where to put my money

cinek

I need some advice about where to put my money so I hopefully have enough for retirement. I'm 28 and am able to save around 2k a month. Currently own the property I live in and the mortgage is at around 85%. I don't have any other loans, credit cards, dependents etc.

I have some peanuts invested in a few vanguard funds, just over 4k. I also have around 30k in a cash isa which no surprise isn't making much money.

My initial plan was to stay where I am for another 5 years or so and save enough (in a cash isa) to buy a 2nd property and move out, renting out my current place but am not sure this is the best move considering the high stamp duty for a 2nd property and after reading about the tenants from hell. Wasn't really looking to make much money from renting it out, just as long as it was getting paid off.

I don't have a pension and an not convinced getting one is the best move as the retirement age keeps going up. I'd like to retire when I want/can not when someone tells me I can.

bowlhead99

cinek wrote: »

I don't have a pension and an not convinced getting one is the best move as the retirement age keeps going up. I'd like to retire when I want/can not when someone tells me I can.

Perhaps with £24k of net pay to save every year after paying your 85% mortgage and bills and living your life, you have a high income, and are already a high rate taxpayer.

The reward for locking your money away in a pension until your late 50s is that you can avoid paying 40% tax on your salary and draw it out later in life when you no longer have a job. A quarter of it will be entirely tax free and the other three quarters will be only be taxed at your marginal rate (eg annual personal allowance at 0%, basic rate at 20% etc) so that most or all of it will escape being taxed at the highest rate you might currently be paying.

Also, you don't mention whether your are employed or self-employed. If you are employed, from April this year your employer must offer an auto-enrollment pension scheme in which they have to put at least 3% of your salary out of their own pocket into your pension scheme alongside your contributions (8% minimum between you and the employer). Many employers offer more than the bare minimum and will match or part-match your contributions to an even higher level.

So for example, in the 'worst' company schemes where they only offer 3%: you put in 5% of your salary, but avoid paying tax (so it only really costs you 3-4% of your salary depending on your tax rate) and then they put in another 3% of your salary, so in total you have 8% of your salary in pension investments and it has only cost you 3-4% of your salary. You have literally doubled your money overnight thanks to your employer giving you free money that he wouldn't give you if you didn't join the scheme, and the taxman letting you off tax that he would charge you if you didn't join the scheme.

And you are 'not convinced' that it would be a good thing to get a pension because we expect the age at which you can draw it will go up from the current age 55 to some higher number later? Well it's nice to have flexibility, but it's nicer to have FREE MONEY that you don't have to earn.

elephantrosie

bowlhead99 wrote: »

Perhaps with £24k of net pay to save every year after paying your 85% mortgage and bills and living your life, you have a high income, and are already a high rate taxpayer.

The reward for locking your money away in a pension until your late 50s is that you can avoid paying 40% tax on your salary and draw it out later in life when you no longer have a job. A quarter of it will be entirely tax free and the other three quarters will be only be taxed at your marginal rate (eg annual personal allowance at 0%, basic rate at 20% etc) so that most or all of it will escape being taxed at the highest rate you might currently be paying.

Also, you don't mention whether your are employed or self-employed. If you are employed, from April this year your employer must offer an auto-enrollment pension scheme in which they have to put at least 3% of your salary out of their own pocket into your pension scheme alongside your contributions (8% minimum between you and the employer). Many employers offer more than the bare minimum and will match or part-match your contributions to an even higher level.

So for example, in the 'worst' company schemes where they only offer 3%: you put in 5% of your salary, but avoid paying tax (so it only really costs you 3-4% of your salary depending on your tax rate) and then they put in another 3% of your salary, so in total you have 8% of your salary in pension investments and it has only cost you 3-4% of your salary. You have literally doubled your money overnight thanks to your employer giving you free money that he wouldn't give you if you didn't join the scheme, and the taxman letting you off tax that he would charge you if you didn't join the scheme.

And you are 'not convinced' that it would be a good thing to get a pension because we expect the age at which you can draw it will go up from the current age 55 to some higher number later? Well it's nice to have flexibility, but it's nicer to have FREE MONEY that you don't have to earn.

Does this work for someone who want to retire early, say 45?

[Deleted User]

elephantrosie wrote: »

Does this work for someone who want to retire early, say 45?

Yes, unless they're also planning to die before retirement age.

xylophone

Are you employed? Does your employer provide a pension scheme?

cinek

thanks for the reply, I am in full time employment and am a high rate taxpayer. Looking at the pension scheme, I need to contribute a min of 5% and my employer will contribute further 7%.

Tax breaks aside, I'd be more than happy with a pension IF I knew I can get money out of it when I'm 57 but I'm sure this will increase before I retire. I can't remember where but I remember reading a while ago that the age requirement might even be 70 by the time I can retire & access my money

ColdIron

Not contributing to a pension is nuts and you will kick yourself when you are older. If you are a higher rate tax payer the case for a pension is compelling due to the tax relief. You say you want to retire when you want, how do you propose doing this without a pension?

bowlhead99

cinek wrote: »

thanks for the reply, I am in full time employment and am a high rate taxpayer. Looking at the pension scheme, I need to contribute a min of 5% and my employer will contribute further 7%

So, let's say you are on £60k which is £5k a month.

If you join the scheme, each month you put in £250 which only costs you £150 net of tax and the employer puts in £350. You have a £600 pension asset for net cost of £150. Not bad. And you are seriously 'not convinced' it is a good thing to do?

I would join the scheme for whatever amount of money would get you as much free cash from the employer as they are willing to put in. In the example above on a £60k salary, that leaves you with a £7200 pension asset after a year, but only uses up £3k of gross salary, £1.8k of net salary. However even after that £3k gross contribution you would still be paying tax on £57k which is £7k into the higher rate tax band (which starts at £50k). So I would make extra pension contributions (either to the employer scheme or a separate personal scheme) for another £7k gross (£4.2k net).

After doing that, you have got all the free employer money possible and all the higher rate tax relief possible, for a total amount of (£7200+£7000 = £14200) of pension investments, and it has only used up (£1800+4200 = £6000) of your available net pay.

As you reckon you have £2k of net pay available to put into savings a month (£24k a year) it seems to be a no-brainer to harness all that potential value using a quarter of your net pay. You will still have £1.5k a month (£18k a year) to put into something else.

If the goal is to build up another deposit for a new property, it makes sense for most of the money to be saved in cash rather than invested - but you are talking about retiring 'when you want' prior to pension age, so you will need some long term investments too. If you have a spare £18k a year, perhaps do £8k into an S&S ISA in investment funds towards your future retirement or other life goals (e.g. future family, kids?), and £10k in the best paying cash or cash ISA towards your next property deposit or simply to upgrade your current home.

cinek wrote: »

Tax breaks aside, I'd be more than happy with a pension IF I knew I can get money out of it when I'm 57 but I'm sure this will increase before I retire. I can't remember where but I remember reading a while ago that the age requirement might even be 70 by the time I can retire & access my money

By next year everyone will get state pension at 66 and that is currently scheduled to rise to 67 by 2028. So by the time you get there, it might be 70 before you can get the *state* pension.

However, private pensions are different and currently can be accessed at 55 (not 65 or 66). A previous government (conservative / liberal coalition) said they would act on a recommendation to have the private pension age go up to track 10 years below state pension age. So if your state pension age was 68 or 69 or 70, your private pension access age would be 58 or 59 or 60. Now the conservatives are in power on their own, they have not actually pushed that through and it is still currently stuck at 55. But it's probably smart to assume it will come through eventually and it won't be stuck at 55 forever.

Still, nobody is thinking that someone of your age will need to wait to 70 to access his private pension which current regulations allow people to access at 55.

Zanderman

cinek wrote: »

Tax breaks aside, I'd be more than happy with a pension IF I knew I can get money out of it when I'm 57 but I'm sure this will increase before I retire. I can't remember where but I remember reading a while ago that the age requirement might even be 70 by the time I can retire & access my money

As others have suggested you may be mixing up predictions about state pension age with private/employer pension age. You need to understand the issues rather more than you seem to at present!

And, as others have pointed out, you get tax breaks with pension contributions - and as you have money to put aside now you should put some into pension - more than your employer scheme requires, possibly into another scheme as well. All of which will have tax breaks.

Believe me, you won't enjoy retirement, whatever age it is, if you don't prepare now when you can afford it.

You would be, as some others have said, nuts not to contribution to a pension..

cloud_dog

cinek wrote: »

thanks for the reply, I am in full time employment and am a high rate taxpayer. Looking at the pension scheme, I need to contribute a min of 5% and my employer will contribute further 7%.

Tax breaks aside, I'd be more than happy with a pension IF I knew I can get money out of it when I'm 57 but I'm sure this will increase before I retire. I can't remember where but I remember reading a while ago that the age requirement might even be 70 by the time I can retire & access my money

Do you know if your company operates salary sacrifice within their payroll? If they do then you will save an additional 2% in reduced NI. Additionally, some nice companies will give you some/ all of their NI savings (mine doesn't).

Being a HRT payer making pension contributions no brainer, a no brainer. We all want flexibility so build this in to your plans, i.e. £X amount in to a ISA and £X in to pension. You might also want to consider making payments in to a LISA, which will recieve a bonus of 25% from HMRC. I wouldn't usually suggest this for a HRT payer but you may want to consider it as an option. Please note that currently you cannot access the LISA until age 60 (unless buying a property which is not relevant in your case), which is why contributing to a pension for a HRT payer is the best option.

cinek

thanks guys. Looks like I need to revisit the pension option