Savings Ideas along with a pension... kinda pension anyways!

dazanteney4

Hello Everyone,

I hope you all enjoyed Christmas and the new year!

Over the Christmas period i had an idea for a savings plan that i could use in the future to benefit me and my future family (hopefully)! I wanted to show you all to get another opinion on my idea.

Well i am a 24 year old male, full time employment, almost saved for my deposit on my first home. Im also very very money originated and have been told I'm razor tight (this is become important later).

I have a company pension which pays £35 a month and at least a once a year bonus of 5% of my wages. This pays even if i don't personally pay anything into my pension.
My idea was to not pay anymore into my pension (about £25 a week which i will increase by 10% a year over the coming months/years) but instead move this into an ISA account gaining around the 2% interest mark. Then over the coming years instead of having things like credit cards, loans, credit in general i could borrow against the money in my ISA. Then rather having to pay back 7%+ for a loan i could charge myself 4%. I would then save myself money not paying the bank and someone else pocket.
Another advantage is that i could also have a month or off if things get tight or i want to treat myself and my family.

I would also be in full control of my money throughout my life which appeals to me a lot rather than having it locked away for day's i may never see.

What does everyone think? Be honest and feel free to ask any questions you may have!

Darren

Linton

dazanteney4 wrote: »

Hello Everyone,

I hope you all enjoyed Christmas and the new year!

Over the Christmas period i had an idea for a savings plan that i could use in the future to benefit me and my future family (hopefully)! I wanted to show you all to get another opinion on my idea.

Well i am a 24 year old male, full time employment, almost saved for my deposit on my first home. Im also very very money originated and have been told I'm razor tight (this is become important later).

I have a company pension which pays £35 a month and at least a once a year bonus of 5% of my wages. This pays even if i don't personally pay anything into my pension.
My idea was to not pay anymore into my pension (about £25 a week which i will increase by 10% a year over the coming months/years) but instead move this into an ISA account gaining around the 2% interest mark. Then over the coming years instead of having things like credit cards, loans, credit in general i could borrow against the money in my ISA. Then rather having to pay back 7%+ for a loan i could charge myself 4%. I would then save myself money not paying the bank and someone else pocket.
Another advantage is that i could also have a month or off if things get tight or i want to treat myself and my family.

I would also be in full control of my money throughout my life which appeals to me a lot rather than having it locked away for day's i may never see.

What does everyone think? Be honest and feel free to ask any questions you may have!

Darren

The interest you gain from money in a cash ISA will over the long term almost certainly be a lot less than you would gain from putting money into a pension or an S&S ISA. However that depends on the details of the pension. Is it a standard money purchase one where you buy into funds held under your name? If you put money in to your pension does your employer increase his contribution?

I suggest that you budget and put a fixed amount into both your pension and an ISA each month before you spend anything and live on the rest. Once your ISA savings have exceeded 6 months living expenses + moneys needed in the next 5 years you can then think about more lucrative investing.

dazanteney4

Linton wrote: »

Is it a standard money purchase one where you buy into funds held under your name? If you put money in to your pension does your employer increase his contribution?

I think its a standard one but i'm not 100% sure. And no my employee is set at £35 a month plus my bonus. This may go up in the future depending on the auto enrollment.

Linton wrote: »

I suggest that you budget and put a fixed amount into both your pension and an ISA each month before you spend anything and live on the rest. Once your ISA savings have exceeded 6 months living expenses + moneys needed in the next 5 years you can then think about more lucrative investing.

Even with the £35 a month you would invest more into a pension? My biggest thing is about the loans... lets be honest everyone needs a new car etc at some point in their lives. I can't see the point of investing money into a pension with a return of 5% example, but then pay out 7,8,9,10% plus for a loan over 3+ years? Surely both are negating each other?

Or am i being narrow minded?

ColdIron

If you pay part of your salary into a cash ISA it will have been taxed (at least) 20% before it goes in, if you pay into a pension the government takes no tax. This is free money. You won't be able to touch it until you are 55 but this is a good thing, your older self will thank you for it

dazanteney4

ColdIron wrote: »

If you pay part of your salary into a cash ISA it will have been taxed (at least) 20% before it goes in, if you pay into a pension the government takes no tax. This is free money. You won't be able to touch it until you are 55 but this is a good thing, your older self will thank you for it

I always under the impression you can put up to £5760 into an ISA without being taxed?

I don't know why people say its free money... you get income taxed taking it out. HMRC just wait to take it from you.... Or am i wrong about this?

Linton

dazanteney4 wrote: »

Even with the £35 a month you would invest more into a pension? My biggest thing is about the loans... lets be honest everyone needs a new car etc at some point in their lives. I can't see the point of investing money into a pension with a return of 5% example, but then pay out 7,8,9,10% plus for a loan over 3+ years? Surely both are negating each other?

Does everyone NEED a new car at some point in their lives???? I would say buy a new car when you can afford to pay cash, or possibly with a zero-interest deal. You can get a perfectly good second hand car that will last you years at perhaps 1/3 the cost of a new one. Dont even think about paying for a loan for anything except for a mortgage.

If you work out a multi year budget on a spreadsheet you should get some idea about how much you can afford to put into a pension and into ISA'd savings without causing too much restriction on your day-to-day activities.

ColdIron

dazanteney4 wrote: »

I always under the impression you can put up to £5760 into an ISA without being taxed?

I don't know why people say its free money... you get income taxed taking it out. HMRC just wait to take it from you.... Or am i wrong about this?

First point, you can put £5,760 into an ISA but only the interest earned from this will be untaxed. The cash you put in will have already have been taxed as income tax before you receive it

Second point, it's true that your pension income will be taxed but the hope is that the money you put in initially grows by a lot more over the 30+ years between the two events

Linton

ColdIron wrote: »

First point, you can put £5,760 into an ISA but only the interest earned from this will be untaxed. The cash you put in will have already have been taxed as income tax before you receive it

Second point, it's true that your pension income will be taxed but the hope is that the money you put in initially grows by a lot more over the 30+ years between the two events

Plus you can take a 25% tax free lump sum from your pension pot.

jimjames

Linton wrote: »

Does everyone NEED a new car at some point in their lives???? I would say buy a new car when you can afford to pay cash, or possibly with a zero-interest deal. You can get a perfectly good second hand car that will last you years at perhaps 1/3 the cost of a new one. Dont even think about paying for a loan for anything except for a mortgage.
.

I assumed the OP was referring to a generic new car to them, not a brand new car. Even a used car will cost an amount of money that would need a loan if they had no savings.

Apart from the hopefully superior performance of investments in a pension over cash lomg term the key benefit of a pension is that it is locked away until you are at least 55.

Put the money inside an ISA and you have the temptation to spend it if you need a new car for example. Once gone you have lost the compounding effect and will need to save extra hard to build it back up.

Far better to have savings as well as your pension so you don't need to be taking out loans.

Wilkins

dazanteney4 wrote: »

I always under the impression you can put up to £5760 into an ISA without being taxed?

I don't know why people say its free money... you get income taxed taking it out. HMRC just wait to take it from you.... Or am i wrong about this?

The money you put into an ISA comes from income already taxed. The money you put into a pension is untaxed at source (effectively the government gives you 20% extra or 40% when you pay tax at the higher rate). This is a crucial difference which it would be foolish to ignore.


A pension is not going to make you rich in old age but it's a substantial extra for most people who would regret not having made that provision.


Yes, income from a pension is taxed, as is all income. The alternative would be to simply draw on capital, but you are unlikely to be able to accumulate enough in a cash ISA, and you may find that its tax free status is subject to provisions in the future.