Enrolling into my first pension - What to know?

krish123

Hi,

i will be shortly enrolling into my first pension and had a meeting with my advisor last week.

My company will be paying in 5% and i plan to do the same initially.

now obviously what the pension people will do is invest my money into the market. This is what really interested me as i already have investments.

What i wanted to ask you guys is do i need to tie in my investments into what the pension company are doing with my money ? And how involved do i need to be in my pension ?

My advisor says not many do as they dont understand investing but personally i would like to get involved as its my interest.

Do any of you guys get heavily involved with your pension and also is there any general advise you have with enrolling in pensions?

i would also like to go into contribution amount aswell im 23 and have a long time horizon so im hoping i can build up a decent pot come retirement.

Look forward to your thoughts.

hugheskevi

What i wanted to ask you guys is do i need to tie in my investments into what the pension company are doing with my money ?

No. Most providers will offer you an investment choice, although it may be limited. If you want more flexibility you may be able to transfer out periodically (every year or so) to a personal pension to get better choice. The key thing is that you want the employer contribution, and unless you have a very small employer they are unlikely to contribute directly into a personal pension.

My advisor says not many do as they dont understand investing

You would typically get about 80-90% of members in the default fund in a workplace pension.

Do any of you guys get heavily involved with your pension

I'd guess the majority of regular contributors are heavily involved to some extent (some may favour passive investing, so are heavily involved in selecting a range of trackers, whereas others would take more positions about which categories or geographies are likely to outperform and change weights accordingly). This however is not representative of the population.

Personally all my DC pensions are in unadvised SIPPS where I choose my own investments from funds, investment trusts, individual shares and ETFs. But that range of investments would be pointless for the vast majority who are unlikely to stray from the default fund.

is there any general advise you have with enrolling in pensions?

Maximise employer contribution.

I'd also suggest any folk starting a pension who have any interest in investing should have no hesitation in being active. The first few years of a pension will have so little in it that mistakes don't matter when taken in context of the impact on final pension pot value. But they provide valuable knowledge for the future when mistakes start to hurt (or at least, have the potential to hurt).

i would also like to go into contribution amount aswell im 23 and have a long time horizon

Broadly, there are a couple of schools of thought here. First one is the conventional approach of working out how much pension you want, then paying in a percentage of income to generate the desired target.

Alternatively, make contributions so as to maximise the income tax relief, employer contributions and National Insurance contributions savings from salary sacrifice which are available. You may not be a higher rate tax payer yet, or have salary sacrifice available. If so, then after contributing enough to maximise the employer contribution any further money available for investment could go into an ISA, and be moved into a pension at a later time when the incentives are stronger. There are some secondary considerations around benefits and bankruptcy, but this approach should lead to a far better outcome if you have discipline (ie will not spend non-pension savings) and are organised.

MoneySavingUser

hugheskevi wrote: »

Alternatively, make contributions so as to maximise the income tax relief, employer contributions and National Insurance contributions savings from salary sacrifice which are available.

This is what I do.

I worked out how much money I need per month and put the rest of my salary into my pension - no point in paying NI and tax on it as I am not using it at the moment.

You need a rainy day fund set up before you can do this.

AlanP_2

Whilst you will have limited control over what the DC pot is invested in you can certainly take that into account when considering what / where else you invest in.

You have investments already you say, so if you were to look at "Your total investments" (DC + Personal) I would suggest that the overall mix should fit with your preferred Asset Allocation strategy rather than both pots duplicating or overlapping each other.

A simple example - If you DC pot funds were invested in large cap stocks at 40% US, 30% UK, 15% Europe and 15% Japan then outside the DC pot you could invest in Asia ex-Japan, Emerging Markets, Smaller Companies to increase your diversification.

Time scales and the potential "reason for the pot" need to be considered as well. The DC pot is for your late 50s at the earliest, you may want to access the non-DC investments before that - for house purchase, marriage, kids etc.

What cash savings do you have as an emergency fund (sudden need for a replacement car, redundancy and the like can strike at any time)?

Having everything "invested" in the markets could leave you exposed to selling at a low point and losing money, having available cash can get over that.

BTW - Congratulate yourself, the majority of 23 year olds are not that interested in pensions and investments, but don't miss out on enjoying yourself while you are young, free and single (assuming no significant other at the moment).

AlanP_2

MoneySavingUser wrote: »

This is what I do.

I worked out how much money I need per month and put the rest of my salary into my pension - no point in paying NI and tax on it as I am not using it at the moment.

You need a rainy day fund set up before you can do this.

OP - Adding to this:

Have you asked your employer whether the contributions can be via Salary Sacrifice or not?

If they can you save on NI and so do they (and some employers share what they have saved with the employee by upping their contribution level).

krish123

hugheskevi wrote: »

No. Most providers will offer you an investment choice, although it may be limited. If you want more flexibility you may be able to transfer out periodically (every year or so) to a personal pension to get better choice. The key thing is that you want the employer contribution, and unless you have a very small employer they are unlikely to contribute directly into a personal pension.



You would typically get about 80-90% of members in the default fund in a workplace pension.



I'd guess the majority of regular contributors are heavily involved to some extent (some may favour passive investing, so are heavily involved in selecting a range of trackers, whereas others would take more positions about which categories or geographies are likely to outperform and change weights accordingly). This however is not representative of the population.

Personally all my DC pensions are in unadvised SIPPS where I choose my own investments from funds, investment trusts, individual shares and ETFs. But that range of investments would be pointless for the vast majority who are unlikely to stray from the default fund.



Maximise employer contribution.

I'd also suggest any folk starting a pension who have any interest in investing should have no hesitation in being active. The first few years of a pension will have so little in it that mistakes don't matter when taken in context of the impact on final pension pot value. But they provide valuable knowledge for the future when mistakes start to hurt (or at least, have the potential to hurt).


Broadly, there are a couple of schools of thought here. First one is the conventional approach of working out how much pension you want, then paying in a percentage of income to generate the desired target.

Alternatively, make contributions so as to maximise the income tax relief, employer contributions and National Insurance contributions savings from salary sacrifice which are available. You may not be a higher rate tax payer yet, or have salary sacrifice available. If so, then after contributing enough to maximise the employer contribution any further money available for investment could go into an ISA, and be moved into a pension at a later time when the incentives are stronger. There are some secondary considerations around benefits and bankruptcy, but this approach should lead to a far better outcome if you have discipline (ie will not spend non-pension savings) and are organised.

I think initially i will enroll in the default investment scheme they provide and see how that goes for a while.

i personally favour passive investments and my personal investment are passive (Vanguard Lifestrategy 80) and plan to build a portfolio around passive investments that cover a broad geography.

Yes well the maximum contribution that my employer will input is 5% so i will match this initially.

krish123

AlanP wrote: »

Whilst you will have limited control over what the DC pot is invested in you can certainly take that into account when considering what / where else you invest in.

You have investments already you say, so if you were to look at "Your total investments" (DC + Personal) I would suggest that the overall mix should fit with your preferred Asset Allocation strategy rather than both pots duplicating or overlapping each other.

A simple example - If you DC pot funds were invested in large cap stocks at 40% US, 30% UK, 15% Europe and 15% Japan then outside the DC pot you could invest in Asia ex-Japan, Emerging Markets, Smaller Companies to increase your diversification.

Time scales and the potential "reason for the pot" need to be considered as well. The DC pot is for your late 50s at the earliest, you may want to access the non-DC investments before that - for house purchase, marriage, kids etc.

What cash savings do you have as an emergency fund (sudden need for a replacement car, redundancy and the like can strike at any time)?

Having everything "invested" in the markets could leave you exposed to selling at a low point and losing money, having available cash can get over that.

BTW - Congratulate yourself, the majority of 23 year olds are not that interested in pensions and investments, but don't miss out on enjoying yourself while you are young, free and single (assuming no significant other at the moment).

thanks for your kind comments, i think its important to plan ahead and understand that if you sacrifice now it can benefit you later on in life .

Yes i mentioned to him immediately about duplicating investments and i think the default pot would fairly closer mirror to that of my lifestrategy fund so i may have to look at this further.

What i had thought to diversify my current portfolio is to invest in emerging markets as the lifestrategy fund is slightly light in this aspect and perhaps thought i could gain this exposure from the pension (by actively requesting this). However im pretty sure the charges will be higher doing this in the pension (they charge higher fees) than if i were to do this personally so im not to sure.

I appreciate you saying about tieing up everything in the market and im mindful of this. another key thing to factor in for myself is that im currently saving up to buy my first property and i dont want to tie up any more money up than i already am (think this is the most i can do tbh).

krish123

AlanP wrote: »

OP - Adding to this:

Have you asked your employer whether the contributions can be via Salary Sacrifice or not?

If they can you save on NI and so do they (and some employers share what they have saved with the employee by upping their contribution level).

Yes i believe this is a option for me, im guessing this is something i should definitely get involved in ?

From what i understand i will not have to sacrifice any of my take home pay ?

MoneySavingUser

krish123 wrote: »

Yes i believe this is a option for me, im guessing this is something i should definitely get involved in ?

From what i understand i will not have to sacrifice any of my take home pay ?

It depends on how the maths works out.

Basically:

Normal pension contributions - you only get Income Tax relief

Salary sacrifice - you get Income Tax and NIC relief (so an extra 12% for a Basic Rate taxpayer).

This is because by entering into salary sacrifice you swap some of your salary for an employer contribution of the same amount.

So your gross salary actually goes down - but your take home could be the same or higher.

However the employer might report the new post salary sacrifice employer to mortgage providers etc. so it could cause an issue if you want to get a mortgage etc.

See this: http://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/salary-sacrifice