Pension - where to start please

flashsnaps

Hi,

I am 28 and really need to start paying into a pension pot. I work for a small company who currently do not offer a staff pension scheme. I have asked and its not going to be implemented anytime soon, I know the government are pushing for it.

Advice please?

jamesd

You might want to check the firm's staging date just to be sure. If there are 30 or more employees October this year plus three months of delay is the last possible starting time. For up to 29 employees it could be anything from 1 June this year to 1 April 2017 depending on the last two characters in the firm's PAYE reference number.

Probably best to use S&S ISA investing until the work scheme starts. That's because the work scheme will, if they are sensible, use something called salary sacrifice that saves you both income tax and NI on your pension contributions. Do it outside that and you just save the income tax.

Purplesky_2

I'm going to assume that you have absolutely no idea what to do, and I'm going to start very basically. Bear with me, if you know what I'm telling you, that's good!

The rule of thumb is to go for 14% of your salary (i.e half your age as a percentage) or as much as you can afford.
Pensions are wrappers where you (and potentially, your company) put money and can get tax 'refunded' to you at you marginal tax rate (i.e. up to about 42k pa salary, you put in £80 and the government top it up to £100, over 42k pa it's more like £60 in from you, tax up to £100). This money then goes into investments. The upside is they grow free of tax, but you pay tax when you take money from them later on (as though it's income...because it is). You also can't get at them until you are 55 (or maybe 57, the rules are changing, I think). This has both pros and cons (which I can explain if you wish). You could also invest in a S&S ISA, which has different benefits, but also allows you relatively quick access to your money if required. (I can explain the difference, if required)


Firstly, have you got some emergency savings? If not, you may want to consider getting at least some, because you cannot access pension funds for financial trouble.
Have you got other goals? Owning a house can take a lot of effort and it's tempting to put off the pension if you are saving or trying to pay down the mortgage but compound interest is a great tool that can be used for you, so get started as soon as you can.:money:

Then, there are people who will have suggestions for who you go through, but if you want something relatively automated and hands-off, you could try getting what's called a stakeholder pension. These usually have broad funds, with a variety of investments (thus reducing your risk of losing all your money), low costs and accept smaller amounts of money than others do by law. :T
Alternatively, you could try learning a bit about investments, and go for a DIY approach. These are called self-invested personal pensions (SIPPs) and they can be a useful tool. In these, you make choices about where and what to buy, so you need to know about what impact diversification, risk, asset class (equities, bonds, cash, money market, property etc), geography (Developed world vs emerging markets vs europe only etc) and fees have (including active vs passive funds). These involve a little more work, initially to set them up, and to monitor and 'rebalance' every year or so, but it's not a horrendous amount of time and energy (Maybe a few hours, every year).

You could even have more than one simultaneously. Throw the whole amount into the stakeholder while you figure out the investment stuff and then reduce or stop the amount going into the stakeholder, and start the SIPP when you feel a bit more confident/informed. :beer:

Recommended books/newpapers:
The automatic millionaire (Not so much the investment side of thing but the goals/values/rules of thumb stuff is pretty good. It's American, so a fair amount of the details are wrong)

Tim Hales' Smarter Investing is often recommended. I looked at it, and it seemed quite dry, but apparently it's good for info.

Love is not enough by Merryn Somerset-Webb. (No gender specified in post. This book is for women ostensibly, but it has a decent introductory chapter to investments.)

DIY investor is quite good (I'll edit in the authors name tomorrow, it's upstairs), although a little out of date with ISA/Pensionallowances etc.

Financial Times. Try it a couples of times a month at the weekend

Internet reading:
Mr Money mustache
Monevator.com
MSE (Naturally):money:

I'm sure there are things that have confused you here, but just ask questions of the very informed people here on the board. You're starting early enough that you can make mistakes and course-correct. And you are asking, if you start you'll likely be able to make good headway. :j

Best of luck

atush

Purple sky pretty much covered it all.

I would say, that if you have an emergency fund, you could consider starting a PP now as each 80 you put in will become 100 overnight. You could start a stakeholder, or you could start a PP or Sipp and invest in a global tracker or a Vanguard fund to start while you research investing in full.

You could put either in a s&Sisa if you think you could do with saving for your future, but a future earlier than age 55-58 when you can start taking pension funds.

kidmugsy

If you are a 20% tax payer who is decades from retirement, don't bother with a pension unless you're going to get an employer contribution. The inflexibility of a pension is a burden you don't want to assume, unless there is a compensating reward - either avoidance of higher rate tax, or harvesting of an employer contribution.

Until your employer starts to offer a contribution, concentrate on clearing any expensive debt, building up an emergency cash fund, and investing in S&S ISAs. Every couple of years check on this board to see if anything has changed enough to alter such advice.

nicknameless

kidmugsy wrote: »

If you are a 20% tax payer who is decades from retirement, don't bother with a pension unless you're going to get an employer contribution. The inflexibility of a pension is a burden you don't want to assume, unless there is a compensating reward - either avoidance of higher rate tax, or harvesting of an employer contribution.

Until your employer starts to offer a contribution, concentrate on clearing any expensive debt, building up an emergency cash fund, and investing in S&S ISAs. Every couple of years check on this board to see if anything has changed enough to alter such advice.

Rather black and white? Personal pension might be used to bridge early retirement if that becomes an ambition (increasingly likely as state and NRAs for occupational pensions become ever more distant) and foregoing the 20% tax relief might hamper that?

Surely not something to rule out completely.

kidmugsy

nicknameless wrote: »

Rather black and white? Personal pension might be used to bridge early retirement if that becomes an ambition

Surely not something to rule out completely.

I'd rule it out for a 28 year old. It's far too soon to start planning for early retirement. Lord, he/she may not have a spouse, house, children yet. There will probably be plenty of opportunities later to switch money from ISAs to pensions.

atush

I agree a little too black and white.

If it were me, even as a basic rate payer if I had an emergency fund, and no expensive debt, I would split available funds between the two and both a pension and a S&S isa.

jamesd

Purplesky wrote: »

You also can't get at them until you are 55 (or maybe 57, the rules are changing, I think)

Expected in 2028, so for this person I'd write 57 and mention that date.

Purplesky wrote: »

if you want something relatively automated and hands-off, you could try getting what's called a stakeholder pension. These usually have broad funds, with a variety of investments (thus reducing your risk of losing all your money), low costs and accept smaller amounts of money than others do by law. :T

Any personal pension can work as described in that paragraph. What normally sets stakeholder pensions apart from others today are:

1. higher charges than available in other personal pensions for comparable investments
2. the £20 maximum for the minimum monthly contribution into the pension, which is a bit lower than usual for personal pensions.
3. the prohibition on most extra charges, which makes them a good deal for people moving money in to take it all out again soon afterwards.

Purplesky wrote: »

Alternatively, you could try learning a bit about investments, and go for a DIY approach. These are called self-invested personal pensions (SIPPs)

No, they aren't. They are called "personal pensions" and both Stakeholder Pensions and SIPPs are forms of personal pension, as are products called simply personal pensions. What distinguishes SIPPs from Stakeholder Pensions and other personal pensions is that the other two broad classes are normally restricted to funds and ETFs ,while SIPPs can allow direct share holding, investment trusts, foreign investments, commercial property direct ownership and many other things.

Purplesky wrote: »

In these, you make choices about where and what to buy, so you need to know about what impact diversification, risk, asset class (equities, bonds, cash, money market, property etc), geography (Developed world vs emerging markets vs europe only etc) and fees have (including active vs passive funds). These involve a little more work, initially to set them up, and to monitor and 'rebalance' every year or so, but it's not a horrendous amount of time and energy (Maybe a few hours, every year).

All of that paragraph applies to all forms of personal pension, whether it's Stakeholder, SIPP or plain personal pension.

The distinction is broadly:

a. Personal pension, typically only collective investments like funds or maybe ETFs. Typically a hundred or more fund choices, can be thousands.
b. Stakeholder Pension, a form of personal pension of type a with some requirements on minimum monthly payments and charges. often with more restricted investment choices and higher charges on the investments than competitive personal pensions.
c. SIPPs, a form of personal pension but with far broader investment choices, typically including shares on major markets worldwide, investment trusts, funds, ETFs. In some products covered warrants, direct property holding, unregulated collective investments, P2P and many other things are available.

Purplesky wrote: »

You could even have more than one simultaneously. Throw the whole amount into the stakeholder while you figure out the investment stuff and then reduce or stop the amount going into the stakeholder, and start the SIPP when you feel a bit more confident/informed. :beer:

Forget Stakeholder Pensions unless there is a requirement for uncommonly low contributions or to exploit the ban on extra fees. They are mostly an obsolete product set because the market has moved on since they were introduced.

Purplesky_2

Thanks for the clarifications.
Yes, you are perfectly correct, but didn't necessarily want to bog down with quite so many details in the first couple of posts. Also, it's nice to be able to explain stuff to someone else. One of the ways of proving what you've learned! (My partner and I only started looking at this stuff in earnest a little over a year ago).

jamesd

Purplesky wrote: »

Also, it's nice to be able to explain stuff to someone else. One of the ways of proving what you've learned! (My partner and I only started looking at this stuff in earnest a little over a year ago).

Yes it is good. I know I've come a long way since I started posting here!