arrgh help me!

15lsp

hi guys

Im 24 and I want to start paying into a pension. My work dont offer a pension.

Currently I earn £16 thousand a yr and I live with my parents. I dont have any savings as im still paying off student debt, i graduated last year.

How do i work out what to pay and whats the best pension scheme available. I looked into the Virgin money pension but I dont know if its any good.

Please help!

Thanks Laura

EdInvestor

Hi Laura

If you're a basic rate taxpayer, you could be better off saving for retirement using an ISA rather than a pension, if there is no pension available to which your company will contribute.

An ISA is a lot more flexible - what if you need money for a house deposit later? You can't get it out if it's in a pension?

Under the new pension rules you can pick up the tax relief later, instead of losing it if you don't contribute every year.It's the ISA which is the "use it or lose it" tax wrapper now.

You can save up to 3k in cash and/ or 4k in funds.Or you can put all the allowance (7k a year) into funds, if you can afford it.

Some people may say that you are better to pay off all debt before starting to save, that might depend on what interest rate you are paying on the debt.

dunstonh

In addition to above, the Virgin pension is dire.

15lsp

thanks a lot, both very helpful. I will look into ISAs. My debit is all on 0% interest so Im in no rush to pay it off but i can afford to pay it off in 6 months anyway.

I have also set up a direct debit to pay off the interest on my student loan every month.

Thats helped me loads, thank you again

Zwicky

15lsp wrote:

I have also set up a direct debit to pay off the interest on my student loan every month.

If by "student loan" you mean the government scheme this should be repaid by deduction by your employer. The deductions are 9%% of your gross earnings over £15,000. So there should be no need to repay interest direct to the student loans company. Of course you can repay more if you want to but it is not a good idea because it is a very low cost loan as the rate of interest is inflation only.

If you have only started work recently it often takes some time before your employer receives a notice from the Inland Revenue to start the deductions.

The question of ISA or pension is a difficult one for people of your age. It is not normally good advice to have your pension savings in a form which you can easily access because unfortunately for most of us, if we can access them, sooner or later we will! On the otherhand at your age it is difficult to balance your cash needs such as house purchase, over the next few years and the usual good advice to start saving for pensions as early as possible. So perhaps the best compromise is to use ISAs for the first few years but at some point it's probably best for most people to put at least some of their savings into a pension of some sort where you will not be able to access it for other purposes.

15lsp

If by "student loan" you mean the government scheme this should be repaid by deduction by your employer. The deductions are 9%% of your gross earnings over £15,000. So there should be no need to repay interest direct to the student loans company. Of course you can repay more if you want to but it is not a good idea because it is a very low cost loan as the rate of interest is inflation only.

I have just started paying £2 a week towards my student loan direct from work which comes out like tax. However my loan stands at £15,000 and each month at least £40 goes on in interest. This is shown on my annual student loan statement. Obviously £15,000 is a lot to pay back so if I just pay the interest every month it wont get any higher.

I know its the lowest loan I will ever get but knowing the amount is increasing is a worry.

People i know with student loans do the same as me or actually pay off lump sums. I have no intention of paying a lump sum off unless I come into money :j

EdInvestor

It is not normally good advice to have your pension savings in a form which you can easily access because unfortunately for most of us, if we can access them, sooner or later we will! ... at some point it's probably best for most people to put at least some of their savings into a pension of some sort where you will not be able to access it for other purposes.

This kind of encouragement to people to engage in childlike lack of self discipline is quite frankly very out of date IMHO, especially on a site like this, where you might expect people to be taking a sensible approach to their financial planning - otherwise why would they be here?

A pension may be useful for someone who has their own business, as the money is protected in the case of bankruptcy. But a private pension with no employer's contribution is a far inferior tax wrapper to an ISA these days for basic rate taxpayers.The inflexibility of the pension wrapper (not restricted to the inability to get any of the money out at all until aged 50/55 and then only 25%) is one of the worst aspects of it. The inability ever to access your savings capital in the pension is a major disadvantage. I am also afraid that anyone who thinks that putting money in a pension where you can never access it ensures you will have a comfortable retirement is sadly mistaken.:(

Laura is of course anyway accumulating entitlement to the two state pensions, and she may wish to get a forecast of how much she will get from them at retirement.It's worth noting that just the basic state pension would cost you around 100k to buy with a normal pension fund these days.

Pension forecast

dunstonh

Laura is of course anyway accumulating entitlement to the two state pensions,

I would stop saying two state pensions as it looks like the second state pension is going to be wiped out by the revised higher single state pension (in one way or another). The second state pension/SERPS was never guaranteed and it was never a good idea to include it.

Oompa_Lumpa

dunstonh wrote:

I would stop saying two state pensions as it looks like the second state pension is going to be wiped out by the revised higher single state pension (in one way or another). The second state pension/SERPS was never guaranteed and it was never a good idea to include it.

Dunston, as a 29 year old higher rate tax payer would you therefore suggest that I should contract out based on the information contained in the White Paper last week?

EdInvestor

Everyone earning under 18k like Laura will still get full value from S2P and IMHO those up to at least the minimum wage should stay contracted in and all basic rate taxpayers should consider it.

In any case the idea is to abolish contracting out in 2012 except for final salary pensions, so there's very little free money on offer.You might as well stay contracted out if you are already, and get the additional small rebates. but it will be hard enough to make any money under current conditions for those who have investment expertise,much less those who don't.

The risk of ending up with less than even a reduced S2P will be high.Don't forget that even the flat rate S2P pension is going to cost about 75k to buy as an annuity.

Oompa,

...as a 29 year old higher rate tax payer would you therefore suggest that I should contract out based on the information contained in the White Paper last week

Are you contracted out or in now?What sort of pension provision do you have?

Zwicky

EdInvestor wrote:

This kind of encouragement to people to engage in childlike lack of self discipline is quite frankly very out of date IMHO, especially on a site like this, where you might expect people to be taking a sensible approach to their financial planning - otherwise why would they be here?

Ed, do step down occasionally from your lofty perch and take a look at what happens in the real world.