PhD and pension advice

caliban1

Thanks!
I am confused now whether I should be thinking of an ISA/house deposit or pension contributions... and what would be best with the amount that I can save. Any suggestions?

Loughton_Monkey

caliban1 wrote: »

Thanks!
I am confused now whether I should be thinking of an ISA/house deposit or pension contributions... and what would be best with the amount that I can save. Any suggestions?

Ultimately, you are ideally going to want both a retirement income and a house (unless you want to rent all your life - including when the income dries up).

Until you start earning 'real' money, either or both of these are a tall order, but the minute you get a 'good' job then I suggest you need to do both. That's contribute to retirement and also build up a house deposit.

I would personally look 'hardest' at the Stocks & Shares ISA route. As an investment, every £1 will perform just as well as in pension, since ISA and Pension funds, these days, are virtually mirrors of each other. The difference between ISA and pension, though, is that the latter attracts tax relief.

Yes, you can invest up to £2,880 (net) and receive £720 'tax' rebate despite not being a tax payer. But by doing so, you are 'locking in' this 20% tax relief. Locking it in 5 years later (having put the money in an ISA until then) gives you exactly the same effect, and so the ISA route is not burning any bridges.

The key point, though, is whether or not you think you will be a higher rate tax payer. If you will be, then the recommended strategy is always to throw the money into an 'equivalent' Stocks & Shares ISA [i.e. using the same types of funds you would prefer for pension], and then wait until you qualify for 40% tax. That's the time that you then unload it from the ISA and dump it into the pension. Basically a totally free 15% 'bonus' - so not to be sniffed at!

I suppose the other advantage of the ISA route is that the money could be used for a house deposit if required (a pension couldn't). But doing something like that could be undesirable since you are 'raiding' your retirement fund to put into another investment (house) that you will probably never 'cash in'.

Overall, you could do a lot worse than set yourself a target. If you can live on £15K a year, wonderful! Assuming you will then get a 'proper' job - let's just say at £35K a year - then why not continue to live for a couple of years at [as near to as you can get] £15K, and throw all the rest into a combination of S&S ISA's and Cash ISA's to 'make up time' for the years between age 22 and 32 during which many graduates would have earned and saved.

After that, you can ramp up expenditure to a level that allows continued investment into house, pension, and cash so that your lifestyle can be maintained after retirement.

bristol_pilot

Pensions are all about higher rate tax relief and employer contributions. In the absence of both of these, a pension is not worthwhile IMO and the OP would be better off saving for a house deposit (or indeed spending at least some of it on beer).

Lokolo

bristol_pilot wrote: »

Pensions are all about higher rate tax relief and employer contributions. In the absence of both of these, a pension is not worthwhile IMO and the OP would be better off saving for a house deposit (or indeed spending at least some of it on beer).

Even lower rate tax relief makes it worthwhile, it's an extra 25% added to your pension pot straight away.

Buying a house isn't a necessity, retirement provision is.

The OP will be 36 by the time hes finished and without a pension or any retirement provisions how will he afford anything (let alone mortgage repayments) when he retires?

bristol_pilot

Pensions in payment are taxable (apart from 25% lump sum), so tax relief on contributions has to be at the higher rate and pension in payment at the basic rate or less for a pension to be worthwhile, especially if there is no employer contribution.

Not having to pay rent in retirement is pretty nearly essential unless you have a whopping pension.

Lokolo

bristol_pilot wrote: »

Pensions in payment are taxable (apart from 25% lump sum), so tax relief on contributions has to be at the higher rate and pension in payment at the basic rate or less for a pension to be worthwhile, especially if there is no employer contribution.

Not having to pay rent in retirement is pretty nearly essential unless you have a whopping pension.

But you get a higher personal allowance. So the tax you save from putting into pension will still be more than you pay back during retirement (assuming the tax rate stays at 20%!).

A house will cost more to run than renting, theres no point buying a house if you can't afford to keep up repayments, buy insurance and replace things when things go wrong - whereas with renting this all falls on the landlord and the only thing you need to pay for is the rent.

By all means a house could be bought but this guy will be 36 when he finishes his PHD and if he buys a house he will put off any retirement provisions whilst he gets onto the housing ladder. By the time he starts his retirement provisions he could be beyond 40, which means he may not pay off his house until he is 65+, and may not be able to afford to do anything during retirement unless he then sells and lives off that.

bristol_pilot

The state pension (also taxable) will eat up a large part of the personal allowance, as will any savings interest etc. Assume that you will be paying 20% tax on the whole of your pension. And probably best to assume there will be no tax-free lump sum by the time the OP retires either.

I'm not suggesting that the OP never has a pension, but rather that the best time to contribute to one will be when he is gainfully employed by an organisation that makes pension contributions and when he a member of the 40% club. In the meantime, access to capital is a more important benefit than a marginal (at best) bit of tax refief.

A key benefit of home ownership is paying off the mortgage prior to retirememt and having no rent to pay. This could easily more than halve the income he will need to live on in retirement.

Lokolo

bristol_pilot wrote: »

The state pension (also taxable) will eat up a large part of the personal allowance, as will any savings interest etc. Assume that you will be paying 20% tax on the whole of your pension. And probably best to assume there will be no tax-free lump sum by the time the OP retires either.

I'm not suggesting that the OP never has a pension, but rather that the best time to contribute to one will be when he is gainfully employed by an organisation that makes pension contributions and when he a member of the 40% club. In the meantime, access to capital is a more important benefit than a marginal (at best) bit of tax refief.

A key benefit of home ownership is paying off the mortgage prior to retirememt and having no rent to pay. This could easily more than halve the income he will need to live on in retirement.

Which isn't guaranteed. If he comes out of with a job working at £20k a year with no employer contribution - then what? He shouldn't bother with retirement provisions what so ever? I think starting to get used to putting in a pension is better than keep putting it off. By all means save for a house deposit but don't write off pension contributions for it, do a bit of both.

I also suspect a lot of employees never reach the 40% tax band, I don't think anyone should wait for these luxury additions to their contracts.

I also got it wrong earlier, didn't realise the OP is 28 now, not 32.

hugheskevi

Even lower rate tax relief makes it worthwhile, it's an extra 25% added to your pension pot straight away.

Buying a house isn't a necessity, retirement provision is.

The OP will be 36 by the time hes finished and without a pension or any retirement provisions how will he afford anything (let alone mortgage repayments) when he retires?

Contributing to a pension when the only thing on offer is basic rate tax relief can be an expensive mistake.

Much better to put the money you would have saved into the pension into an S+S ISA instead, and contribute more to a pension at a time when one of the things that make pension saving worthwhile apply (higher rate tax, salary sacrifice, employer contributions, receiving means-tested benefits).

Drawing down the S+S ISA to replace the lost income from higher pension contributions as and when one of those things apply means you essentially move the S+S ISA into the pension.

Doing that could significantly increase your pension pot compared to contributing to a pension regardless of particular circumstances - the increase could easily lead to a 20% higher pension pot.

Lokolo

hugheskevi wrote: »

Contributing to a pension when the only thing on offer is basic rate tax relief can be an expensive mistake.

Much better to put the money you would have saved into the pension into an S+S ISA instead, and contribute more to a pension at a time when one of the things that make pension saving worthwhile apply (higher rate tax, salary sacrifice, employer contributions, receiving means-tested benefits).

Drawing down the S+S ISA to replace the lost income from higher pension contributions as and when one of those things apply means you essentially move the S+S ISA into the pension.

Doing that could significantly increase your pension pot compared to contributing to a pension regardless of particular circumstances - the increase could easily lead to a 20% higher pension pot.

Either way, retirement provision should be done before house purchase.