Is my pension contribution "worth it"

Ad86

Hi.

Just after a bit of advice.

Im currently only paying 2% into auto-enrolled pension.
Employer matches the 2%.

I also have a small amount from a pension at a previous company (less than £1k) that I have the option of transferring or receiving back.

I keep asking myself if this 2% im paying in is really worth it??

Im in my 20s, live in a rented house with my other half, and we were "trying" to save for a first home and wedding.

That sacrificed money could be put to better use right now could it not??

Or am I just thinking for now!!! ?

Any advice is appreciated.

Southend1

It's never going to be enough to retire on. But you are getting free money from your employer. Rather than stopping you should increase your total contributions to something closer to 10-15% of salary (including employer contribution). Will your employer match more than 2%?

Ad86

Ok fair point.

If I remember rightly my employer will match up to 6.

But an increase in my sacrifice up to 6-7% pushes the plans of marriage/house even further away.

I hate to think I'd be spending the majority of my pension on paying a private landlord rent money.

System

It seems to me that at the moment you are trying to meet two objectives but achieving neither. Might it not be worth considering cancelling the pension contributions all together, for a fixed 10-year period say, and concentrating on saving every penny you can for the house?
Then switch back to targetting the pension objective, accepting of course that you will have leeway to make up.

I know the employer contribution is free money, but isn't that a bit like letting the tail wag the dog?

Linton

Clifford_Pope wrote: »

It seems to me that at the moment you are trying to meet two objectives but achieving neither. Might it not be worth considering cancelling the pension contributions all together, for a fixed 10-year period say, and concentrating on saving every penny you can for the house?
Then switch back to targetting the pension objective, accepting of course that you will have leeway to make up.

I know the employer contribution is free money, but isn't that a bit like letting the tail wag the dog?

A bad idea in my view. Who is to say there wont be some other convincing reason not to start a pension in 10 years time. And every year you fail to put money into your pension means that you have lost out, lost out on your employer's contributions and lost out on investment returns. Over the next 40 years what you fail to put in now will amount to a large sum.

Suggest that rather than just "trying" to save you look carefully at your finances and make a definite commitment to put a fixed amount aside each month, preferably as soon as as you get paid. You can then make a plan showing when you will have the money to get married and buy your house.

Ideally you should increase your 2 % up to the maximum your employer will match. When you have made your plans you can try out some "what ifs" and see if that is possible.

System

Linton wrote: »

Over the next 40 years what you fail to put in now will amount to a large sum.
.

That's true. But over the next 40 years the money you pay in rent will also amount to a large sum, but for someone else.

Ad86

Interesting points. Upping my pension sacrifice to 6 would not leave us a great deal of 'spare' cash to save etc on the side. I suppose really need to decide whether to put more into today and tomorrrow or go for an increase in pension for the future. Doesnt seem like we can do both.

torbrex

Remember you also get tax relief on your contributions.

It is always a difficult balance between 'now' and 'later', only you can really answer your own question.

In my case, I always put in as much as my employer would match then tried to work with what I had left in my pay packet. It worked out for me as I am mortgage free and looking to start drawing down from one of my pension funds in April now that I am 55.
I took the view that free money was not to be sniffed at.

guymo

Just to force home the point:

if you had a monthly salary of £1500 (as an example only, because I don't know what your salary is) and made the maximum matched contribution of 6%, you would reduce your take-home pay by £72 a month, in exchange for which you would have £180 in your pension.

Whether or not to take that additional £108/month is your call of course. There is an argument that if you have strong salary increase prospects over the next ten years, you will easily be able to make up that amount and the £72/month in your pocket now is more valuable. Not everyone would agree with this and it is important to understand just what your options are and what they mean.

gadgetmind

If you can pay by salary sacrifice, and if the employer matches, then each £2 going into your pension is only costing you 68p as you save 20% tax and 12% NI.

I put money into a pension in my 20s and 30s, and am *very* glad I did as it formed a solid base to build on, and early retirement is a possibility for me.

I know it's hard starting out, and retirement seems a *long* way off, but we see quite a few people every week coming here saying "In my late 40s, no pension, what should I do?" and there are rarely any good answers.

OldBeanz

I think this article should be a sticky!
http://www.telegraph.co.uk/finance/personalfinance/investing/10742396/When-saving-for-10-years-pays-more-than-saving-for-40.html