One of the main selling points about my employer is that they offer a defined benefit (final salary) pension. This essentially means that each month I pay into my pension fund which is a proportion of my final salary. For each year that I work, I gain around 1.9% – a 30 year career would mean that I have a pot equal to 57% of my final salary. I am under no illusion that this scheme is amazing and that I am very lucky to be enrolled.
The problem with defined benefit pensions schemes is that the company is essentially promising to pay you a certain amount of money – irrespective of how the market changes. Your pot in a defined benefit scheme is unaffected by a poor performing market – the benefit remains the same. While the pension fund will still be invested like other funds (bonds, funds, stocks etc.) – the company offering the scheme are liable to ‘top-up’ the pot where required.
It is for this reason that most employers, offer what’s called a defined contribution pension, where they commit to match a certain payment into a fund each month. While the contribution remains the same, the size and value of the pension fund depends on the economy and market conditions. A recession and poor economy will lead to a reduced pension size, but a high performing market could give significant gains. There is a lot more risk involved.
Sign Up On Day 1
Like any other savings account, the trick to accumulating a large pension pot is to maximise the duration that you contribute. The longer the period of time that you pay into it, naturally the larger the pot will become. Each year, new graduates are recruited by the company I work for – most of which are ignorantly unaware of what an amazing deal they have just got themselves. Unfortunately, some are so clueless about pensions that they don’t even bother enrolling in the first place. Although it may be 40 years away, we all need to think about retirement and have a long term goal in mind.
Spousal / Partner Pensions
It goes without saying that two pensions are far better than one! Even if your partner only intends to work for a few years before starting a family – paying into a pension fund is definitely worthwhile. You always have the option years down the line to resume paying into a fund, or even transfer it or combine it with another.
A Pension Is Just One Source of Retirement Income
While pensions offer a great source of income for when we eventually stop working, they should by no means be the only source of income. I heard a sad story about a senior professional in the UK who worked for a large Accountancy firm who made one mistake (accepted a tickets to a prestigious event [i.e. a gift] which was against company policy – gross misconduct) and was dismissed and lost his pension fund. Many companies reserve the right to revoke these funds in these circumstances. I’m willing to bet that he didn’t have an equivalent back-up plan in place!
NOW is the time to start generating your additional passive income streams. Whether you are 20, 30, 40, 50 or older – it is never too late (or early) to start generating passive income. The fundamental concept of retirement is commonly attributed to something you do in your 60s when you stop working because you are ‘eligible’. I like to think of retirement differently. – Something you do when you are generating enough passive income that you don’t have to work 9-5 anymore. For most, this involves having a pension policy that is ready to pay out – i.e. passive income. For others, this involves having a clever and diversified portfolio which is generating income long before. Rental Properties, Stocks, ISAs, Savings, Funds, Businesses, Niche-Websites, Blogs etc.
It is time to start thinking about retirement NOW! Retirement is not something you necessarily do in your sixties… retirement is something you can do whenever you get motivated…… Just ask my friend Pauline if you don’t believe me.
What is your plan for retirement? How much income would you have to be generating passively to consider giving up your full-time job early?