Why I will not be Relying On a Pension to Retire

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It’s that time of year at work again – the time where we decide what benefits we want to buy with our benefits fund. As usual, the debate around pensions has started again focused on how much people are considering contributing.  I definitely believe this is a personal choice and have to resist the urge to shout “Are you crazy?!!!” when a colleague boasts that he never responds to the benefits selection call, instead he just goes with the company default. Talk about letting someone else make your money decisions! (As you can probably tell I struggle to hold back on preaching financial education when I hear crazy things like that. I guess once you’ve been woken up to the necessity of taking control of your finances and your future it’s difficult to go back to sleep-walking).

Now the general consensus is that we all should be contributing as much to our pensions as possible. Plus points include:

  • The benefit of the company match (e.g. if you put in 1%, the company will also put in 1% – so it’s like getting 2 for the price of 1 in this instance).
  • Tax benefits – the tax and national insurance you would have paid on the contributed earnings are also added to your pension pot.

I like all of these things, given that I’m all for maximising my money, but there are a few things that make me question how much I should contribute to a pension.

My conflict with the UK Pension system

State Pension age is on the rise. For the grandparents it was 65 years old (60 for women), for my parents it will be 67 years old and currently for my age group it’s set at 68. At £115.95 per week you won’t get very far with state pension alone. Why does this matter?

Generally the earliest you can draw from your private pension is age 55 (10 years before state pension age). If you withdraw money before this minimum age you could incur significant penalties (currently 55% tax on the amount drawn early). So here’s where my issue lies…if state retirement age is rising, the point at which you can start drawing from any other pension pots (without significant penalty) is also on the increase.

Maybe it’s the Millennial in me, but given the prior age hikes and the ageing population, I wouldn’t be surprised if there were further increases from those stated above. With this in mind, focusing all of my retirement efforts around locking a significant chunk of my earnings away for roughly 30 years has never really appealed to me. It seems that, despite the financial landscape being very different for Millennials versus prior generations, we are pushed to follow the same model (work hard, contribute to pension, retire).

Retirement – A right or a privilege?

Many people believe that we should retire, with some even going as far to call it a right. In some parts of the world parents work until old age. When they can no longer work their children become responsible for looking after them. In other parts of the world (including the UK) the norm is to work for a number of years, up until a certain age and receive a pension to cover your living costs when no longer working.

The changing nature of pensions:

  • Defined benefit pensions – what schemes used to be. Involved a degree of certainty over the amount you would receive (normally referred to as “final salary” or “average salary” pensions). Most (if not all) are closed to new entrants. If you have one, hold on to it, they are like gold dust.
  • Defined contribution pensions – what most schemes are today. The only certainty being how much you put in. Your pot is then invested with the final sum on retirement dependent upon how well those investments have performed.

In light of this change many may find themselves continuing to work or having to look to children/other family members for support as they reach retirement age, due to pension pots being less than they hoped for.

The reality is that retirement is a privilege; one that not everyone will be in a position to afford – each person will need to put plans in action to achieve it.

What does retirement look like for me?

financial freedom v2

It’s all about the freedom to choose how I spend my time (well before the age of 68 – the aim is 45).

Most of us have to spend a chunk of our day at work for money. So in order to choose how I spend my time my living costs need to be covered whether I work or not. This means putting money to work in areas that generate income streams whether I’m present or not such as property, businesses, stocks & shares.

Despite my conflict, I still make a contribution to a pension (one in which I can manage the investments), with the view that if for any reason I don’t get to use it someone in my family will benefit. I just don’t believe that it should be the sole focus when it comes to providing income during retirement.

What about you?

What does retirement mean to you? Are you seeking early retirement? If so, what are your plans to achieve it?

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6 Comments

  1. September 1, 2016 / 11:03 pm

    I’m not from the UK so I apologize if I am misunderstanding- does your employer contribute to a retirement plan that is run by the government? You make a very strong argument for not having you pension make up the majority of your retirement plan. Even so, I would contribute up to the employer match and then divert the rest of my retirement funds into something more accessible/flexible.

    In the US we’re told that Social Security will run out before my age gets there. Maybe I am naive, but our government can’t just let it run out-we’ve paid into it-they’ll figure something out. Even so, it has never been the basis of my retirement plans. I hope to have a few rental properties for monthly income (and that can be sold if I need a cash infusion for a long term care situation). I contribute to my employers plan, but I won’t be vested in the employer match for another 2 years and I don’t know if I will stay that long. I also have an IRA and a brokerage account I am trying to build monthly income from. I think I’ll be alright, barring any health catastrophe, but I do like to revisit my options every few months to make sure I am on track.

    • September 3, 2016 / 9:07 am

      Hi Jax. Thanks for your comment. In the UK there is a government state pension, but given the low weekly pay out and ever increasing retirement age, don’t believe anyone should rely on it. There is also no guarantee that it will still be there by the time my age group gets there.
      Employers’ pension schemes are separate. Typically an employee would contribute a certain percentage of their salary to the scheme with an employer match, similar to what you guys have in the States. There are also some employers who operate a “Salary Sacrifice” scheme where the employer contribution is included in your salary so you don’t get that same feeling of “free money”. So for example, in the latter scheme you would choose to contribute 4% from your salary which would consist of 2% employee contribution and 2% employer’s contribution (i.e. it all comes from your pocket).
      Sounds like you have considered a range of options for funding your retirement, which I think is the way forward. The key is the consistent allocation of savings to these plans (e.g. your IRA or investing accounts) so that you can gradually build up funds and benefit from compounding over time. If you haven’t already calculate the amount you will need to retire at your desired income. This will help to clarify your monthly savings goal. Lastly, as you rightly note, given that you are in the US you cannot ignore healthcare costs, which isn’t something we have to think about in the same way over here (long may that continue).
      The good thing is you have a plan, which puts you ahead of the crowd. Keep pushing!

  2. July 1, 2017 / 7:55 pm

    The state pension should be regarded as a benefit and not a right. As a benefit, the Government of the day will change the terms and conditions to suit themselves.

    Eventually, like the NHS (a little controversy there), it will be rationed to those who need it most. The oft quoted question of ‘should someone with the wealth of Simon Cowell (sorry mate) really be given a state pension or free at the point of delivery health care, with so many demands on the system?’

    I don’t believe the Government will dramatically extend the age a private pension can be drawn, as it is a disincentive to invest in one – and they desperately need you to.

    Either way, the message is you can’t rely on the state to provide for retirement income. As you say, that’s a choice, but consider this, many of my generation (I’m 56 this month – happy birthday to me), will be the first of any generation who won’t be able to afford to retire. And that is wholly down to the choices they’ve made in their past

    • msmoneymaximiser
      July 3, 2017 / 5:11 pm

      People taking retirement as a given is one of the things that prompted me to write this post. As for extending the private pension age, it’s looks like things are headed that way, given it’s linked to state pension age. Aside from the age increases the other big issue is whether people will have enough saved. For a lot of people, as you point out, that will not be the case. My thoughts are that people will need to build new income streams to supplement any pension they may have.

      • July 3, 2017 / 6:08 pm

        I’ve calculated (predicted/guessed) that I can build a pension fund of £300k in 10 years if I work 70 hours per week.

        That gets me a 50ft Beneteau yacht for £100k, moored in Gibraltar harbour, and the rest to live off. You can follow my progress on Facebook (stupid is the norm).

        If I had not been so stupid with my finances when younger, I wouldn’t have to cram 20 years worth of work and savings into 10 years.

        If an 18 year old invests only 2 hours per week of salary until they retire, then another income stream won’t be required. Try convincing an 18 year old of that though

        • msmoneymaximiser
          July 3, 2017 / 9:53 pm

          The benefits of hindsight! It’s a shame that most of us don’t start getting it together until later. Those who do I’ve found were given some good financial education by their parents.

          All the best on the journey! Will check it out on Facebook.

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