Some Clear Advice

mattrgee

Hi all,

I'm 26, not a home owner and don't pay into a pension. I don't have any savings.

I have approximately £800.00 'left over' each month after taking care of direct debits, petrol, shopping and general living. I really want to start saving but don't know where to start. I'm currently spending this money on things I don't really need, clothes, computers, gadgets etc..

I live in a council house which I can buy for about £100,000, houses are typically selling for between £130,000 - £150,000 where I live, so this seems like a good deal.

Should I concentrate on buying the house and worry about a pension later? Does anyone know how much a £100k morgage would cost each month? As I might be able to afford both???

Should I save into an ISA instead on a pension?

Thanks in advance.

Troubleatmill_2

With £800 each month as spendies..

1/ !!!!!! it away on friteries.
2/ Plan for your future.


A 25 year mortgage on £130K is about £740-760 per month.
Now... if you get a 2 bedroom place and rent a room out.....the cost is way less.

There are many here far more learned than I, but I would suggest ( ready to get shot down in flames ) - that buying propety is probably the most astute investment you can make. My thinking is that you can always trade bricks and mortar for cash. Also - once you have paid your mortgage off - you could be a part time lollipop man - and still have no worries about a roof over your head.

Re Pensions- you should start thinking about saving something for your retirement. The tax benefits are well recorded ( even better if you are a 40% tax payer ).

The good news is that you are young enough to make serious inroads to a healthy retirement.

So..my gut feeling- get on the property ladder- but take my view with a pinch of salt - I'll leave it to more qualified forum posters to "up the ante".

Good luck
Troubleatmill

dunstonh

I think you did a good job there Troubleatmill.

I would suggest you start saving £700 quid a month to show that you can actually afford the mortgage commitment. At 26, to have no pension and no savings and not be a home owner, you do have to wonder what you do with that £800 left over each month. If you havent managed to build up any savings now, then how do you expect to afford the mortgage, if you go down that route?

Owning the property will be more expensive monthly than the rent. However, ownership means that you wont have to pay a monthly amount out after the mortgage is repaid. i.e. in retirement.

Your primary residence shouldnt be treated as an investment. Its a damned expensive investment otherwise. On a £100k mortgage, you would pay back around £260k. Whilst the UK stays on its low inflation, stable economy track, property prices are not likely to increase like they have done and downward pricing or remaining unchanged for a number of years is quite a possiblity now.

margaretclare

Hi

Max out your ISA allowance first. You can save £3000 a year into a cash ISA and not pay any tax on the interest.

If 2 wrinklies like us can save, a 26-year old with £800 a month disposable income should be well able to. My DH saves approx £200 every 4 weeks, that's the £200 that he hasn't used from the previous 4 weeks pension. Since last August he's built up £1800 in his cash ISA just by saving his 'spare'. I do it the other way round - I save first, and in a few short years I've built up £8400+ in yet another pension fund (a stakeholder). The nice taxman will give you 22% on top of whatever you save i.e. if you save £78 a month the taxman's contribution makes this up to £100 a month which is then invested.

So there you have 2 fairly painless ways of saving! Also, saving is fun. Try it - you might enjoy it.

Margaret Clare

EdInvestor

mattrgee wrote:

I live in a council house which I can buy for about £100,000, houses are typically selling for between £130,000 - £150,000 where I live, so this seems like a good deal.

It does indeed. Step one in buying the house is to start accumulating a deposit.Aim for 10% - 10k. This should take you about 2 years. Put 3k each year into the ISA and then the rest in a high interest account (see Savings forum for the best one). Will you be able to get a "Right to buy" mortgage ?See the mortgage forum for help with that.

mattrgee wrote:

I'm 26 and don't pay into a pension.

Actually you probably do.If you are working and pay National Insurance contributions, this will entitle you when you retire to the two state pensions - the basic state pension, and the earnings linked State seond pension S2P ( formerly known as SERPS. Adds up to about 8k a year at present, so that's a good basic income for retirement, you can top this up later after you've got the house.

Apply here for a state pension forecast so you know what you are likely to get, and make sure your record is always paid up over the years.

dunstonh

I think it would be foolish for any 26 year old to include the second state pension in their planning. It almost certainly will not exist by the time they get to retirement and as the Govt has reduced SERPS 3 times in the past, there is no reason to think that there would be any retained benefit for the period that you did qualify for it. Its actually one of the positive points of contracting out.

EdInvestor

It almost certainly will not exist by the time they get to retirement

That's the kind of attitude that just encourages the likes of G.Brown to chip away at it.

People should pay attention to their S2P/SERPS entitlement.Far too few people know about it, or how much it is ( it doubles the state pension for someone with a full record retiring now ) IMHO everyone should get a forecast of their entitlement every year, to check how it's going.

It's actually contracted out personal pensions that have dwindled severely over the years, not S2P so much. Many people who contracted out 15 years ago will get much less pension than if they had stayed in S2P.

The contracted out pension misselling scandal is on the way as we speak.

CIS

I expect it will be their in the longrun , I trust it to be (Iam 24), and nothing I came across whilst working for the Pension service gave me any indication to the contrary.

I think that EdInvester is right in that people shouldn't discount AP, it can equal a persons Basic State Pension for value, and even pay out when people haven't accrued a payable basic pension.

dunstonh

I expect it will be their in the longrun , I trust it to be (Iam 24), and nothing I came across whilst working for the Pension service gave me any indication to the contrary.

Many of the proposals call for scrapping it and replacing it with an increased single state pension. Its one of the few things that the majority (there are exceptions) seem to agree on. Lord Turner's report to the Govt recommended it as well. Although we do know that the Govt didnt like what it heard and disregarded most of it for the time being.

I am not saying you should discount it. I am just saying that you shouldnt plan on it being there. As I have said SERPS benefits have been reduced 3 times since its introduction in 1978, 4 if one includes the increase in SPA for women.

There are several reasons to suspect that S2P might be reduced in the future, including the following:

1. SERPS has been reduced 3 times for men and 4 for women.
2. Government has stated its intent to change S2P to a flat-rate scheme and this might affect S2P entitlements that have accrued prior to such a change.
3. If Government bows to the pressure to scrap additional state pensions and increase the Basic State Pension,S2P entitlements that have already accrued might be lost.

It is very unlikely that any Protected Rights would be clawed back in the event of changes to S2P. None were when SERPS was changed and it would take primary legislation to do so. Some might say that a bird in the hand is worth two in the bush.

And, if you are self employed or go self employed, you dont get it anyway.

EdInvestor

There are several reasons to suspect that S2P might be reduced in the future, including the following:
SERPS has been reduced 3 times for men and 4 for women.

Could you provide a source for this assertion?

Government has stated its intent to change S2P to a flat-rate scheme

No it hasn't. What it has done is to adjust the earnings linking, so that high earners get less than before, whereas low earners get much more than before. SERPS is a particularly good deal now for people on single figure incomes, who are treated as though they are earning around 12k (IIRC).So it has moved in the flate rate direction a bit, but is still earnings linked in the main.

If you counted this as one of the reductions you mention, then it very much depends on how much you earn: for many people it was an increase, not a reduction.

If Government bows to the pressure to scrap additional state pensions and increase the Basic State Pension,S2P entitlements that have already accrued might be lost.

It seems unlikely that vast numbers of people would be made worse off by such as a change - there would be an outcry and it would be politically unsustainable. One should bear in mind that it is the lower paid who benefit mostly from SERPs/S2P - higher earners will be contracted out mainly into company pensions - and these people are key Labour voters.

cheerfulcat

mattrgee wrote:

I live in a council house which I can buy for about £100,000, houses are typically selling for between £130,000 - £150,000 where I live, so this seems like a good deal.

Should I concentrate on buying the house and worry about a pension later? Does anyone know how much a £100k morgage would cost each month? As I might be able to afford both???

Should I save into an ISA instead on a pension?

Are you happy to continue living in the house you currently rent for the next seven to ten years? If not, I would suggest that buying it is not such a good idea. [I'm with dunstonh on this btw; your home should not be viewed as an investment. In fact, some people go so far as to see such property as a liability, since it costs quite a lot both to buy and to maintain and no matter what anyone tells you, a positive return on your capital is not a certainty.] If you are happy with living in the house there is something to be said for buying, though.

The ISA/pension question comes down to whom you trust more, yourself or the government. If you can save in an ISA without being tempted to spend the money, I would suggest starting there. If you might be inclined to " dip " then the pension is probably a better place to save; you just have to hope that a future Chancellor doesn't fancy another " dip " himself. You can always go for one of each.

I think dh's suggestion is an excellent one

dunstonh wrote:

I would suggest you start saving £700 quid a month to show that you can actually afford the mortgage commitment.

Why not start off by putting £250 a month each into a cash mini ISA and a couple of high-interest regular saver accounts, say for a year, just to see how disciplined you can be about a) making regular payments and b) leaving the money untouched. If you want to test your reactions to stock market fluctuations as well you could go for 2 mini ISAs ( one cash, one S&S ) and a regular saver. If nothing else, at the end of the year you'll have a nice little deposit!

HTH

Cheerfulcat