Starting a pension

timberford

I am 26, earning £30,500 gross, and I have no pension (or savings - buying a house last year saw to that). I know I should be putting money away, however, I have no idea where to start.

My employer offers a basic stakeholder pension, but no contribution if I pay in.

Where would be a good place to invest my money and how much should I realistically be paying at a minimum?

Any information would be greatly appreciated.
Thanks,
Paul.

EdInvestor

Since you have no employer contribution and are on basic rate tax, it would be better to restock your savings via the ISA at present. Don't forget you are contributing compulsorily to the two state pensions via NI, you may like to check out how much you are likely to get in due course from this source: https://www.thepensionservice.gov.uk

Pensions are great if you have free money from the company and pay higher rate tax., but before then, better to use the cash ISA initially for savings and then the stocks and shares ISA for investments. This money is all tax free and accessible, unlike the pension.The ISA money can be put into a pension later if appropriate but you can't do it the other way round.

Keep all options open at this stage.

Dithering_Dad

EdInvestor wrote: »

Since you have no employer contribution and are on basic rate tax, it would be better to restock your savings via the ISA at present. Don't forget you are contributing compulsorily to the two state pensions via NI, you may like to check out how much you are likely to get in due course from this source: www.thepensionservice.gov.uk

Pensions are great if you have free money from the company and pay higher rate tax., but before then, better to use the cash ISA initially for savings and then the stocks and shares ISA for investments. This money is all tax free and accessible, unlike the pension.The ISA money can be put into a pension later if appropriate but you can't do it the other way round.

Keep all options open at this stage.

Tsk, even after all we discussed recently, you're still advising people not to start a pension. Shame on you EdInvestor.

To the OP, I would say that if you put your retirement income soley in an ISA then you will possibly end up just relying on the state pensions because with the first financial emergency you come up against, or with the next house purchase you will dip into the ISA and spend your retirement money.

Pensions on the other hand cannot be touched (even during bankruptcy) until you reach 55 and are not used to means-test benefits (unlike ISA savings).

Just to put EdInvestor's comments into perspective, she has a Final Salary Pension and two Personal Pensions as well as ISA savings. She advised you to do something she would not do herself - namely put all of your eggs into 1 basket. It's usually a good idea to check if the advisor follows their own advice before you act upon it....

jamesd

timberford, please read ISAs v Pensions: The Official Retirement Debate for an extensive discussion of the relative merits of pensions and stocks and shares ISAs for retirement investing.

Dithering Dad, you've correctly outlined the means tested benefit risk of losing the ISA pot but EdInvestor has a reasonable view at the moment. timberford is on over 30k at 26 and therefore seems quite likely to be a higher rate tax payer in a few years. For someone willing to take the risk of being on means tested benefits that does currently favour putting stocks and shares ISA investing first and deferring much of the pension side until higher rate tax is being paid.

It is prudent to do a mixture of the two to provide some protection against that means tested benefit case but with no employer contribution the gain on the pension side is quite low and it's reasonable to target just say 5k worth of pension income for now.

This can all change to favour pensions when there's an employer matching contributions, if salary sacrifice is available or if higher rate tax is being paid.

I've ended up doing pretty much what I wrote here: no pension contributions, maximum ISA contribution; then making high pension contributions and also continuing the maximum ISA contributions when higher rate, employer contributions and salary sacrifice apply.

The most important point is to start investing, not just using savings accounts, whether it's the pension or the ISA tax wrapper being used.

For someone on a lower income or same income at a higher age you'd be more right than you seem to be for this specific case - comes down to the specifics of the person asking.

timberford

Thanks for the information from you all, I really appreciate it.

I did have a read through the pensions v ISA debate and came away thinking that an ISA would be a good option given my employer doesn't offer any contribution to a pension. But it doesn't appear to be clear cut.

JamesD when you say "it's reasonable to target just say 5k worth of pension income for now" are you saying I need to be saving £417 per month? That would be a stretch I have to say...

I'm not sure I agree with the argument against ISA's because you can dip into them. If an emergency should arise then I would need to get the money from somewhere and if it's not from an ISA, then surely borrowing from the bank would be more expensive?

Can someone point me in the direction of what kind of 'means-tested benefits' I could miss out on by having a large savings?

Thanks again.

dunstonh

I'm not sure I agree with the argument against ISA's because you can dip into them. If an emergency should arise then I would need to get the money from somewhere and if it's not from an ISA, then surely borrowing from the bank would be more expensive?

You should have savings to cover the emergency. Some people just dont have the will power to not dip into the ISAs. Plus, the state will also make you dip into the ISAs as well if its a benefits issue whereas the pension doesnt with most benefits.

JamesD when you say "it's reasonable to target just say 5k worth of pension income for now" are you saying I need to be saving £417 per month? That would be a stretch I have to say...

He means £5000 a year income after state retirement age. (age 68 in your case). In real terms you more or less have a £10,000 a year allowance to earn tax free. If your basic state pension eats up around £5000 then then leaves you £5000 to earn tax free. The pension is the option that gives the most for the £5000 income. It will significantly beat the ISA as you get tax relief on the contributions going in and no tax to pay on the income coming out. The ISA would have no tax to pay coming out by no tax relief going in.

This is why a mix of pension and ISA is best rather than one or the other exclusively. Investment returns have nothing to do with the issue as the same investments are available in pensions as they are in ISAs.

EdInvestor

Dithering_Dad wrote: »

To the OP, I would say that if you put your retirement income soley in an ISA then you will possibly end up just relying on the state pensions because with the first financial emergency you come up against, or with the next house purchase you will dip into the ISA and spend your retirement money.

You assume everyone lacks self discipline, Dithering Dad.It aint necessarily so.Some of us are a bit more adult.The ISA is an annual "use it or lose it" tax allowance, whereas you can put up to an entire year's salary into a pension at any time.If you pick pension over ISA you close off a valuable savings and investment option and relinquish control of your capital forever.Why close off options if you don't need to?

Just to put EdInvestor's comments into perspective, she has a Final Salary Pension and two Personal Pensions as well as ISA savings.

You'll find this is the case with most people from a professional background over a certain age, as joining pension schemes was a compulsory condition of employment up till 1988, you had no choice.

Dithering_Dad

EdInvestor wrote: »

You assume everyone lacks self discipline, Dithering Dad.It aint necessarily so.Some of us are a bit more adult.

Having seen many posts on the Pensions board from people asking "How can I get money out of my pension? I want to purchase a xxxxxxxx*", I am 'adult' enough to realise that not everyone is good with their finances.

I am also 'adult' enough to know that bad things happen to good people. When redundancy/long term sickness/etc. strikes and the mortgage provider, credit card companies and other creditors start knocking on the door, people will use (or be forced by the benefit's office, to use) their ISA money to alleviate a temporary financial problem - possibly creating a permanent financial problem later in life. Many people will have taken decades to build their pensions and could take just months to demolish them. They may then not have time to rebuild their pensions and certainly, while you may be able to put 100% of your earnings into a pension, very few other people could. I think you should spend a little time in the DFW board with real people - you seem to have a skewed view of people's finances.

*please insert "holiday home", "Buy to let", "Larger family home", "yatch", "Nigerian investment opportunity" as required.

Dithering_Dad

EdInvestor wrote: »

If you pick pension over ISA you close off a valuable savings and investment option and relinquish control of your capital forever.Why close off options if you don't need to?

Ditto if you choose ISAs over pensions. Not everyone has your 'professional' background and so have to try and make the most of the meagre amounts they can put by for their old age. By consistently advising people to use ISAs instead of pensions (regardless of their background or circumstances), you're losing them an additional 20% of pension savings and putting their retirement money at risk if a financial 'bump' does appear in the road.

Those of us who have a decent amount of disposible income can afford to pay into both pensions and ISAs and the ideal would be to have enough state and personal pension pots to fill the £10k annual tax free allowance, with the rest of the money coming from ISA investments. If we get a long-term illness then we may lose our ISA savings, but at least we have the pension fallback.

Those people who don't have a decent amount of disposible income have to choose between a pension or an ISA and even you must admit that if they will struggle to reach the national average of a 40k pension pot, then they're better off paying into a pension because it's tax free on the way in and tax free on the way out.

The trouble with having plans like 'I'll save up for 10 years in an ISA and then when my pay takes me over the 40% bracket, I'll start paying into a pension" is that life sometimes gets in the way and you may reach year 8 and get made redundant or get a long-term illness. Suddenly the plan falls apart, the government says "wow, look at all your savings - we can't help you, my lad, you're too well off. Come back once it's less than 6k". They won't accept "but it's my retirement money!!" and they also won;t allow you to shove it all suddenly into a pension because that's voluntary deprivation of assets to gain benefits....

EdInvestor

Dithering_Dad wrote: »

I am also 'adult' enough to know that bad things happen to good people.

Indeed so.It's startlingly common for people to enter involuntary early retirement in their 50s for instance, with no real chance of getting another job, and unable (without huge penalties) to access their company pensions.State pensions are a long way off of course.This is just one example of when an investment ISA can come in very handy to bridge the gap.

UK pensions are too inflexible and rigid, they don't enable people to deal with the complexities of modern life.That's why many people are deserting them in favour of other kinds of investing.

Dithering_Dad

EdInvestor wrote: »

Indeed so.It's startlingly common for people to enter involuntary early retirement in their 50s for instance, with no real chance of getting another job, and unable (without huge penalties) to access their company pensions.State pensions are a long way off of course.This is just one example of when an investment ISA can come in very handy to bridge the gap.

UK pensions are too inflexible and rigid, they don't enable people to deal with the complexities of modern life.That's why many people are deserting them in favour of other kinds of investing.

Surely the point is that if one can't get a job when we're in our late 50's and early 60's then that's where state benefits (that we've paid for all of our working lives) then come to our aid, except if you have more than 6k in saving. The alternative is to use up all of the ISA savings while you're in your 50's and early 60's and then have nothing but the state stipend when you reach 'normal' retirement age?

I can provide a real-life example of this with my own father. He had a normal working-class lifestyle working in various blue collar manual jobs. He always contributed to a personal pension, not having the advantage of a company one. When he was in his 50's he damaged his back and was unable to work again. Because his savings were below the 6k threshold and his pensions savings were exempt from means-testing, he received Incapacity Benefit, a reduction in council tax, mortgage interest payments, etc. that all (coupled with my Mother's small income and tax credits) helped to 'bridge the gap' until he turned 65 and received his state and private pensions.

Once again, you're basing all your pensions advice back to your comfortable 'professional' lifestyle where people can afford to have both pension and ISA savings. Many people won't have ISA savings to 'bridge the gap' until their Final salary, company pensions and state pensions kick in. They will simply have their state pensions and their personal retirement provision. If they follow your "ISA only, no matter what" advice and are made redundant or are unable to work due to an infirmity in their late 50's, they will not be able to 'bridge the gap' with benefits but will have to use their retirement savings. When they reach normal retirement age, their savings are gone and they're relying soley on a state pension.

You damn well know that most people will not be able to save enough of a pension pot to even clear the £10kpa tax free allowance (especially after they have taken the 25% tax free sum), yet you persist in pushing ISAs to everyone just because of your own personal predjudice. You are costing people an additional 20% of investment income on their meagre pension savings and lose out on the increase in tax credits you get from pension contributions. It's disgraceful.