I thought I had it all planned

Browney

I'm 21 years old and money conscious, iv managed to save up £20,000 and thought i wanted to invest in property, but after reading a lot of information on this website i'm not sure what to do anymore.

My situation:

I live at home still and i can save £700 a month, i don't want to move out just yet and my parents have said its my home as long as i need it to be.

If you were in my position what would you do with the money, and by the way i mean savings wise i have other money set aside for enjoying my youth.

JoeCrystal

And what about enjoying your old age? Have you set up anything for your retirement? Have you been contributing into a pension scheme and if not, find out if your employer contributes to it.

If it is my house deposit, I would keep it in Cash ISAs, waiting for it to be used. Keeping saving into it until you get 40% and get the best mortgage deal.

Cheers,
Joe

JimmyTheWig

I agree with JoeCrystal.
If you can pay into a pension at work where your employer will also pay into the pension, do that. If you don't you are turning down the equivalent of extra wages.
If your employer doesn't contribute then a pension is probably still a good bet if you are paying 40% tax.
If not, then I would still consider putting money aside for your old age, either in a pension or in a stocks and shares ISA.

As to where you want to invest the money, the best place to invest it is probably in your own home. If you want to buy your own home in the next 5-10 years then its safest to keep the money in cash savings (ISAs probably best for the tax benefits).
If it's going to be more than 10 years before you need this money then look at riskier investments.

srcandas

I'd take the pension only if it had free money - ie employer contributions. Certainly do not tie up unneccessarily any of your own money in pensions at your age as what you wil need over the next decade is flexibility. And you can add the money into pensions at any time in the future when you may get an added bonus from more tax relief.

You may need a house deposit, money for gathering further skills, and/or money to move away to further your career.

As for cash or investment I'd investigate a split. Cash will almost certainly earn you virtually nothing and might even make a loss. While investments carry risk with sensible selection you can minimise this.

But take your time. And very glad you are enjoying your youth. You cannot buy the years back no matter how good your investment strategy

JimmyTheWig

srcandas wrote: »

I'd take the pension only if it had free money - ie employer contributions. Certainly do not tie up unneccessarily any of your own money in pensions at your age as what you wil need over the next decade is flexibility. And you can add the money into pensions at any time in the future when you may get an added bonus from more tax relief.

I don't disagree with this, but I think that as soon as you start working (and have cleared any non-government student debts) that you should start putting money away for old age.

But I agree with srcandas that it would be annoying to put £100 into a pension and then find in 5 years time that if you had an extra £6k in cash you would be able to get a better mortgage product.

But what I am saying is that the money should be put away for old age, rather than in a pension per-se.
So if you had the "old age" pot in savings, for example, you could lend yourself £6k from your "old age" pot to get the better mortgage. Then you could repay the £6k, plus interest, to the "old age" pot (as well as continuing with the money you would have put in there each month) from what you save on the mortgage.

So by all means keep the flexibility, but don't forget about old age planning all together.

FatherAbraham

srcandas wrote: »

I'd take the pension only if it had free money - ie employer contributions. Certainly do not tie up unneccessarily any of your own money in pensions at your age as what you wil need over the next decade is flexibility. And you can add the money into pensions at any time in the future when you may get an added bonus from more tax relief.

You may need a house deposit, money for gathering further skills, and/or money to move away to further your career.

Maybe.

But the need for retirement income is far more likely -- it's practically a certainty.

All the short- and mid-term needs you mention are optionals. Income in retirement isn't an optional.

If funds are earmarked for retirement, then they mustn't be "flexibly" used for interim needs. That's why one should have the courage of one's convictions and put them into a limited-access retirement fund.

If one sees the need for interim expenditure (housing, training etc), then one must save explicitly for those things. The retirement-income fund should not be spent on these things -- the "flexibility" you promote is simply a self-defeating consumption of one's future wealth.

Since most people seem to underestimate how much retirement income costs, it's a very bad idea to have early access to one's retirement savings available.

Pension funds also have the distinct advantage of protecting the assets from one's creditors, not just from oneself.

I think your point about increased tax relief is questionable too. The best pension-fund tax relief goes to those who pay higher-rate tax -- but also to those who are able to save a lot on a low income, since they can get tax relief on tax which was never paid in the first place. It may be decades before the OP becomes a higher-rate taxpayer, if ever -- but the tax "relief" for low-earners (once residual income is below the personal allowance) is an exceptionally good deal.

Warmest regards,
FA

JimmyTheWig

FatherAbraham wrote: »

If funds are earmarked for retirement, then they mustn't be "flexibly" used for interim needs. That's why one should have the courage of one's convictions and put them into a limited-access retirement fund.

My point, to back up srcandas, was that say you had paid £6k into a pension pot over 5 years. basic rate relief and (a generous) 5% growth would have turned it into £8,454.

Alternatively you could have put it in a savings account (that you call "fake pension") earning 2% net and no tax relief and you'd have £6,307.

Now you want to buy a house. Without using your pension money you have a reasonable deposit and can buy the house if you get a £100k mortgage. You get a 4.0% fixed rate for 5 years. This costs £528 a month and after 5 years you owe £87,105.
You remortgage for £87,105.

Alternatively, you take £6 out of your fake pension savings account and get a mortgage for £94k. This puts you in the next LTV bracket down and you get a 3.5% fixed rate for 5 years. This costs £471 a month and after 5 years you owe £81,141.
You remortgage for £87,105 - the same amount as in the above scenario.

So in the second scenario, you release £5,964 in equity after 5 years and the lower monthly repayment meant you saved £3,420 (ignoring interest earned along the way). Which gives you £9,384. There was also £307 left in the fake pension savings account.


Keeping with the generous 5% growth on your pension pot, your £8,454 would have turned into £10,790 in those 5 years.

But at this point if you put your £9,691 that you've saved on your mortgage into a pension, tax relief will make that £12,114.
I.e. you've got £1,324 more in your pension than you would have done otherwise.


I'm not saying forget about pension planning in your younger days. But what I'm saying is that, in some cases, you can make the money work harder for you than a pension company can.

100saving

I must say I am finding all very interesting as I am in a similar place to "Browney". I am saving £950 a month and looking to invest in property as a long term idea of growth.

my employer does not currently pay in to a pension with me so its not worth me setting this up. I am just saving as much cash and making it work as hard as I can using ISAs and Reg./current accounts. over the next year I have predicted around £600 in earnings and in year 2 around £1100ish depending on interest rates not dropping but not rising. not in the same league as some on here but if i can get the cash savings earning around £2k a year within the next 3/4 years with the idea of buying somewhere in a few years time with about £40k deposit. (london postcode)

I have done similar maths as JimmyTheWig in the past and it does check out and is something that should be thought about!

jimjames

For anyone whos employer does not currently pay into a pension, check out auto enrolment. If they aren't paying in now they will have to within the next year or two depending on the size of company. Companies with over 160 employees will have to do this from 1 April 2014; ones with larger numbers of employees sooner than that so check when your company will be affected.

http://www.thepensionsregulator.gov.uk/employers/staging-date-timeline.aspx

srcandas

FatherAbraham wrote: »

Maybe.

But the need for retirement income is far more likely -- it's practically a certainty.

True but more of a certainty is the working life of the OP.

At any time in life the unexpected can occurr. The idea that you must prioritise, at the cost of say putting a roof over your head, setting aside money specifically for the years 65 to 100 and not the years 12 to 65 is alien to me. Especially when many find inheritance, profit from the assetts of their working lives, and lack of need remove the problem of money when retired.

I guess we are all offering good input just from different angles so hopefully it will all help someone.

Cheers

Lomcevak

Well done for saving so much at such a young age!

At your age I wouldn't be in too much of a hurry to buy property; it can be a bit of an anchor, and so early in your life the flexibility to move around to wherever life, love, or work take you is important. So I think saving for a 40% deposit is a great idea, but don't be in too much of a hurry to spend it.