Newbie confused by the basics!

findingmyownway

Evening all,

I have never had a pension.

I don't have a clue where to start. I am 24 years old and have just started a new job. There is no company pension but they provide me an appointment with an advisor.

Does anyone know what he is likely to advise? I guess i don't have to do what he says but if i don't know any better then how can a judge if what he is recommeding is suitable?

What kind of salary percentage is normal to put into a pension at my age? I currently have no dependents.

And what exactly happens to your money? Is it just like a glorified savings account? What about everything you hear about pensions going bust? Is it true?

Sorry for all the stupid questions, i really am a newbie when it comes to this area of money saving!!!

dunstonh

Does anyone know what he is likely to advise?

Impossiblet to tell. Is the adviser independent or tied?

Even if independent, what he/she will advise will depend largely on what information you give him/her.

What kind of salary percentage is normal to put into a pension at my age? I currently have no dependents.

No pensions already and 24 means you should be looking at around 12% gross. However, it really depends on how much you want in retirement and what age you want to retire. Your state retirement age is 68. If you dont want to go on that long, you may need to pay more.

And what exactly happens to your money? Is it just like a glorified savings account?

Its a long term monthly contribution into investments. You choose (or are recommended) the investments to use.

What about everything you hear about pensions going bust? Is it true?

Personal pensions dont go bust. Problem is media coverage in this area has been really poor.

CLAPTON

At 24 your priorities might be something like this

a. clear debts (except maybe student loans)
b. build up a emergency and living fund etc so you never need to borrow and pay interest (except for mortgage) i.e. no car loans no holidays on credit etc
c. start house deposit fund
d. think about pension

pension basics

- pension payments come out of gross income so you get tax relief on your payments at your highest tax level.
- often (but not in your case) your employer contributes

the above two combined make paying towards a pension a very good deal as the money in your pension pot grows very quickly in relation to your own contribution.


But:
once you contribute to a pension you can't withdraw any cash until your are 55.
at that age you can get 25% tax free and take a pension if you wish. The pension income will be taxed.



How much to contribute: difficult one but to build a worthwhile fund think in terms of 10% of your salary

EdInvestor

Pensions are a much better deal when you have free money from your employer and are a higher rate taxpayer, ie when you are older. These days you can put large lump sums into pension much later in life, and it is often better for younger people to save in an ISA ( unlike the pension this tax allowance is 'use it or lose it' on an annual basis.)

The stocks and shares ISA has the same investment options as a pension but is much more flexible - you can withdraw the capital and income tax free any time. Remember that your NI contributions are already funding 2 state pensions.

Ideally when you eventually retire you will have income from both pensions and ISAs, the one taxed, the other not.

dunstonh

These days you can put large lump sums into pension much later in life, and it is often better for younger people to save in an ISA ( unlike the pension this tax allowance is 'use it or lose it' on an annual basis.)

There is a risk attached to that which does not guarantee that can take place. Accept the risk, and it could be worthwhile. If you are the type of person that doesnt get advice and doesnt really monitor things, then the risk is probably too high.

EdInvestor

dunstonh wrote: »

There is a risk attached to that which does not guarantee that can take place. Accept the risk, and it could be worthwhile. If you are the type of person that doesnt get advice and doesnt really monitor things, then the risk is probably too high.

Eh?

findingmyownway

Thanks for the tips everyone.

CLAPTON, your guestimate of my priorities is pretty accurate. I really want to pay of existing debts (small CC balance and car loan) and get some savings behind me so i don't need to get credit again. I already have a house & mortgage so thats that one ticked off!

10% of my gross income would be £250/month (salary£30K) which seems like a hell of a lot! I wouldn't be comfortable investing so much into something i can't touch for so many years. Maybe a combination of a smaller contribution to take advantage of the tax relief (i'm not quite in the 40%K tax bracket but not far off) and ISAs will be the best thing to do for now untl i get other debts paid off etc.

dunstonh

EdInvestor wrote: »

Eh?

You mean you are telling people on here what to do without knowing the risks?

jamesd

findingmyownway, if you think that you will be in the higher rate tax bracket soon then it's probably worth delaying pension contributions until you are, so that you can get 20% basic rate tax relief added to the pension contributions and reclaim another 20% for higher rate tax relief with your tax return.

Your mortgage is probably at an interest rate lower than your savings rate in cash ISAs or lower return than investments in a pension or stocks and shares ISA would be so overpaying the mortgage is probablly not the best of ideas if you are financially stable.

olly300

findingmyownway is your employer definitely not putting any contributions into your pension?

findingmyownway

olly300 wrote: »

findingmyownway is your employer definitely not putting any contributions into your pension?

definatley not, why?


JamesD - i didn't follow that tax bit. So if i was earning £32K (i think thats the cut off for 40% tax) i'd have to claim something back? I will prob go over that threshold next March.