Pension or House Deposit?

Edmond_2 · 4 August 2018 at 10:29AM

My wife and I both recently started working for the NHS. The we immediately cancelled the pension as we can't afford 9.1% of our salaries right now, but will be able to when our son starts to get 30 hours free childcare (or when he goes to school if that doesn't happen).

It did get me thinking though - are we better off in retirement if we put 9.1% of our salaries into savings for a house deposit (we're currently renting) for 5 to 10 years. I crunched the numbers, and financially we seem to come out about the same in retirement, i.e. we either have a bigger pension, but don't own a house, or we have a smaller pension but own a house outright and don't have to pay rent.

What's the better option?

Some things to consider - my wife and I have virtually no existing pension between us at 35. The NHS contribute about 14% for our 9.1%, which is very good. My model for retirement finances is based on us both staying at the NHS until retirement, which is a risky assumption. My parents own their house outright, and I'll likely inherit half with my sister.

twotonealex · 4 August 2018 at 10:49AM

Morning Edmond,

I'm sure someone else better clued up than I am will be along soon, but I believe I'm correct in the below:

The NHS scheme is a very valuable scheme, it's not like a defined contribution scheme where you have X amount in your pot.

The NHS scheme is a defined benefit, it takes your average career earnings and you will get this amount guaranteed every year from retirement.

'Career Average Re-valued
Earnings based on a proportion
of pensionable earnings in each
year of membership'

The 9.1% is almost irrelevant in terms of how much you will get at the time of pension age (as the pension payments will be much higher!)

You both are lucky enough to have access to an exceptional scheme, so putting aside the house purchase for a second, you should both start contributing as soon as possible.

Starting a pension at 45 is not ideal at all, have you considered what age you want to retire?
Are pay rises in the future likely?
How long until your son is old enough for the 30 hours free childcare?

Owning a house is important, no doubt about it - 5-10 years for a deposit saving is quite broad, have you done the sums to work out a realistic time frame?

It might be worth you looking at your finances across the board to see where it's possible to trim your outgoings with switching products, etc etc.

Cheers

Drp8713 · 4 August 2018 at 10:54AM

Your calculation is very wrong.

Lets say you take the employer contribution at face value (its worth a lot more than 14%)

9.1+14= 23.1% in the pension.

9.1% - 32% tax and NI (assuming you are a basic rate taxpayer) = 6.19% for the house, which you then pay some of towards mortgage interest.

They are not the same, one is 3.7 times as good as the other.

Edmond_2 · 4 August 2018 at 11:09AM

Thanks.

We're to the bone at the moment, but that's going to change spring next year when our son gets his 30 hours, and my wife and I get a large pay rise, so we're not waiting long at all until we can afford the money for pension/savings.

The figure I have down for a 30k house deposit is 5 years, but these are out of date assumptions. We're both getting a significant pay rise next year as part of the new NHS pay scheme. I also based this on my wife going back full time when our son goes to school, which she's on the fence about. I also want to look at house prices again and see if 300k gets us what we need. So the five years is a bit finger in the air. My wife currently works 0.9, so it's not far off my full time assumption.

As for future pay rises, worst case we get to the top of our band and stay there, although coming from the private sector I a) don't like the idea of staying at the same place for the rest of my life and b) am not 100% confident that either of our roles will remain for that length of time. Career wise I can assume our income will remain steady until retirement as a worst case, with pension contribution from whoever I end up with as a variable.

What I haven't looked at is the possibility of doing both. I'm reluctant to do this, because I want some semblance of a life for me and my family. I'd rather sacrifice something in retirement than toil now when I want to enjoy life with my kids.

Alexland · 4 August 2018 at 11:14AM

Basically you ideally need to put money aside for both concurrently by increasing your income and/or reducing your outgoings. Frankly it sounds like you are already behind on both objectives - is there anything that you could do to improve your financial positions by taking the long term view?

As people have commented you do have access to a good pension scheme however owning your own property in retirement is also extremely beneficial. You would need an extremely large pension to be able to afford to pay rent in retirement.

However if your plan is to only buy a property when you receive inheritance - how close this is and are you certain that your parents won't need the money for end of life care, cat charities, etc? Would they consider gifting you any money in advance of inheritance? Will you still need to take out a mortgage to repay the difference between the share of the inheritance and the property you would buy? Would the mortgage run for long enough to be affordable?

It's also worth considering the Skipton Lifetime ISA to help you save a deposit for a 25% government bonus.

https://www.skipton.co.uk/savings/isas/cash-lifetime-isa

Also worth considering if your parents would participate in a family deposit mortgage, for example:

https://www.nationwide.co.uk/products/mortgages/family-deposit-mortgage

Alex

Edmond_2 · 4 August 2018 at 11:28AM

Drp8713 wrote: »

Your calculation is very wrong.

Lets say you take the employer contribution at face value (its worth a lot more than 14%)

9.1+14= 23.1% in the pension.

9.1% - 32% tax and NI (assuming you are a basic rate taxpayer) = 6.19% for the house, which you then pay some of towards mortgage interest.

They are not the same, one is 3.7 times as good as the other.

I'm basing a savings contribution in 9.1% before tax an be NI etc, i.e. the same as what my pension contribution would be. That leaves a gap of the 14% NHS contribution if I go with the saving option.

I reckon 5 years of not paying into the pension is worth 10-12k between us, per year, depending on when we retire, but we'll no longer have to pay rent and we'll have an asset.

twotonealex · 4 August 2018 at 11:30AM

Edmond wrote: »

I'm basing a savings contribution in 9.1% before tax an be NI etc, i.e. the same as what my pension contribution would be. That leaves a gap of the 14% NHS contribution if I go with the saving option.

I reckon 5 years of not paying into the pension is worth 10-12k between us, per year, depending on when we retire, but we'll no longer have to pay rent and we'll have an asset.

Edmond, if you don't mind me asking, what are each of your salaries?

Edmond_2 · 4 August 2018 at 11:36AM

twotonealex wrote: »

Morning Edmond,

'Career Average Re-valued
Earnings based on a proportion
of pensionable earnings in each
year of membership'

The 9.1% is almost irrelevant in terms of how much you will get at the time of pension age (as the pension payments will be much higher!)

Could you explain this one to me? In my naive model I just put in 9.1% and 14% into an online calculator (I think it was on this site somewhere). Would this give me realistic retirement figures, given that the NHS pension is not like a private sector one?

Also, given the political climate, is the pension always going to be like this, or is it at risk of getting signed away by future governments?

Edmond_2 · 4 August 2018 at 11:44AM

twotonealex wrote: »

Edmond, if you don't mind me asking, what are each of your salaries?

We're both on around 33k at the moment, to increase to 37 next year. Top of the band is about 40k.

kidmugsy · 4 August 2018 at 11:48AM

Edmond wrote: »

We're to the bone at the moment, but that's going to change spring next year when our son gets his 30 hours, and my wife and I get a large pay rise, so we're not waiting long at all until we can afford the money for pension/savings.

I'd be astonished if your best policy isn't to join the NHS scheme from the Spring (if not sooner). You may never again have the chance to accumulate some "gold-plated" DB pension rights. If in ten years time neither of you is working for the NHS you'll be kicking yourselves if you hadn't joined the NHS scheme.

One thing you must do now is check up on the Life Insurance aspects of the NHS scheme and any other insurance-like benefits. These things matter when one has a couple of hostages to fortune.

Be sure to open a LISA each, if only for £1, before you are 40. Now would probably be a good time.

xylophone · 4 August 2018 at 11:50AM

You do realise that the pension protects the widow/er and the child in the event of your death?

I was acquainted with a couple where the husband had an LGPS pension - they were in their thirties and had a toddler and infant.

There was a freak accident when the husband was at work and he was killed outright.

What would have been the position of that widow and her children without the spouse/child pensions?

Pension or House Deposit?

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