UKH

Hello UKC land,

So I am 25, Company I work for has signed me up with a pension Company which I am happy with and I have increased my pension contributions to as much as I would feel comfortable. 
 

however, I recon I could probably contribute a further £100 or so a month, is there something I am missing and could be making a good decision… the current plan is to just slowly buy a cam a month. 
 

Any recommendations from anyone or advice they wished they received at 25 (pension related)
 

 Cheers

paddy

If you want to contribute yourself i would suggest seeing a decent pension guy and starting a stocks and shares pension, leave your employer to put what they want in yours but your money would be better invested elsewhere as the funds that workplace pension go in are very low growth, IMHO of course.

If you put that £100 into your work pension is it matched in any way by your employer? If so, that will get you a return that is essentially unmatchable by any other sort of sane investment. The only problem is that I guess you won't be able to get at it until you're old (I don't know what UK pension withdrawal rules are).

If it's not matched by the employer then things are trickier - £100 a month isn't a huge amount and investment management fees would significantly cut into the returns it would generate. So I'd look to invest it in something with minimal management fees.

Yeah, “Stick an extra £100 a month in your pension if you have it.”

Not necessarily - most workplace schemes go for growth for people Paddy's age, only as you get older does the investment profile change to prioritise security over returns. His bit of the fund will almost certainly be 100% invested in stocks and shares rather than the bonds a 50yr old's would be invested in.

To be honest it’s pretty difficult to suggest what to do on the basis of the info you’ve given. All sorts of factors come into play: salary, tax bracket, yours and your employer’s contributions, aspirations regarding timing of and luxury of retirement, reasonable expectations with regards to promotion, dependents, etc.

But, to give you an idea: an extra 1200 invested each year, accumulating at 3%pa for the next 35years, would be worth around 70k. That 70k might be expected to get you around an extra 3k pa in retirement (based on a quick Google of current annuity rates). So, one way to look at it is “is saving 1200 extra per year now worth 3000 extra per year then?”. When weighing that up it’s important to remember that what you envisage doing with that money in 35+ years time may not be possible: you may be physically less able, or looking after somebody else less able, or in the worst case, dead.

These figures are very “bag of the fag packet”. There are many calculators online for this sort of thing. They’d also take into account inflation which I’ve ignored for simplicity (but I’ve adjusted down the industry standard 5% growth assumption to 3% to fudge it).

Anyway, might give food for thought at least.

Ignore this nonsense. Pension contributions are taken from gross salary. If you pay income tax every pound you put in your pension immediately grows by 20pence. Investments outside of pensions are from net salary and also attract income tax on any growth. 

You should put your 100quid into a your current pension. If you identity a better pension later you can transfer it but for the time being go for the simpler option or else you might loose the will. Your plan to start paying into your pension at a young age is bang on.

3 important questions are:

-What tax rate are you paying on this £100?

If higher rate, get in in there. The writing is on the wall for higher rate tax relief so pile it in while you can.

-Is there any more company matching contribution to be had?

No brainer if so.

-Are you using all your ISA allowance?

Don't know your situation but at 25 you probably have quite a few life events to save for. Arguably reasonable, if slightly less efficient, to put it in an ISA for now until you know you won't want it for [expensive thing]. (mutt has seemingly assumed you'll avoid paying income tax on the difference this would make when you draw your pension, and ignored ISAs, but the start saving early advice is sound)

Worth having a look to make sure there's not a SIPP out there that's cheaper/better than your company's offering, but I'll assume you've already done that from what you say in the OP.

Best advice is probably to get better financial advice than you'll get from UKC.

If there is no workplace matching an alternative option is to put it into a stocks and shares ISA - buying a cheap global tracker (e.g. a MSCI world etf).  If you don't touch it for the next 40 years it will be worth a decent amount but you retain the flexibility to use the money when you want (e.g. a house deposit in 10 years time may be more useful than larger pension in 40).  ISAs are a powerful tax perk with a bit more flexibility than pensions.

Regardless of what you do its worth understanding the basic pros and cons of pensions and ISAs and how to use an ISA in a low cost way (normally cheap exchange traded funds).  There's lots of info on this out there and will help you make and informed choice.  

Just to stress: I am NOT a financial adviser

ISAs are only a powerful tax perk if 1) you are getting into CGT territory and/or 2) you are likely to have dividends from your (non pension) investment above the limit for your tax rate (£1000pa for normal tax payers, £500pa for higher rate from memory). 

Pension investment is a bit of a one way trip for your money as it's locked away pretty effectively until you retire. But the fact it's done gross so your contribution gets the tax back on that money is incredibly valuable. 

If you are able in your company scheme to voluntarily use salary sacrifice you get even more bangs for your buck as the money is technically used to reduce your salary and then that same amount be paid as an employer contribution on your behalf so you don't pay national insurance on it either. This is a very common arrangement and wouldn't effect things like the salary you could quote for mortgage applications etc.

Company pension schemes may have lower management charges than setting up a free standing AVC - definitely something to be aware of and check. Just because you are in a company scheme doesn't mean that the company makes all the decisions about what funds you're invested in. My company scheme had dozens and dozens of funds to choose between and that choice was entirely up to me.

You are ignoring the tax free allowance. Yes income is taxable in retirement but if you take the money then you get the tax free allowance twice. It's a no brainer. 

As for life events, yes make  allowance for them but resist the temptation to blow thousands on a wedding and buy the most expensive house you can afford. The early years of a mortgage is pretty much the only time one can consider not paying into a pension. Hopefully one day the morgage will be manageable and you can resume preparing ground for a tolerable/early retirement.

Hehehehehe.  UKC financial advice.

The tax facts are here: https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief and are a little different to what's been said above

Just about everything else depends on your scheme rules and personal circumstances.  For example, not all schemes deduct at source from gross pay, though most do.  Not all schemes have employer contribution, though most do.  Etc. Etc.

https://www.moneysavingexpert.com/investments/ has some excellent orientation information

A few other thoughts:

Workplace pensions have been law since 2018...so if your company is just signing you up, they may need to make some back payments

It may be better to pay down high cost debt (e.g. credit card)

If you don't own a home, and are basic-rate tax payer, then the Help to Buy ISA may be as good or better idea.

In most circumstances you won't be able to access the money again until you're 60; but pensions are inheritable.

Ideally you need to talk about the detail with someone qualified.  Make sure they are independent and qualified (unbiased.co.uk).  I'd recommend paying a fixed fee for advice, don't get into paying a percentage of fund for them to give ongoing advice and management.

It’s locked away until you want it for your retirement is what you should be saying. 

it’s one of the best long term investments you can make. 

you can always stop paying the top up  at any time. So you can flex to suit. 
 

I'd recommend buying a copy of "Smarter Investing" by Tim Hale, it's an easy read (can be read in a weekend) and is excellent. I wish I'd read it when I was in my early twenties. 

Hate to say it, but I feel pension advice will need to change. The world is rapidly changing into a different beast.

Not really enough info but broadly, yes, pay into your pension if you can because it is tax efficient.

You don't pay income tax if your payment goes into a pension (usually taken out of your salary before tax is calculated). In basic terms, if you pay 20% income tax then £100 into the pension per month would mean only £80 less in your take home pay - more critical if you pay higher rates of income tax. If the pension is taken out after you've paid tax, you can apply to have this tax refunded.

You are limited as to how much you can pay into a pension per year so paying in when you are young is still worth doing. For info I started paying into a pension at 21 and I could retire if I wanted to when I am 55 with enough money to live comfortably.

Nobody has mentioned the other option, just buy that new cam/other climbing gear/money towards trips each month. When you're old, you're not going to regret having gone on more trips/ had more climbing experiences when you were younger. Gear helps with that!

Others have mentioned ISAs which are a good counterbalane to pensions: there is a valid debate whether to put money into pensions or an ISA, and there's no one-size-fits all answer.  Also a Lifetime ISA (can be used for either pension or house buying), if you are eligible, has some decent tax benefits.

When they are sat bored, no funds to go anywhere, barely eating properly, confined to one room as they can't heat the whole home and only receiving a near worthless state pension they might wish they'd planned for the future more.

Many folk can be active until 70, 75... but with wise planning early on, it's possible to be retired long before that and climb Monday to Friday when crags and walls are deserted. 

Play the long game.  

IMO most people buy too much stuff

I can relate to that more, but when working full time, time was more of an issue than money for the trips I wanted to go on. 

It might turn out to be the wrong decision, but if it is I won't be around to worry about it. Hopefully having had 17 extra years of retirement to look forward to, seems preferable to some old memories and the need to work full time until I'm 68. 

To the OP.  Are you planning to work until you are 70 and then have a small additional pension to make your retirement comfortable or are you wanting to retire early with a significant private pension?

As some other have rightly said .. ANS = it depends.  You probably have to share a fair bit more info about your personal circumstance in order to suggest any reasonable options.

My first questions would be: 

1. Age?  25
2. What is your family situation - do you have dependents?  Are you married?
3. Do you expect your family situation to change in due course?  Are you planning to have kids?Quite possible for 25yr olds.
4. What is your housing situation?  Do you rent or own?  Do you intend to change that in due course?
5. How much debt are you carrying and how is that structured?
6. Do you have a fully stocked rainy day fund?

If you don't have a fully stocked rainy day fund (4-6 months living costs) squirrelled away for when sh1t happens ... do that first.

Next - I would want to know if you have a credit card and if you're paying that off in full each month or carrying a balance?  If you're carrying a balance on a credit card @ 21% for example .. the answer is almost guaranteed to be - pay that off next.

Then onto the workplace pension.  Tell us about it?  Is it matched and are you taking the full match or only contributing enough to get a partial match?  What is it invested in - can you give us the fund(s) names pls.   The matched thing is important.  The best one can expect to get annually in stocks and shares in the long run is ~7% pa - that is true over 100+ years in the US stock market.  Matched however = doubling your money.  The point is - doesn't matter what you invest in, you are basically never going to beat (over the long term) a matched contribution from your employer and therefore that this is likely the next best option purely from a returns perspective.  It's free money!!

If you've already maxed out your employers match .. then the calculation changes again.  Generally speaking, purely on a return basis, a pension will always beat an ISA.  Why?  Because pension contributions are done before tax and ISA contributions are done after tax.  That means that in order for your ISA to beat the returns you get on your pension ... it first has overcome the fact that it started from a lower starting point and then it needs to outperform again to beat it.  It's improbable that an ISA will outperform a Pension purely because of the way it is structured w.r.t tax ... the Pension gets a head start on the ISA.  Ex:  Basic rate tax payer pays £100 into her/his pension .. that same money would have resulted in only £80 in their ISA because they would have first had to pay 20% tax on it!!!!

So if its only return you're looking for and you don't mind locking it up .. then pension is again the right answer.  The question now heavily pivots on both what your employer has you invested in, what annual charges they're leveraging and what costs they might charge you to get that extra £100 per month in.  Your choice is either to stick it into your company pension or put it into a low cost SIPP from someone like Vanguard.  [1]  0.15% pa annual mgmt feeds (capped at £375), can only invest in Vanguard funds I believe, £7.50 if you choose ETF's (not advised with your £100) or free if you opt into their funds, vanguard will automatically claim back the 20% basic rate tax on your behalf but if you're a higher rate tax payer then you'll need submit an annual tax return to get the extra tax relief.

This all assumes you only care about absolute return.  If instead you have an evolving family situation and are likely to need the money before retirement - you're probably looking at an ISA or perhaps a lifetime ISA if you are yet to buy your first home.

Fees matter.  If you have 1x platform claiming to be able to secure you 5% pa return with a 1.5% fee .. then you net off at 3.5% pa.  Alternatively another platform claiming to be able to secure you 4% pa return and only charging you 0.15% fee .. then you net off at 3.85%pa.  

Time in the market matters.  The effects of compound interest (8th wonder of the world) are apparent only if you're putting your money away for long periods of time i.e. 30 years.

Example: 

• £100,000 invested with 3.5%pa return over 30 years (compounding annually) = £280,679
• £100,000 invested with 3.85%pa return over 30 years (compounding annually) = £310,595

Tiny difference in annual return over a very long period ... can equal a large difference.  Fees matter!

Hope this helps.

https://www.vanguardinvestor.co.uk/what-we-offer/personal-pension/personal-...

Ah, forgot the lack of tax on pension contributions thing!

Aye do that, spend all of it then be sure to moan loudly if you can't afford to get on the property ladder/ have to work full time til you're 80 and blame it all on the boomers/tories like any self-respecting millennial ;p

There are as many things to do with your £100 a month as there are stars in Skye*.

Fundamentally you might need to decide a) If you wouldn't rather just buy some things to make your life more fun/enjoyable right now (cams as you said) as you are already being pretty responsible with your pension b) What your attitude to risk is if you are wanting to invest the money.

There are such a gigantic range of products and platforms you could invest on/with that without some information about your targets (e.g. Would you like to save for a house deposit? Or buy a flat to rent?) and your attitude to risk (yolo it on dogecoin for a chance to 10x your money or stick it in US gov treasuries?) and your time horizon (want to lock it away for half a century? Or have it reliably there to use/access at a moments notice?), it isn't possible to give a good range of suggestions. I'm sure this thread will fill with information and give you many random ideas but adding a bit more info might make it more focussed and helpful.

My 2 cents: I picked some actively managed funds based on past performance and morningstar rating and they have done pretty well. I put some into funding circle and it was rubbish (though I did get my principal back and even a tiny amount of interest). I invested in my own business and it's going very well so far (fingers crossed). I bought a house to do up and rent and that went very well. I got burnt by having money in some kinds of generic giant funds and needing to withdraw just after the 08 crash. So I'd say that based on my experience it's probably only peer-to-peer lending that I'd avoid if I was doing it again (oh, wait, also I'd avoid stock market crashes!).

* according to the latest guidebook.

Interesting.  How much did you invest and how long did you leave it invested with Funding circle for?  Their average returns on the platform for well diversified participants (which I think meant >£1000 with £10 loans implying 100+ loans in your portfolio) were positive every single year since 2012.  [1]  Positive during Covid and even at their worst in 2018 .. only dropped to projected rate of return of 3-4% again - for all well diversified participants on the platform.    

That being said .. can't recommend P2P it either - it is clearly not for the majority and appears to rapidly be going out of fashion at present.  Like Zopa, Funding Circle is permanently closed to new investors and existing investors loans are being slowly sold off.  

[1] https://www.fundingcircle.com/uk/statistics/

£15k, maybe 5 years, maybe a bit longer. About 3 or 4% sounds like what they were saying for my account last time I logged in but I don't believe it, there are too many variables like late loans and bad debts and every loan finishing at a different time and so on that make it extremely complex to contradict them but my spreadsheet full of information suggests it might be more like 2% or less. Every 6 months after I first invested they have knocked the predicted aggregate interest down by a percent or so. So basically they talked _all_ the talk about very low risk and pretty attractive returns relative to risk and then after they had your money, that return just went down and down (even before covid). In retrospect the signs were all there: Take a load of loans too dubious for a bank to touch with a bargepole, wrap them up together because "more loans = diversification= lower risk"... Where have we all see that before? [cough] subprimemortgages [cough]. In the end I probably got off lightly, it wasn't a cluster****, just not a very good or efficient way to invest money.

I started selling to get out of it as fast as possible about 3 months before covid hit (another issue - it's a completely illiquid investment)

They didn't help themselves in my eyes by closing down the secondary loan market (a critical part of the entire operation which allowed some measure of liquidity) and then blatantly lying about it being "paused" until the market was fair again (or some such gobbledigook) for about 2 years before finally admitting that it was never coming back.

But, hey, you live and you learn. And despite reading about it a _lot_, I still managed to learn first hand that when someone comes up with some new financial instrument that they say is just going to be great and sounds too good to be true, it is. Of course.

Thanks everyone ! 
 

appreciate the efforts 

Buy the cams! 

Life's short. 

The thing about financial planning is you gain from your investments and don't lose out from the cost of managing unnecessary debt. You can have your cam and seat it!

I think the age old advice.......spend less than you earn, as best you can, would stand you in good stead.

A lot of pension advice involves usury which is a big cause of the problems we are in.

Usury or capitalism. Sadly it's a system we have to live in. It is perfectly possible to choose ethical investments in a sipp wrapper, which is a pension just like any other. Deciding not to engage in the system that we all live in is futile and will likely end in poverty in old age.

Mmmmm, yes, I think we agree. The vast number of 'us' caught up in trying to look after ourselves in the future through investing our money in the capitalist system however, is the reason these schemes won't help us. However much we want to ignore it, see latest IPCC report. I realise you will have done so.

It all worked nicely for the last couple of generations....dividends paid out by the fossil fuel industry are now the problem.

Bitcoin mate innit.