Staff Stakeholder Pension Scheme

edchalk

Hi,

I've recently started working for a bank and i'm trying to work out if their pension is worthwhile. I can contribute anything from 2-8% of my basic salary and this will be matched by them for as long as I continue to work there. Am i right in thinking that my contributions should also be increased by basic rate income tax ?

I suppose my real dilemma is whether or not I can put this money to better use elsewhere. I'm 25 and I currently make overpayments on my buy-to-let interest only mortgage whenever I can afford it. My hope is to clear all the capital outstanding on this property within the next 10 years, thus providing me with a constant source of income for later life (roughly £575 pcm)

Would it make sense in my position to hold off the pensiion contributions till the house is fully paid off & then begin my pension at 35 or will this be too late ?

any advice much appreciated.

I was also wondering what would happen to a pension such as this if I decided to switch employers ?

EdInvestor

edchalk wrote: »

I've recently started working for a bank and i'm trying to work out if their pension is worthwhile. I can contribute anything from 2-8% of my basic salary and this will be matched by them

So, free money. Don;t turn that down.

Am i right in thinking that my contributions should also be increased by basic rate income tax ?

Yes, or higher rate if you pay it.Bear in mind that you do pay tax on the pension in retirement, so that only 25% of it (the lump sum) is actually tax free.

Would it make sense in my position to hold off the pensiion contributions till the house is fully paid off & then begin my pension at 35 or will this be too late ?

No, because of the free money from the employer.(Otherwise the BTL plan would be a good strategy IMHO).

I was also wondering what would happen to a pension such as this if I decided to switch employers ?

Depends what type it is.If a final salary, it will be increased to match inflation until you retire.If a money purchase it will remain invested. Normally you can move m/c pensions into a personal pension or SIPP if you want to take more direct control over the investment of the fund after you leave the job.

dunstonh

I suppose my real dilemma is whether or not I can put this money to better use elsewhere.

You put in 8% (6.24% in reality), they put in 8%. You get tax free growth.

If your annual salary was £15,000, then 16% into the pension is £2400. However, that has only cost you £936. Any alternative would have to grow by nearly 250% just to make up that difference let alone show a profit.

I'm 25 and I currently make overpayments on my buy-to-let interest only mortgage whenever I can afford it.

Why? That just increases your tax bill and can be very inefficient.

thus providing me with a constant source of income for later life (roughly £575 pcm)

A taxable income. Plus the property will be subject to CGT upon disposal.

Would it make sense in my position to hold off the pensiion contributions till the house is fully paid off & then begin my pension at 35 or will this be too late ?

Far better off getting rid of the property and paying the maximum matched into the pension. That is the better financial option if you have to make a choice. Ideally keep both but do remember that the property is subject to income tax on the rental income and capital gains tax on the property value when you sell.

I was also wondering what would happen to a pension such as this if I decided to switch employers ?

It remains invested where you want it or you move it to where you want it.

Yes, or higher rate if you pay it.Bear in mind that you do pay tax on the pension in retirement, so that only 25% of it (the lump sum) is actually tax free.

Doesnt matter if it has tax on it. The rental income does as well.

edchalk

Thanks for all the advice - I think i'll start with a 5% contribution for now & then and see how it goes.

I must admit it seems a bit strange resisting the urge to pay off my mortgage as soon as possible, surely by making mortgage overpayments I shall be reducing my interest liability should interest rates increase ? I certainly do not want to sell the preperty as it has turned out to be quite profitable even after tax. Would it not be better to clear this debt now rather than leave it in the hands of interest rates which are out of my control ?

Thanks again for all the help

dunstonh

I think i'll start with a 5% contribution for now & then and see how it goes.

Then you are wasting money. You should stop overpaying the buy to let and pay the 8% into the pension.

I must admit it seems a bit strange resisting the urge to pay off my mortgage as soon as possible, surely by making mortgage overpayments I shall be reducing my interest liability should interest rates increase ?

But then you increase the tax on the property rental income and you end up realising the rental yield on the property is probably less than 5% and you can get better on a savings account with no risk. With tax at 22% currently, in effect, a 6% mortgage is only costing you 4.68% in real terms. So, can you beat 4.68% on alternatives? yes you can and that is where your money should be going.

Would it not be better to clear this debt now rather than leave it in the hands of interest rates which are out of my control ?

No. You should have an emergency fund to cover that (ideally 6 months expenditure and no rental income) and maximise the pension. Up to the 8% mark, the pension will wipe the floor with the property. Its far more profitable than the property.

Also, dont get to sentimental about returns made in the past. Good investments can go bad. Look at future potential. Well you sell the property you are going to pay 18% capital gains tax on the gains. You are paying income tax on the rent. Look at the net positions and look at the future. Are the next 8 years going to be like the last 8 years for property? Almost certainly not.

EdInvestor

It's usually not sensible to pay off a BTL mortgage as you can claim the interest as an expense against the taxable rental income.However it depends on what other expenses you are claiming and how much the rental income is, plus your other taxable income.So the optimal mortgage scenario will differ from landlord to landlord.

The big downside of any pension of course is that you can never access 75% of the capital , unlike the BTL.

edchalk

thanks - will maximise the pension & freeze the mortgage then

dunstonh

The big downside of any pension of course is that you can never access 75% of the capital , unlike the BTL.

But when 61% of the pension is paid for by tax relief and employer contribution and you get 25% back at the end then it means that your retirement income has only cost you 14% of the amount used to purchase the income.

Nothing can beat that. Doesnt matter what negatives you try to put on it. The buy to let couldnt come close.

EdInvestor

dunstonh wrote: »

But when 61% of the pension is paid for by tax relief and employer contribution

The pension income is taxable in retirement, it is not tax free.

and you get 25% back at the end

This is the only tax free bit, and the only bit of the capital you can access.

I agree that when there is free money from an employer the balance tips to the pension, as I've said above.But for a basic rate taxpayer with no employer conts, IMHO investing outside the pension is a better option.

The person who hits the jackpot is the higher rate taxpayer with employer contributions.In this case the pension is a no-brainer.

dunstonh

The pension income is taxable in retirement, it is not tax free.

Never said the income was tax free. The pension itself has tax relief on the personal contributions and tax free growth.

In this case, it is total no brainer. The OP is going to get a retirement fund for which he/she has only paid 14% of the final value (ignoring growth as alternatives would get growth as well).

Any alternative would have to be 100% self funded and there is no way to get it back.

But for a basic rate taxpayer with no employer conts, IMHO investing outside the pension is a better option.

I refer you to the pensions vs ISA thread which lists the occassions when it is. Although you know what the main one is and thats getting the first £10k of income (in todays terms) provided by pensions (as in all pensions) as the first 10k of income is tax free and the tax relief is then still beneficial.

Also, for income provision only (ignoring capital provision) the pension still pays the most income.

EdInvestor

dunstonh wrote: »

Never said the income was tax free. The pension itself...

Weasel words: on another thread you say people should somehow know without being told that a "pension" means an income : here you say they are two totally different things.

the main one is getting the first £10k of income (in todays terms) provided by pensions (as in all pensions) as the first 10k of income is tax free and the tax relief is then still beneficial.

Most people will have at least half that allowance taken up by the state pension: but the other half could just as easily be used to cover the rental income from a BTL, which would then also be tax free.