Starting Young

Ggazw

Theres usually a debate between people in their 20's and 30's in my Uni group whether to save for a pension or to buy a house...I have gone for both.

At 26 years old I have decided to start my pension savings at £80 a month and the government contributing £20...I am pleased to have started this however I get the impression that maybe this is too little? I am also saving approx £400-£600 a month to buy my first property in the next 4-5 years.

My employers are not introducing a pension scheme until 2017 so I have started this scheme with Virgin Money.

ViolaLass

Your uni group need to open their eyes - 26 is not that young!

Southend1

My understanding is that Virgin money is one of the more expensive providers. But it's good that you have started saving for retirement. As to whether £80 is enough, you need to work out what level of income you think you will need in retirement and work back from there to figure out how much to contribute. As a rule of thumb, pay in half your age as a percentage of income when you start saving - in your case around 13% of your salary.

HardCoreProgrammer

You are not on higher rate tax (in which case you contribute 60 and government adds 40) and your employer does not contribute until 2017.

There is no material benefit in contributing to a pension as the government contributions when you pay in will almost certainly be taken away (as tax) when you come to draw your pension. I would save your money in a stocks and share ISA until 2017 and see what is on offer, or until you hit the 40% tax band.

I assume that you have a mortgage. Saving in an ISA allows you the added flexibility of withdrawal e.g. if you lose the job. Once the money is paid into a pension, you cannot get it out until your late fifties.

And dare I say, 26 IS young! You have at least 40 years until you collect your state pension (if it still exists then). I would certainly have done more interesting things for my life if I woke up as a 26-year old tomorrow.

ViolaLass

HardCoreProgrammer wrote: »

I assume that you have a mortgage. OP states first property not yet bought. Saving in an ISA allows you the added flexibility of withdrawal e.g. if you lose the job. Once the money is paid into a pension, you cannot get it out until your late fifties.

And dare I say, 26 IS young! You have at least 40 years until you collect your state pension (if it still exists then). I would certainly have done more interesting things for my life if I woke up as a 26-year old tomorrow.

26 isn't particularly young in terms of starting a pension (the OP said he was 'starting young') and you can still do interesting things while saving.

atush

26 is ok for starting a pension, earlier is better.

And if 100/m 1200/yr is ok or not, what % is this of your salary? As 13% is what you would hope for starting at 26? But obv you need to get onto the property ladder as well.

the best thing for you to do, now before your work pension starts, is maybe doing a full MSE on all your outstanding bills, and doing a spending diary. Are you making your lunch or buying? Are you buying lots of take outs? Poncy coffees?

So as to find waste, eliminate, and save more to boost both pension and deposit? Save an extra 20/m? Up each by 10. Save 100, up by 50.

hugheskevi

One of the best things I've done financially is to start a personal pension. However, that was alongside my occupational pension, and the personal pension was just to mop up higher rate tax liability. By a variety of ways (of which pension was one of the more important but not the only way) I've only paid a meaningful amount of higher rate tax in one year of my life so far (now aged 37).

However, whilst that was a very efficient approach it also hurt a lot in terms of liquidity - years when you might be buying a house, paying for a marriage and honeymoon, buying a car, furnishing a house or paying for young children all need liquid resources and often at much the same time. In those years, games such as deferring income tax liabilities with HMRC (via Coding Notice amendments in year, which result in a shortfall of tax paid, which is corrected via self-assessment payments, generating up to 21 months of interest free loan) and using 0% credit cards to generate tens of thousands of pounds of liquidity were great in a few tight years to enable me to keep piling money into pensions.

The last thing I would have wanted to do was tie up inaccessible money in a pension when the only money on the table was basic rate relief. Far preferable for that to stay liquid (ISAs are ideal), and enable larger pension contributions when a better offer (higher rate tax and/or salary sacrifice) is on the table.

TheTracker

Unless you are in the HRT zone, or your employer matches contributions, then I wouldn't touch a pension at your age and in your circumstances. Whether to target home ownership is another kettle of fish.

Southend1

TheTracker wrote: »

Unless you are in the HRT zone, or your employer matches contributions, then I wouldn't touch a pension at your age and in your circumstances. Whether to target home ownership is another kettle of fish.

How would you advise OP to save for retirement then?

atush

I agree. Starting small is better than not starting. AS the 80 they are putting into a pension is much lower than the 400-600 they will be saving for a deposit. They are talking about putting only only 13-20% of their available monthly savings into a pension, and 80-87% into the deposit. More than fair?

Compounded returns are better the longer they have to work.

hugheskevi

Compounded returns are better the longer they have to work.

Yes, but they work the same in an ISA as they do in a pension, particularly given that ISAs can be invested in the same assets as the pension would be investing in. The tax relief effects are neutral, assuming higher rate relief does not become available, because if you move ISA funds to a pension in the future you get 20% relief on the ISA growth, and mathematically it all works out to be the same as putting it into a pension and getting compounded growth on the initial tax relief.

Setting a contribution pattern without regard to tax status and salary sacrifice availability will lead to a worse outcome than active consideration of whether the incentives point toward to save in an ISA or a pension in each year. At the moment, pensions have nothing going for them for the OP given all they get is 20% basic rate relief, suggesting ISA investment is preferable. Then in future years those ISA funds can be moved into a pension when higher rates of relief or salary sacrifice will boost their value significantly.

Risk of policy change is complicated to factor in, and can mean that it may be better to take what is on the table than be greedy and wait for something better, which policy change may remove in the intervening period. But here, all that is available is basic rate relief and there is no sign of any policy change to remove that.

The value of actively considering what you are being incentivised to contribute toward depends on uncertainties such as whether the OP will be a higher rate taxpayer or have salary sacrifice available in the future, but under plausible assumptions the increase in final pension pot can be considerable - perhaps around 20% (from memory, when I last looked at some numbers on this).

The main exception to this is discipline - if money not going into a pension would instead be frittered away then this does not hold. However, given the thread is about where savings should be held, this does not appear probable.

There are minor exceptions around means-tested benefit entitlement (and other entitlements that are means-tested) and bankruptcy where money being in a pension may be preferable, although that isn't clear-cut in my opinion as in times of need, it can be argued that you want your resources available to use, rather than protected but unavailable. However, these are legitimate considerations, and need to be assessed on a case-by-case basis to see if the risk justifies the loss of value of not exploiting timing effects to maximise relief.