When to start a pension

uniben

Hi,
I'm 23 and am currently at University.
I have been looking around various web-sights, looking at information about pensions, and I've come away very confused. They all say that starting early is the best thing to do. But in my current position (I have a part-time job) is it better to just save in ISA's and savings accounts until I get a full time job, and then start making pension contributions?

jamesd

A good time to start pension contributions is when you get a job where your employer will match some of your pension contributions with their own money.

For now it's probably best for you to start to learn about investing with a stocks and shares ISA. Then that money will be available to you as a lump sum to pay a property deposit. Getting a property deposit and leaving renting is likely to provide you significant financial benefits that are greater than those of starting a pension immediately.

atush

Well, the earlier the better really, but if your employer doesn't offer one, in your case I'd wait instepad of opening a Personal pension and just use Cash ISas and S&S Isas.

After all, you will need things goiing forwards such as flat deposits, possibly buying a car, and perhaps building savings to buy your own home.

So open one if one is offered now, but also save into ISAs for the nearer parts of your upcoming life as well. Make sure all debt is paid off before committing money to savings (apart from lwoer cost debt such as mtgs and student loans) and saving up to 6 months in essential spending is advised.

Lady_Aga

Whenever and however you decide to save towards your old age, remember it is for your retirement. Those 20-30 years after you stop working.

It's not a deposit fund, or a new baby fund or a round-the-world-trip fund, or child's univeristy/wedding fund. It is for you for when you are old.

Pay into it and forget it exists, so you are not tempted.

property.advert

I have a contrary view to the idea of saving as much as possible as early as possible, though if you have enough income I also support the general idea of this. Additionally, if your salary progression is likely to be fairly flat throughout your working life it may have some impact on your ability to fund this (or indeed any other ) pension.

Initially, I'd forget about pensions, save to explore where an employer uses matching funds. Even then, the maths will decide whether you forgo the free money. Don't worry about paying back student loans either. However don't borrow expensively on overdrafts or credit cards and sort out your day to day finances.

As you'll probably be paying large chunks of rent, you need to get that down as far as possible. You need a deposit to get onto the property ladder, not for some money making scheme but just to protect you from the ravages of rent increases over time. If you achieve this early enough then it frees up much larger chunks of money later in life to pay into pensions.

Another reason for my bias towards later payment into pensions at a higher level is supported by the tax treatment of pension fund contributions. Paying into a pension with 40% relief is far more beneficial than receiving 20% relief, yet you have to save a deposit and pay off a mortgage from taxed income. Thus you are better off saving when you only receive 20% relief and better off paying into a pension when you receive 40% (or 50%) relief. This may all change though if higher rate relief is withdrawn but ceteris paribus etc.

Also, don't buy the fashionable pad but rather the place you can grow into.

When you have somewhere, you benefit from mortgage payments lower than rents (especially if you rent out a room or two) and you have more free cash to pay into pensions. Unless you leave it way too late, the maths for this way outstrips the start early approach as you are funding a pension you cannot get for another 35 or more years with money that is required to buy a house today.

gadgetmind

property.advert wrote: »

Thus you are better off saving when you only receive 20% relief and better off paying into a pension when you receive 40% (or 50%) relief.

Agreed, but this money must be put aside for later pension investment rather than being frittered and must go into assets that trounce inflation over the long term.

This may all change though if higher rate relief is withdrawn but ceteris paribus etc.

This tax relief has already been seriously capped via the new annual allowance, which is 1/5th of what existed previously. Pay in too much and you get a massive tax charge.

One might hope this allowance would be lifted again when the 50% tax rate goes (soon, hopefully) but that's perhaps wishful thinking.

property.advert

gadgetmind wrote: »

This tax relief has already been seriously capped via the new annual allowance, which is 1/5th of what existed previously. Pay in too much and you get a massive tax charge.

One might hope this allowance would be lifted again when the 50% tax rate goes (soon, hopefully) but that's perhaps wishful thinking.

Few people here or elsewhere will ever get near the annual £50,000 contribution limit.

What is useful though is for someone who has no intention in starting a fund to actually open one as this would allow 3 years of up to £50,000 to be utilised later, mopping up any higher rate taxes which would otherwise have to be paid.

Start a property late and you have higher mortgage repayments, which when coupled with the other living costs needed, means that you are going to need more cash and thus will likely end up paying far more 40%/50% tax than would otherwise be necessary.

As for an increase in the £50,000 limit, I think that is gone for good I'm afraid. Over time it will be eroded by inflation but I am not sure we will see such a direct allowance increase. Tinkering on the periphery will likely be the way forward.