Is this a good plan? (Pensions query)

[Haircut]

I'm currently a 26 year old single guy without many financial commitments, no mortgage or car payments.

I've just started a new job which takes me over the 40% tax threshold and was planning on taking advantage of this as much as I can with my pension.

I can still live pretty damn comfortably assuming a taxable income at the 40% limit so my plan is to put everything I earn over this amount into my pension - reason being I would only see 60% of it anyway so I may as well get all of it as mine by putting in into the pension pot.

I've only been used to putting 4% of my wage into a pension before and so bumping it up quite a bit seems a drastic thing to do, but it seems to make financial sense.

I will probably be looking to buy a house within a couple of years and will likely take my contributions down a bit when this happens. So does this seem like a good move in the short term or is there another way I can better invest my money?

 

[starscream]

If you are going to buy a house, wouldn't it make more sense to save up a deposit? The more you can save, the less your mortgage payments will be, so you can put more into your pension at that point.

 

[Haircut]

If you are going to buy a house, wouldn't it make more sense to save up a deposit? The more you can save, the less your mortgage payments will be, so you can put more into your pension at that point.

Should have mentioned that really - I already have a decent deposit for a house so I'm not overly concerned about adding to it.

 

[i know nothing]

Are you looking to contribute more to the pension scheme run by your employer or are you looking to start a personal pension plan?

What type of pension plan do you currently have?

 

[Haircut]

Probably my employers scheme but, to be honest, I'm not sure what my options are.

If I put in 3% of my salary my employers put in 6% and that's the maximum they do. I'm looking at putting between 15 and 20% of my gross salary into the pension if I do opt for this though.

I have no idea if I have to put this into my employers scheme or if I can start one myself as well for the extra though

 

[Sequoia]

I'm currently a 26 year old single guy without many financial commitments, no mortgage or car payments.

I've just started a new job which takes me over the 40% tax threshold and was planning on taking advantage of this as much as I can with my pension.

I can still live pretty damn comfortably assuming a taxable income at the 40% limit so my plan is to put everything I earn over this amount into my pension - reason being I would only see 60% of it anyway so I may as well get all of it as mine by putting in into the pension pot.

I've only been used to putting 4% of my wage into a pension before and so bumping it up quite a bit seems a drastic thing to do, but it seems to make financial sense.

I will probably be looking to buy a house within a couple of years and will likely take my contributions down a bit when this happens. So does this seem like a good move in the short term or is there another way I can better invest my money?

Hmmm.

A lot of this depends on how you see your future unfolding, both medium and long term. And, especially long term, it's incredibly difficult to have any degree of certainty. The way I see it, a pension provision is generally a good bet, especially as it is a tax-efficient use of money. And, of course, the earlier you start, the more it is (usually) worth.

BUT ..... consider the opportunity cost, too.

If you put a lot of surplus money into a pension, that means it isn't available to put into your first property. That means either that you won't be able to afford a property you otherwise might have been able to afford, or even in comparison with the same property, you'll have to finance more of it by mortgage. So, when looking at the tax efficiency of a pension, don't forget to offset the cost of mortgage interest on that larger sum. It'll drive your payments up, cost you a lot of interest over a long period and, in all likelihood, delay you clearing the mortgage by months (or years) meaning not just greater payments, but perhaps more of them.

So, to a degree at least, the decision you are trying to make is to assess how the property market is going to perform over the next 25 years, AND how the stock market (that being where your pension contributions will be) over the next 40 years. I have trouble predicting the stock market over the next 40 minutes, let alone 40 years.

Frankly, either way, you're buying a pig in a poke. Personally, I went the property route and don't regret it. But then, property now is not the same game it was 15 years ago. When I did it, it was largely money for old rope. It isn't, now.

Or, to muddy the waters even further .... if you're thinking about property, don't restrict yourself to thinking UK. That is NOT where a lot of the smart money is these days. But, if you decide to be adventurous and invest abroad, check out the both the potential risk level AND any gotchas in an alien legal system VERY carefully. It can be lucrative, but it is a minefield for the naive, the unprepared and the inexperienced.

 

[Haircut]

Sequoia, I was actually hoping you would have some sort of input into this thread

I'm a touch drunk at the moment (2 bottles of wine, a can of beer and a bit of vodka - tonight was meant to be a quiet night in!!) so I may be a touch more candid in my reply than I may otherwise have been!

At the present moment I have, thanks mostly to an inheritance from my Grandad, a deposit that will be worth ~25% of my first property.
For this I am extremely grateful, but from my point of view I can either make that 25% deposit into a 30% deposit by saving £10-15K or I can put that into my pension and it will hopefully be worth a damn site more than that when I come to retire.

When I come to buy I'm working on the assumption that I can get something for around £250-260K with a £200K mortgage. I have the amount I require in deposit at the moment (notwithstanding a stockmarket crash) so presently I'm more concerned about my salary increasing rather than adding a lot of money to the deposit.

When I got my current job it was around a £10K payrise (plus hopefully £8K+ bonus) so I know I can live comfortably on a figure where I'm putting 20-25% into a pension.

As far as I'm concerned, the stockmarket is risky over a short term basis - but over a 34 year period, which technically is what I would be investing in, it seems a good bet.
Property is all well and good, but at the present moment I'm not prepared to put in the effort or the investment to get something going that is remote to me.

 

[Sequoia]

I suggest talking to a financial advisor with the figures. One aspect of it is that if you put the money into upping the deposit to 30%, you cut the payments to those of a 70% mortgage, which means you'll have the money saved (and more importantly, the interest you won't owe on the money saved) which can then be added to the pension over the duration of the mortgage.

Or, alternatively, look to see what effect on the repayment period it has if, having upped the deposit to 30% and therefore decreased repayments, you were to maintain the repayments at the level they would have been for a 75% mortgage. It'll reduce the duration of the mortgage. And then, once the property is paid off, you'll have a period that may well be several years between when you would have finished paying for the mortgage and when you actually do where the surplus can go entirely towards pension.

I'm not sure I explained that very clearly.

If you increase the deposit, you can either :-

1) pay the difference into a pension over the 25 years (assuming it's a 25 year mortgage), or

2) pay off the mortgage faster, by paying the savings into the mortgage, reducing the term of the loan and, after it's finished, invest the entire monthly sum of mortgage payment into pension (or shares, or whatever).

If you take option 2), the fact that you are paying extra capital off the mortgage from month 1 will reduce the accumulated interest significantly, and bring the conclusion of the mortgage forward, probably by quite a lot.

I haven't crunched the numbers, but it would be fairly easy to do the basic calculation. All you need to do then is check out the tax implications.

Or finally, it may prove to be the optimum strategy to mix these two methods. It may be that it's worth putting some into a pension, to maximum tax advantages (especially if there's a corresponding employer contribution, because if there is, adding that and the tax breaks makes it a tempting proposition), and the balance to increase the deposit.


One more thing, and this may seem a bid morbid, so forgive me if I opt for a pragmatic view over a tactful one. What if you don't live long enough to reach pension age? Cancer? Car crash? Whatever. If you put money into property, at least you get the benefit of it while you're living in it. If you go entirely for pension, you get no benefit until you start drawing it ..... if you ever do.

Once you've committed money to a pension scheme, it can be very hard to shake it loose again. If, on the other hand, it's in property, you can vary your plans if circumstnaces change. Suppose you get a dynamite job offer, but it means relocating permanently ..... to the US? Or Australia? Or wherever you fancy. Property is rather more liquid, generally, than a pension holding. And, of course, if you opt to put extra funds in property, then you have a property where the equity is relatively high. That, if you chose to use it, can be used to leverage the purchase of another property. And if the property market keeps rising (which is NOT an assumption I'd be prepared to gamble on, in the UK, at the moment), the increased equity in that second property can be used the same way. It takes time, but it can be done.

So, with 30% equity in a £250k property, you have some £75k to use to leverage. If you use that to acquire a rental property (and if you choose carefully) you can generate an income that'll pay the rest of the mortgage on that, while the capital value is increasing.


I wouldn't presume to advise anyone on this decision. I just hope to prompt some questions, maybe some thoughts that you might not have already had.

Personally, I don't have a lot of faith in the pension industry. But that might just reflect my experience, which is that there are better ways. However, my better way did rely on a stroke or two of phenomenal luck in timing, and that is not something you can bank on. So just because I found a better way doesn't mean the same strategy would work today, so I don't wish to push my prejudices in the matter onto anyone else.

 

[Haircut]

The reasons you have mentioned are exactly the reasons why I'm not sure this is the best move for me at the minute.

I could afford to get on the housing ladder at the minute and the main reason I don't want to do that is the fact that I now work for a large American investment bank and potentially I could have a very good job in New York in a couple of years time.
Given the housing market in the UK and US at the minute though it may make sense to try and buy something here at present and sell it in a year or twos time?

Obviously I have no idea how things are going to pan out in the long run, but I completely understand you point of view regarding property. My personal opinion though is that I would make more in the stock market than in property over the next couple of years (especially once you consider stamp duty, surveys, solicitors fees etc.)

As you say an IFA would be in the best position to advise me in my situation and I think that's the next step for me. I was just wondering if anyone had any opinion on the matter.
Yours has been very helpful Sequoia.

 

[Sequoia]

...

Given the housing market in the UK and US at the minute though it may make sense to try and buy something here at present and sell it in a year or twos time?

Well, maybe.

The market seems to have shaken off a bit of the doldrums, but it's a tentative recovery, interest rates have just risen and personally, I'm expecting more rises over the next year or two. Will those rises be enough to depress the market? Dunno. Maybe, though I suspect if it does anything, it'll dampen it rather than kill it.

But the housing market bouyancy is based very largely on consumer confidence, and there are a number of things that could dent that, not least of which are oil prices, non-oil energy prices, huge consumer debt, the situation in the Middle East, terrorist activity, the mess in Iran and to some extent, Afghanistan, the state of the US economy, and so on. As you work for an investment bank, you've probably got as good a grasp as I have on how tenuous confidence can be, and how a "nervous" market could react badly (and rapidly) to any event it might normally shrug off.

If you buy property with a view to selling in a year or two, I'd suggest it'll only work if either you have a rapidly appreciating market (and we don't, right now - those times are - in my view - gone), or if you buy to develop and have the skills and experience to get that process just right. And skillful development isn't something you can do easily, or without a heavy degree of personal involvement. There's still plenty of opportunity for skilful developers, provided you have the time to devote to it, and get it right. But good opportunities are far harder to find than they were a few years ago, because it's no longer the case that any muppet can make a killing just by buying reasonably well, and sitting on it for a few months. As you point out, you have significant buying and disposal costs to bear.

No, personally, I'd advise against buying for a year or two unless you are planning on treating developing seriously, or unless you're planning on getting your value from it by living in it, rather than just as an investment.

But all this is not to say prices wont still go up over the next year or two. They will, in all likelihood. But it's a risk-analysis thing. My analysis is that the risk is MUCH higher than it was a few years back .... to the point where I've liquidated all UK property holdings (bar one that isn't an investment property anyway).

Were it may and I was expecting, or hoping for, a transfer opportunity like that, I'd be reluctant to make investments that either take months to liquidate, or which could involve large losses if I'm forced to liquidate at an inauspicious time.

Property will still probably be a good investment, IF you can afford to wait out any short-term dive. But, if the market drops andthen that New York opportunity comes up, can you afford to wait it out? THat might depend on how longthe New York job would be for? If it's a year or two, put the property in the hands of a good management company and go. But if it's long term or permanent, a property over here could be a weight round your neck, not a benefit.

I'd be very cautious about property if you're hoping for a job abroad in the next year or two. Saving a couple of years rent is obviously appealing, but by the time you've accounted for the factors you mentioned (stamp duty, survey fees, solicitors costs, selling costs, etc), rent starts to look like bargain.

It looks to me like you've got a bit of a quandary on your hands.