Pension advice for a beginner (24 years old)

bp5678

Hi there,

If I'm honest I don't know too much about pensions. I'm 24 years old and even though retirement is a long way away I feel like I should be maximising my pension now.

I often hear people talk about paying the full/maximum pension. This is what's currently going into my NEST Retirement Date Fund pension:

Employer contributions: 3% of my earnings (£27k per annum)
My contributions: 5.0% of my earnings (£27k per annum)
Tax relief: Think this is 1% or maybe just a little more than 1%.

I have £1724.67 in total in my pension. Last month, my employer paid in £76.62.

Am I paying in a lot? Should I be paying in more/less? Should the company be paying in more/less?

There's also the opportunity cost. I.e if less is paid into my pension then I'd have more money coming into my current account after each payslip. With this added account I could put it into high interest places like a Marcus account with 1.5% interest.

My goal is to buy a £170k house at the end of this year. I'll have £30k saved for a deposit on a £27k salary.

Since I've been kind of oblivious to what is going on, I thought I'd ensure I'm getting the most out of my pension by either paying in more or paying in less and moving the 'extra' money I'd get to a high interest account and not touch it when it's there. Thanks

---

UPDATE:

Thanks everyone for your help (so far).

Based on the majority of the replies, I think for now I'm going to leave my contributions as they are to focus on saving for my first home. Once I've bought this (around the end of the year), I'll then try to up my contributions to at least 10% (maybe even 15%). I'll also look into changing from my default pension fund to perhaps Higher Risk or Sharia Funds pension fund schemes.

bostonerimus

Ideally you should be paying more into your pension, maybe 15% or 20%. You haven't mentioned what funds you own inside the pension, you need to understand how your pension money is invested.

bp5678

bostonerimus wrote: »

Ideally you should be paying more into your pension, maybe 15% or 20%. You haven't mentioned what funds you own inside the pension, you need to understand how your pension money is invested.

Thanks. I've just edited the title to include a bit more info. I'm not too sure exactly what you're asking but I hope the extra detail I've added to my original post helps with context.

kev2009

Does your company pay in different rates depending on what you contribute or do they just pay a fixed amount regardless of what you pay in?

As mentioned, I would at least be trying to pay in 10% yourself + the employer contribution.

Maybe best to work out your outgoings and see what is left, then pay in what you can, allowing you to also save some money for a emergency fund to cover unexpected things i.e job loss or large bills etc.

Also consider if you plan to retire at state pension age or if you want to retire sooner as will mean if sooner, you need to pay more in.

Kev

MallyGirl

bp5678 wrote: »

Hi there,


Am I paying in a lot? Should I be paying in more/less? Should the company be paying in more/less?

There's also the opportunity cost. I.e if less is paid into my pension then I'd have more money coming into my current account after each payslip. With this added account I could put it into high interest places like a Marcus account with 1.5% interest.

1.5% is not high interest - it's about half the rate of inflation. Money invested in funds (stocks and shares) will, over time, out perform this. Pension will be invested in funds/shares but it is up to you to see exactly what they have chosen. You are likely to be invested in the default fund - find out what that is, what other options there are, then take control of the future. I would be increasing your contribution to 10% if you can

Spreadsheetman

bp5678 wrote: »

Hi there,

If I'm honest I don't know too much about pensions. I'm 24 years old and even though retirement is a long way away I feel like I should be maximising my pension now.

I often hear people talk about paying the full/maximum pension. This is what's currently going into my NEST Retirement Date Fund pension:

Employer contributions: 3% of my earnings (£27k per annum)
My contributions: 5.0% of my earnings (£27k per annum)
Tax relief: Think this is 1% or maybe just a little more than 1%.

I have £1724.67 in total in my pension. Last month, my employer paid in £76.62.

Am I paying in a lot? Should I be paying in more/less? Should the company be paying in more/less?

There's also the opportunity cost. I.e if less is paid into my pension then I'd have more money coming into my current account after each payslip. With this added account I could put it into high interest places like a Marcus account with 1.5% interest.

Since I've been kind of oblivious to what is going on, I thought I'd ensure I'm getting the most out of my pension by either paying in more or paying in less and moving the 'extra' money I'd get to a high interest account and not touch it when it's there. Thanks

For a long tern investment savings accounts like Marcus are useless - they are losing against inflation every year and you would also be taxed on the interest if you had a significant sum saved.

The Nest target date funds for your age are mostly in shares (equities) which should do considerably better than inflation in the long term. Growth is also tax-free inside the pension wrapper.

Your employer is paying the minimum they can get away with (3% now) as are you (5%). I'd say you want to double your contribution as an absolute minimum - 10% plus 3% from your employer is a respectable start for your age. You will need to increase the proportion as time goes on, but getting started early is the most important thing.

hugheskevi

I'm 24 years old and even though retirement is a long way away I feel like I should be maximising my pension now.

Maximising and optimising are different things, and you probably want to be optimising.

I often hear people talk about paying the full/maximum pension.

Aside from those making full use of their Annual Allowance, the standard amount of which is £40,000 p/a, or contributing the higher of £3,600 or their salary, full/maximum doesn't mean anything.

Am I paying in a lot?

No, neither in absolute or percentage terms.

Should I be paying in more/less?

Depends on your wider financial strategy.

Should the company be paying in more/less?

Depends on the terms and conditions of employment, they appear compliant with statutory minimum levels of contribution.

With this added account I could put it into high interest places like a Marcus account with 1.5% interest.

1.5% may be the highest instant access saving account interest rate available, but it is in no way high interest, not even covering inflation.

Cash holdings are good for liquidity, but terrible for longer-term investment.

Pensions are great if one or more of the following applies:

• You are contributing to maximise an employer contribution, eg, via matched contributions
• Your employer offers salary sacrifice
• You are a higher/additional rate taxpayer
• You receive higher means-tested benefits as a result of the contributions

If none of the above applies, it will be better to invest in a stocks and shares ISA, and later contribute to a pension when one or more of the above does apply. That would be optimising pension contributions.

An alternative, but less efficient, approach is to identify a contribution rate based on your target at retirement (or a rule to approximate this) and make that contribution rate regardless of whether or not you are getting best value for them by exploiting one or more of the above features.

More widely, you need to consider your overall financial strategy and how pensions fit into that. The sort of things this covers are:

• Debt repayment
• Precautionary savings
• House purchase, including mortgage
• ISA savings, including stocks and shares ISA, LISA and help-to-buy ISA
• Pensions, including State pension, personal pensions and workplace pensions

Early in career, the main the thing to ensure is that you are taking full advantage of the employer contribution, eg, making the most of any matched contributions.

Spreadsheetman

hugheskevi wrote: »

......
Pensions are great if one or more of the following applies:
....

They are also out of reach until at least age 55 so there is no way to plunder the retirement savings however much temptation there is.

bostonerimus

bp5678 wrote: »

Thanks. I've just edited the title to include a bit more info. I'm not too sure exactly what you're asking but I hope the extra detail I've added to my original post helps with context.

Which "Target Date Fund" are you using? Do you understand what it invests in? You should investigate.

wjr4

I personally switched from a retirement date fund to their higher risk fund as I have at least 35 years until retirement. What are you short, medium and long term goals? Do you want to own a property? Do you have an emergency fund?

Patrol

Not 100% certain on the figures below but fairly sure the principle is correct.

As mentioned earlier 5% is the minimum you can pay in and is about £1350 a year on your salary. If you opted out you would get about £1100 extra net pay a year instead of the £1350 pension payment. You would also lose about £800 a year employer contributions.

So you're currently getting £2150 into your pension each year for a cost to you of £1100.

If you put that £1100 into a Marcus account it would grow by about 1.5% a year. Compare that to £2150 into a pension growing by whatever your selected fund(s) return.

Opting out sounds like a terrible idea on that basis.

If you can't afford extra pension payments now, stick to 5% and consider putting part of any pay rises, promotions or change in salary into the pension. e.g. if you get a 3% pay rise increase your pension by 1% or 2% so you get some pay benefit plus some pension benefit.