How much should I pay into my employee pension?

snowqueen555

Okay after two months my pension pack finally came!

I am 25, I am also not sure how long I will stay at my workplace, as I am looking for new employment (however I said that a year ago and am still in the same place!).

The highest contribution (gross) is

4% and they pay in 10%, I also know I get tax relief of 20% on my contribution.

I am wondering if it is better to pay more into a pension (I thought as much as 10% but 6% is what I am thinking at the moment) or is it better to use that money to build up immediate savings in an isa or something?

I am already saving some money in a regular saver.

My salary ratio would look like this

45% All Bills
25% Regular Saver
6% Pension
24% Free money to spend

**So the question is, should I just pay the 4% or pay 6% or 10%?**

If 10% goes out of my pay packet I will feel it, 4% won't be so bad.


Thanks.

dunstonh

I am wondering if it is better to pay more into a pension (I thought as much as 10% but 6% is what I am thinking at the moment) or is it better to use that money to build up immediate savings in an isa or something?

Savings in an ISA gives you no free money and no tax relief. So, why do you think savings could be better?

If you pay £64 into the pension, the govt will pay £16 and the company will add £200 giving you a £300 contribution.
If you pay £64 into the ISA you will have a £64 contribution.

snowqueen555

Its important to build up some liquid assets, yes I would be gaining less money but the money might be more useful in an isa than in the pension?

Should pay 4% or up to 10% in my pension? Where would most benefit be seen?

kidmugsy

If you pay more than 4%into your works pension, does the employer pay in more than 10%?

moonrakerz

snowqueen555 wrote: »

Its important to build up some liquid assets, yes I would be gaining less money but the money might be more useful in an isa than in the pension?

Yes - damn nuisance these pensions things - can't get hold of the money for a week in the Maldives ! - or can you draw it all out ? has this been asked before ? :rotfl::rotfl:

snowqueen555

No 10% is their maximum contribution, all I need is to contribute 4%, but could do up to 10%

Which was why I was asking whether I should contribute extra or save that money into an isa instead?

Thanks

Loughton_Monkey

To start with, paying in your 4% to attract the employer's 10% is an absolute 'must'. A complete 'no brainer'.

What you are asking, it seems, is whether you should contribute even more into the pension, or put that additional money somewhere else.

With an underlying 14% going into pension, at your age, that is still on the 'thin' side of what you need in investments to maintain living standards into retirement. [A 40 year career-long Final Salary scheme requires 20%/25% average annual contribution to provide 2/3rds of your final salary as a pension].

Hence I would strongly recommend another 5% (or so) being invested for retirement.

But you have choices. Generally speaking, these days, investing in a Stocks & Shares ISA is pretty much equivalent to investing in a pension fund. Most 'funds' come in Pension flavour, and a related 'OEIC' [Non Pension] flavour. If not, there is always an equivalent fund type that will be roughly the same. Hence £100 a month into a pension scheme, or £100 into a S&S ISA should be expected to produce virtually the same fund value at retirement.

HOWEVER

1. For every £80 you put into the pension, £100 is actually invested because of tax relief.
2. But in an ISA, only the £80 is invested.
3. At age 65 (or any age for that matter), your S&S ISA fund is truly and totally unencumbered by rules. You can leave it there, spend it, take it out and put it into safer 'savings' or give it away.
4. At age 65 (or any age after 55 for that matter) your pension can only be taken in a strictly defined form. This usually means taking a 25% tax free lump sum and buying an annuity with the remaining 75%. the entire annuity amount is taxable.
5. To be more specific, provided you take the lump sum, the net result is that the 'true' value of the pension is 6.25% higher than the 'true value' of the ISA - if you ignore the constraints on flexibility.

Note the implication that money you put away into the pension is 'locked' - which you may consider 'good' (it ensures you will never spend it in a mad moment of need, panic, or desire), or 'bad' depending upon your own attitude.

Note, also, that you should consider two other types of general use for your money. 1. We all need to save short term for things like cars, weddings, emergencies, holidays, and the like. 2. Another major 'investment' that many of us make is a house, and that requires significant savings for a deposit (especially these days).

You should consider both these other needs - neither of which detract from the 'need' to invest up to 25% for retirement (in pensions and/or ISA's).

IF you think it through carefully, the 'right' decision (for you) will probably come to you.

dunstonh

Its important to build up some liquid assets, yes I would be gaining less money but the money might be more useful in an isa than in the pension?

That 4% you pay is actually only 3.2% take home pay. Are you really saying you cannot afford to do that and save money.

Ignoring growth, after 5 years in the pension, the value would be £18,000. 5 years in a savings account would be £3840. What part of that makes the savings option better? Lets make it many years later (as is the case with retirement planning) when the pension is worth £180,000 and the savings £38,400.

property.advert

Of course take advantage of all employer contributions so if they match up to 10% then do 10% but if they put in 10% after you put in 4% then do that.

Much said above about different forms of saving but in my opinion, you need to get your head around the property purchase thing. If paying into a pension means delaying a property purchase, then you will be paying rent whilst trying to save a deposit and then when you finally buy you will either have to pay more for it, borrowing more or buying a lower class of property. That means that you have either less money for the next 25 years or you have a smaller asset. When taken into your total wealth pot at retirement age, this is a significant discussion point.

Your tax level will be crucial as well as getting 40% back is hard to beat.

My gut feeling is that you need to get onto the property ladder ASAP, especially if you pay tax at 40%. Go play with http://listentotaxman.com/ and see what happens when you pay pension contributions and pay tax at 40% compared to trying to pay tax and save cash for a deposit.

snowqueen555

dunstonh wrote: »

That 4% you pay is actually only 3.2% take home pay. Are you really saying you cannot afford to do that and save money.

Ignoring growth, after 5 years in the pension, the value would be £18,000. 5 years in a savings account would be £3840. What part of that makes the savings option better? Lets make it many years later (as is the case with retirement planning) when the pension is worth £180,000 and the savings £38,400.

My question was whether to overcontribute to the pension or rather put that extra money into an isa. I am already going to put in the 4% anyway.

snowqueen555

Charges =

0.28% Fund charge per year
0.02% Fund expenses per year
0.10% Annual management charge

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0.40% I assume this is low cost?

Pension also includes Life assurance, and a long term sickness payout if you are ill for 25 weeks or more

Thanks