Basic Pension Advice

craigthfc_2

Hi

I am 21 and in my first job since leaving university, but have always been good at saving money and today at my company we had a pensions talk.

I am wondering if there is any argument against starting a pension now?

At my employers I can contribute immediately, but my employer will not start contributing for another 3 months. If I contribute 2% then they also contribute 2% - would it be worth starting even before they contribute and also would it be worth contributing 4% myself this early?

Thanks for any advice - I will talk to the IFA that our company uses in due course, but just wanted to have a think about the issue beforehand.

CLAPTON

well 2% isn't a lot
howeverr once the employer starts contributing then its free money so definitely join

dunstonh

I am wondering if there is any argument against starting a pension now?

Are you looking for one?

The earlier you start, the easier it is for yourself later on.

Free money is free money whether its 1% or 2%. In the coming years they will have to increase it but its better than nothing. What you pay today saves you having to put double away in 10 or so years time.

bendix

In the interests of clarity, there is NEVER a good reason not to start a pension.

Cautious_Investor_3

bendix wrote: »

In the interests of clarity, there is NEVER a good reason not to start a pension.

Being the pedant that I am there is NEVER a good time to start to make provision for retirement.

There are occasions when a Pension, I admit they are few and far between, is not the most appropriate vehicle.

The Cautious Investor

hugheskevi

There are occasions when a Pension, I admit they are few and far between, is not the most appropriate vehicle.

I'd argue that a young or middle-aged basic rate tax-payer should be saving into a S+S ISA in the absence of an employer pension contribution or access to salary sacrifice or receipt of means-tested benefits.

Once you become a higher rate taxpayer or gain access to salary sacrifice, the money can be fed from the ISA into the pension via higher pension contributions. If higher rate tax or salary sacrifice never happens, just feed in enough to fill personal income tax allowance as you approach retirement.

What is the advantage of a pension over a S+S ISA to people with these characteristics (basic rate taxpayer, no employer contribution, no salary sacrifice), assuming the person is financially competent and wants to optimise their long-term saving arrangements?

Just to be clear to the OP - this answer is because you asked for arguments against a pension. The clear weakness with this is that it assumes someone would actually save as much into a S+S ISA as they would save into a pension. Human behaviour being what it is, many wouldn't save as much, or would spend it rather than feeding it into a pension in the future. You should definately be contributing enough to the employer pension to get the full employer contribution match.

bristol_pilot

IMO, pensions are all about securing employer contributions and/or higher-rate tax relief. If neither of these is available then I agree that a S&S ISA may be the best way forward for someone who is both financially disciplined themselves and in control of their spouse (try explaining to your wife why you can't afford a new kitchen when there is £500k in the ISA account). If you rely on an ISA, you will also effectively be unable ever to start your own business as in the event of bankruptcy an ISA can be seized whereas a pension is protected.

The OP has access to an employer contribution, so should join the scheme and pay in whatever amount maximises the employer contribution.

There are some other reasons I can think of for not having a pension: terminal illness (will not reach retirement age), a very low income (can only save for a small pension so would lose out on benefits), fabulous wealth (rich-for-life, so don't need a pension).

Cautious_Investor_3

hugheskevi wrote: »

What is the advantage of a pension over a S+S ISA to people with these characteristics (basic rate taxpayer, no employer contribution, no salary sacrifice), assuming the person is financially competent and wants to optimise their long-term saving arrangements?

I take your point about waiting until you are a higher rate tax payer but if you are never likely to earn this level of income a Pension does get at least basic rate tax relief, which of course an ISA does not.

You are right though, in my opinion, a balance between pension and ISA, taking into account up front tax relief and likely tax position in retirement, is important.

The Cautious Investor

jem16

Cautious_Investor wrote: »

I take your point about waiting until you are a higher rate tax payer but if you are never likely to earn this level of income a Pension does get at least basic rate tax relief, which of course an ISA does not.

In the end though, with the exception of the 25% tax-free lump sum, the Pension may end up paying 20% tax and the ISA is tax-free.

You are right though, in my opinion, a balance between pension and ISA, taking into account up front tax relief and likely tax position in retirement, is important.

Yes pension up to approx £10k worth of income in retirement and ISA thereafter.