25 years old, join a pension scheme or pay off mortgage?

Chrismaths

I'm an investment manager aged 25. I have no pension, as I don't want to lock up my money in a vehicle that is subject to Gordon Brown's (& his successors') whims for the next 30 years (minimum). Pensions are not tax-free - they are tax-deferred. Yes you get tax relief now, but you pay it when you withdraw it.
The wife and I save into ISAs currently, as they have the same tax treatment inside the wrapper, and if you need it you can get your hands on the money. I don't own a house as I rent a house that would cost £950 per month in interest for £610. But in your position I'd get rid of the mortgage, as post A-day you can put your entire salary into a pension if you want, so you could save up a big pot rapidly if you so chose. This approach requires discipline - the whole point of locking up your pension is that the Government doesn't trust you not to blow it. The pensions crisis is real, but it is in the public sector, as the government has mortgaged our generation's future to buy the votes of Labour-voting public sector workers. Pensions are more an issue for the young than the old, as it's us poor b*ggers who'll have to pay for the decisions made (or not made) now.

The way things are going in the UK (the only country in the G7 with rising unemployment and a rising tax burden (linked perhaps?)) I fully expect to emigrate before the age of 35.

al_yrpal

Ed seems very keen on this business of 'trading down' and releasing equity. I can tell he/she is not retired and hasn't observed at first hand what a rottern deal this is and how traumatic it can be. I can, because I have observed several of my retiring close friends following this route and ending up riven with angst and very unhappy.

The sort of things that happen are:-

You get a rottern deal from the equity release people, the money is gone too soon. Or, you sell up and end up retired in a small place teeming with young families with exhuberant noisy kids when all you want is a bit of peace and quiet.

One couple moved from a nice 4 bed detached into a terraced place with no garden and ended up only £30 grand better off - was it worth it?

The best trick, as dunstonh has indicated is to treat your retirement fund as an ongoing expense. Live within or below your means (a good read is 'The Millionaire next door' on this subject), in a house that you can manage easily physically and financially in retirement. Alongside paying your mortgage you can hopefully make some modest investments inside and outside a pension, which leaves you sitting pretty with a decent pension AND a sizeable amount of cash in retirement to invest or spend as you wish.

The point is having a mortgage is actually increasing your financial gearing, which means you can make investments and hopefully those gains. Having no mortgage may make you feel secure, but to my mind it makes no financial sense at such a tender age.

The answer is, a little bit of this, and a little bit of that....

Chrismaths

Equally valid advice. So long as we take responsibility for the financial decisions we make, that's fine. Paying off your mortgage early (say by the age of 35-40) releases a huge amount of cashflow in subsequent years, whilst you are still working, and would expect to be close to the peak of your earning powers. In that manner, you can easily save a large amount of money quickly to provide for your retirement - whether in a pension or no is individual choice - not only that but if you're a HR tax payer at that time you get more tax relief on pension contributions anyway.

A pension fund is ONE way to save for your retirement, not the only way. And to my way of thinking it is a singularly inflexible one.

EdInvestor

I can tell he/she is not retired and hasn't observed at first hand what a rottern deal this is and how traumatic it can be. I can, because I have observed several of my retiring close friends following this route and ending up riven with angst and very unhappy.

Of course all financial decisions can go wrong or be less than optimal- and some people are unsuited to some ways of investing.

I'm sure Margaret Clare will be along before along to explain how equity release has worked very well for her and her husband - and certainly I know many people who have traded down very successfully.Admittedly they have usually released a great deal more money than 30k and have tended to move, if not to retirement communities, then certainly to areas which have had a suitable population mix than the ones mentioned( and usually a more salubrious climate as well ).

My point was really that a house can be a more flexible and reliable store of value for someone looking to generate income in retirement than a pension, if it's a choice of one or the other.In addition to trading down and equity release, you can also rent out a room and earn a tax-free income.

But no doubt some people will be more suited to one than the other - and of course the ISA route now presents a third option for long-term savings.

One does tend to notice that industry people will always present the plus points of the insurance products.My posts are designed to offer some balance, so people have a better foundation from which to make their own personal investment choice.

dunstonh

One does tend to notice that industry people will always present the plus points of the insurance products.My posts are designed to offer some balance, so people have a better foundation from which to make their own personal investment choice.

One does tend to have to balance your posts which are nearly always biased to one type of action only and do not take into account that different people have different needs. With your continued anti-industry stance, it is no surprise that the advisors here to have balance your posts with more factual and accurate information and this usually means having to mention other products on offer.

I'm sure Margaret Clare will be along before along to explain how equity release has worked very well for her and her husband

I am sure MC doesnt need anyone to put any words into her mouth but I doubt this was an action she planned to do and wasnt an option taken lightly.

My point was really that a house can be a more flexible and reliable store of value for someone looking to generate income in retirement than a pension,

It isnt though. If you paid your 25-40 year mortgage amount into a pension, it would wipe the floor with the property as an investment.

I find it hard to understand that you could consider your primary residence to be more suitable for retirement income than pensions on a like for like basis.

Tahiti

If the company were to contribute like for like, I would at least put something into a pension arrangement. And if you are a 40% tax payer, it makes even more sense in my opinion.

However, if the employer contribution is low, and/or you are a lower rate tax payer, I have to say that I personally would probably look to save it in another way (paying off the mortgage, or more likely, in an ISA as rainy day money).

A pension is intended for retirement, and you cannot access it until (in your case) age 55 as things stand so it is inflexible, and as has been pointed out above, it is tax deferred rather than tax free.

MGAstra

I think paying into a 'salary sacrifice' pension is actually a better retirement plan than trying to pay off a huge mortgage then re-mortgaging to release equity later in life.

Further more, if the money put into an ISA was only used when you reach retirement, then again a salary sacrifice pension scheme sounds like the better option to me.

MGAstra

Could someone please confirm or correct the statements below…

If I put £50 out of my gross salary into a pension fund per month and my employer adds a further 12.8% for their part of NI, then the pension fund has increased by £56.40. Alternatively the £50 could be paid directly to me after NI and tax (12.8% and 22%) resulting in £32.6 which I could then put into an ISA.

WOW! The input to the pension fund is much greater than to the ISA.

The pension fund managers take 1% commission pa.
The pension fund is not available to me until I reach 55.
When retirement is reached, 25% of the fund can be taken as tax free.
The remaining 75% of the fund can be used to buy an annuity (after being taxed??) or can be withdrawn in small amounts (limit set by government??) each year.
Hopefully the fund managers can increase the value of the fund by the same percentage as inflation each year + 1% so the value of the fund isn’t reduced.

The ISA has a much lower input per month, but will increase by a bit more than the rate of inflation each year.
The ISA is always accessable should there be a need.

I need to do the maths on this one (I can see a spreadsheet coming together soon) but it appears that the fund managers would not need to work hard (if work at all) to make the pension out perform an ISA.

Hence, if the money put into an ISA is not touched until retirement, then it would have been better in a pension fund.

Any corrections or additional information would be greatly appreciated!

Thanks for taking the time to read this.

claretmatt

I think the ISA v Pension debate is going to continue on these boards and weighing up the pros and cons of one against another is difficult to ascertain without knowing the full circumstances

The way that i've seen salary exchange (sacrifice) schemes work before is that both the employers / employees NI savings and tax saving are contributed towards the pension and a £50 per month contribution would actually increase to £84.18 on this basis.

I have devised a spreadsheet to show the individual calculations, which by all accounts is difficult to explain in a message reply.

Obviously the way that individual schemes operate is different from one to the next and it would be wise to ask what is actually going to be invested on your behalf.

The link that Edivestor provided previously does show some of the pit falls involved and these need to be considered before you make a commitment.

EdInvestor

The remaining 75% of the fund can be used to buy an annuity (after being taxed??) or can be withdrawn in small amounts (limit set by government??) each year.

Income from pension annuities and income drawdown plans is taxed at your highest rate in retirement - hence the tax relief is clawed back.Your capital is not accessible unless you die before the age of 75 and have taken drawdown.Otherwise it is lost.You can withdraw 120% of what you would get with an annuity from a drawdown plan.

Income from ISAs is unrestricted and tax free (and of course the capital is available any time).

The personal allowance is bumped up to around 8k for retired people but this is usually used up by the two state pensions .

This is why pensions tend only to be beneficial for those who pay higher rate tax now and expect to pay basic rate in retirement. These people pocket an 18% cash handout from the tax relief on a personal pension, (that's cash, it doesn't go into the pension fund which they claim back on their tax return.

So for the higher rate taxpayer it's usually worth it.I wonder if they would think it was such a good idea if the 18% also got trapped in the pension fund?