Pension advice needed

autumn2012_2

Hi, Im 21 and looking at starting a pension. Is this wise? How much should I contribute as a minimum?

xylophone

Does your employer offer a pension?

dunstonh

Is this wise?

it is wiser than doing nothing.

How much should I contribute as a minimum?

Are you doing this to tick a box (i.e. you can say you have a pension even if you only pay peanuts into it) or are you doing it for a purpose (i.e. retirement planning)?

At 21 you dont have to pay the same amounts towards retirement as a 25 year old or 30 year old. You have those extra years. So, starting now is a good thing. The earlier you start, the less you need to pay per month.

However, how much you need to pay will depend on when you want to retire. How much you want to retire on and if there is an employer scheme available and how much is going into that employer scheme from the employer.

jamesd

The amount to pay into a pension depends in part on when you want to retire. It takes more paid in to retire at 57 than at 67. At a young age like 21 the differences are fairly small, though. For people closer to those ages it can become impossible to put in enough to do it because there is so little time for compounded investment growth to help them

One thing to do is find out if you have a workplace pension and if you do, what your employer will do to help employees who use it. Auto-enrolment law is going to force many employers who don't have a pension scheme today to start one so waiting for that is a good idea, because the employer contributions that are required increase the value of your money.

Beyond what the law requires, many employers will do things like match up to 6% or 8% of employee contributions with their own money on top. That's a quick doubling of your money. Another reason to check out an employer scheme.

So first general rule is, if you have an employer scheme and have any interest at all in retiring early, pay in as much as the employer will match.

At 21 you also have to consider your other financial needs, like perhaps buying a home sometime. Getting together a good deposit for that is likely to deliver more benefit to you than any pension contributions not being matched by an employer. This is because part of your monthly mortgage cost is buying the home, eliminating a future expense. It also greatly increases stability and certainty in life as well as getting rid of the need to deal with letting agents and their fees regularly.

You'll also need to accumulate an emergency fund.

So, a general recipe for a 21 year old is get all employer pension matching matching, accumulate a good emergency fund and plan for home purchase, while living a life that is sensibly balanced between fun and providing for your future. Each person will choose a different balance. Many have a very short term focus in their thinking, living week to week. Relatively few look long term and realise that a bit extra put away now means they have to work for ten or twenty fewer years.

kangoora

Put away £50/month increasing with inflation each year for 40 years earning a conservative 4% investment returns and 2% inflation, and you'd be looking at circa £80k after 40 years. £100/month would be nearly £160k.

Even allowing for these dropping with inflation it's till going to be a tidy sum that could allow you to retire early or treat yourself (or your kids!) in your old age instead of working until you are 68 (could be 70 by the time you get to that age).

I'm in the group in jamesd last paragraph and to achieve an early retirement I'm currently putting 60% of my gross salary into a pension in my early 50's, luckily I can afford to do that. If I couldn't I'd be looking at least an extra 5 years work until my early 60's.

autumn2012_2

Thank you for the advice. I do have a work pension however Id rather start paying into a personal pension as I dont trust this workplace pension scheme (dont ask me why- Im a cynical person) Im hoping to retire at 60. I already have bought my home so I have passed that hurdle. Now Im thinking long term for my retirement. I have debts atm which I am paying off - once these are gone Im going to put money away for my daughters' futures i.e uni or home-ownership etc. People are saying that Im only young so dont worry about it but I feel like with only 39 years until hopeful retirement and 2 children to also factor in I should start doing something now.

atush

Sorry but you are wrong.

There is no reason to mistrust the pension, once paid into it is separate from your employer. So distrust your employer if you w ant, but the pension your employer pays into is the one you should join. As it is FREE MONEY. To not so so, for some silly reason, is in effect taking a pay cut.

Say the employer will match your contributions. So say you pout in 80 pounds, which the govt adds 20 (tax relief) to make 100. And your employer pays in their 100. You will have 200 in your pension that cost you only 80. How is it wise to turn your nose up at this?

So Join it monday. And pay in enough to get the maximum your employer will out in, Say he puts in 3% if you do so too- then put in 3%. If you want to save more, then you can open a personal pension that is separate from your employers pension. AS at age 20ish, it would be good to be putting aroudn 10% of income into your pension (but this can include your employers bit, and the tax relief).

But do pay off your debt, after joing the work pension but before opening another one, or paying in more than the matching contribution to your work pension. AS it makes so sense to save much, if you are paying expensive % on debt.

And do run up an emergency savings pot, so that you dont go into debt in future.

Mistermeaner

Good to have a long term plan

Have an objective look at your workplace pension - don't trust is a strange thing to say as its likely to be better with company contributions than you can do in a personal pension

autumn2012_2

I think I havent explained it correctly. I have a workplace pension to which I contribute £30 per month however I want a personal pension also as I dont trust this workplace pension scheme. Its not my employer I dont trust - its the government. I want a personal pension as a second pension and then if for whatever reason I dont get my workplace pension I still have something. Alot can happen in 40 years

Mistermeaner

Whatever changes the government make to your workplace pension will also happen to your personal pension

The only real difference is you get free money in your workplace one.

What is it you don't trust?

autumn2012_2

Im not really sure - I just think putting all your money into 1 pension which is effectively a government pension scheme is unwise. I dont expect to get a state pension so I thought about starting a personal pension as well as my own savings and the workplace pension.