Graduate looking for pension advice

George_Smiley

I'm beginning a graduate role this September in a major US company. It starts on 28k and they offer a pension plan. I think I agreed to put 6% of my salary into it (they add some more as well) however I'm unsure of what to do for now.

I obviously have student loans, overdrafts and a credit card which all need dealing with (the student loan less so). However I want to think ahead. What percentage of your salary would you put towards your pension/savings and paying off debts?

I'm planning on taking home around £1.5k a month after tax, NI and student loan. Minus the 6% towards the company pension, I need to have a plan for attacking my 4k worth of bank debt (overdrafts, card). What kind of a balance would you take?

Thanks for any replies, I apologise for the vague question.

mramra

Firstly, contribute as much as is required to obtain the maximum employer contribution as this is effectively free money.

Next, I would concentrate on knocking down your overdrafts/credit card (starting with the one that has the higher interest rate). I wouldn't worry about the student loan, your minimum payments will be deducted by your company at source.

Once your debts are cleared you could contribute more to your pension. However, assuming you are in your early twenties and starting a job on £28k, it is likely that you will become a higher rate taxpayer in future years. If you believe this will be the case, I would invest in stocks and shares ISAs for the time being (you have the same investment choices as you would in your pension), then when you become a higher rate tax payer, move cash from ISA to pension each year to minimise (or eradicate completely) any higher rate tax.

George_Smiley

mramra wrote: »

Firstly, contribute as much as is required to obtain the maximum employer contribution as this is effectively free money.

I remember them saying the 6% pay reduction to pension would give a resultant 12% contribution by the company. That is essentially getting 6% free, correct? I do apologise for my complete lack of pension knowledge however, am I allowed to withdraw money from my pension at any given time - do these usually incur charges?

Once your debts are cleared you could contribute more to your pension. However, assuming you are in your early twenties and starting a job on £28k, it is likely that you will become a higher rate taxpayer in future years. If you believe this will be the case, I would invest in stocks and shares ISAs for the time being (you have the same investment choices as you would in your pension), then when you become a higher rate tax payer, move cash from ISA to pension each year to minimise (or eradicate completely) any higher rate tax.

Oh that's great, thank you. I was planning on dabbling in the market when I got out of university. I did a little before I started and it was very interesting. From what I'm aware of, there's a maximum limit you can invest into a stocks and shares ISA. Is any profit you make entirely tax-free? For instance, say I was to find the bargain of the century and made 10k from 1k overnight, would that 9k rise be entirely tax free?

Lokolo

It depends on your life goals, you should do a pension calculation

http://www.hl.co.uk/pensions/interactive-calculators/pension-calculator

You cannot withdraw money from your pension until you reach 55, which you can then take up to 25% tax free, the rest will support you by providing income during your retirement.

S&S ISA gains are tax free yes, but you will not find anywhere that goes from £1k to £10k overnight

mramra

George_Smiley wrote: »

I remember them saying the 6% pay reduction to pension would give a resultant 12% contribution by the company. That is essentially getting 6% free, correct? I do apologise for my complete lack of pension knowledge however, am I allowed to withdraw money from my pension at any given time - do these usually incur charges?

Your maths is correct. You also get tax relief on your contributions i.e. your 6% is from your gross pay, not your net pay. But, no you can't withdraw money until you are 55 (under current rules). That is the price you pay for the government's tax relief on your contributions - it is savings for retirement.

George_Smiley wrote: »

Oh that's great, thank you. I was planning on dabbling in the market when I got out of university. I did a little before I started and it was very interesting. From what I'm aware of, there's a maximum limit you can invest into a stocks and shares ISA. Is any profit you make entirely tax-free? For instance, say I was to find the bargain of the century and made 10k from 1k overnight, would that 9k rise be entirely tax free?

There is an annual limit (can't remember the exact figure - between £10k and £11k) but all gains are free of tax.

Linton

George_Smiley wrote: »

I remember them saying the 6% pay reduction to pension would give a resultant 12% contribution by the company. That is essentially getting 6% free, correct? I do apologise for my complete lack of pension knowledge however, am I allowed to withdraw money from my pension at any given time - do these usually incur charges?



Oh that's great, thank you. I was planning on dabbling in the market when I got out of university. I did a little before I started and it was very interesting. From what I'm aware of, there's a maximum limit you can invest into a stocks and shares ISA. Is any profit you make entirely tax-free? For instance, say I was to find the bargain of the century and made 10k from 1k overnight, would that 9k rise be entirely tax free?

If they use the words you use they may well put in 12% if you put in 6%. It's either reasonably generous, or extremely generous so you would be well advised to enrol. You cannot take money out of your pension until you are 55.

As regards an S&S ISA. The current annual investment limit is £10680. Any profit is completely tax free.

George_Smiley

Thanks for all of the replies. Very interesting indeed.

I'll need to clarify what the exact company contribution is now, as I found the wording quite misleading. Nonetheless, very generous of them adding the extra bit. Also, I had absolutely no idea that the 6% reduction came from gross pay, that's brilliant. If I recall correctly, you can invest a maximum of 25%, though that sounds a little much, I imagine it helps avoid higher tax brackets?

Am I right in saying that any money I invest with this company's pension scheme is dependant on the company being around? It's not every day that a Dow Jones top 30 heavyweight goes bust, but if that were to happen I imagine the pension would follow? I remember reading once that the government ensures you receive 50k worth of savings if one were to go under, is that right?

Again, apologies for the complete lack of knowledge!

atush

I agree you should contribute the 6% needed to get the free 6% contribution frm you employer.

and then slam down the debt overpaying the highest interest ( i assume CC) first. If you dont' already have one, get a graduate acct. they often have free overdrafts for a year or so.

then save up 6 months living expenses in cash (isa for you as a taxpayer- this may take more than one year so after one year's ISA is full, save elsewher like a regular savings acct). Once that is done, try a S&S isa for more investment when you have the money/month. You will need these savings to keep yourself out of debt once it has been repaid, and to further life goals such as buying a house, a car, starting a family etc.

Linton

George_Smiley wrote: »

Am I right in saying that any money I invest with this company's pension scheme is dependant on the company being around? It's not every day that a Dow Jones top 30 heavyweight goes bust, but if that were to happen I imagine the pension would follow? I remember reading once that the government ensures you receive 50k worth of savings if one were to go under, is that right?

It is most likely that the company pension is defined contribution whereby a personal fund is built up rather than defined benefit where you become entitled to % of your salary as pension.

That being the case, your pension fund is entirely ringfenced from your employer. In fact it will probably be held by one of the major insurance companies. And that money is ringfenced from the insurance company - they just manage it, they dont own it.

Loughton_Monkey

Your pension would be largely protected, even if your employer went totally belly-up.

Otherwise I endorse other comments:

1. Under no circumstances 'leave' the pension scheme because of temporary difficulties. With the 100% contribution from employer and 25% top-up from HMRC this is a "must do".

2. Having ensured paying the minimum into pension to get the maximum employer contribution (that's 12%), remember that you will need to have in the order of 25% of your gross earnings [over your working lifetime] to get a 'decent' pension. Hence you should aim to put another 12%/13% into some equivalent investment as well.

3. Normally, one would say put that extra 13% into the pension as well, but if there is some chance that you will become a higher rate tax payer in a few years, there is certainly something to be said for 'parking' it into a Stocks & Shares ISA while you remain a basic rate tax payer. [remember that your pension will grow according to the funds you choose. Whatever these are, you will usually find very equivalent funds available in S&S ISA's - so you will enjoy roughly the same 'growth']. Once you are paying high rate tax, you then 'drip feed' as much of your ISA fund as you can into pension in order to 'eliminate' any higher rate tax liability. [Or obviously do this straight out of income if you can afford it].

4. Pay off your debts as soon as you can.

George_Smiley

Linton wrote: »

It is most likely that the company pension is defined contribution whereby a personal fund is built up rather than defined benefit where you become entitled to % of your salary as pension.

That being the case, your pension fund is entirely ringfenced from your employer. In fact it will probably be held by one of the major insurance companies. And that money is ringfenced from the insurance company - they just manage it, they dont own it.

Oh I see, that makes a lot more sense now. I imagine that's why they brief us on the types of investments they make and why (I think) they allow you to define what you want it in (energy, finance..). I shall try and find the correct documents to work out exactly what they offer. I think I'll either stick with the 6% or maybe up it to 10% and do what sum of the guys have suggested - start paying down debts, build up an ISA and research some investments for a future stocks and shares ISA.

May I ask your opinion on Self Invested Pensions? Do these work in the same way a normal pension would i.e. via company?