Reirement planning etc - complete novice!

lazy&indebt

As you may be able to tell from my username, i usually hang around the Debt free wannabe board! But as I feel I am pretty much sorted with my debts now (I am not being charged interest on anything so am putting all extra cash - around £250-£300 per month into an ISA to earn interest until I have enough to pay off debts which will be about another 2 years) I am starting to think about what exactly to do about my future. I am only 22 and am renting a property currently.
I feel the first thing for me to do is to take part in my company's pension scheme where I contribute x amount and I think they contribute about 6% of my monthly salary, then to look at getting a mortgage (once debts are cleared) does everyone think this is the right order in which to do things?Should I wait until my debts are completely clear before starting a pension? Are there better ways to save for retirement? Help, I am completely clueless!

margaretclare

Hi

If your employer contributes 6% to your 6% then you'd be daft not to take this offer. It would be like chucking away a 6% pay-rise! Then there's the tax-relief by which the gubbmint hopes to encourage us to save...do it!

Margaret Clare

EdInvestor

Quite a complicated one.On the one hand, it's always a good idea to take advantage of any free money going from the employer.

On the other hand, any money stashed in a pension cannot be accessed at all until aged 55, and then only 25% of it can be taken out, the rest must provide an income.

That inability to get at the money might be a good thing for someone who's a bit short on the self discipline front and keeps getting into debt.

On the other hand, it might be a bad thing if it means that there is a long delay in paying off the debt, and thus turning to accumulating money for a deposit on a home.Acquiring a home is IMHO at least as important (if not more so) than acquiring a pension.

What type of company pension is this? If it is a final salary pension,this would be a big extra point in its favour.

It might also be sensible for the OP to get a state pension forecast, to see how much progress has been made in saving towards the two state pension through NI contributions. That will give him a better overall picture of his financial situation.

dunstonh

On the other hand, any money stashed in a pension cannot be accessed at all until aged 55, and then only 25% of it can be taken out, the rest must provide an income.

It's not that difficult a decision. Making some assumptions here on the type of pension and salary; assuming money purchase and £18k salary.

Age 22, means 45 years until state retirement age. If you assume 6% of an £18,000 salary and then that grows by an average of 7% p.a. it results in a final fund value of £330,220. Thats the free money alone. Who cares that £82500 is only available as a lump sum and that the rest will go to provide an income of over £14,000 a year. That part of it hasnt cost you anything. With your personal contribution, you could double that up.

Of course, inflation will have an impact on that but then rising pay over the years will go some way, if not all the way to combat that.

EdInvestor

Then again, what's the likelihood if he devoted that money to paying off a mortgage over only 25 years that he won't have an asset worth double the pension, plus a further retirement fund accumulated in an ISA and thus tax free in the following 20 years after he's paid off the house.

Of course it's ideal to have both a house paid off and a good pension and the state pension and another fund as well when you retire.:)

But I do tend to believe that where someone is paying rent, it makes more sense for him to start paying off his own mortgage ASAP rather than his landlord's. If he can afford to do this and put money in a pension as well, that's the way to go.

Much may depend in this case on the OP's salary, job and future prospects.

Andy_L

EdInvestor wrote:

Then again, what's the likelihood if he devoted that money to paying off a mortgage over only 25 years that he won't have an asset worth double the pension, plus a further retirement fund accumulated in an ISA and thus tax free in the following 20 years after he's paid off the house.

Slim if they're only devoting 6% of salary to a 25 year mortgage & an ISA

EdInvestor

Not both at the same time.....

dunstonh

If you cannot afford to buy a house and pay 6% gross of your money into a pension then you shouldnt be buying the house.