Starting pension when only 20 --Update #49

Jack_Griffin

I am not a financial adviser, but I do wish I'd put something into a pension much younger.

I don't understand the take the "high risk fund" advice? I always thought the way to invest was to spread the risk over a basket of options of various risk levels, that way you if one area does poorly it is likely the others will compensate and vice versa. But personally I am risk averse so maybe it is me saying that.

Tancred

Linton wrote: »

That is just silly - why would an advisor operating in their vested interest give the free advice that not going for an employers person would be very foolish. Wouldnt it more more in their interest to recommend not taking the employer pension but to contact an advisor?

To add my vote - you should take the pension and get as much free money as possible.

PS I am not a financial advisor.

There is no such thing as 'free money'. Any contributions paid by your employer are part and parcel of your remuneration and should be treated as such. I often hear moans from public sector workers about their low pay, completely ignoring the fact that their defined benefit pension schemes are an effective addition of 30-35% of salary!

Tancred

atush wrote: »

Rubbish.:p

Even more of us are normal people who WISHED they had started their pensions at 20 rather than at over 30.

And you have sown on another thread, that you aren't taking into acct, investment growth, componding, dividends etc over those 40 years.

I agree that monies over the contribution required to get the max free money should be invested in ISAs. And that short term goals are important. But asking the OP to give up free money is just silly.

It's not rubbish. Paying £50 a month at 20 isn't going to build you a million - so unless you earn a lot of money very early in your life you'll need to make some tough decisions. Sometimes it's better to start a pension at 30 and make more hefty contributions from that point onwards - it all depends on your priorities.

Linton

Tancred wrote: »

There is no such thing as 'free money'. Any contributions paid by your employer are part and parcel of your remuneration and should be treated as such. I often hear moans from public sector workers about their low pay, completely ignoring the fact that their defined benefit pension schemes are an effective addition of 30-35% of salary!

Not if you decide or are persuaded not to join the scheme.

Tancred

GhIFA wrote: »

OP will get contributions from the employer - free money. OP is not a taxpayer, yet will still get tax relief on his contributions - more free money. OP won't get this free money investing in an ISA.

It's not free money - there is no such thing. It's tax relief, which is merely a reimbursement of the income tax paid. ISAs are tax free and you can do what you want with the money, whereas a pension is a long term commitment and you cannot touch the money until at least 55 under current legislation.

GhIFA wrote: »

If he should be pessimistic about the returns on a pension, then logic would dictate that an ISA will be no better - the investment options are the same.

True, but an ISA gives greater flexibility.

GhIFA wrote: »

I don't know the OP, so not quite sure how I would have an "interest" in "pushing" him towards a pension. Simply setting out the benefits of doing so.

OP - Generally speaking, the earlier you can start contributing to a pension, the better, and if you're getting free money towards this as well then it is (as you've already said) a "no-brainer. You will see the benefit of this when you eventually come to retire. Pay what you need, or can afford, to pay to maximise the matching employer contribution. If you have the capacity to save more after this, then ISA's are the next best option in terms of tax efficiency. The fact that you are thinking about this already is good, and will hopefully mean that in the years to come you will have instilled in yourself a saving discipline which will be useful to you when you come to to think about deposit on a property or whatever your long term goals might be.

If the employer matches the contribution then yes it's a good idea to start the scheme and contribute the minimum at such a young age. But surely the OP will want enough money to buy a car, save a deposit to get a place of his own etc. A pension is important but it's not the most important item to save for at the age of 20.

Tancred

Anselm wrote: »

Ok I'll check, however, I was just going off what other posters had advised


Ok I'll check whether it is a defined benefit pension. When I get all the info on it, I'll post more about it here, to see if there are any pros/cons to it

Thanks for the help.

The bottom line is: if it's a defined contribution/money purchase scheme and the employer contributes, then it's a good idea to join and put in just enough to make sure that you get the maximum contribution from the employer. If it's defined benefit you need to make sure you want to stay at least two years because if you leave earlier you lose the benefits and would only get a refund of your own contributions. After two years you can usually preserve the pension benefits, which would normally be inflation proofed until your retire. However, you would need to check the exact T&Cs of the scheme.

Tancred

Linton wrote: »

Not if you decide or are persuaded not to join the scheme.

That would be cutting off your nose to spite your face.

Wobblydeb

Tancred wrote: »

If the employer matches the contribution then yes it's a good idea to start the scheme and contribute the minimum at such a young age. But surely the OP will want enough money to buy a car, save a deposit to get a place of his own etc. A pension is important but it's not the most important item to save for at the age of 20.

I would kindly suggest the OP does both. I started my pension at 23, when I was still renting and occasionally car-less (when a banger failed an MOT). Looking back now I am nearing 40, I am incredibly glad I have those early pension years under my belt.

I remain unconvinced I would have been better off in my 20s driving instead of catching the bus, or paying a mortgage instead of sharing with mates.

p.s. I am not a financial advisor either.

gadgetmind

Tancred wrote: »

That would be cutting off your nose to spite your face.

Yes, so perhaps you ought to consider being a little more careful with that sharp knife you're waving around.

I'd just like to tell the OP that I'm not an IFA and don't even use one myself. However, I strongly agree with the good advice you've had regards paying in as much as is required to get the max out of your employer.

The fairly meager pension contributions I made in my 20s and early 30s have grown into pot that shames the relatively large contributions I'm making now. So start early, use your head, and don't get discouraged when the value of the pot bounces up and down.

Of course, you do also need to start saving outside a pension, but please don't turn your back on free money.

GhIFA

Tancred wrote: »

It's not free money - there is no such thing. It's tax relief, which is merely a reimbursement of the income tax paid. ISAs are tax free and you can do what you want with the money, whereas a pension is a long term commitment and you cannot touch the money until at least 55 under current legislation.



True, but an ISA gives greater flexibility.



If the employer matches the contribution then yes it's a good idea to start the scheme and contribute the minimum at such a young age. But surely the OP will want enough money to buy a car, save a deposit to get a place of his own etc. A pension is important but it's not the most important item to save for at the age of 20.

It's not a reimbursement of tax as OP has already stated that he is a non-taxpayer, but even if was tax already paid, OP gets it back by making a pension contribution, rather than it remaining with the treasury. And to pick up on a point you made earlier, the employer contribution is free money - if the OP doesn't make a pension contribution he doesn't get it.

I also understand how ISA's work. However, consider this - OP can invest in exactly the same way in a pension and and ISA. Paying £80 into the investment via his employer's pension will get him a £200 contribution. Paying £80 into the same investment via an ISA will get him an £80 contribution. The ISA is never going to catch up.

I never suggested it is the most important item to save for. In an ideal world, the OP will make use of both, to utilise the tax efficiency of each wrapper, and maximise the flexibility. Regardless of how old OP is, to turn down what is being offered would be unwise. And getting in the discipline early gives OP the best opportunity of providing for a comfortable retirement.