Pensions, am I being foolish?

mikeywills

I could do with a bit of advise. The facts, I am 33 and do not have a pension. I currently set aside £250 a month into a savings account attached to my offset mortgage. There is approx 8K in the pot, but I feel I am missing out. It has always been my intention to use the money to invest in property, by buying, renovating and letting a second home, but I am a long way off being able to do this with the current fund.

So what I could really do with assistance over, is how can I make the best return on this money that will allow me access to it at a later date. I appreciate that a pension is basically just a wrapper to a savings fund that is tax free, so what would be the best route for new money and how could I make more from the capital I have at present.

Suggestions much appreciated, no matter how wacky!

EdInvestor

First, why don't you check out the pension(s) that you do have: the two state ones.

https://www.thepensionservice.gov.uk

In addition, how much equity do you now have in your home?

mikeywills

You have lost me ed, I only have 1 state pension, as my current employer does not offer a stakeholder pension scheme. The link you gave just brought up a uk2 pages which didn't seem relevant?
A reasonable amount of equity in my current home about 160K or thereabouts? why what are you thinking?

dunstonh

In this life we have to do a number of things and not just one. For example, we dont decide whether we should pay the gas bill or the electric bill. We pay both. The same applies to retirement planning. You shouldnt decide to pay the mortgage off with offsetting and not pay towards your retirement.

The basic state pension is £4381. There is an additional state pension called S2P (used to be called SERPS). However, it is best not to rely on that. The Govt have reduced that four times since it was introduced and self employed individuals dont get it at all. Most people dont do enough for retirement so if you get any S2P, then consider it bonus.

So, as it stands at the moment, you have no provision for retirement and will be looking at an income of £4381 a year, in todays terms, from age 67 (yes, your state retirement age is 67, not 65).

Offsetting is probably saving you around 6% in interest but investments would in a half decent spread would be looking closer to 8-9% p.a. average.

You need to decide how serious you are at buying property, doing it up and selling it on. Especially in a cycle of increasing interest rates putting pressure on house prices. You also want to consider if putting all your eggs into that property plan is a wise move.

mikeywills

Thank you dunstonh, your concerns are some which I have considered myself. I think what I am looking at is if there is a better possible return to my existing capital sat in a savings account with a return of approx 6% for my mortgage and none towards my fund.
If as you say the investments could return between 8-9% then this would obviously be more beneficial. I assume in addition to this the money would be benefitting from tax relief at source gaining the additional 20+%.
How can I go about creating a fund that will have relative easy access for me to utilise it in about 5 years, when the fund should be in the regions of £25,000 allowing me to use it to purchase a second property?
Or is this not possible?

EdInvestor

Pension link now fixed, sorry about that. Suggest you check on your S2P entitlement, if you are entitled to the full amount it will double your state pension at least.

160k equity in your property is a good savings pot already accumulated, well done. What many people do when they retire is "trade down" to a cheaper place, thus releasing a cash pile to invest for income. Your 160k if invested would generate an income of around 8,000 pounds a year to add to your state pensions (see above), so you are doing quite well .

But it is not sensible to have all your eggs in one basket eg property and cash savings. You should have some in the stockmarket too.I thus suggest you open a maxi ISA now with 7k of your savings and invest it in equity funds via a discount broker such as https://www.h-l.co.uk who will rebate the charges.

Check some of the longer threads in the Savings and Investment forum for discussions about how to invest, which funds etc.In April I would top up the ISA with next year's 7k allowance paying in the money as and when I can also investing it in funds.

As you don't have an employers contribution, are not a high rate taxpayer, and may need the money for property investment later, I wouldn't suggest you invest in a pension, because you can't get the money out until you are 55, and the tax relief going in is taken back when you pay tax on the income in retirement anyway.

So it's not such a good deal as it sounds.