House deposit saving - good plan?

Purplesky_2

Since you're looking to use the money for a house deposit, there's almost no need for the ISA. Look at the various current accounts that you can get for easy access. You can get one at 5% for pete's sake at TSB! The best way to make your money grow faster is to take advantage of savings rates and let it compound, and to understand tax better. ISAs generally only give you the interest at years end.

With current accounts, the money you get in interest this month earns interest next month! Even if you wanted to keep your ISA, you could get a 6% savings account and your money would be earning more in there than it would in your ISA, even without the tax advantages.


I would seriously look into getting a pension, as a 40% tax payer and so young, it's SUCH a good opportunity. £60 from your net pay to get you £100 in your pot! (And that's without employer contributions!) NOWHERE are you gonna get that rate!

And you could probably get £8 a month back from TSB in a short time. So then you only need to find £50 a month. Cut your grocery bill by £10 and that's only £40 you gotta find. Don't order a takeaway and cook beans on toast or scrambled eggs or something, there's another £15. You can make your new pay stretch even further than you think.

jimjames

bobobski wrote: »

Thank you jamesd, all very interesting but as I mentioned I don't yet have an emergency fund, so I'm choosing to forgo higher interest for easy access right now. However, your link has now become a favourite in my internet browser for c. 12 months' time It's annoyingly difficult to save/invest for a high return when you have nobody to fall back on if it doesn't work out.

TSB pays 5% with instant access, it's a current account so couldn't get any more instant access.

bowlhead99

bobobski wrote: »

Lippy: my concern is that if I put away, say, £100 per month into my pension then that leaves me around £6.5k lighter in 5 years' time in terms of the deposit. I do see the benefits in having a pension and I am aware that I'm basically taking a lower salary from my employer for not having one, but it being the smartest move in 45 years' time doesn't mean it's the smartest move in 5 years' time. I've thought quite a lot about that and I don't think an occupational pension is the be all and end all for everyone in every situation. But thank you for highlighting it for me, I really need a "life to-do list"!

It's good that you've thought it through. But, see those figures in the context of what you're trying to achieve.

A few posts up you've noted that £60k of cold hard cash as a deposit is not enough and you may well be waiting longer (there's absolutely nothing wrong or abnormal with being in your 30s - maybe a quarter of the way through your working life - before you buy an expensive property).

So, if the arbitrary £60k is not really enough, then probably if it changes to 54k or 66k, it doesn't make a major difference. 10% of that figure you had saved is neither here nor there- it changes a 20% deposit on a £300k place into an 18% deposit on a £300k place. Not the end of the world. Or it is a few months of waiting. You may even find it is worth the wait because house prices may not be skyrocketing in 2020, they could be flatlining or falling.

Presumably your salary at age 25 is light years ahead of what it was at 20. Unless you're in a funny industry where the very start of your career is a plateau, you should expect your hard work to result in your salary going up up up so by age 30 the salary will have moved on again - maybe not as fast as from 18 to 25 but you never know. Instead of worrying that 5x your 40k salary is only 200k of potential mortgage, you simply borrow 5x your improved 50k salary or 4x your 60k salary and borrow 240-250k instead, which on top of your deposit will get you a starter home. Or with a willing partner with similar income and some deposit, gets you a 600k place while still young. Not bad considering medial household income is under £25k, nationally.

Getting on the property ladder earlyish is a good thing if you know you're not going to want the flexibility of, say, being able to go off and work overseas or in another part of the country as a career expanding move for a couple of years in your early 30s. But you're choosing an extra £6k in your deposit fund instead of £10k in a pension after the tax relief, or maybe £20k depending on how much the employer will match (100pm is a pretty miserly amount, less than 3% of a gross salary of £40k).

In the long term you will want a roof over your head *and* presumably, tens of thousands of pounds of retirement income which will require several hundreds of thousands of pounds of investments. It is not that you need one or the other and the retirement fund is something to deal with once you are older.

Probably the average 25-year-old does not have a massive pension. But then statistically the average 25 year old is not paying 40% tax to the government on every new pound he earns, so the average 25-year-old doesn't have the same incentive to use one.

Taking the 6k for an extra house deposit rather than the £20k pension (and five years investment growth on the pension) does seems crazy- giving money to the government unnecessarily and requesting less pounds from your boss than he is willing to give you.

You are in a rush to get a house so you like to think of it as having different priorities (5 year smart move vs 45 year smart move). But once you have the house there will be other priorities, your car will be 5 years older, you'll fancy a wedding or a honeymoon or a child or an upgrade to the starterhome you just bought etc etc and pension will never get exciting until it become the new 5 year urgent problem. Certainly 45 years from now at age 70 it will be impossible to save hundreds of thousands of pounds of new money for your retirement.

Personally I did cut back on some personal pension contributions while saving some of my deposit so perhaps I'm a hypocrite, but I was doing it later in life when I'd already got the ball rolling on the pension, employer would still put money in if I didn't, and so on. Still, it's wiser to learn from the mistakes of others than make the mistakes yourself - I'm finding it expensive playing catchup with the pension.

Good luck however you choose to do it, but: the high interest current accounts here are great for instant-access deposit building, but that deposit building is not so great for the second objective of retirement planning.

If the employer pension match is not very good (e.g. less than a percent) - one thing you could do to preserve flexibility is to put the money you should have been putting into pension, into S&S ISAs in similar investments that you would have bought inside the pension.

As a vehicle for saving for a house deposit, S&S ISAs they are not great because there is no guarantee that the money it's worth would be as much as you put in, at whatever day you choose to buy the property - it would be a high risk approach. However, if (when!) you later come to the realisation that you don't need the money for a house deposit after all because your retirement is equally important as buying a nice place now, you could always take the money out of S&S ISAs and put the proceeds into a pension at that point, and all you'll have missed is the historic employer match and not 5 years of investment growth (because you got that in the ISA) or tax relief (because you'll get that when you contribute it to the pension eventually).

bobobski

It's good that you've thought it through. But, see those figures in the context of what you're trying to achieve.

Bowlhead, your reply is excellent and extremely helpful. You're absolutely right, I have not been thinking of the big picture. I would have had a £200,000 family investment into a house but for personal reasons that's not an option anymore, and I think I've struggled to come to terms with exactly how long it will take me to build up the funds on my own.

You are in a rush to get a house so you like to think of it as having different priorities (5 year smart move vs 45 year smart move). But once you have the house there will be other priorities, your car will be 5 years older, you'll fancy a wedding or a honeymoon or a child or an upgrade to the starterhome you just bought etc etc and pension will never get exciting until it become the new 5 year urgent problem. Certainly 45 years from now at age 70 it will be impossible to save hundreds of thousands of pounds of new money for your retirement.

Again, absolutely right. Between you and Lippy, you've convinced me to go for a pension when I start the new job in September, so thank you for helping me to see the light.

Future salary is impossible to predict, but I'm in law, so salary should increase nicely year on year with a couple of jumps when I pass certain years of qualification.

Anyway, thank you again for the response - you have made my day.

bobobski

Look at the various current accounts that you can get for easy access. You can get one at 5% for pete's sake at TSB!

TSB pays 5% with instant access, it's a current account so couldn't get any more instant access

Not sure how I missed this account. Applying now!