Late Twenties Saving - From Red to Black

ManicRower

Hi Guys,


First time on this particular forum (spent more time on the mortgages & house buying forums whilst going through the purchase of a flat). I guess I am hoping for a bit of guidance really.


I'm 28 and thus far have worked pretty hard to get myself on the housing ladder (along with my fianc!e), get a decent job and just generally use my 20's to get us in a stable position so we are able to enjoy our 30's and beyond. As a result, in the next 6-12 months I will be in the fortunate position where we will have saved and purchased a flat (I am London-based), saved and paid for a wedding/honeymoon and come out of it with zero debt (mortgage aside) and my student loan will also have been paid off.


Pension-wise, I have a small pot (circa 4 years worth) of contributions from my time in the public sector. I left the public sector 2.5yrs ago and since then have not had a private pension until my current employer started the mandatory one in April of this year. The contributions are terrible (the company puts in 10% of whatever my monthly contribution is. e.g. if I put in £100pcm, they put in £10pcm).


We have also saved a 'float' fund of 6 months mortgage payments, just in case either of us get into any unforeseen difficulties, if the boiler goes bang, etc. I'm now starting to think about 'what's next?'


As of Feb I will be joining a new company and taking home circa £3,200 after tax, rising to £3,500 when my student loan finishes Q3 2016. The pension is also slightly better (employer contribution of 3% of base salary). My mortgage and bills come to £1,300, leaving me with roughly £2,000 a month to live off and spend/save as I please.


I guess what I'm looking for is some guidance on what sort of plan I should adopt going forward. I am thinking I should probably join my new company's pension scheme, but I don't really understand the returns or the drawbacks of such inflexible saving (compared to cash).


Assuming I should sort a pension, then what? Am I better off overpaying the mortgage? maxing out ISA's? Stocks & Shares? I'm pretty clueless as to what is available and as much as I don't like the idea of my money being sat in an account and devaluing over time, I don't want to lose it all in a market crash either (same as most people I expect).


Hope this ramble makes sense and would appreciate any advice or general pointers that would nudge me in the right direction.

Eco_Miser

First thing - you don't lose money in a market crash. The value of your holdings drops, but they're the same holdings, and will eventually regain their value, and more. (Subject to having a diversified holding, individual companies can go out of business altogether.) So long as you don't sell a a loss, you haven't actually lost money.

Pensions - you save from untaxed income now, it grows tax-free, and you get 25% of the resultant sum back tax-free, and the rest at your marginal tax-rate then - possibly lower than your current tax rate. The draw-back is you can't touch it until 10 years or so before state pension age - but then it might fund those 10 years of early retirement.

This compares with S&S ISA where you save from taxed income, it grows tax-free, and you draw it, anytime, tax-free. The investments and growth can be the same in both wrappers.

You don't have to choose between the options you listed, you can do all of them.

Linton

You seem to have everything sorted out very well. Only one comment there - your "float fund" should include more than just your mortgage. It should include everything needed to keep you going for perhaps 6 months and to cover emergencies - eg a new central heating boiler. The reason is that you dont want to be in a position where you have to sell investments to meet a sudden emergency. That is a good way to turn a potential loss into a real one.

So what's next? You need to be thinking about the future. Any known major expenditure in say the next 3-5 years should be covered by cash. Beyond that you need to be thinking about stockmarket investments. To avoid unnecessary taxes and minimise admin hassle this means pensions and S&S ISAs.

You should certainly join your new employers' pension scheme to get as much "free money" as they are prepared to give you. Beyond that it's a question of balance. They both provide access to much the same investments. Where they differ is that pensions give you better tax relief especially if you are a higher rate tax payer in work and wont be when retired. On the other hand cash can be withdrawn from ISAs at any time whereas Pensions cannot normally be accessed until you reach 55. So you will need to decide what fraction of your spare income you wish to put in each.

Perhaps it would be worthwhile to spend the time between now and February to learn about investing. Read the Savings and Pensions forums on this website. Buy some books, Tim Hales Smarter Investing is often recommended but there are many others. Dont believe everything you read but anything that seems particularly interesting, surprising, or too easy research further.

atush

I agree you seem well sorted but need to boost your fund a bit to incluse all bills not just mtg, plus upcoming Known spending such as holidays, replacements etc.

Then, you say you dont understand pensions compared to 'cash'. Cash is fine for current needs and spending up to 5 years, but NOT for long term or retirement. For that you need investments.

Investments in a pension are good because you get employers money, tax releif, and you cant spend it on a 'whim'. It also cant be taken from you by creditors.

For spending 10 years+ away, but before a pension is needed, you also invest in S&S isas.

Overpaying a mtg makes sense when rates are high, but not when rates are low like now.

So, for stocks and shares, read Funds, not individual shares. As these are more diversified.

For you, you should put as much into the work pension as will get the max employers contribution. After that, you c an add some more, or you can open a separate personal pension.

kangoora

If you are going to be taking home circa £3.5k after tax you must be well into the higher rate tax band on your gross income.

If that £2k is spare then I'd consider contributing enough to get your gross income just below the HRT tax band. All of that contribution will get tax relief at 40%. There's a lot of rumours that HR tax relief is going to be cut so I'd take advantage of it now.

Get the maximum employer match and then you need to decide if you want to save into a separate SIPP or put extra into your company pension - this will depend on the charges for your company pension vs. a cheap online SIPP and also what type of investments you want to be available. Personally, all things being equal, I'd be tempted to have a separate SIPP.

If you still have 'spare' cash and you believe your emergency fund is adequate then probably an S&S ISA is the way to go.

You don't mention kids but they do happen, sometimes even when not planned for - so you may find in the future you need to swap your flat for a house. Something you need to consider when looking at your overall savings plan - deposit, moving costs, new furniture etc.

lawriejones1

Given you're taking home £2k a month I reckon 6 months mortgage in cash is a fair amount. I have 6 months of total expenditure but it's certainly less than you might need.

I'd second the discussion about kids an priorities, but always try to make your money work as hard as it can do and spread it around. With £24k you can max out a S&S ISA per year and stick £10k in a pension with little trouble.