Advice for a 20 year old starting out.

wjr4

Agree with the comments above re. saving for a property purchase. Personally, I think he needs a healthy emergency fund, to save for a property (Help to Buy ISA/LISA), think about his income protection/life cover needs in the future & continue paying into the pension and getting the maximum employer contributions.

He is already paying quite a bit into his pension and he will not be able to access that for at least 35 years. I don't agree with the salary sacrifice comment though for his age purely because it reduces his salary for mortgage purposes.

He could be in a completely different situation in say 5-10 years time where he wants to start a family/move to a bigger property and that's where saving outside of a pension helps.

kidmugsy

I see no point in someone so young tying up his money inaccessibly in a pension except when (i) he's maximising his employer's contribution, or (ii) can use salary sacrifice. Otherwise he might as well keep the money in a more accessible place or, indeed, wait to see whether tax relief for basic rate taxpayers is increased in future.

A sensible place to save might be a LISA. He'd need to guess when he might want to buy a property and then choose between a Cash LISA and an S&S LISA. Perhaps you should explain to him the vast tax privileges that owner-occupiers get and why he should therefore expect to buy his own house by (say?) age 30 or so.

justme111

Well, the guy seems to have other savings on track and big issues as house purchases he is not going to forget a out anyway. What he suggests to put additionally into pension is not much so it is nit going to hurt and deteact from other objectives but it is going to give him satisfaction that at least one side of life is taken care of and does not need his attention for foreseeable future and shape the right attitude for the future.

Not_Me_Officer

Lokolo wrote: »

I obviously have no idea where in the country he is based, but on £18k he is looking at only being able to afford a £80k mortgage.

I would agree with you about not paying in any more to a pension and instead saving for a property
However i was on £18k at the time i bought mine for £157k and i got a £102k mortgage at 3.19% fixed for 5 years which was quite a decent rate back in 2013. Not sure what the rates are now. I'll worry about that next year.

OldBeanz

http://www.telegraph.co.uk/finance/personalfinance/investing/10742396/When-saving-for-10-years-pays-more-than-saving-for-40.html
http://www.dailymail.co.uk/money/howmoneyworks/article-3440945/Why-bother-saving-pension-s-advice-gave-sister.html

steampowered

There is very little point starting a SIPP if he does not have a sizeable pension pot. It will add additional fees and create unnecessary complexity to his financial arrangements. Not worth doing before he has built up a reasonable pot.

If he wants to contribute more to his pension, he should simply increase his contributions into the company scheme.

As he is only a basic rate taxpayer, I am not sure that saving everything into a pension is the best idea. Perhaps putting money into an ISA or LISA would be a better idea. He won't get so much tax relief, but access to money is pretty important if he needs to for example fund a deposit for a house. Getting the tax relief will become more important if he becomes a higher rate taxpayer.

He has seen the way the state pension is and wants to retire before this (as I am but my case is different of course totally to his) probably in his mid-late 50s so a 35 year time scale!

I put his figures into the pension calculator on ttps://www.moneyadviceservice.org.uk - based on £170 a month personal contribution and £170 a month matching employer contribution.

This came out as a £7,000 a year pension if taken at age 55. This is not really enough to live on. Though I suppose he could always increase his pension contributions as his salary increases.

enthusiasticsaver

If he only has a small amount available I don't think it is worth opening a sipp as the charges would be distortionately high. Does he have a DC pension with his employer or DB? My husbands company scheme had several different levels (saver and booster) and your sons' company may have the same or the facility perhaps to do avcs.

He is young and saving from a young age is a great thing to do as it gives him maximum opportunity to benefit from long term growth. However it will be inaccessible for many years so in addition to paying into a pension it is worth him saving for other things he may want (ie like a property) either by doing a LISA or just using regular savers.

justme111

What are those disproportionately high charges ? Cavendishonline seems to offer SIPP at 0.25% or do I liss anything ?

Not_Me_Officer

* don't go in to a SIPP unless you have a decent wedge to begin with.

That seems to be the advice based on the past few responses.

Where do you suggest saving that wedge if they're wanting a pension format? I'm assuming you would suggest against it & go to a S&S ISA for example and then when it's a 'decent amount' (whatever that means) withdraw from the ISA & put in the SIPP?

crv1963

Thank you all for your replies.


He is going to keep an eye on his pension on-line and if his employer offers to put a further increase in their contributions ie more matching money he'll up his, currently he pays 8% and they pay their current maximum of 6%.


He's going to open an L-ISA initially cash so he can see if he can manage to add to this monthly as well as a HTB-ISA he currently has, he thinks that he is putting the equivalent of what it would cost to live with his mate aside monthly- currently saving this with his mother.


His rainy day fund currently stands at two months take home pay which I don't think is too bad considering he's only been working for about 18 months.


He has the advantage that after getting drunk once he hated the hangover so stops drinking when out after a couple of pints and can't abide the smell of cigarettes so no expensive daily spend!


He found the articles about compound interest useful and is going to read more about best savings/ pensions etc. He works in accounts and his work involves a lot of cost benefit analysis for production lines and company costings as the youngest there I think some of his colleagues offer him some wisdom around personal finance and hence his already increasing contributions and saving/ testing affordability of independent living by saving the cost with his mother. As well as working, working towards accountancy qualifications he does maintain a work life balance as he's always telling me off for not doing so properly myself!


Thank you all again and I've suggested he looks at this site for advice and inspiration.