Savings vs Investment and Pension advice

MadMat

yes they do a separate purchase approx 12 weeks after the initial direct debit. I only hold funds so there are no transaction fees, dunno what they'd charge for a stock or ETF

picking one out that shows it clearly from my statement

07/05/2014 07/05/2014 REG. SAVER Transfer From Bank Account
Bank A/C : ****5761 n/a n/a 120.00

12/05/2014 15/05/2014 B506190971 Vanguard LifeStrategy 100% Equity Accumulation (GBP)
.6164 @ 12978.58533 12978.58533 6164 -80.0

13/05/2014 16/05/2014 B506608161 Vanguard Global Small-Cap Index Accumulation (GBP)
.24 @ 16452.48000 16452.48000 24 -39.49


and then around 12 weeks later


21/08/2014 21/08/2014 SP21082014 SIPP Contribution Claim
n/a n/a 30.00

22/08/2014 28/08/2014 B539055161 Vanguard LifeStrategy 100% Equity Accumulation (GBP)
.1479 @ 13525.48240 13525.48240 1479 -20.00

26/08/2014 29/08/2014 B539103751 Vanguard Global Small-Cap Index Accumulation (GBP)
.05 @ 17226.03000 17226.03000 05 -8.61

Mat

kidmugsy

noclaf wrote: »

lol thanks for all the info guys, whilst I can might aswell top up the pension as much a poss...before the wives and kids phase of life...

Wrong-headed in my view. Save your pennies now and contribute them to a pension in a few years time when you'll be avoiding 40% tax rather than 20%.

AlwaysLearnin

OP, does your employer offer salary sacrifice for pension contributions? If so, you could save 12% NI too at the moment, plus perhaps get a bit of a rebate. I can see kidmugsy's point in the previous post, but a 32% saving may make the pension contribution worth considering (the above comments about you needing to split your savings still apply though)

bowlhead99

kidmugsy wrote: »

Wrong-headed in my view. Save your pennies now and contribute them to a pension in a few years time when you'll be avoiding 40% tax rather than 20%.

It sounds tempting and should give the best overall result because it extracts the maximum free cash from the government. But leaving it to later risks staying in the same mindset that has left him with minimal pension pot to date.

If you put £300 net pay into a pension now it's only grossed up to £375 for basic tax whereas in five years time as a HRT payer, a £300 contribution is grossed up to £500. Still, with £375 growing for 5 years at an arbitrary 8% on a mixed but equities-heavy portfolio, it reaches £550 in 2019. That's a bigger number than the £500 that you finally got around to putting in in 2019 (the extra £50 makes up for the fact that with inflation, we should probably be thinking of putting in £330 later or £300 now for the same real terms contribution).

Obviously dealing with the pension problem now means the deposit fund or other savings pots are not growing as fast as they could be. But in the future once the pay is higher and the higher rate tax relief kicks in, the pension contributions cost relatively less as a proportion of 'spare take-home pay' and so the savings and unwrapped investments will still start to snowball. It's just a tradeoff between cash in hand now versus later.

OP has so far been going for the cash in hand now, not because of a tax-relief-efficiency model but just because that's his natural preference. Once he has his own house and family to worry about, it is going to be be harder to give up monthly net pay and change that entrenched mindset to start using the pension, which is why I would advocate doing that now. As there is plenty of retirement planning pension pot shortfall to catch up, there will still be ample opportunity to do a lot of that with 40% relief as well, I'm just advocating starting it a little earlier so some of it is only at 20%. The relief is still worth having though even if it doesn't truly maximise the total relief that could have been available.

Certainly one option is to just invest in an S&S ISA wrapper all the money that was going to be put into a pension, and invest in the same underlying assets. Then if it doesn't get needed for house purchase or day to day living, throw a big lump sum of £10k, £20k, £30k into the pension later and take the full 40% relief on it, out of that year's salary. However that does need some self control and it's quite possible the £20k, £30k would not exist because it would just get spent on house and car and holidays and going out and toys and family etc.

noclaf

thanks for all the feedback guys, I think striking a balance now between pension and savings is a good idea
I'm still unclear on my employers current pension arrangements but some changes are taking place from Jan15:
If an employee contributes an additional 5% of gross salary , the firm will add another 11% on top to match so thats 16% extra in addition to the 10% basic contribution the employer makes.
basic 10% +employee 5%+employer 11% match = 26% of gross per month ( this is not including potential tax relief)
seems fairly generous if my math is correct?

atush

I think you need to do a spending diary, for a start spending 60 quid a month on coffee is ridiculous.

Byt a good quality instant like Azzera or limit your poncy coffees to 20 per month max.

And with that spend, I am 100% sure you are overspending in other areas. How long since you MSE'd your phone, insurance etc? More to save? How often do you go out with mates? Spend? Takeouts?

kidmugsy

noclaf wrote: »

I'm still unclear on my employers current pension arrangements but some changes are taking place from Jan15:
If an employee contributes an additional 5% of gross salary , the firm will add another 11% on top to match so thats 16% extra in addition to the 10% basic contribution the employer makes.
basic 10% +employee 5%+employer 11% match = 26% of gross per month ( this is not including potential tax relief)
seems fairly generous if my math is correct?

That's so generous it's hard to believe. Check it; if it's true "fill your boots".

System

As you are a basic rate tax payer I would save in a S&S ISA rather than a SIPP for now and when you hit 40% tax rate divert to SIPP. The ISA will also give you more flexibility should you need funds for house etc.. However you will have to save cash also for your house. Ideally you should be filling your ISA allowance given your salary and lack of mortgage/dependents.

bowlhead99

kidmugsy wrote: »

noclaf wrote: »

If an employee contributes an additional 5% of gross salary , the firm will add another 11% on top to match so thats 16% extra in addition to the 10% basic contribution the employer makes.
basic 10% +employee 5%+employer 11% match = 26% of gross per month ( this is not including potential tax relief)
seems fairly generous if my math is correct?

That's so generous it's hard to believe. Check it; if it's true "fill your boots".

That does sound spectacularly good. I agree it's pretty difficult to believe that they would be giving you 21% of their own money on top of your salary (10% and then another 11%). If they could really afford that much money, you would expect them to increase basic salaries instead, because I would bet a lot of people looking for a new role (particularly the young) would focus more on the headline salary than on what might be available within the benefits package and untouchable until retirement.

I would suspect that the reference to giving you an extra 11% on top is NOT 11% of your gross salary, on top of already giving you 10% of your salary as standard.

What is far more likely is that if you contribute up to another 5% of your salary, (let's just say that works out to £100pm), they will give you a boost of 11% on that amount. (ie 11% of the £100 = £11, not 11% of £2000 = £220). If they structure your extra contributions as a formal 'salary sacrifice' then you are not getting paid as much and they don't have to pay as much employer's national insurance on your salary so they can save 11% or more on £100 of sacrificed salary, and are happy to give it to you.

So, that extra free cash is certainly valuable for you, but it wouldn't be 26% of your salary going into the pot. It would be 10% from them and 5% from you and (11% of 5%) from them again.

Well worth finding out the details of this scheme.

Although when you say "this is not including potential tax relief" you might be misleading yourself because if we are talking about you contributing "an additional 5% of gross salary" you have not paid tax on that salary anyway so there is no further tax relief to be had. If it had been "another £50 a month of your net salary" then you could add back the tax relief to figure out the gross salary that would end up in your pension pot.

noclaf

it appears I must of OD'd on the poncy coffee's when I first read the new pension changes

my employer certainly isnt that generous : so via salary sacrifice if I contribute 5%, they will contribute an additional 11% so total contribution will be 16% and as per bowlheads post above, since its from gross no further tax relief etc 16% is still reasonable. Also note that 11% is max contribution/match they will offer