should i pay into a pension now with auto enrolment coming in?

14k_london

I am 31 and have no pension and no savings. I'm an idiot, i know. until yesterday i knew nothing about auto enrolment and was stressing over stakeholder pensions, pp and pipps.

My employer employs around 90 people. now if i've understood it correctly he will have to introduce auto enrolment next year and he will only have to match 1% of my salary(currently 38,000) going up to 3% in 2018. This seems like a good deal to me, insofar that prior to even knowing about auto enrolment i was going to start paying into a personal pension of 250 a month.

if i started paying 250 next year instead with the boss putting money in according to how he's meant to i would end up slightly better off than if the scheme never existed

I'm thinking rather than wasting time putting money into a personal pension now it would be better placed in a s&s isa.

have i got my facts right or have i got the wrong end of the stick here? Should i forget about what ever the boss is going to line up and go for a sipp (i suppose i should wait and see what he's offering first) i know 250 is not alot, but i was going to open up a s&s isa anyway.

I wish i'd taken an interest in this earlier. Oh well, live and learn!

DreamerV

I don't think you're an idiot. 31 is young compared to I'd guess many, many people starting 30+ with lots of debts to clear 1st. I'm sure there are plenty on here who wish they'd started at 31.

I'm sure someone will come along soon and give you a detailed answer/advice

stinktankcynic

14k_london wrote: »

I am 31 and have no pension and no savings. I'm an idiot, i know. until yesterday i knew nothing about auto enrolment and was stressing over stakeholder pensions, pp and pipps.

My employer employs around 90 people. now if i've understood it correctly he will have to introduce auto enrolment next year and he will only have to match 1% of my salary(currently 38,000) going up to 3% in 2018. This seems like a good deal to me, insofar that prior to even knowing about auto enrolment i was going to start paying into a personal pension of 250 a month.

if i started paying 250 next year instead with the boss putting money in according to how he's meant to i would end up slightly better off than if the scheme never existed

I'm thinking rather than wasting time putting money into a personal pension now it would be better placed in a s&s isa.

have i got my facts right or have i got the wrong end of the stick here? Should i forget about what ever the boss is going to line up and go for a sipp (i suppose i should wait and see what he's offering first) i know 250 is not alot, but i was going to open up a s&s isa anyway.

I wish i'd taken an interest in this earlier. Oh well, live and learn!

I'm in a similar position. But I've been in final salary, avc's, stakeholders etc. I stopped because of the falling annuities, threat of means tests and that I no longer get employers cons. This changes in 2014, so free employer money. Although auto pensions are small, it will add to what I've got. I'm going stocks ISA's instead. More control.

jamesd

Best to wait and hope that your employer doesn't so something daft like picking NEST as the pension to offer. Particularly unsuitable where there are higher paid employees, because of its cap on how much can be paid in.

Meanwhile you can invest within a S&S ISA. That's good practice for pension investing and gets you a pot of money that's available in an emergency. Though not first choice, because the emergency might come at a time when investment values are lower. A fair amount in a savings account is first choice for emergency fund.

No need to kick yourself over the past, you're paying attention and doing something about it and that's good.

pennyshahin_2

Hi I'm 44 and work part time with a cleaning company and their pension scheme is NEST I don't earn enough to be automatically enrolled but have the option to opt in if I want, I don't really undeerstsnd pensions, I have a post office one which was frozen when I left about 15 -16 years ago and I was there about 9 years, I stated a couple up about 7 or 8 years ago with friends provident and scottish windows but stoped them because I decided just to live for today-now I'm married, I have qite alot in premium bonds-and just wanted some advice from people who understand these things more than I do.Thanks

jamesd

You're:

1. old enough
2. not earning much
3. unlikely to be able to afford to retire before state pension age on your income and existing pensions
4. inexperienced with investing

That tends to make me think that it's in your best interest to ask to join the NEST scheme at work, even though I'm not generally keen on it.

atush

You are 31, so if starting a pension today should be paying in 490 per month (incl employers contribution and taxrelief along with your contribs. Waiting til next year would mean instead of 15.5% of your income going into pensions that 16% should as you should aim in your starting year to put in half your age as a %. Your proposed contribution of 250 would work out to be more like 10%.

Saving into a S&S isa is all well and good, but for every 80 you put into an ISA you will have 80. for every 80 you put into a pension, you will have 100.

At your age, you should aim to have 3 months spending saved in easy access cash (in ISAs to save tax), then a pension and S&S isas and other investments.

So if you have no savings and investments at all, I'd get on to the cash bit first, then open a pension and S&S isa.

FatherAbraham

atush wrote: »

Saving into a S&S isa is all well and good, but for every 80 you put into an ISA you will have 80. for every 80 you put into a pension, you will have 100.

You're not comparing like with like.

The £100 in a pension fund will be taxed more severely when taken as annuity income.

The £80 in an ISA will have an income-tax allowance made for capital return if taken as annuity income.

Warmest regards,
FA

atush

No, not necessarily. The 100 in a pension fund could be only 75% taxed at basic rate (or even no rate if within your personal allowance). 25% is tax free.

I am not saying not to have S&S isas (or cash ISAS) I am saying that ISAs should not be relied on alone.

FatherAbraham

atush wrote: »

No, not necessarily. The 100 in a pension fund could be only 75% taxed at basic rate (or even no rate if within your personal allowance). 25% is tax free.

The personal allowance is an irrelevance when comparing the taxation of income taken from ISAs or pensions: it applies in both cases.

The key point is that all of the return from an annuity bought with pension fund money is taxable income, whilst part of the income bought with non-pension-fund money is regarded as capital return, and therefore not taxable income.

The possibility of a 25% tax-free withdrawal reduces the amount of the entirely-taxable annuity return (and it's quite possible to use that "lump sum" to buy an annuity which will then be taxed in the same way as other non-pension-fund annuities -- I asked a question about that on this board a couple of weeks ago, and got some instructive replies).

However, the remaining 75% pension fund can only be used to generate income which will wholly be regarded as taxable income; there is no allowance made for capital return.

You don't seem to acknowledge this difference between income taken from funds which have been tax relieved, and hat taken from fund which have already been subject to income tax.

atush wrote: »

I am not saying not to have S&S isas (or cash ISAS) I am saying that ISAs should not be relied on alone.

I'm saying that the reasons you are giving as comparative advantages of pensions are wrong. I'm not saying there are no comparative advantages.

jamesd

Pension, pay in £80, get £100 in the pension pot, take 25% tax free lump sum and you now have £75 in the pension for a net cost of £55.

Put the same net £55 into an ISA and you have £55 in the ISA.

So you need to compare the income you can get from £55 in an ISA with the income you can get from £75 in a pension.

Lets pretend that all of the pension income is taxed at basic rate because the whole personal allowance for income tax is used. That reduces the effective value of the £75 in the pension to £75 * 0.8 = £60. Lets also pretend that the ISA is fully tax free for income generation.

That in turn means that you need to somehow generate 9.1% more income from the ISA than the pension to break even ((60 / 55 - 1) * 100).

You can't even break even with the purchased life annuities you can buy outside a pension because they are a less competitive market with lower payment rates than pension lifetime annuities. And of course the ISA PLA isn't really 100% tax free and for many at least part of the pension income is.