Pension or house deposit?

jamesd

Lets say you are a smoker and use 20 cigarettes a day at a cost of £7 per pack of 20 and that the price and amount you pay into an investment only goes up with inflation. That's £210 a month in today's money. Invest that outside a pension for the 30 years until state pension age at an after inflation investment growth rate of 5%. That gets you a pot size of about £175,000. Depends on how you take the income but about 5% of that can be taken as income if you don't buy an annuity, so it could produce £8,750 a year or £729 a month of income for life. From that just £210 a month it costs you. And all in today's money.

If it was going into a pension without employer matching the basic rate tax relief on the way in increases that by 25% to £218,750. 25% tax free lump sum can be used to generate tax free income of say 5%, so £54,687 can produce £2,734 a year. The £164,062 left in the pension pot can produce taxable £8,203 a year, £6,562 a year after tax. Total after tax of £9,296 a year or £774 a month.

Now say you pay into a pension where the employer will match the contributions. Now that out of pocket £210 a month gets you £1,161 a month.

The numbers above are for 30 years of investing. The fewer the number of years, the lower the values will be. You can play with this calculator.

This doesn't just apply to smoking. You can do the same with any regular expense. A few less food deliveries a week or whatever else can produce really big increase in retirement income.

atush

So, which to concentrate on? Both is stupid because that just lengthens the time it takes to complete either.

Both is not stupid, both is the way most do it.

you've had some good advice here, and made some poor assumptions (such as you can live on the SP if you won your own home).

So, join your work pension ASAP. Then save everything else for a deposit. Yes, 35 is pretty late to start, but we started late like that as we lived overseas before that. And now we have a healthy pension pot, and a home. you can do it, you just need to start.

Buying a cheaper place that needs doing up is a very good idea.

Radiantsoul

I am not sure starting at 35 is really so bad.
I mean you still have 33 years to save(I am guessing the state pension will be 68 if not older by then). The state pension will be about £145 per week.

If you save £100 per month and get a real return of 3% you would end up with about £66k. There is a general theory you can withdraw 4% of your portfolio reasonably safely, so you would have about £50 more a week than the basic state pension.

N1AK

MadeToFit wrote: »

£35k at 35 eh? I don't understand how anybody who's been university educated can ever attain that without exceptional luck. If I'm lucky then my big share option will actually be worth that and can be exercised early next year. If so then I'll be back asking what to do with it

Didn't join the work-scheme at my first employer until about ~25, paid in since then (5% matched) and at 28 I currently have £18k with about £4k being added per year. Partner earns less than me, but has better pension scheme and has about the same amount in it now even after doing her PHD.

If you can get your contributions matched then, in my opinion, paying into a scheme is the best choice. My take home pay drops by very little (after tax, NI, student loan) and my pension is growing nicely.

If you can't get matching then I would seriously consider investing the money elsewhere (property being a good option).

ColdIron

N1AK wrote: »

If you can't get matching then I would seriously consider investing the money elsewhere (property being a good option).

You are neglecting the tax free element of pensions, for higher rate tax payers this is 40% which is not inconsiderable. You may not be one now but ...

FatherAbraham

N1AK wrote: »

If you can't get matching then I would seriously consider investing the money elsewhere (property being a good option).

This makes no sense. What has employer contribution to do with the asset-class chosen?

Most personal-pension plans (including group personal pensions) have a "property" or real-estate fund. The exception seems to be stakeholder pensions, which sometimes exclude the option because the limits on stakeholder charges (or liquidity?) make it impossible to offer.

In any case, how can you predict that real-estate will be a "good" asset class, compared to the alternatives, such as equities (or, more likely, a diversified portfolio)?

Warmest regards,
FA

bowlhead99

ColdIron wrote: »

You are neglecting the tax free element of pensions, for higher rate tax payers this is 40% which is not inconsiderable. You may not be one now but ...

Given the OP is surprised that someone who has had 14 years since uni could possibly have put away a 35k pot (gross, including compound investment returns and potential employer matching), I assume he's not a higher earner.

The suggestion from N1AK was that if you can't get any significant employer matching, pensions don't give you as much benefit as they give the average person and it might not be the same no-brainer that it would be for others. Saving 40% tax now to pay only 20% tax on it in retirement is the other aspect that makes pensions very attractive, but if you're saving 20% tax now to incur 20-25% or whatever the lower rate is in 30 years time, it is less attractive.

If the above advantages weren't there, it means the only advantage of pensions is the tax-free lump sum (which we hope is still around in 30 years) and the creation of some taxable income in retirement to use up the rest of your nil-rate band (above state pension) if you don't have any other income. Those advantages, as I see it, are smaller than the first couple of advantages mentioned above, and must be offset against the fact that you may have restricted choices in what you can do with the pension pot once retired and the complete loss of access for personal use during pre-retirement, which is a biggie.

So, as you say "you may not be one now". Rather than following that statement with a ",but ..." (implying choosing the pension option with this year's spare cash would somehow help you if and when you end up being one in a few years' time) - it would have been perfectly valid to say ", and if you're not one now they are not nearly so useful."

Of course, if you did expect to be a high rate taxpayer in a couple of years' time you could instead invest in something liquid (so, probably not property) that could be cashed in and spent on your living expenses in those future years, giving you the ability to sacrifice your highly taxed income into a pension scheme in those years and minimize your lifetime tax bill.

FatherAbraham wrote: »

This makes no sense. What has employer contribution to do with the asset-class chosen?

I think the point is, putting money inside a pension wrapper is great if it attracts high tax relief and free company matching. If you can't get the free company matching and your tax circumstances mean you don't value the tax-relief wrapper (because the positives of some tax saved are offset by the lack of mobility of assets which will restrict your pre-retirement life-choices), then pensions are less great. And if you decide pensions are less great, then you can look at asset classes that could not have been held in a pension (physical residential property, as contemplated by the OP, being one of them).

In any case, how can you predict that real-estate will be a "good" asset class, compared to the alternatives, such as equities (or, more likely, a diversified portfolio)?

A diversified portfolio is a good thing - no arguments there - and can be maintained in a pension, or an S&S ISA, or even outside a wrapper for quite some time if you're not a particularly high rate taxpayer.

With an investment in physical property (whether as a place to live, or initially to live and later to let out, or fully BTL), you can typically get 3-5x gearing on it at reasonable cost. While a mix of equity, bonds and real estate funds in a pension fund might produce a better 'basic' return over 30 years, it's not obvious that it will exceed a 4x geared real estate investment when the latter is held for 30 years. Given the OP needs a roof over his head anyway, paying the annual maintenance on a property and the gearing cost to the bank might be a suitable alternative to paying rent expense including profit margin to his landlord. The capital investment is then done outside a pension wrapper but has CGT relief where he can meet the criteria for it.

Of course I take the point that a diversified portfolio getting as much tax relief as possible is something that people should aim for, and agree with the other posters that it is not an all-or-nothing question, as a roof over your head with no spending money in retirement is as useless as having spending money in retirement that needs to be entirely spent on rent.

planteria

just looked back at this thread.

MadeToFit wrote: »

My employer does have a pension scheme, but it's a closely guarded secret. My boss encourages me to get a SIPP, the implication being that I should buy shares in the company. (They like giving us worthless options too.)

MadeToFit wrote: »

If I'm lucky then my big share option will actually be worth that and can be exercised early next year.

can't help thinking that MadeToFit ought to be working for someone else, on one hand, but potentially in a good place, at the same time.

kingrulzuk

im working full time since i was 18 and now im 30.

where can i check how much i have contrubuted to my state pension??

atush

By asking DWP for a pension statement.

in any case, as to the OP discussing their work pension:

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.

I don't understand this- asking to join the pension would cause dismissal? Make him PE no1? A scam? He has company options?

I don't know who he works for, but given all companies have to offer a pension now or very soon would make it illegal for them to treat him poorly for asking. And last time we had options in a company we worked for, it was worth many thousands when it vested. And formed our house deposit once we sold them.