32 Year old - Pension or No Pension

FrankRizzo

Ive turned 32 and do not have a pension. I have a mortgage but no other debts, enough savings for emergencies (I wont dip into this for anything else). My financial awareness is pretty good but I hold my hands up that I don’t have much understanding of pensions. I have just got married, turning 32 and feel as though I need to get my finger out, understand pensions and start contributing. The only thing is I am being made redundant, however I am happy to move on and find myself another job. One thing that worries me is hearing from older colleagues about all their redundancy/TUPE horror stories and how there pensions T&Cs changed for the worse etc. I start wondering should I just over pay my mortgage instead of a Pension after all, the way the job market is I could end up going between jobs going forward?

Linton

You need to be saving for your retirement unless you will be happy living on £7500/year. The sooner you start the more money you will get at retirement because the longer the money is sitting there increasing by the investment returns. The most tax efficient way of saving for retirement is by use of a pension.

In your next job it is quite likely that the employer will run a pension scheme into which they will contribute extra money. This benefit can be very significant.

You mentioned over paying the mortgage as an option. What is the interest rate? Say you are paying 3%, so that's what you would be gaining from each overpayment. Putting the same money into a pension would on average get you significantly more than that in investment returns. Add in the tax benefits and the possible employer contribution and the answer really is obvious as to which is the better deal.

If you change jobs fairly frequently you will often have the choice of leaving your old pension where it is or transferring into the new one. So you should be able to avoid having lots of small pensions. But even if you cant, having a range of old pensions is no problem, you dont lose them.

quotememiserable

When people are talking of changing pension t&cs you must be aware that earned pension stays earned, and changing rules only affect new pension earnings from the date of the change. Almost the whole public sector is in a frenzy currently fueled by failure to understand this.

kidmugsy

quotememiserable wrote: »

When people are talking of changing pension t&cs you must be aware that earned pension stays earned, and changing rules only affect new pension earnings from the date of the change.

Almost the whole public sector also seems unable to acknowledge that their terms are typically changing from unbelievably generous to merely extraordinarily generous. My own preference is that we strip even accrued benefits from those parts of the public sector that collaborated in Brown's ruining of the public finances.

mania112

Sounds like you need pension and protection (the latter makes more sense when you start a new job and start a family).

FrankRizzo

Linton wrote: »

You mentioned over paying the mortgage as an option. What is the interest rate? Say you are paying 3%, so that's what you would be gaining from each overpayment. Putting the same money into a pension would on average get you significantly more than that in investment returns. Add in the tax benefits and the possible employer contribution and the answer really is obvious as to which is the better deal.

If I overpaid my flat and cleared it and assuming I then save big deposit for a family house then could I not use the rental from my flat to pay my living at retirement? And would I be better off with this approach than pension payout?

Linton

FrankRizzo wrote: »

If I overpaid my flat and cleared it and assuming I then save big deposit for a family house then could I not use the rental from my flat to pay my living at retirement? And would I be better off with this approach than pension payout?

I would doubt it as you cant reasonably assume the value of the flat and the rent you get from it would do any better than rise with inflation. Invested money should (and historically has) over time do better. Also you have the possibility that your employer would provide a large input into your pension, which he wouldnt into you buying property.

Suggest you do some trial calculations. You could use this calculator to determine your future pension income. Then its a matter of working out the costs of buying and maintaining property and the expected net rent.

atush

One thing that worries me is hearing from older colleagues about all their redundancy/TUPE horror stories and how there pensions T&Cs changed for the worse etc.

This sounds to me like you were working in the Public sector and had access to a FS pension and didn't take it up. Poor you.

In any case going forwards. If you get a lage redundancy pmt, and have loads of cash already, you could start a private pension. Each 80 you put in will be grossed up my BRT to 100. you can pout in 2880 (which will be 3600 after tax rel) but could contribure more if you wanted, based on your income this tax year.

Going forwards, join any workplace pension in your new job. Keep filling ISAs as well.

Generally speaking, if using pensions to save for retirment you should put in have your age as a % when you start (ie 16% in your case) and should have at least 35K by age 35. So you are a little behind the game, but have over 35 years to catch up.

atush

FrankRizzo wrote: »

If I overpaid my flat and cleared it and assuming I then save big deposit for a family house then could I not use the rental from my flat to pay my living at retirement? And would I be better off with this approach than pension payout?

No, you might not be better off than not having a pension. As you will have almost all your assets in property with no equities.

Equities have outperformed property in any time period of 10 years or more (and certainly have this last 5 years). As a first time LL you will have all sorts of problems such as vandalism, bad tenants who don't pay, to void periods etc.

you won't get Tax relief (as you do with a pension), but will pay tax on any rental income after allowable expenses. Interest paid on a mtg is an allowable expense, so if you keep the flat and rent it, you could be better off having a mtg.

So keep the flat if you can, but don't skimp on a pension to do so.

somethingcorporate

FrankRizzo wrote: »

If I overpaid my flat and cleared it and assuming I then save big deposit for a family house then could I not use the rental from my flat to pay my living at retirement? And would I be better off with this approach than pension payout?

And what happens to your income when your tenants stop paying the rent and it takes the best part of 4 months to turf them out?

Not something I would relish the prospect of when I am retired.

A single B2L is incredibly high risk if you are relying on it for a regular income. I think you'd need in the region of 6-8 properties to make it reliable but then managing half a dozen properties is a pretty big commitment.

FrankRizzo

Thanks folks all comments useful. Looks like pension is the only way forward.

My mother made a comment about a friend of my dads. She said his pension plummeted just as he was about to retire. Excuse my ignorance but how does this happen?