Changed Days

My son started work this time last year and, on his first day, I gave him the best advice for that event that I could: “Remember to sign up for the company pension!”

Of course, he didn’t need that advice because he’d have been automatically enrolled these days and would have had to register to come out of his company pension scheme, as opposed to physically signing up to joining it as I once had to. Doing so was one of the most important financial decisions of my life, not that I was aware of it at the time. I’d be lying now if I said I could remember signing on the bottom line that took me into the company Defined Benefit scheme, I’m just ever so glad I did. I don’t think I ever missed the money either, not even thinking about the subject until about ten years later when I started to become interested in investing for the future. Even then, I took the pension scheme for granted. After all, surely everyone was enrolled in some sort of scheme?

I read in the paper this morning, however:

A 25-year-old starting work in the private sector would have to put almost a third of their salary into a workplace pension to match the retirement benefits of a colleague embarking on a career in the public sector, according to a report by the Taxpayers’ Alliance, the low-tax campaigners.

Never mind the public vs private sector debate (if you can). What shocked me was that a twenty five year old would need to invest a third of their salary to get a decent equivalent of a “defined benefit” pension on retirement. It just highlights what a loss to the average employee the demise of those DB schemes has been. Not that they’ll probably notice, or miss, something that they never had. But it certainly makes me think that your fresh faced employee joining the workplace today has a tougher financial future ahead than I ever did. To be honest, if I had been told that signing up to the company pension scheme that I joined in the Eighties would cost me a third of my salary, I doubt I’d have joined. But my contribution was nowhere near that.

A few other things that have gone since those heady Thatcherite days when I joined the working population: firstly, the company car I was given was a total perk, hardly cost anything on tax and was way, way better than having to buy your own car. That’s not the case now – I opted out the last company car scheme I was offered due to the tax burden on it.

Secondly, my starting salary of £7k a year meant I could get a mortgage of £23k, enough to buy a small flat in my home town and get on the property ladder with a ten percent deposit. That’s almost laughable these days and has me wondering if I’ve got my facts right – but I know I have.

Thirdly, if I wanted something like a new TV for my flat, I had to sign up to a Hire Purchase agreement or save up the money. I was about three years into employment before I signed up for an Access Mastercard (Your Flexible Friend) which changed how just about everyone thought about getting into debt. Something that was almost shameful to my parent’s generation became almost fashionable and cool – paying for dinner with a credit card let you almost imagine you were Gordon Gekko from “Wall Street”, or Bud Fox at least. Surely that slinky mobile ‘phone wasn’t far away either?

gekko

I smile at those recollections now, but many of my early financial decisions I made happened without me thinking too much about them. Generally speaking, however, the basic things I assumed in those days were both sensible and achievable – pensions were a good thing, you should try to get on the property ladder early and you should be wary of debt. And, generally speaking, those rules are still sensible today. It just seems that for my son’s generation, they’re a lot less achievable.

21 thoughts on “Changed Days

  1. A few minutes with a spreadsheet reveals that the tax payers alliance may be playing fast and loose with their assumptions in order to make a political point – to be fair I am broadly in agreement with their beliefs, but they ought to do it honestly.

    Liked by 1 person

  2. My public sector employer has a contribution rate of over 26%. You would think that joining the scheme would be a no-brainer?

    I had a thirtysomething year old guy move over to my team who had not joined the pension when he started work at the organisation four years prior. Even back of the envelope calculations showing how much he was losing by the month didn’t prompt him to sort things out. I had to physically march him over to the pension department to get him to sign up. It really beggars belief.

    Denial of death is one thing but denial of retirement? Another colleague has worked here for 25 years without signing up. He knows he should have, but thinks it’s too late now. If you’ve been throwing money away for 25 years what difference does a few more years make? I just don’t understand that logic. I think a lot of people don’t want to think of retirement until it’s too late – I didn’t until about 40 – and people don’t want to admit their mistakes as they are so anchored in their opinions.

    Young people today face a real problem, pensions are hugely expensive and without a DB scheme the contribution rate needs to be large and for a long time. Most people (myself included) just aren’t capable of planning 40-50 years ahead when in their twenties when it really counts.

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  3. Like you, when I joined my company, I had to opt in to the defined benefit pension scheme. There was a two-year window in which I was allowed to join (can’t recall why it wasn’t permitted after two years), so as a clueless youngster going from earning zilch to suddenly having loadsamoney, I came to the obvious conclusion that I needed all my earnings and couldn’t afford to pay into a pension. Hmm!

    Thankfully, I came to my senses at the two-year cut-off point, but when I think now about what those two extra years will be worth to me one day versus what I reckon it would have cost at the time…

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  4. 6 months into my job I got the offer to join the DB scheme, didn’t have a clue about it but knew it was important to join. Was the bargain of the century, in the 18 years I was in it until it was closed I’ve personally contributed £23K and it’s currently worth £13K per year and with it being indexed linked I estimate it’ll be worth at minumum £26K per yr in 20 years when I can draw on it. Towards the back end it was tweaked like having it based on career average salary, luckily I was on the right side of these changes for it not to impact me, I did pass on paying extra to keep the retirement age at 60, moving to 62 but when a year later they want to move it to 65 I paid the extra to keep it at 62.

    In constrast in the last 5 years I’ve paid £27K into the replaced DC scheme which on a 4% drawdown is currently worth £3K per year. I’m putting in on average 3 times the match but that’s mainly to reduce taxes by making use of salary sacriface, keep myself as a basic taxpayer.

    On salary sacrifice I didn’t join it when my employer first offered it, I thought was a tax dodge that would come to bite back, took a year to realise it was endorsed tax avoidance by the then government rather than a tax evasion woose.

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  5. When I secured my first permanent full time job at the age of 26, it was my sister who had said ‘Sign up for the company pension’ so I did. I’m glad that even when I was struggling with debt that it never crossed my mind to stop the payments, I just treated it like tax. I didn’t realise it was a DB pension until 15 years later, when new starters could only sign up to a DC pension. One of my friends who worked at the same company for 10 years never opted in and as far as I’m aware, she has opted out of auto-enrolment – she’s of the opinion that she should have signed up earlier and now it’s too late, the same ‘logic’ that @Aidan mentions.

    It is harder for youngsters of today – they do need to get their foot on the investing ladder a lot earlier and think about their retirements now rather than later to allow the power of compounding to help them out.

    Liked by 1 person

    • I’ve a couple of friends in the building trade who were never offered a pension and therefore don’t have one. Now, in their fifties, and finding their work physically demanding they are almost terrified about having to work until they reach 67. How, at their age, can they change career? I don’t know what to say to them.

      Liked by 1 person

  6. TPA – Political? I don’t believe it 😉
    Can’t say I even understand the tables in Appendix B – what am I missing?
    Like Jim, I advised my son (late 20s now) to take an active interest in his pension. His company is offering 12% non-contributory into a DC scheme – which seems not bad these days. More importantly, he’s taking an active interest in his long term finances. He’s started making additional contributions and these are being topped up by NI savings by the company. After much discussion about the excellent Escape Artist post (https://theescapeartist.me/2017/02/24/what-if-i-know-nothing-about-investing/) he looked at the funds offered by the scheme and transferred to the highest risk fund, away from the default managed option. Good on him. He’s on a decent, if not brilliant, salary and has now ferreted away quite a fund that should see him in good stead many decades from now. He also reads many of the FI community blogs and has taken much of the frugal thinking on board, but not to the extent of living like a hermit!
    He has a plan – which makes me feel a lot better!

    Liked by 1 person

    • That’s great and I’m hoping my son will do similar. I wish someone had told me to bank 10% of my first wage cheque and then continue doing so until you retire – which will come a lot sooner if you’d followed that advice.

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      • Just when I was starting work, about 25 years ago, I read an article in the Independent that said to save half of every pay rise. I did. It still felt I was getting a pay rise, and I didn’t miss the other half – which I used to over-pay my mortgage.

        Saving half the pay rises into overpaying my mortgage – two best bits of finance I ever did. It was a total fluke reading that article, but it certainly had a huge positive impact on my life. That and “join every pension going” would be my three pearls of wisdom to the younger generation.

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  7. Thanks for sharing Jim. I echo the sentiment in the comments.

    I’m too young to have had the opportunity of a DB scheme. I worry that in around 10 years time we will start seeing the first tranches of people without DB pensions retire and they will have great financial difficulties.

    We can be hard-nosed and say it’s their fault but planning, thinking, that far into the future is hard. Hard for everyone. I struggle with it.

    I also agree with P, for those unfamiliar, be wary of the Taxpayer’s Alliance – they are an opaquely funded advocacy group.

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  8. I’m one of the few lucky young people in the US with a pension. In my state gov’t, you don’t have a choice. You just get it. I contributed 3% of my income for ten years, and that’s it. Then it’s worth a percentage of your final income based on how long you’ve worked (40% for 20 years, 60% for 30 years, etc.) We also have a defined contribution plan which I signed up for immediately because the HR lady scared me into it when I was hired, saying not signing up was the biggest mistake she’s ever made.

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    • Before compulsory registration in a pension fund became the default in the UK, an HR Director told me I’d be “absolutely flabbergasted” by the amount of people who didn’t join the company scheme. I’d a couple in my own team who felt that “property was better than pension” and they needed all the money they could get on a mortgage. I couldn’t persuade them otherwise.

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  9. Here is a question for you:

    Since your son has a much tougher start in his working life than you do you think you should give him a big chunk of your early retirement fund?

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      • Surely that’s a question for you….the thing is to start somewhere! I also think that one important thing you can do for your children is make sure your own affairs are sorted. That means money for care, wills and power of attorney sorted, and affairs simplified.

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      • Next question.

        And why just your children should get a “big chunk” of your wealth and not everyone else in their generation?

        As you admit, you did nothing to earn most of your wealth. Just luck to get a job with a final salary pension. Just luck to happen to be owning a house at the right time.

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  10. People with DB schemes earned them, it was part of the terms and conditions of their job. It wasn’t a “gift” . As for being lucky to own a house and sell at the right time, it fails to take into account the process of actually working day and night to pay it off. Making a profit on it is the luck of the draw. I’ve seen mine fall in value as well as rise, just market conditions at the time. I always have seen my home as a place to live, not as an outright investment. The comment that why shouldn’t the kids and everyone else not get a big chunk of your wealth still has me laughing. Who’s wanting something for nothing now? Bad case of sour grapes Neverland.

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  11. When I got my first full time job back in the mid 90s the firm had switched over from DB to DC a couple of years before. I was aware straight away that it was in effect an arbitrary 20% or so pay cut for the graduate intakes after the cut off vs those before. There has just been a huge transfer of wealth from most wage and salary earners to those who already own the assets or entitlements. It looks as things stand that many young people will simply never earn enough in their lifetimes to cover the essential expenses of education, home and pension and children on top of day to day living expenses. The income has been redirected to the rich.

    Most of my friends and family work in sectors that still have defined benefit schemes although they have become less generous over the years with later retirement dates and career average vs final salary etc. However I wish I had a DB scheme for the peace of mind it would bring. DC schemes and other forms of savings simply do not provide much security for retirement unless the sums involved are vast. How much will I need and how long will I live? There is no way of knowing for sure. What will inflation do to my savings? Again no way of knowing. The idea that an average person is going to be able to manage all these risks is laughable. Annuities were the best answer but they are too expensive now to be of much use to most retirees. I am not sure how I will manage these challenges when I am older and slower as I have enough difficulty with it now. A DB pension would definitely help me sleep more easily.

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  12. cat793.
    I wish Id had access to a db scheme for longer, only had one for a short time then straight onto a dc scheme. Still at the end of the day Ive got to make what Ive got fit the lifestyle I want. Only time will tell if thats possible. This early retirement thing is very fluid.

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  13. Population explosion has shrunk the cake for all, neoliberal inequality has exacerbated that; the zeitgeist has changed and now each generation can only get worse off than the last as a whole, in a total reversal of what the Boomers took as their entitlement. The next generation will only get burnt crumbs from trying to make it fairly through life, unless their parents can and do pass on retained Boomer wealth. They’ll probably be told they’re feckless.

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