Pension or house deposit

sheilanick

The company my son works for is starting up a pension fund and he wants advice on how much he should contribute. Now I understand that the earlier he starts his pension, the better but...

He is in rented accommodation with a wife and young child and I think at this stage he should probably concentrate on getting a house deposit together and worry about his pension once he is a homeowner. I am therefore considering advising him to start an ISA instead, so he can access any surplus cash as and when required.

He is 28, a 20% taxpayer with a modest salary.

Any thoughts please?

xylophone

He should contribute at least as much as will achieve the maximum employer contribution and try to save for a deposit as well?

And saving in an ISA might not be the best solution at the moment.

There are current accounts that pay better interest even for a basic rate tax payer and if his wife does not pay tax these would certainly be worth considering for her as well.

Are you/his wife's parents in a position to help with a gift towards the deposit?

p00hsticks

I dontl agree that you should be recommending an ISA

These days cash ISAs really aren't worth it for 20% tax payers -he'll get a better return from a high interest paying current account, even considering the tax he'll pay on it (see the 'budgeting and bank accounts' part of the forum for ideas)

And if he's to be saving for a deposit, it's probably not a long enough timeframe to be considering an S&S ISA

How much is the company going to be contributing to the pension ?

dunstonh

He is in rented accommodation with a wife and young child and I think at this stage he should probably concentrate on getting a house deposit together and worry about his pension once he is a homeowner. I am therefore considering advising him to start an ISA instead, so he can access any surplus cash as and when required.

There is always an excuse not to pay into the pension. New house will eat money for years as they furnish and decorate it. A young child will get older and more expensive. Maybe another will follow.

So, he could have excuses not to pay into a pension until he is in his 50s if he wants excuses.

He is 28, a 20% taxpayer with a modest salary.

So, in pension terms, he is already running late.

Any thoughts please?

Are the pension contriubtions really going to make a big difference to his short term saving? You dont say how much but its unlikely to be that much. A £100. Maybe £200. Small fry compared to building up a deposit.

Not joining the scheme will mean missing out on free money from the employer and may save him a few pounds now but cost him big time later.

atush

I agree he should join the pension, putting in the amount needed to get the maximum employers contribution. Then save as much as possible elsewhere. the current acct for the wife would be a good idea. If you could help with a loan for the deposit, so much the better.

Not joining the work pension with employers contribution is flushing free money down the toilet. Advising him to do this would be foolhardy.

kangoora

atush wrote: »

I agree he should join the pension, putting in the amount needed to get the maximum employers contribution. Then save as much as possible elsewhere. the current acct for the wife would be a good idea. If you could help with a loan for the deposit, so much the better.

Not joining the work pension with employers contribution is flushing free money down the toilet. Advising him to do this would be foolhardy.

Do you know what would be useful, a calculator which takes someone's monthly pension payments (or percentage of salary) and which you can apply an employer matching contribution to. Then have it show the potential pot at the end of a period (configurable) and also show how much of that pension pot the employee will have paid and how much will have come from the employer and HMRC/government. I suppose you could even add a growth percentage on funds and split that out also to show 'free' money from investment returns.

A graphical or even text version of this would, I think, help to show just how beneficial a pension can be, especially if started at a young age.

I know these exist out there but probably not displayed in the manner I think would help drive it home. I'd volunteer to do it myself but wouldn't have a clue how to start

sheilanick

Thank you for all your replies. I should have made my question clearer. The intention is to join the scheme and contribute the prescribed percentage to secure the employer contribution. He is asking me whether he should try to contribute above that amount.

I haven't yet see the scheme details, so I can't confirm the amount of contributions, so I will post more details when available.

Thank you for the comments on ISA savings, I will get him to look as alternatives maybe a monthly saver might be better.

atush

While he should pay more in ideally, he should get the house deposit sorted first After paying in enough to get the mas his employer will pay.

AS an example, if this is his first pension, whe should be paying in at least 14% incl employer.

sheilanick

Thank you for the suggestion of 14%, that's a useful guide.

It seems that the company is putting in 3% and his contribution has to be between a minimum 1% and maximum 5%.

atush

does he have to put in 5 or 1% to get the 3%? that is the rub. The crux, whatever.

sometimes (no offence intended) trying to get information out of posters to actually say anything is like pulling teeth? Water out of a stone? Whatever.

kidmugsy

sheilanick wrote: »

Thank you for the suggestion of 14%, that's a useful guide.

It seems that the company is putting in 3% and his contribution has to be between a minimum 1% and maximum 5%.

If his 1% secures their 3% that's the rate for him to contribute. Thereafter his efforts should be concentrated on accumulating an emergency cash reserve and a deposit for a house. He can contribute to a pension later when perhaps he and his wife are earning more. If he's lucky he'll get the chance to buy a house after a housing crash, and start paying more into a pension after a stock market crash. If he's unlucky he'll find himself paying more than 20% income tax on his pension when he draws it. Lord knows what state the country will be in, forty years hence.