Advice for someone who is confused by pensions

carebear95

Good morning everyone,
I m soon to be starting my 1st full time work after deciding to leave uni a few months back, as such i've never had a private pension before and i am a year too young to be autoenrolled for the workplace pension.
So basically i m looking for advice as to how to go about getting a private pension/ if that is the best option for me at this point in life?

I'm 21 and shall be earning roughly 12k, however due to my low living costs and with a pretty healthy budget, i can see myself only spending 65%-70% of my income (and for further details i already have a help to buy isa set up and am transfering my small amount of inheritance into it on a regular basis, therefore will have the amount needed for a house deposit so my only current savings/spends apart from the essentials are a small amount towards getting married and for legal costs to buy a house and for paying someone to sort my will out in the near future).
Any advice to a confused person, very welcome:)

PensionTech

At your age and salary, you don't have to be auto-enrolled, but the employer has to grant you entry to the scheme and pay employer contributions if you ask them to. (They're actually required by law to give you information about this so it's disappointing that they apparently haven't.) Worth at least the free employer money - and if you can put more in, great, particularly if they do salary sacrifice (so you save on National Insurance).

Because you're only just above the tax threshold, if you want to pay in more than the £1k or however much would take you below the Personal Allowance, you might be better off putting some of it in a private pension because you will get 20% relief on that automatically - whereas through the employer, depending on their arrangements, you *may* only get relieved directly on the tax you actually pay, meaning that you'd lose out on the extra relief below the Personal Allowance.

Starting a pension is definitely a good idea - your future self will thank you. I will leave it to others on here to recommend possible providers should you choose to go with a personal pension plan as well as/on top of your employer's scheme.

(Edit: just to give you a little bit more detail about your right to join the employer scheme. Because you're outside the age range but above the earnings threshold, you are what's called a "non-eligible jobholder" - silly name but there you go. Non-eligible jobholders have the right to "opt in", which means joining the scheme and getting employer contributions. So that you can see why I make this distinction: besides this category and the category you'll be in next year when you are old enough to be auto-enrolled, there is another category of worker covering people who are both outside the age range and below the earnings threshold. That third category is called "entitled workers" - just to make it nice and confusing. Those people are allowed to join the pension scheme and pay in their own money, but the employer doesn't have to pay in any money for them.)

bigadaj

Pensions are only really a wrapper, they form part of your financial life.

At your age and your earnings level then pension saving, whilst good, probably isn't a huge priority. Investigate what your employer will contribute into a pension and put in enough to maximise that.

Otherwise maximising savings through high interest current accounts and regular savers might be best, you can get tens of thousands in there and the first £1000 is tax free.

PensionTech

Pensions are only really a wrapper, they form part of your financial life.

At your age and your earnings level then pension saving, whilst good, probably isn't a huge priority. Investigate what your employer will contribute into a pension and put in enough to maximise that.

Otherwise maximising savings through high interest current accounts and regular savers might be best, you can get tens of thousands in there and the first £1000 is tax free.

I very much disagree. Pensions are not "just a wrapper" - they are a tax-advantaged wrapper. This makes them very attractive compared to conventional saving products. The downside is obviously that your money is locked up until age 55 (probably slightly later by the time the OP reaches that age) - but the OP seems to be satisfied with their immediate needs, house saving and marriage saving, so why shouldn't they start thinking about their future? The earlier you contribute to a pension, the better, as you benefit hugely from compound returns. And you have more time to ride out the market, meaning you can adopt a higher-risk strategy, which in the long term (hell, even in the medium-to-short term) should outperform high-interest current accounts.

There is of course the spectre of the LISA - which might be something that interests the OP, provided it doesn't disappear along with Osborne - but it's not a great retirement solution in the long-term.

bigadaj

PensionTech wrote: »

I very much disagree. Pensions are not "just a wrapper" - they are a tax-advantaged wrapper. This makes them very attractive compared to conventional saving products. The downside is obviously that your money is locked up until age 55 (probably slightly later by the time the OP reaches that age) - but the OP seems to be satisfied with their immediate needs, house saving and marriage saving, so why shouldn't they start thinking about their future? The earlier you contribute to a pension, the better, as you benefit hugely from compound returns. And you have more time to ride out the market, meaning you can adopt a higher-risk strategy, which in the long term (hell, even in the medium-to-short term) should outperform high-interest current accounts.

There is of course the spectre of the LISA - which might be something that interests the OP, provided it doesn't disappear along with Osborne - but it's not a great retirement solution in the long-term.

Fair enough our opinions will differ.

After considering and benefitting from any employer contributions then I can't get excited about tax relief on pensions for a 21 year old earning £12k. Money held either unwrapped with the £1k tax free allowance or within an isa, both of which are accessible if needs be, would be preferable to locking up money for 34 years, or probably quite a bit more given how the world would look in 2050.

AnotherJoe

bigadaj wrote: »

Fair enough our opinions will differ.

After considering and benefitting from any employer contributions then I can't get excited about tax relief on pensions for a 21 year old earning £12k. Money held either unwrapped with the £1k tax free allowance or within an isa, both of which are accessible if needs be, would be preferable to locking up money for 34 years, or probably quite a bit more given how the world would look in 2050.

^^^ all this.

carebear95

PensionTech wrote: »

At your age and salary, you don't have to be auto-enrolled, but the employer has to grant you entry to the scheme and pay employer contributions if you ask them to. (They're actually required by law to give you information about this so it's disappointing that they apparently haven't.) Worth at least the free employer money - and if you can put more in, great, particularly if they do salary sacrifice (so you save on National Insurance).

Because you're only just above the tax threshold, if you want to pay in more than the £1k or however much would take you below the Personal Allowance, you might be better off putting some of it in a private pension because you will get 20% relief on that automatically - whereas through the employer, depending on their arrangements, you *may* only get relieved directly on the tax you actually pay, meaning that you'd lose out on the extra relief below the Personal Allowance.

Starting a pension is definitely a good idea - your future self will thank you. I will leave it to others on here to recommend possible providers should you choose to go with a personal pension plan as well as/on top of your employer's scheme.

(Edit: just to give you a little bit more detail about your right to join the employer scheme. Because you're outside the age range but above the earnings threshold, you are what's called a "non-eligible jobholder" - silly name but there you go. Non-eligible jobholders have the right to "opt in", which means joining the scheme and getting employer contributions. So that you can see why I make this distinction: besides this category and the category you'll be in next year when you are old enough to be auto-enrolled, there is another category of worker covering people who are both outside the age range and below the earnings threshold. That third category is called "entitled workers" - just to make it nice and confusing. Those people are allowed to join the pension scheme and pay in their own money, but the employer doesn't have to pay in any money for them.)

Thank you for your reply, i certainly feel much less confused now:) I shall do further research into private pension options. Its currently apart from my will, the only thing i haven't financially planned for the future and i certainly realize that a state pension does not make for a comfortable retirement.

carebear95

bigadaj wrote: »

Pensions are only really a wrapper, they form part of your financial life.

At your age and your earnings level then pension saving, whilst good, probably isn't a huge priority. Investigate what your employer will contribute into a pension and put in enough to maximise that.

Otherwise maximising savings through high interest current accounts and regular savers might be best, you can get tens of thousands in there and the first £1000 is tax free.

Thank you for your advice:) I can see where you are coming from. I should have probably mentioned it in my original post when i referenced having a house deposit and money for a wedding saved; i have 15k strategically shared between a high interest current account, two regular savers and a help to buy isa. So unless i look at going with a second bank (i m unsure if i'd be breaking the t&cs of my current account to do so? and if a second current account could do my credit score any harm, i m not massively keen on getting one) , until Lisa's are available, i have all the savings products that are available to me.
With a good safety net, i m quite happy to lock up money in a pension or long term risk free investment option if its worth it financially.
It probably comes across a little strange to be worried about this at 21, but having had a parent pass in their mid 30's who had a private pension which i was then left, i d like to that situation to exist for my partner/children if that was to happen to me.

bigadaj

carebear95 wrote: »

Thank you for your advice:) I can see where you are coming from. I should have probably mentioned it in my original post when i referenced having a house deposit and money for a wedding saved; i have 15k strategically shared between a high interest current account, two regular savers and a help to buy isa. So unless i look at going with a second bank (i m unsure if i'd be breaking the t&cs of my current account to do so? and if a second current account could do my credit score any harm, i m not massively keen on getting one) , until Lisa's are available, i have all the savings products that are available to me.
With a good safety net, i m quite happy to lock up money in a pension or long term risk free investment option if its worth it financially.
It probably comes a little strange to be worried about this at 21, but having had a parent pass in their mid 30's who had a private pension which i was then left, i d like to that situation to exist for my partner/children if that was to happen to me.

That's fine, the one golden rule in finance is only do what you are happy with, and sometime security is better than any return for people.

It may be prudent to limit the number of accounts you have if you are submitting for a mortgage, in theory so long as you have no overdraft then current or savings account should make no difference but no one knows detailed bank credit analysis so it could be better to avoid.

You can have as many current accounts and regular savers as you want, subject to the bank accepting you. £50k in high interest current accounts is easily achievable, £130k for a couple, plus maybe £25k or more in regular savers. So there's plenty of capacity for savings if needs be.

For me the ability to access funds and liquidity is important, particularly for emergency savings but people sometimes like the idea of locking away sums to remove them from temptation, which a pension would achieve, it's just that 35 or 40 years is a long time.

carebear95

bigadaj wrote: »

That's fine, the one golden rule in finance is only do what you are happy with, and sometime security is better than any return for people.

It may be prudent to limit the number of accounts you have if you are submitting for a mortgage, in theory so long as you have no overdraft then current or savings account should make no difference but no one knows detailed bank credit analysis so it could be better to avoid.

You can have as many current accounts and regular savers as you want, subject to the bank accepting you. £50k in high interest current accounts is easily achievable, £130k for a couple, plus maybe £25k or more in regular savers. So there's plenty of capacity for savings if needs be.

For me the ability to access funds and liquidity is important, particularly for emergency savings but people sometimes like the idea of locking away sums to remove them from temptation, which a pension would achieve, it's just that 35 or 40 years is a long time.

Glad to hear that looking into more current accounts is a potentially option for future savings. I wouldn't say I ever succumb to temptation with wanting to make a big spend, so i dont feel i have to be locking anything away, but if i m not going to use it i just think why not lock it away in my mind.

I appreciate that 35 years is a long time, but as long as I've an emergency savings pot accessible to replace washing machines and stay fed and bills paid if i was to be made redundant then i dont really need more than a couple of thousand accessible really.

PensionTech

Fair enough our opinions will differ.

Agreed so in responding to the following, I am not in any way suggesting that your point of view is less valid than mine. However, just to explain my position...

After considering and benefitting from any employer contributions then I can't get excited about tax relief on pensions for a 21 year old earning £12k. Money held either unwrapped with the £1k tax free allowance or within an isa, both of which are accessible if needs be, would be preferable to locking up money for 34 years, or probably quite a bit more given how the world would look in 2050.

I can't get excited about 3% interest in a current account either. We're talking small fry in each case and current accounts are not a good option for long-term saving. I think pensions win out, but given my professional background, I accept that I am perhaps more enthusiastic about the benefits of pensions (and more wary of the dangers of not having one) than the average person. Whether accessing the money before age [whatever it is by that time] is attractive depends on your personal circumstances - my point being that the OP seems perfectly happy not to access it, in which case the better financial returns are on a pension. But as you say, flexibility does have its value.