At 24, should I worry about a pension?

HardCoreProgrammer

To the OP, I would like to add to the advice given by the other contributors.

As I have said in another thread already, the money offered by your employer comes with strings and risks attached. Do not simply consider it as "free money".

1. You will not be able to access the money until 10 years before retirement age (currently 65-10=55). The retirement age and the rule about being able to access the money 10 years before may be changed by the government.

2. Your pension contributions are a sitting duck. There is nothing you can do about any future policy changes once the money is paid into the pension fund. Pension policies have been altered numerous times by the government in power in the past, and will probably be altered many more times before you draw your pension.
In extreme cases (e.g. Hungary), pension funds may be nationalised during financial crisis and pension savers may have their money taken from them. Had the money been in savings and you see trouble coming, you may be able to move it to a foreign bank account (as some did in the Cyprian banking crisis last year).

3. You get tax refunded, but you will pay tax when drawing the money out. It is possible that you will pay more tax when you access the money than the tax refund when paying into the pension.
If you are in the 20% tax band and your employer does not contribute, there is no point paying into a pension, because I am almost certain that income tax will be higher when you retire (due to aging population, etc). If you are in the 40% tax band, it may be worth a bet that you will come out on top (as you are likely to be in a lower tax band when drawing your pension).

4. You pay the "opportunity cost" of not having access to your money.
For example, even if you are facing repossession and get thrown out on the street, you will still not be able to access your pension savings.
Another example is if you want to buy a home in the future. Property prices in London have been rising at up to 20% a year. By saving into a pension scheme, you are delaying the time when you can save a deposit during which time house prices may have moved on significantly.

Lets have a simple example.
Lets say I am earning 25k after tax and I can save 5k a year. If I join my employer's pension scheme I will have 2k less disposable income. (To keep it simple, let us ignore inflation and savings interest.)
To save a 25k deposit for a 250k property takes 5 years without paying into a pension (25k/5k) and 8y4m paying into a pension (25k/(5k-2k)). This is a time difference of 3y4m.
Assuming that my employer matches my contributions, I lose 2k * 5 = 10k of "free money" during the 5 years by not saving into a pension.
But I will gain the price appreciation of the 250k property during the 3y4m when because I bought it earlier by not saving into a pension.
To "break even" (ignoring the policy risks I made in earlier points), the property price has to appreciate less than 4% (10k/250k) during the 3y4m. Recently, property prices have been appreciating >10% per year in London.


For your information, I resisted paying into my old employer's pension, as I was on the standard tax rate and they only paid about 1.9% when I sacrificed 5% of my salary. I got on the property ladder as soon as possible and was very happy with my decision, despite everybody telling me I am a fool for turning down free money. In fact, I did not start saving into a pension until I had built up a fund covering 12 months worth of mortgage payments and living expenses, just in case.

FatherAbraham

cupofjava wrote: »

I can understand a pension is great if you're planning to stay with the same company for many years, but at the moment I have no plans for that. Yet, I don't want to jeopardize my future savings and understand that I'm essentially turning down 'free' money.

I also understand I can consolidate pension pots, but it looks like this isn't that easy and has several pitfalls? I really don't like the idea of having many 'mini' pensions scattered all over the place and really wish the system was more flexible!

It's causing me quite a bit of worry and I don't know whether to just suck it up and pay in, or wait a few years until I hopefully settle into a career somewhere.

Look at the big picture. You will have many jobs through your life.

You need to save a proportion of the income from each one towards your retirement. That's the most measured and sensible way to do it. Even if your "career" consists of 40 one-year engagements, why should that be viewed as any different from one 40-year employment?

Small defined-benefit pots are not a problem for you, since the employer carries all the costs of the scheme. Small defined-contribution schemes can be transferred to accumulate one large cheap one, if necessary.

It's more sensible to carry a retirement-saving cost through every job you do, rather than try to load it only onto "career" jobs. Saving for retirement is a cost most of us must bear, so it's better to pay it constantly in every employment, to avoid having huge costs later on.

I'm not even sure that short periods of employment has any bearing on the matter whatsoever. Even if one's contributions were forcibly returned by an employer enforcing a 2-year-minimum-membership period, you wouldn't be worse off than if you'd not been a member -- and you could still transfer the entire fund value to a personal pension.

Warmest regards,
FA

atush

HardCoreProgrammer wrote: »

To the OP, I would like to add to the advice given by the other contributors.

As I have said in another thread already, the money offered by your employer comes with strings and risks attached. Do not simply consider it as "free money".

1. You will not be able to access the money until 10 years before retirement age (currently 65-10=55). The retirement age and the rule about being able to access the money 10 years before may be changed by the government.

2. Your pension contributions are a sitting duck. There is nothing you can do about any future policy changes once the money is paid into the pension fund. Pension policies have been altered numerous times by the government in power in the past, and will probably be altered many more times before you draw your pension.
In extreme cases (e.g. Hungary), pension funds may be nationalised during financial crisis and pension savers may have their money taken from them. Had the money been in savings and you see trouble coming, you may be able to move it to a foreign bank account (as some did in the Cyprian banking crisis last year).

3. You get tax refunded, but you will pay tax when drawing the money out. It is possible that you will pay more tax when you access the money than the tax refund when paying into the pension.
If you are in the 20% tax band and your employer does not contribute, there is no point paying into a pension, because I am almost certain that income tax will be higher when you retire (due to aging population, etc). If you are in the 40% tax band, it may be worth a bet that you will come out on top (as you are likely to be in a lower tax band when drawing your pension).

4. You pay the "opportunity cost" of not having access to your money.
For example, even if you are facing repossession and get thrown out on the street, you will still not be able to access your pension savings.
Another example is if you want to buy a home in the future. Property prices in London have been rising at up to 20% a year. By saving into a pension scheme, you are delaying the time when you can save a deposit during which time house prices may have moved on significantly.

Lets have a simple example.
Lets say I am earning 25k after tax and I can save 5k a year. If I join my employer's pension scheme I will have 2k less disposable income. (To keep it simple, let us ignore inflation and savings interest.)
To save a 25k deposit for a 250k property takes 5 years without paying into a pension (25k/5k) and 8y4m paying into a pension (25k/(5k-2k)). This is a time difference of 3y4m.
Assuming that my employer matches my contributions, I lose 2k * 5 = 10k of "free money" during the 5 years by not saving into a pension.
But I will gain the price appreciation of the 250k property during the 3y4m when because I bought it earlier by not saving into a pension.
To "break even" (ignoring the policy risks I made in earlier points), the property price has to appreciate less than 4% (10k/250k) during the 3y4m. Recently, property prices have been appreciating >10% per year in London.


For your information, I resisted paying into my old employer's pension, as I was on the standard tax rate and they only paid about 1.9% when I sacrificed 5% of my salary. I got on the property ladder as soon as possible and was very happy with my decision, despite everybody telling me I am a fool for turning down free money. In fact, I did not start saving into a pension until I had built up a fund covering 12 months worth of mortgage payments and living expenses, just in case.

No3 very unlikely

No4 which is why you should have other savings and investments outside a pension

No1-2. Yes you have to wait for the money, govts who want to be re elected won't go too far

Sterlingtimes

HardCoreProgrammer wrote: »

As I have said in another thread already, the money offered by your employer comes with strings and risks attached. Do not simply consider it as "free money".

There are strings: every time there's a General Election I get the jitters. I chose to place all my funds into house purchase at the age of 21, but by the age of 27 I started making pension contribution.

Now at the age of 59, I am relieved that I did. Apart from a little bad luck with Equitable Life (which has compounded out at 5%) my various DC contributions have made 10% compound interest over the years.

stclair

atush wrote: »

I have a little theory that people who think like you will never afford to retire. Because they didn't save for it

I'll be more than comfortable on my retirement. I want to expand on this but I dont want to tempt fate. 😯

atush

I dont believe you but go on believing it yourself?

TheTracker

atush wrote: »

I take the view you were lucky starting your company made you wealthy. Most people dont start their own, and some that do the company fails.

No luck about it whatsoever.

And my point wasn't to start a business. It was to use the income you generate in the best possible way. It isn't always to squirrel some of it away for 40 years hence.

Thrugelmir

cupofjava wrote: »

It's causing me quite a bit of worry and I don't know whether to just suck it up and pay in, or wait a few years until I hopefully settle into a career somewhere.

I started work at 17. Due to family influences I started my first pension plan by saving £10 a month. Several decades later I now look back and can see what good advice it was. Compounding is an investors friend.

Lokolo

HardCoreProgrammer wrote: »

To the OP, I would like to add to the advice given by the other contributors.

As I have said in another thread already, the money offered by your employer comes with strings and risks attached. Do not simply consider it as "free money".

1. You will not be able to access the money until 10 years before retirement age (currently 65-10=55). The retirement age and the rule about being able to access the money 10 years before may be changed by the government.

I am not sure how you cannot consider it as free money. Thats what it is. Yes there are strings, but it still free money.

2. Your pension contributions are a sitting duck. There is nothing you can do about any future policy changes once the money is paid into the pension fund. Pension policies have been altered numerous times by the government in power in the past, and will probably be altered many more times before you draw your pension.
In extreme cases (e.g. Hungary), pension funds may be nationalised during financial crisis and pension savers may have their money taken from them. Had the money been in savings and you see trouble coming, you may be able to move it to a foreign bank account (as some did in the Cyprian banking crisis last year).

There is the FSCS which is very useful.

3. You get tax refunded, but you will pay tax when drawing the money out. It is possible that you will pay more tax when you access the money than the tax refund when paying into the pension.
If you are in the 20% tax band and your employer does not contribute, there is no point paying into a pension, because I am almost certain that income tax will be higher when you retire (due to aging population, etc). If you are in the 40% tax band, it may be worth a bet that you will come out on top (as you are likely to be in a lower tax band when drawing your pension).

As well as the 40% oppurtunity you have mentioned, a lot of schemes offer Salary Sacrifice, saving you NI (12% for most), which you won't pay on the return of the money.

4. You pay the "opportunity cost" of not having access to your money.
For example, even if you are facing repossession and get thrown out on the street, you will still not be able to access your pension savings.
Another example is if you want to buy a home in the future. Property prices in London have been rising at up to 20% a year. By saving into a pension scheme, you are delaying the time when you can save a deposit during which time house prices may have moved on significantly.

And on the opposite, should you face resposession or bankruptcy, your pension is protected.


Your post is very much anti pensions (in tax wrapper sense). You should consider that pensions are good for some, and not so great for others. However a person should consider all financial information in their lives, such as property, emergency savings, longer term savings and retirement savings.

As with atush, a lot of those complaining that they cannot afford to retire are ones that never considered how they should save for retirement and the tax wrappers available.

I currently overpay my mortgage, put into S&S ISA, Cash ISA and pension.

mintedmatty

TheTracker wrote: »

A contrarian view. I'm glad I didn't start a pension until my late 30s. Deciding not to do so in my early 20s was one of the wisest decisions I ever made. I ploughed all my money into preparing for and starting my own businesses in my 30s, saving a house deposit, enriching myself through study and travel along the way. I was doing very well for myself at age 24 working for the man. I sincerely believe if I'd taken some of these 'free' perks like pension matching when I was in my 20s I'd still be working for the man, with a healthy pension, but far less happy and less wealthy than I am now. Much depends on your own ambitions and working life strategy. If you have any bent for entrepreneurship or want to run your own business in future, I'd advise taking that into consideration while making your decision.

Glad someone has stuck their neck out and provided such advice, the OP needs to see what is available, there are many ways to achieve a 'total pot' that will enable a comfortable retirement. From my point of view its very gutsy and not something I'm currently comfortable with but i'm glad we live in a country where people have the balls to stand up on their own feet and make a real push of going on their own!

Personally I've paid into a pension since day one of employment, I tried to save 10% of whatever I earned into pensions, ISA's, House deposit, Premium bonds etc - whatever I needed most at the time. My employer now is a medium sized enterprise that has just started paying into my pension, I don't get much but I have a couple of previous employer pensions and have paid into my own since I started with my current employer.

I just think the sooner you get used to paying into a pension the more comfortable you will feel further down the line and you will see it will be worth it.