Pension or house deposit?

planteria

& when MTF has confirmed his pension options, made a plan, and started putting it into action....how should he best save up his House Deposit:question: the best Cash Regular Saver available:question:

marathonic

planteria wrote: »

& when MTF has confirmed his pension options, made a plan, and started putting it into action....how should he best save up his House Deposit:question: the best Cash Regular Saver available:question:

This is a tough one. I'd save 6-months expenses as an emergency fund using the best instant access ISA available (if I thought I could do it without having to withdraw for the year, I'd use a regular saver instead).

Then, I'd have a look at what's on the market locally and what my estimated requirement would be with regards to a 10% deposit (plus fees). If I worked out I could get there within 5-6 years, I'd save totally in cash. If it was going to take 7+ years, I'd be very tempted to go with equities instead (some may disagree with this approach).

If I went the equity approach, I'd monitor my position continuously and move completely to cash when I got within an estimated 3 years of my goal.

planteria

marathonic wrote: »

This is a tough one. I'd save 6-months expenses as an emergency fund using the best instant access ISA available (if I thought I could do it without having to withdraw for the year, I'd use a regular saver instead).

Then, I'd have a look at what's on the market locally and what my estimated requirement would be with regards to a 10% deposit (plus fees). If I worked out I could get there within 5-6 years, I'd save totally in cash. If it was going to take 7+ years, I'd be very tempted to go with equities instead (some may disagree with this approach).

If I went the equity approach, I'd monitor my position continuously and move completely to cash when I got within an estimated 3 years of my goal.

sounds good to me. at the moment getting a good return on cash is tough.

xylophone

My employer does have a pension scheme, but it's a closely guarded secret.

Will he have to kill you if he tells you?:rotfl:

I would strongly suggest that you find out about it and join up......

JustAnotherSaver

Sorry to jump in on this but the £35k comment stood out for me & i had to reply...

I'm not doubting dunstonh's post about how ideal 35k is at age 35. I just question how normal folk could afford this.

As they say with investments - they can go up as well as down, so for this, let's assume they've done neither. Unlikely, but imo fair.

I started full time at age 19, but let's say i started at 18. Let's also say i paid in £171.56 per month for the 17 years (age 18 + 17 years = 35yrs old).
£171.56 per month * 12 months = £2058.72 per year * 17 years = £34998.24.

I remember early on i was hitting £150-£170 per week for long enough. So £170 was a big big chunk of my monthly wage & not something i'd see as affordable.

If i was a big hitter on 30k yes, but on my wage back then - no.

Unfortunately i knew nothing of investing, pensions & the like back then & only got interested in my mid>late 20s & as such started my S&S ISA at age 28 paying £100pm (as the bulk needs to go towards house deposit).

Safe to say i'm well behind & need to pick up the payments once we move.

dunstonh

I'm not doubting dunstonh's post about how ideal 35k is at age 35. I just question how normal folk could afford this.

That has already been covered in this thread with examples of how it could be achieved.

I started full time at age 19, but let's say i started at 18. Let's also say i paid in £171.56 per month for the 17 years (age 18 + 17 years = 35yrs old).
£171.56 per month * 12 months = £2058.72 per year * 17 years = £34998.24.

£171.56pm gross is just £137 net. a contribution of that level for 17 years growing at an average of 6% pa. would give you a fund value of £59953.

If you use the same rate of return backwards over those 17 years then £35,000 would be achieved with £100.15 gross or £80.12 net.

Most personal pensions have a minimum contribution of £100pm gross nowadays. So, you can see that it is quite possible for most people to achieve that figure... if they want to.

FatherAbraham

MadeToFit wrote: »

On the subject of pensions: am I correct that 'a pension' is just a special tax efficient container for shares and funds?

Yes, that's a good basic summary. A pension wrapper can hold several types of investment class. It protects the capital from being accessed by you or by your creditors. Distributions can't usually be made before the age of 55. It permits taxation deferral of present income into a (usually) lower-income time, with the additional bonus of a 25% tax-free lump sum.

(Then there are defined-benefit schemes, which simply guarantee an income in retirement, and are hard to get).

MadeToFit wrote: »

Isn't it also the case that with most pension products the provider's default recommendation of fund is pretty rubbish? So how do you choose? (Indeed, how do you pick a share to invest in...?)

Sounds like garbage in general, who told you that? Modern pension arrangements tend to have reasonable, balanced default fund options. That's not to say that a different asset allocation might suit most people, but since most people aren't that keen on learning about asset allocation theories, the default funds are often a good place to start.

MadeToFit wrote: »

Is there a way I can dribble cash into a pension -- say £200 per month? What sort of set up would I need for this? Can it be flexible about how much I put in?

Regular monthly in-payments are pretty much the way that pensions are designed to work. Tax rules on lump-sum contributions seem to be getting more stringent (annual limits are coming down again next year).

You can change your contribution level at any time. There's usually a minimum contribution level, but that should be below where you want to contribute.

Warmest regards,
FA

MadeToFit_2

dunstonh wrote: »

At the moment, you are planning to be on the breadline/poverty level in retirement. That is your position based on what you have told us. Is that what you want?

No. But the message I'm getting is that it's so late that poverty is now my only option.

JustAnotherSaver wrote:

I'm not doubting dunstonh's post about how ideal 35k is at age 35. I just question how normal folk could afford this.

Ha! So I'm not the only one! Maybe if you rent a room in a student dwelling, don't go anywhere, try not to eat,...

Anyway, let's draw a line under that.

xylophone wrote:

Will he have to kill you if he tells you?[/code]
Constructive dismissal more than likely. Causing work and costing money will make me public enemy number one. The scheme is probably a scam anyway knowing that devious lot.

Thanks FatherAbraham for some sense. Conclusion: just choose one, any will do?

The online calculators I've tried vary.
Virgin's calculator says £200 per month gives income of £5k, but of £20k if contributions increase by 10% each year.
Standard Life calculate £6k with the same parameters.
The Guardian estimate £5.5k, and agrees with Virgin for the 10% increases.
(I had put in links but am not allowed.)

Surprisingly, the effect of an initial lump sum is insignificant. Even a £35k initial investment increases Virgin only to £9k and £24k.

So what about my £700 per month?!
The nub of the matter is that: if I can't buy a house then the pension must be big enough to pay rent.

At a guess I'd put put £200 per month into an arbitrarily chosen pension, increase that by 10% every year, and hope for the best. Everything else is house.

That would leave £500 + current rent = £1200 per month for mortgage repayments. So the question there, is how do you determine the optimum deposit and term to minimise total interest charges?

dunstonh

No. But the message I'm getting is that it's so late that poverty is now my only option.

Its not too late to do something about it. It is more a case of whether you want to or not. Remember any money you spend today is effectively taking it away from later.

At a guess I'd put put £200 per month into an arbitrarily chosen pension, increase that by 10% every year, and hope for the best. Everything else is house.

For someone starting late, that is a small contribution. However, a 10% annual increase would go someway to compensate for it.

jamesd

MadeToFit wrote: »

No. But the message I'm getting is that it's so late that poverty is now my only option.

All it means is that it'll eventually cost you more in monthly pension contributions to get a particular income level than it would if you had started earlier. Not a huge deal for someone who is 38 and still around 30 years from reaching their state pension age. You've probably got ample time to aim to retire early if you want to.

MadeToFit wrote: »

That would leave £500 + current rent = £1200 per month for mortgage repayments. So the question there, is how do you determine the optimum deposit and term to minimise total interest charges?

Do you actually need a house? Really need that space compared to a flat? If you need the space, does it have to be a house that will cost £1200 a month in mortgage repayments or would a cheaper place do the job? One of the easiest ways to save a lot of money on housing costs is to start with only what you truly need and in a place that needs doing up.

With a repayment mortgage you can go for the longest term you're allowed to use. That reduces the monthly payment. That's a good thing for budgeting because the capital debt gets decreased in real terms by inflation, which causes pay to rise over time. So it becomes easier to pay more the more time has passed. So low start, higher later is a good way to go.

The most competitive mortgage interest rates are at LTV below 60%. 75% is where the really good rates are. Quite decent rates can be had at 80 or 85% LTV. Above that and you end up paying a significant penalty for the extra risk of having a place with less margin between property value and amount lent.

A general plan is to cut back on expenditure now with the idea of saving as fast as you can to get a deposit together. An inexpensive flat that needs doing up would be a better buy than a house that takes several times as long to get the deposit together, because it leaves you renting for longer.

If it takes two or three or four years it's OK not to make pension contributions if your employer has no pension scheme. If they do have one, pay in at least enough to get full matching by them because that's a great deal in almost all cases.

What I did was buy one of the cheapest flats in a street, which needed doing up, at 75% LTV and an income multiple only a bit over one. Easy for me to afford that so I can continue to save a lot for whatever comes next.