First pension at 30

grastgirl

I am starting a new job soon and have the opportunity to start a pension that I will be able to contribute to for a sensible amount of time (3.5 yrs). I'm pretty sure I'm going to go for it, but I just wanted to ask if there's any loopholes I should look for. The details:

Me:
30 yrs old, no pension to date other than basic state pension and S2P (neither of which I have enough years to qualify for yet)
£33000 pa (including £2700 London weighting), should I use £30300 for calcs?
Lower rate tax payer
Pension:
Employee contribution via salary sacrifice of 6.35% (£2095 pa?)
Employer contribution of 16% (£5280)
To USS (Universities Superannuation Scheme)
Linked to best years earnings, adjusted to allow for inflation
Giving me ~£1400 per year pension

If you need more info, just ask.

kennyboy66_2

its a no brainer. Not much else to say.

grastgirl

Thanks for the reply, I'll have to decide about AVCs as well at some point, although I want to see how well my take home survives tax, NI, pension, student loan and travel card expenses before I commit to that. I'm sure that's a much more complicated question.

jh2009

Its a no brainer to join this scheme.

As you pay basic rate tax, then you'd only really be paying 80% of your contributions of £2095.50 (£1676.40). When you include employers contributions £1676 per year for a £7375 pension contribution isnt a bad deal! (this schemes like this makes some peoples decision to just put a few hundred in an ISA as an alternative look like an act of lunacy!).

The USS is i think a final salary scheme. So i guess you've done your benefit calcs on £33000 x 3.5/80 = £1443 per year. (is that where your £1400 per year is coming from?). Some of that pension you'll be allowed to cash at retirement.

The only thing with joining a pension is that you cannot access any benefits until your normal retirement age (or you could take early retirement from 55 if this scheme allows).

As for AVCs, these aren't that complex. It just involves you considering whether to pay extra contributions, for which you'd get tax relief. Find out if you've been offered an added years option, as that can be a good deal. Alternatively these may be held in a seperate fund and used to buy extra benefits. Generally AVCs are more flexible and you can stop, change or start these at any time.

grastgirl

jh2009 wrote: »

As you pay basic rate tax, then you'd only really be paying 80% of your contributions of £2095.50 (£1676.40). Thank you for this clarification.

The USS is i think a final salary scheme. So i guess you've done your benefit calcs on £33000 x 3.5/80 = £1443 per year. (is that where your £1400 per year is coming from?). Yes Some of that pension you'll be allowed to cash at retirement. 3/80 as standard, 0/80 to 5.75/80 by choice

The only thing with joining a pension is that you cannot access any benefits until your normal retirement age (or you could take early retirement from 55 if this scheme allows). Fine by me, I live well within my means at the moment, so I won't miss it.

As for AVCs, these aren't that complex. It just involves you considering whether to pay extra contributions, for which you'd get tax relief. Find out if you've been offered an added years option, as that can be a good deal. Alternatively these may be held in a seperate fund and used to buy extra benefits. Generally AVCs are more flexible and you can stop, change or start these at any time.

I can get added years AVCs and money purchase AVCs. This is the bit I'm getting confused about. I can put in an additional 15% as added years, but I can't seem to work out how many added years a certain amount of contribution (over 3.5yrs) will give me, as I can't be sure I'll still be in the scheme at 65 (for which they provide a calculator). I'll have to ask them to do a specific calculation I think.

The money purchase AVC sounds more risky/involved to me from what I've read in their literature, so I don't think I'll be going for it at the moment. Would it be better than putting the money in a stocks and shares ISA because of the tax relief?

jh2009

"I can get added years AVCs and money purchase AVCs. This is the bit I'm getting confused about. I can put in an additional 15% as added years, but I can't seem to work out how many added years a certain amount of contribution (over 3.5yrs) will give me, as I can't be sure I'll still be in the scheme at 65 (for which they provide a calculator). I'll have to ask them to do a specific calculation I think.

I think you'd be best to ask them to do this, as i couldnt comment either way.

You seem sure you will only do 3.5 years, and sometimes people say this but end up doing 20. (though you know your own circumstances better than me obviously).

If they give you a proportionate benefit, eg 3.5 years / 35 of the added years then its probably worth considering if you can afford this as it will provide a benefit linked to your final salary.

The 15% extra contribution is only obviously going to cost you 12% (as 20% is tax relief).

"The money purchase AVC sounds more risky/involved to me from what I've read in their literature, so I don't think I'll be going for it at the moment. Would it be better than putting the money in a stocks and shares ISA because of the tax relief? "

You would get tax relief by investing in an AVC. So each £1 is only costing you 80p whereas £1 in an ISA costs you £1. Isas do though give instant access, whereas avc money is locked away.

I dont know the investments used for the avc but a pension and an isa are just wrappers. The investments work in the same way. Imagine a chocolate bar but the only difference is one has a pink wrapper, the other a blue one, and thats really the difference between investments held in an isa/pensions.

Of course the individual investments offered to you in both could differ.

I guess the answer to both of the above depends on whether your priorities are to save extra for retirement, or to save for a lump sum/nest egg for the future. It also depends on your financial state and you've already said you have other things to pay for.

The USS is a good scheme to be a member of, so theres no shame if you dont pay an AVC. Younger ages are however better times to contribute to pensions. The more you save today, the better you'll be tomorrow in your retirement.

grastgirl

The contract with the university is set at 3.5yrs (they go as far to say in the contract that they can't undertake to extend it), but as the pension is used by most universities, I may move on to another university but keep the same pension IYSWIM. So I could do 3.5years or 20 as you say.

I need to ask about the proportionate benefit as well, as I agree that if this is the case, I should try my best to afford it (although I/they will already be putting in more than the "recommended" half my age).

In terms of investments, I think I would be inclined to be cautious whichever route I took (possibly too cautious at my age to make the best of them), for instance I have cash ISAs (currently saving for house deposit), but haven't yet tried a stocks and shares ISA.

I guess I need to learn (a lot) more about investments in general to make these sorts of decisions. Thanks for your input, it's helped me clarify what questions I need to be asking.

jh2009

Im a simlar age (32) and am in quite a similar position to you so understand where you're at.

Stocks and shares isas are a more longer term investment than a cash isa. (eg 5-10 years). But if you're saving for a house deposit a cash isa is probably better to save into first.

Cash isas pay an interest rate and almost all guarantee the cash sum you invest. Of course rates are low right now, and you have to move cash isas around to get the best rate (as most banks offer one year introductory rates to get you in, which then drop).

A stocks and shares isa means you invest in shares, unit trusts, bonds, etc. Any growth is free of capital gains tax/income tax. Potentially you can gain more than if invested in a cash isa, but with this potential for higher returns comes with the risk of what you invested going down.

We all think differently with risk, and theres no shame in that. I guess it depends on how serious it would be if you made a loss on anything you invest. If moneys tight, then naturally you're a bit more cautious. If theres spare and you are prepared to take some risk on it to get a better return, then a bit of risk may be more appealing.

grastgirl

Thankfully my cash ISA, although not getting the "Best" rate is still getting something, although I am thinking of moving it when the new tax year starts, I'll stick with places that have full FSCS protection. I think I'll be looking at filling up a fixed rate cash ISA before a stocks and shares ISA, once we have paid deposits etc and don't need instant access.

My OH has had a really bad experience with a Stocks and shares ISA, so I'm loathe to go for it. I also managed to lose money (thankfully money I could afford to lose) on the only shares I ever bought (Egg - could only have made money in the first three days or so after issue), so I am cautious.

jh2009

" My OH has had a really bad experience with a Stocks and shares ISA, so I'm loathe to go for it. I also managed to lose money (thankfully money I could afford to lose) on the only shares I ever bought (Egg - could only have made money in the first three days or so after issue), so I am cautious. "

Stocks and shares isas are generally a longer term investment, so you would get periods when they go up, and periods when they go down, but its only when you sell them that any gain/loss is realised. But this also means they aren't really great for short term investments.

Did he invest them before the crash in autumn 2008, and then sell them early last year when the market was at its lowest? A lot did that, but those that held generally saw their investments recover quite dramatically in the 2nd half of last year.

Investments now, although we've had a recovery, are actually still quite cheap at the moment, so now in some ways it remains a good time to invest if you are looking at the longer term, even with the recovery we've had last year. Lower prices now mean more chance of return than waiting for the market to recover. In some ways its like buying something in a sale now, instead of waiting for the prices to go back up. Thats why last year (in addition to low cash isa rates) i didnt bother with cash isas and just invested my whole isa allowance in a s and s isa, and ive had a good return.

Also long term inflation can affect cash in cash isas, whereas history shows market types investments produce returns over the long run above inflation.

But as ive said above, investing in the market if you need short term access to cash, plus security of capital, means s and s isas are less appealing as an investment.

dunstonh

My OH has had a really bad experience with a Stocks and shares ISA, so I'm loathe to go for it. I also managed to lose money (thankfully money I could afford to lose) on the only shares I ever bought (Egg - could only have made money in the first three days or so after issue), so I am cautious.

S&S ISAs dont lose money. They are just a container for your investments. The exact same investments that are available with pensions. Its the investments that can go down as well as up.

Cash has risks as well. Especially for long term planning. You may not have investment risk but you have shortfall risk and inflation risk. For 30 odd years, you are virtually guaranteeing that you will have to nearly treble your retirement contributions if you only want to use cash compared to those with investments.