New to pensions... facts or myth?

smi85

I'm currently in the process of paying off my debts, have a small amount of debt around £1500 mark and on course to being both debt free by christmas and also having a bit put away for a rainy day in my ISA. So around christmas I'd like to start planning for my retirement by putting some money away which I can't touch til then.

The problem I have is that my friends and boss are telling me pensions will be worth nothing, it'll be worth nothing when I do retire etc. My boss unhelpfully advising me to invest in property instead - he was promptly advised to increase my wages substantially!

What is the truth? Ill be looking to pay around 150/200 a month into a pension pot and if there really are alternatives out there I'd love to hear them, but I'm 26 and want to make the most of what I have available as early as poss!

Sorry for rambling and thanks in advance

Lokolo

A pension is a type of wrapper for investments, the same with a Stocks and Shares ISA.

Property is an investment. And putting all your money into one investment is dangerous (all eggs into one basket), so you usually spread it over a number of different investments.

You don't have to use a pension for your retirement, it's one possibility. The advantage of the pension is that your company may contribute to it. You also get tax relief on your earnings, so you pay £80 into your pension, and actually, £100 gets added!

Aegis

smi85 wrote: »

I'm currently in the process of paying off my debts, have a small amount of debt around £1500 mark and on course to being both debt free by christmas and also having a bit put away for a rainy day in my ISA. So around christmas I'd like to start planning for my retirement by putting some money away which I can't touch til then.

The problem I have is that my friends and boss are telling me pensions will be worth nothing, it'll be worth nothing when I do retire etc. My boss unhelpfully advising me to invest in property instead - he was promptly advised to increase my wages substantially!

What is the truth? Ill be looking to pay around 150/200 a month into a pension pot and if there really are alternatives out there I'd love to hear them, but I'm 26 and want to make the most of what I have available as early as poss!

Sorry for rambling and thanks in advance

Definitely a myth. A pension is a tax-efficient vehicle for investing into a wide variety of assets aiming to generate growth for your retirement. You get tax relief on what goes in and partial tax exemption on what comes out, you can get national insurance relief if you pay into a company scheme by salary sacrifice and you can control where the investments are made, so the growth you get within your pension can be more or less the same as the growth you get outside the pension.

The pensions likely to be worth a lot less when you retire are the state pensions, largely due to their unsustainable nature if the population keeps living longer. As such it's more important than ever to ensure that you're adequately planning for yourself.

ISAs are still definitely worth doing as well, including stocks and shares ISAs if you're not already taking advantage of them.

dunstonh

my friends and boss are telling me pensions will be worth nothing

idiots

My boss unhelpfully advising me to invest in property instead

He is "one of those".

What is the truth? Ill be looking to pay around 150/200 a month into a pension pot and if there really are alternatives out there I'd love to hear them, but I'm 26 and want to make the most of what I have available as early as poss!

whatever you do for retirement is better than doing nothing. Every option has pros and cons. If the employer pays into a pension then its by far the best option as you have to consider that free money.

S&S ISA and pensions are then the main two things for personal provision. For most people a combination of the two is best.

Property can form a part for some people but it requires work and has risks (as you are borrowing on multiple properties and need the rental income to beat the mortgage and you need about 6 properties at least to really get a decent enough income from it (as you need to pay capital gains tax will you sell and you need to repay the mortgage - you are only left with the difference if there is any).

smi85

Thanks, good info there.

So if I was to put £200 aside per month for retirement planning, would you say put £100 p/month into a S&S ISA and £100 into a pension plan? And obviously look to increase both when possible, in line with payrises etc.

Currently only have a Cash ISA.

atush

I can only think your friends are stupid, and your employer is the same, or has a pension scheme that you could join and doens't want you to (as it may cost him a bit). Never fear, this option will soon be gone for him. In any case, find new fronds by the time you retire, as all these people may be too poor to pay for their round down the pub as you will be if you also rely int eh state pension.

I suspect (as I am NOT stupid) that the 'pensions' they are talking about are th state pensions that everyone who worked used to get at age 60, 65 now 68? they used to be worth les each year, but the current gov have restored some better uplift I think.

In any case, we here think of pensions (as opposed to the state pension) as the ones that :

A ) you work for the Gov/council so are super lucky and are in a final salary scheme that pay you a percentage fo your final salary for life. with uplift for inflation and surviror benes. Woth houndreds of thoudands of ounds ont he open market which of you opt oput you can never hope to amass.

The ones that your employer has that you pay x% into (before tax so you save a min of 20% of x) and then they pay x, or if you are lucky 2/3/4/10 times x into which is known as 'free money' to you. This of it as extra salary paid only to non stupid types and payable after age 55-65.

C) A personal pension where you pay into a scheme on your own and gain tax relief at your higherst rate on whatever you put in. Better than thothing but not as good as a/b.

atush

smi85 wrote: »

Thanks, good info there.

So if I was to put £200 aside per month for retirement planning, would you say put £100 p/month into a S&S ISA and £100 into a pension plan? And obviously look to increase both when possible, in line with payrises etc.

Currently only have a Cash ISA.

Have you asked (and are you sure) that your enployer doens't have a schemethat they pay into (I suspect not). If so your plan is fine BUT:

Consider what might happen if youare made redundant- say your employer ceases trading (not totally unlikely as he says pensins are rubbish).

If you hold ISAs, they count as cash.investments owned by you and can affect benefits paid if you are in the above situation. Also, should you fal into debt etc, creditors could claim it.

A pension in most all cases can be outside if such calcuations so would not reduce your entitlements.

both can be taken into acct in the case fo divorce though.

jamesd

smi85 wrote: »

My boss unhelpfully advising me to invest in property instead

And when auto-enrollment is introduced, your boss in doing that would be breaking the law by trying to encourage you not to enroll in a scheme that would cost the company some money if you used it.

smi85 wrote: »

What is the truth?

If there's a work scheme where your employer matches or adds any money you should join it as soon as possible.

If there is not such a scheme then investing within a S&S ISA at your age is OK for a while until you have a fair accessible reserve beyond just a few months or a year or emergency funds. Cash ISAs are not suitable for long term retirement investing, they don't make enough money.

Do you own a home yet? If not, that increases the emphasis on ISA instead of pension so you can accumulate a suitable deposit.

Pensions in general are good for providing the first part of retirement income, say the initial £5,000 or so. Above that they still provide more income than ISA but the gain is less for basic rate tax payers.

If you think that you may be a higher rate tax payer and get higher rate tax relief for pensions later that implies that S&S ISA is better now. You could switch the money from ISA to pension later to get the higher rate tax relief.

Pensions are protected from benefits means tests and bankruptcy or other insolvency at younger ages. ISAs aren't. So there's some protection benefit in using a pension once you accumulate a few years of living money in an ISA. Or you could try to get to the point where your income from investments could support you without needing benefits indefinitely, without draining the capital. That would take a lot of determination for at least a few years, depending on how much you spend for what you consider to be essentials and your income.

Loughton_Monkey

smi85 wrote: »

......So if I was to put £200 aside per month for retirement planning, would you say put £100 p/month into a S&S ISA and £100 into a pension plan? And obviously look to increase both when possible, in line with payrises etc....

I thoroughly recommend you take a close look at 'funds'. By reading and browing sites like HL, Trustnet, etc. you should discover the huge and daunting range of funds available.

But here's the key fact. If you name any single pension fund you like, then any of us could point to an OEIC fund which invests in the same assets/territory/focus etc. In many cases we are talking about 'identical'.

In reality, we all build up a 'bag' of funds [I have about 12 in my ISA], and it follows that £1 invested in that specific bag of funds will grow (or fall!) exactly the same whether under the Pension wrapper or under the ISA wrapper.

The difference is that the pension 'bag' of funds will be 25% higher due to the tax relief. It is perfectly legitimate to 'build up' the value in the ISA wrapper, and then transfer them into pension years later. Provided you have the 'room' within tax relief limits [and for most 'ordinary' wage earners you would], then you get the 25% boost when you eventually transfer them. In other words, you still end up with the same total fund value.

The choice is purely down to you. As already said, if you would achive higher rate tax later in life, then building up the funds in the ISA and transferring only when you get to 40% tax is very lucrative.

If you remain a basic rate taxpayer, then it depends on how you look at it. Build the funds up in a pension and they are 'locked' until age 55. Build them up in an ISA and you can access them (but you will never receive more tax relief on that money).

Some people look on the 'locking away' (pension) to be 'good'. Others see this as 'bad'. It depends upon your own viewpoint. Personally I prefer pension because it keeps it away from 'temptation' that you might later regret.

smi85

I think it might make sense to open a S&S ISA and save the extra cash that way, there's a good enough chance I will be in the higher tax bracket in the future to make it worth a shot. It all makes a lot more sense now thanks very much, will have a look at the various sites which offer S&S ISAs.

fairleads

smi85 wrote: »

I think it might make sense to open a S&S ISA and save the extra cash that way, there's a good enough chance I will be in the higher tax bracket in the future to make it worth a shot. It all makes a lot more sense now thanks very much, will have a look at the various sites which offer S&S ISAs.

And in a few more years time you will find out just who's advice was the more stupid. Good luck with your future house purchase. It'l be one of the better options available to you when you've got a bit of financial independance under your belt.