Students and Pensions

McKneff

petrolhead89 wrote: »

:T OK Boss!

.........................................

agh bless, I'm old enough to be your nana, consider your legs
smacked........;)

back o' the legs with a big ruler.:eek::p

lvader

Starting a pension early gives you a chance of retiring early or not having to save quite so much later on and the sooner you get used to a sum of money coming out of your salary for the pension the better. You don't miss what you never had.

jimjames

The sooner you start saving/contributing the better due to the miracle of compounding interest. It is never too early to start and some advice is for grandparents to start a stakeholder pension for new borns.

http://www.lovemoney.com/news/grow-your-wealth/retirement/from-baby-to-billionaire-1697.aspx

Putting £5000 a year away from 25 to 35 yields more than putting £5000 a year away from 35 to 60.

http://www.darwinsfinance.com/start-investing-today-amazing/

“If you started investing at age 25 and put the same amount of money into stocks until age 35, you’d have more money at retirement than if you started saving at 35 and invested the same amount of money in stocks EVERY YEAR until retirement”

The 25 year old starter invests £55,000 and ends up with £615,580 at retirement.
The 35 year old starter invests £130,000 and still has less at retirement: £431,754.

Despite the 25 year old only paying in for 10 years compared to the 25 years payments of the 35 year old by compounding returns you actually have more savings at the end so suggesting it is ever too early to start is definitely way off the mark! Rubbish might not have been the most appropriate word but as shown by the numbers above it is very bad advice to delay saving if you have the funds available to do so.

DavidHayton

IMO it is never too early to start saving. At every stage of life it is soooo easy to say in x years time I will have more money so I can start then. A disciplined approach starting early serves the dual purpose of building up a pot of money and also controlling your expenditure (if you have saved it you can't spend it).
The question is whether a Pension Scheme (capital letters) is the best for you at your stage in life. As another poster said, if your employer offers a scheme it is almost certainly a good idea for you to join if your employer pays into it (this is effectively a pay-rise). As for personal schemes such as a SIPP, you would need to balance up the tax advantages over the restriction on getting your money out again if you need it, e.g., for a house deposit.
You could "hedge" by splitting the money between a Pension Scheme such as a SIPP and an ISA. Companies such as Hargreaves-Lansdown would be more than happy for you to do this. (They do not slap on fixed fees on their SIPP so they are very attractive if you only have smallish amounts. They are also great for funds but watch their stockbroking fees, if you are interested in direct investment in shares).

jamesd

I suggest a stocks and shares ISA for the moment, then funds outside any tax wrapper. This is because it's all potentially available for property deposit and it's a good way of leaning about investing and investments. That learning and experience is of substantial value.

When you get a mortgage you can avoid mortgage overpayments or go for an interest only mortgage and continue to invest. That invested money can then form both a pot to pay off the mortgage and the basis of early retirement, or financial emergency, planning.

As you get closer to the age at which you can take pension income you can consider switching some of the money into a pension to get the pension tax relief, once it's clear that you will have enough outside the pension to keep your income up to the level you need until the pension starts. That's currently age 55 at the earliest and then that has to bridge the time until your current state pension starting age of 68, likely to be several years older by the time you get there.

Loughton_Monkey

Even if you don't pay tax, you can invest up to £3,600 (£2,880 net) into a pension and get the relief.

In principle, the earlier you save for retirement, the better. It is never too early. A pension does have some 'characteristics' that you should understand. Mainly you cannot get your money out until you are 55. This is 'good' or 'bad' depending upon how you look at it. Also, a pension will be invested in 'funds' - usually equities but they can be more 'boring' but less volatile bonds/gilts and safer investments. Again, this is 'good' or 'bad' depending upon how you look at it. Since you are miles away from retirement, the 'good' thing is that your money has a very long time to grow and equities should perform very well in the longer period. Much more than in a cash ISA.

Actually, though, you have an obvious 'optimum' route, I feel. This would be to open a Stocks & Shares ISA. The reasons I say this are:

1. Money in such an ISA will grow virtually exactly at the same rate as in a pension. Almost all pension funds are of a type usually available in an 'OEIC' flavour - and a lot of the time managed by the same person and the money is in the exact same companies.

2. What you are 'missing' is the tax relief. When you draw a pension, the tax man takes his amount out (plus growth) when you take the pension - but you can, in a pension, 'grab' a small amount of this in the form of a tax free lump sum. But you will have every opportunity, in a few years, to move the money from the ISA into a pension and gain that tax relief - so you would only be missing a few years growth on that proportion.

3. So while 'performance' will be very similar, then you still have the option. If you desperately needed the money some time soon, then at least it would be there in an ISA. If, however, you had the 'resolve' to keep it in there (as you should) then it will behave more or less just like a pension (as per above).

My own short term strategy, therefore, would be to use S&S ISA until I got my first 'proper' job and then seek to take out a pension, and then transfer this ISA money into it, to obtain the tax relief.

psychic_teabag

Loughton_Monkey wrote: »

What you are 'missing' is the tax relief.... But you will have every opportunity, in a few years, to move the money from the ISA into a pension and gain that tax relief - so you would only be missing a few years growth on that proportion.

Would you miss out ..? Say you put £1000 into an ISA and it grows by 30% over a few years, then you move it a pension and get an extra 25% boost due to the tax. That ought to be the same as if you'd put it into the pension immediately, getting the 25% boost, then having it all grow by 30%. That does assume that the rules don't change in the intervening years.

Actually... I wonder... - if you aspire to be a higher-rate taxpayer in the future, then presumably going the ISA route and moving it later could be beneficial since you can reclaim higher-rate tax when you move the money across to the pension. (Your lump sum still only gains 25%, but you can offset it against your earnings to pay less tax.) Or have I missed a detail somewhere in there ..?

Loughton_Monkey

psychic_teabag wrote: »

Would you miss out ..? Say you put £1000 into an ISA and it grows by 30% over a few years, then you move it a pension and get an extra 25% boost due to the tax. That ought to be the same as if you'd put it into the pension immediately, getting the 25% boost, then having it all grow by 30%. That does assume that the rules don't change in the intervening years.

Yes, sorry, I think you are right. You get the growth under the ISA, and then the tax relief will 'shadow' the higher figure when you later dump it into the pension.

It does, I suppose, lead to a wise strategy for anyone destined for a 'good' career, leading to higher rate tax. Save avidly in S&S ISA, don't touch it, and await the time you have 'spare' 40% tax relief. Then (subject to limits not being broken, taking into account, say, company pensions) drip feed the ISA money into a pension.

dunstonh

It does, I suppose, lead to a wise strategy for anyone destined for a 'good' career, leading to higher rate tax.

it can be but it comes with risks as well. Such as legislation changes such as reducing the annual allowance or a reduction in higher rate relief or the basic rate of tax or the removal of the ability to factor in pensions into working/childrens tax credits. So, you really have to be on the ball with what is going on.

Reaper

On the question about whether it is too soon to start a pension I have no choice but to say it is never too soon because I have taken out a child pension for my new born.

The big plus is rather bizarrely the government will top it up an extra 20% tax refund even if the person it is for is a non-tax payer (all the way up to £240pm).

Needless to say it should not be your only form of saving, but it's wrong to think you won't benefit from it until you retire. By starting early you benefit in having to make smaller monthly contribution the rest of your life to achieve the same goal.

In the case of my son he won't have to worry about whether to start a pension at the same time as saving for collage, car, and house.

Just be sure the money you put in is not money you will change your mind about later and wish you could get back.