Save at least 10%.
If you do this from pay packet 1 you'll never miss it. Yeah you'll maybe not have the newest cool toys but..
Friend is currently riding across the antipodes. Now in NZ having done 00s of Kms in Oz. Think she's due back in march. They have a lovely house and a good standard of living but importantly her squirreling it away mean she has at least the same spending power as when she was working.
remind him the money is lost pre-tax - so assuming he's on the 20% band, his 12% is only costing him 9%(ish).
Best advice I’ve heard was for a friend who retired at 55.
Her dad said always overpay. Pension, mortgage, ISA etc
Save at least 10%.If you do this from pay packet 1 you’ll never miss it. Yeah you’ll maybe not have the newest cool toys but..
Which is all great if you have the spare cash to save that much.
Some don't.
Which is all great if you have the spare cash to save that much.
Some don’t.
Which is kind of the point - if you start good saving habits early and ideally from the first paycheck, it will always be "easy" to live on less than your wage and save a proportion. Whereas if you get used to spending all you earn, then it will always be incredibly difficult to save anything; regardless of how much you earn.
Which is kind of the point – if you start good saving habits early and ideally from the first paycheck, it will always be “easy” to live on less than your wage and save a proportion. Whereas if you get used to spending all you earn, then it will always be incredibly difficult to save anything; regardless of how much you earn.
I think the point being made is that 10% of £40k a lot easier to save than 10% of £20k, because on £20k you need to spend £20k just to get the basics of food, heat and shelter, on £40k you still 'only' need to spend £20k on those things and have £20k to save and/or be frivolous with.
(but probably sill worth it regardless as 12% (really 9%) of his starting salary is a lot cheaper way to buy a 1/53rd than 12% of his final salary).
Significantly better than my defined contributions work pension which is easily the best way for me to save. As above join the pension scheme without doubt.
Do what you need to do to get the max contribution from your employer.....
I’m 57, if I could give one bit of advice to my younger self it would be; pay start paying into your pension as soon and as much as you can!
Her dad said always overpay. Pension, mortgage, ISA etc
Save at least 10%.If you do this from pay packet 1 you’ll never miss it. Yeah you’ll maybe not have the newest cool toys but..
Very much this.
Not having the best toys, the best holidays, the best house, meant that we had savings when appliances blew up, we could overpay the mortgage with any surplus till we had paid it off before 50, and hopefully our work pension schemes mean that we will be able to enjoy a retirement
(I accept this will be harder for youngsters now, but the principles apply)
Yes, there is the benefit of compounding from paying into a pension from a young age.
However its going to be a small amount at a time in life when cash is scarce.
Glad I ignored that advice when I was in my early 20's.
I've a pension that I paid into for less than 4 years that is currently forecast to pay out more per year than I was earning as a salary when working there. I can also take it from 55 (with reduced payouts) or 60 without.
Luckily our kids saw grandparents benefit from good pensions, and know what we'll be getting so understand. They are also ensuring they all take the maximum match from their employers too.
Luckily our kids saw grandparents benefit from good pensions, and know what we’ll be getting so understand. They are also ensuring they all take the maximum match from their employers too.
they could put in 100% of what they earn and still get nowhere close to the pension their grandparents got...
If this:
Which is all great if you have the spare cash to save that much.
Some don’t.
Then consider different job.
Happiness is everything. However, being skint, at any age, and not being able to do anything about it because you're skint will make you unhappy IMO.
Pension, as much as possible. It's a great habit to get into from as young an age as possible and really dangerous if you don't -because most people find themselves at 40 with **** all of a head start.
Mate's kid has put 30% of everything she ever earned into pension + savings. She was proper skint all through her 20's - all her mates were out partying and although she did have a nice time it wasn't crazy. She'll be retired, on more money than the national average salary, from about 45 years old. Or if not retired - completely free to choose what for, when, and for whom she works.
He d be mad to turn it down. My first job I was lucky to share train commute with company secretary the first week, first thing he said was get enrolled into pension and share scheme. I said I was skint, I really was, he said just find the money.
U r right though, these old schemes were gold plated and closed now, but replacement is still good, just not as good as it was.
Secret is start early.
Thank goodness for auto-enrolment. Not the case when I first started years back. I wonder just how many started late paying into pensions before then.
Pay in from day 1, forget it and don’t notice what you’ve never had in your pay packet, and be glad you did when retirement age reached. That’d be best advice to any youth.
No idea about your numbers but generally a public sector pension incl employer conts is going to be better than any private options he might think about.
I dunno much about pensions, but I bet its probably a good deal.
However a more important piece of advice I think, is to do some other investing elsewhere, through a SIPP or something. Compound interest means that in 20 or 30 years time he may well be doing really well. What 19 year olds do not realise is that 40 comes around really fast..
Advice? Start now.
I wouldn't rush into it at that age because there are better things to spend it on and have fun while you can. I am only 55 yet don't want or seem to need any of the things that made me happy in my 20's. I am happy with a much simpler life now, own a house, don't desire flashy cars or bikes and so on.
Nobody knows what they will be like, how they will feel or what position they will be in in 40 years time plus as said above, looking on negative side you may not even be alive by then.
If there is any time to be a bit rock and roll then it is in your 20's but then I guess if you are joining the police you may not be that type of person anyway...
Presumably he’s still living at home, and this is his first proper wage? In which case it’s hard to argue that he needs it all, and can’t afford the pension deductions.
I’m 57, if I could give one bit of advice to my younger self it would be; pay start paying into your pension as soon and as much as you can!
How odd. Mine would be to get an enormous mortgage and buy the biggest house possible as soon as possible.
Oh, and that Leicester will win the preniership in 2008 ( or whenever it was)
Biff
I'd say, pay into your pension, add some to a savings account and live life.
Don’t overthink it - pay into the police fund and see where life takes him.
The thought of starting a career with the intention of sticking it out for 40yrs to get a good pension makes me shudder.
I’ve been in the same line of work for 35 years and by god I’m bored of it! 🤣
Thanks all, some good advice there
We'll continue with pension and look to invest a small amount monthly into a low cost stocks and share index fund to start with, and put some of his savings from part time to work better in some cash ISA and easy access accounts.
it looks like people are not being encouraged to save
