Set-up Pension or Save for a Mortgage

hotlymet

Hi All,

I'm in my mid-20's and i'm starting to think about the future much more seriously, specifically whether to save up for a mortgage or set up a pension.

I operate as a contractor through my limited company so I've currently not had a pension set up for me by an employer.

I plan to put away £150 per week which equates to ~£30K in four years time, when i'd have a better chance of being accepted. With this i'd hope to get either a ~£150K property with a 80:20 LTV or a slightly more expensive property with a 85:15 LTV.

Once the deposit was raised, i'd then continue to put this away to my pension.

What are your thoughts on deferring setting up a pension and prioritizing the mortgage depeosit?

dunstonh

I'm in my mid-20's and i'm starting to think about the future much more seriously, specifically whether to save up for a mortgage or set up a pension.

Why either? You should be doing both.

Once the deposit was raised, i'd then continue to put this away to my pension.

Nice idea but will you be able to afford it? property ownership comes with its own costs. You will also be behind in your retirement planning and will need to pay in a sufficient amount to catch up the missed years.

ischofie1

I tend to agree that you should concentrate on both.
Is £150 PW your drop dead max you could afford?
If you could stretch this to £190 you could put £50 PW in a pension considering this would only cost you £40 with tax relief.
If you can't do £190 PW I'd still do the pension meaning you'd be saving £110 PW towards the house.
Then lower your LTV ratio to stay within the 4 years. Mortgages are becoming more available at lower values than you are aiming for. You may not get the best rate but you could always re-mortgage in a few years when you've paid some equity off & maybe house prices have risen.

Regards.

atush

Plus you say you are a limited company. If you pay into a pension thru your company, it will lower your company's tax bill (and employers nics).

ChemistDude

hotlymet wrote: »

Hi All,

I'm in my mid-20's and i'm starting to think about the future much more seriously, specifically whether to save up for a mortgage or set up a pension.

I operate as a contractor through my limited company so I've currently not had a pension set up for me by an employer.

I plan to put away £150 per week which equates to ~£30K in four years time, when i'd have a better chance of being accepted. With this i'd hope to get either a ~£150K property with a 80:20 LTV or a slightly more expensive property with a 85:15 LTV.

Once the deposit was raised, i'd then continue to put this away to my pension.

What are your thoughts on deferring setting up a pension and prioritizing the mortgage depeosit?

Prioritise the mortgage but don't defer your pension either. Put small amounts in say 3-5% of company profits and pull the rest out as dividends and put in an ISA or LISA(next year). Anything you put in your SIPP through the company you won't have to pay corporation tax on.

kidmugsy

(i) Are you drawing enough salary from the company to qualify you for NICs that earn you State Retirement Pension? (I understand that's £8060 p.a. at the moment).

(ii) Do you then supplement that salary by drawing dividends at a rate such that you pay no more than 7.5% income tax on dividends? I would be careful not to draw dividends that led to my paying 32.5% tax on them.

If the latter leaves surplus income accumulating in the company you might consider having the company contribute to a pension for you, after it has enough of a cash reserve to see you through bad times.

I must say that in your shoes I'd be tempted to open an HTB ISA, and then next year a LISA, rather then contribute to a pension personally.

In addition you can pile your own surplus income into a monthly saver account that returns 5% or 6% p.a. Each tax year, take stock of the current laws and opportunities, and modify accordingly.

Unless you have a substantial financial incentive to have the company contribute on your behalf, I'd prioritise accumulating emergency cash and a deposit, over the inflexibility of tying up your money in a pension for thirty-five years or so.

You are not in the same world as people who can harvest an employer's contribution, and use salary sacrifice, unless your company is piling up reserves surplus to your needs.

greenglide

(i) Are you drawing enough salary from the company to qualify you for NICs that earn you State Retirement Pension? (I understand that's £8060 p.a. at the moment).

the "sweet spot" is between £112 and £155 per week which is £5,824 to £8,060 as in this range you get a qualifying year but pay no actual NI.

ChemistDude

greenglide wrote: »

the "sweet spot" is between £112 and £155 per week which is £5,824 to £8,060 as in this range you get a qualifying year but pay no actual NI.

Aye, I love the fact I pay myself a directors salary of £8,060 and pay ZERO NI but keep gaining stamp year after year. It's brilliant!

jamesd

Given your age and work situation I'd go with all to get into a home with a mortgage as soon as you can, putting off pension contributions for say up to five years.

The main assumption behind that is that long term you're going to both save more in rent by owning and that your quality of life will improve. Meanwhile it'll be relatively easy to catch up on up to five years of missed pension contributions.