Pensions - advice for early 20s
Discussion
My sons are 21 and 24 and both just starting on their corporate careers - grad roles, FTSE100 employers, getting paid around 26k, 5% employer pension contribution etc.
They're asking me for advice regarding pension contributions vs saving for a deposit vs general saving.
I've got my views on how much they should be putting into the pension but I'd be interested to know what 20-something PHers are thinking/doing and what the PH 'Dad' collective are advising their kids?
They're asking me for advice regarding pension contributions vs saving for a deposit vs general saving.
I've got my views on how much they should be putting into the pension but I'd be interested to know what 20-something PHers are thinking/doing and what the PH 'Dad' collective are advising their kids?
Save, as a percentage, half the age you started contributing at. This has been recommended as a good rule of thumb to help reach retirement goals. I would also suggest reviewing the default fund or lifestyle package of their scheme and making an informed choice as to whether it is appropriate to their risk appetite at their age.
Take free money from employer to max.
Anything over and above put in S&S ISA in something like VLS100. Mark it for retirement use only, not general savings for dipping into.
Fire and forget with just periodic check once a year to check all is well. When they get closer to say 50 look at something like the target retirement funds, assuming such things still exist.
Then if SIPP age goes from 57 to 60, or more - they are not trapped.
IF they go into higher rate tax band then consider SIPP rather than ISA depending on existing rules.
IMVHO.
Anything over and above put in S&S ISA in something like VLS100. Mark it for retirement use only, not general savings for dipping into.
Fire and forget with just periodic check once a year to check all is well. When they get closer to say 50 look at something like the target retirement funds, assuming such things still exist.
Then if SIPP age goes from 57 to 60, or more - they are not trapped.
IF they go into higher rate tax band then consider SIPP rather than ISA depending on existing rules.
IMVHO.
I started by putting 4% in at 18, have put 9% in since I was 29 (32 now), company puts in 21.95% (19.95% for DB / 2% cash).
Once I’d bought a couple of houses and moved to a nicer house / holidays / cars etc I upped my contribution.
I’d be telling them to enjoy themselves before life gets in the way, ensure they are putting something away and / or saving for a house but don’t dwell on it too much!
I also have a small S&S ISA which is long term accessible savings, maybe it’ll bridge the gap to early retirement, pay off the mortgage, or get wasted on a new car, etc, but no real plans for it.
Once I’d bought a couple of houses and moved to a nicer house / holidays / cars etc I upped my contribution.
I’d be telling them to enjoy themselves before life gets in the way, ensure they are putting something away and / or saving for a house but don’t dwell on it too much!
I also have a small S&S ISA which is long term accessible savings, maybe it’ll bridge the gap to early retirement, pay off the mortgage, or get wasted on a new car, etc, but no real plans for it.
red_slr said:
Take free money from employer to max.
Anything over and above put in S&S ISA in something like VLS100. Mark it for retirement use only, not general savings for dipping into.
Fire and forget with just periodic check once a year to check all is well. When they get closer to say 50 look at something like the target retirement funds, assuming such things still exist.
Then if SIPP age goes from 57 to 60, or more - they are not trapped.
IF they go into higher rate tax band then consider SIPP rather than ISA depending on existing rules.
IMVHO.
That's what I would suggest, just adding to utilise LISAs which comes with tax relief on (I think) up to £4k pa.Anything over and above put in S&S ISA in something like VLS100. Mark it for retirement use only, not general savings for dipping into.
Fire and forget with just periodic check once a year to check all is well. When they get closer to say 50 look at something like the target retirement funds, assuming such things still exist.
Then if SIPP age goes from 57 to 60, or more - they are not trapped.
IF they go into higher rate tax band then consider SIPP rather than ISA depending on existing rules.
IMVHO.
I have always put in the maximum amount I could since starting full time employment at 19, I think it was 5.45% from me and 21.5% employer - As others have said, it’s free money and the earlier you put it in the more it will compound.
I generally saved ~50% of my take home pay whilst living at home, which I used to pay off all expenses in one go (car insurance, car tax, mobile phones, other tech etc) rather than getting it all on finance.
I also opened a S&S LISA which I used solely for a house deposit, maxing that out each year, collecting the government bonuses and seeing ~30% growth in the 2.5 years I had it.
The rest of my money was spent on clothes, days out, holidays and cars of course...
Basically, max out pension contributions, open a S&S LISA, avoid high interest finance, especially for small purchases which could be paid for by simply saving a couple of months! Cars have always been an exception to that rule for me, it is PH after all
I should add, I’m 25 now, the above is what I did in the past 6 years and still do (minus the LISA, it’s now just an S&S ISA!)
I generally saved ~50% of my take home pay whilst living at home, which I used to pay off all expenses in one go (car insurance, car tax, mobile phones, other tech etc) rather than getting it all on finance.
I also opened a S&S LISA which I used solely for a house deposit, maxing that out each year, collecting the government bonuses and seeing ~30% growth in the 2.5 years I had it.
The rest of my money was spent on clothes, days out, holidays and cars of course...
Basically, max out pension contributions, open a S&S LISA, avoid high interest finance, especially for small purchases which could be paid for by simply saving a couple of months! Cars have always been an exception to that rule for me, it is PH after all
I should add, I’m 25 now, the above is what I did in the past 6 years and still do (minus the LISA, it’s now just an S&S ISA!)
Edited by 95JO on Tuesday 13th October 02:30
It is good to see they have their heads properly screwed on!
1) Max out pension contributions to the employer matched level (free money).
2) Then use a Lifetime ISA to get the same level of tax relief but with full access for their first home purchases.
3) Stay in the habit of saving and setting money aside.
4) When they hit the higher rate tax band a SIPP/pension is better than an ISA tax wise, but not as flexible for withdrawals. Put as much as possible into the former for higher rate tax relief and anything left over at the basic rate level into a Lifetime ISA, then a Stocks & Shares ISA when they have purchased their first homes.
You could make it more difficult and complex, but right now that is all there is to it!
1) Max out pension contributions to the employer matched level (free money).
2) Then use a Lifetime ISA to get the same level of tax relief but with full access for their first home purchases.
3) Stay in the habit of saving and setting money aside.
4) When they hit the higher rate tax band a SIPP/pension is better than an ISA tax wise, but not as flexible for withdrawals. Put as much as possible into the former for higher rate tax relief and anything left over at the basic rate level into a Lifetime ISA, then a Stocks & Shares ISA when they have purchased their first homes.
You could make it more difficult and complex, but right now that is all there is to it!
Pretty similar to others. I have always contributed to a company pension since the age of 17, however I didn't really understand it for a few years so was only contributing around 4% for 6 years. I since upped that to 10% (matched to 8%) toward intended to contribute more but have realised the 'trap' coming where private pensions will be age linked to the state pension. I now contribute 500/month into VLS60 and 150/month into a company share scheme...which I'm hoping will allow me to retire in my late 50's....only 30 years to go.
To summarise as other have mentioned, max out the pension to the company contribution level. Dont put all his eggs in one basket. LISA are just free money, so it's a good idea to open and start saving towards a house in that.
To summarise as other have mentioned, max out the pension to the company contribution level. Dont put all his eggs in one basket. LISA are just free money, so it's a good idea to open and start saving towards a house in that.
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hstewie said:
Thanks for sharing, interesting read and a good explanation I will pass down to my son in time. hstewie said:Rob_125 said:
Pretty similar to others. I have always contributed to a company pension since the age of 17, however I didn't really understand it for a few years so was only contributing around 4% for 6 years. I since upped that to 10% (matched to 8%) toward intended to contribute more but have realised the 'trap' coming where private pensions will be age linked to the state pension. I now contribute 500/month into VLS60 and 150/month into a company share scheme...which I'm hoping will allow me to retire in my late 50's....only 30 years to go.
To summarise as other have mentioned, max out the pension to the company contribution level. Dont put all his eggs in one basket. LISA are just free money, so it's a good idea to open and start saving towards a house in that.
+1To summarise as other have mentioned, max out the pension to the company contribution level. Dont put all his eggs in one basket. LISA are just free money, so it's a good idea to open and start saving towards a house in that.
The way I see a pension these days is you are putting money in for a very long time and you will get that money back out, but exactly when is not certain. If you work for a company their contribution makes it worth while. So its good to understand that and understand your needs in regards your retirement age.
When I started work my work pension age was 50. Then it moved to 55. Now its 57. It might even creep to 60. Thats 10 years added on. Does not sound like much saying from 50 to 60 but if you started work at 20 and did 30 years to 50 but now its suddenly 60 so thats 40 years work an extra 30% working time!
Plus at 20, 25 or even 30 you probably dont know how you will feel at say 45 - 55 with regards work and your retirement age.
I certainly thought I would want to work till 55 or maybe a bit more when I was say 20. But now, at 40.... the sooner I can stop work the better. So I need something to bridge the gap!
QuartzDad said:
My sons are 21 and 24 and both just starting on their corporate careers - grad roles, FTSE100 employers, getting paid around 26k, 5% employer pension contribution etc.
They're asking me for advice regarding pension contributions vs saving for a deposit vs general saving.
I've got my views on how much they should be putting into the pension but I'd be interested to know what 20-something PHers are thinking/doing and what the PH 'Dad' collective are advising their kids?
I’m 34 and haven’t ever really had to think about a pension as it was a no brainer joining my company’s DB scheme when I joined at 22. The new scheme for new entrants is a DC with the company doubling the employee contribution up to a max of 9/18%. If they have a similar matched arrangement I’d be encouraging them to max that out, might as well get as much out of the employer as possible. Then it’s saving for a deposit, once the house is bought, income has risen and potentially tax band has changed then it might be time to revisit pensions again. Then there’s also the most important thing for your 20’s, having fun. There’s no point in being too strict with money at that age to the detriment of enjoying life, especially when you consider that the money you’re saving isn’t going to be any use for 35-40 years. That they’ve considered it at all at that age is testament to their maturity and your wise guidance!They're asking me for advice regarding pension contributions vs saving for a deposit vs general saving.
I've got my views on how much they should be putting into the pension but I'd be interested to know what 20-something PHers are thinking/doing and what the PH 'Dad' collective are advising their kids?
Thats good advice re having fun.
Also you are time rich in your 20s. Try having 3 nights out a week or going camping in France for a month on a whim in your 40s. Just not possible. Thats time you are not going to get back until you are retired and by then you are not quite as able to do those things.
I used to come home from work on a Friday night 200 mile drive, out into town for 8pm. Then up at 6am, track day all day. Then back out in town for 8pm. Then on Sunday, maybe karting or shooting or gym. Probably getting in my car about 9pm heading back to work digs on the Sunday night another 200 mile drive.
If I did that now it would kill me!!!
Also you are time rich in your 20s. Try having 3 nights out a week or going camping in France for a month on a whim in your 40s. Just not possible. Thats time you are not going to get back until you are retired and by then you are not quite as able to do those things.
I used to come home from work on a Friday night 200 mile drive, out into town for 8pm. Then up at 6am, track day all day. Then back out in town for 8pm. Then on Sunday, maybe karting or shooting or gym. Probably getting in my car about 9pm heading back to work digs on the Sunday night another 200 mile drive.
If I did that now it would kill me!!!
Thanks everyone, all very helpful.
Interesting to see some of the big numbers in terms of employer contributions. Think I've had one employer give 8% plus the employer NI saving, the rest have been a straight 5%.
I've suggested they put in 10% each so 15% in total. If they can maintain that through their 20s then it should give them a decent start. The rest is going into a combination of help-to-buy ISAs, sharesave schemes and 15 year old BMWs
Interesting to see some of the big numbers in terms of employer contributions. Think I've had one employer give 8% plus the employer NI saving, the rest have been a straight 5%.
I've suggested they put in 10% each so 15% in total. If they can maintain that through their 20s then it should give them a decent start. The rest is going into a combination of help-to-buy ISAs, sharesave schemes and 15 year old BMWs
I'm 30, have always just done the bare minimum (well employer only) in order to maximise debt repayment/house deposit saving ability.
Exceptions were one month 4 years ago where I made a one-off £2.5k contribution to minimise income ahead of a court appearance for speeding (allowed me to legally declare a lower net income and get a fine of 1/3 of what it could have been) then when my income took me into the 60% marginal rate a year or 2 back I make an ad-hoc contribution when cash allows to minimise that.
Exceptions were one month 4 years ago where I made a one-off £2.5k contribution to minimise income ahead of a court appearance for speeding (allowed me to legally declare a lower net income and get a fine of 1/3 of what it could have been) then when my income took me into the 60% marginal rate a year or 2 back I make an ad-hoc contribution when cash allows to minimise that.
One way to look at it:
Or, if you save nothing, then you have to keep working until you die.
Over-simplistic, and unrealistic, but it does put the problem into perspective.
So the number is somewhere between 100% and 0%.
At a rough guess, the sweet-spot is probably around 25% for someone in their 20s (so maybe around 10% nett if you take in company contributions and tax-relief). I was lucky that when I started working, non-contributory final salary pension schemes were common. Funding rates for those were likely in excess of 25% to get 2/3rds final salary at 60 with 40 years of service.
I am glad I am not starting work now. I did not have the discipline to start saving anything significantly over and above the final salary scheme until I was in my 40s, and have had to save 50%+ over 10 years or so to be able to retire before 60.
- work from age 20 to 60 = 40 years
- live until 100 = 40 years
Or, if you save nothing, then you have to keep working until you die.
Over-simplistic, and unrealistic, but it does put the problem into perspective.
So the number is somewhere between 100% and 0%.
At a rough guess, the sweet-spot is probably around 25% for someone in their 20s (so maybe around 10% nett if you take in company contributions and tax-relief). I was lucky that when I started working, non-contributory final salary pension schemes were common. Funding rates for those were likely in excess of 25% to get 2/3rds final salary at 60 with 40 years of service.
I am glad I am not starting work now. I did not have the discipline to start saving anything significantly over and above the final salary scheme until I was in my 40s, and have had to save 50%+ over 10 years or so to be able to retire before 60.
Edited by 1 on Tuesday 13th October 10:05
Lord.Vader said:
I started by putting 4% in at 18, have put 9% in since I was 29 (32 now), company puts in 21.95% (19.95% for DB / 2% cash).
Once I’d bought a couple of houses and moved to a nicer house / holidays / cars etc I upped my contribution.
Once I’d bought a couple of houses and moved to a nicer house / holidays / cars etc I upped my contribution.
95JO said:
I have always put in the maximum amount I could since starting full time employment at 19, I think it was 5.45% from me and 21.5% employer - As others have said, it’s free money and the earlier you put it in the more it will compound.
Not sure many companies now are paying 20%+ into pension schemes, somewhere between 5/5 and 10/10 seems to be most common. For the younger generations it's going to be hard to have anything like the pension their parents had, and it will mean that the gap between those who "have" and those who "have not" will only get larger when inertance money moves between generations, as those with money can afford assets which generate more money, while those with little will still have little. Anyway, OP - as others have said, max out employers contributions, but after that it is up to your kids what to do, and I guess some of that will come down to what help you want to give them in future, and where they want to live. It is the best time in their lives to have fun and enjoy themselves, and there has to be a balance between that and saving for a house deposit or pension, no matter how much they may make financial sense. If your kids want to be in London and owning a house by 30 without your help that requires a very different set of priorities than someone who knows you are going to give them £10k as a deposit for a flat in Middlesbrough.
FWIW I'm in my early 30's with a house, a (smallish) pension and some cash savings. I dont try and save other than a couple of hundred quid a month, but do save any money I've not spent at the end of the month. It's all about balance - there is little point being the richest person in the graveyard and neither is there any point postponing things you enjoy in your 20s and 30s because you're worried about saving for retirement, but equally I have no intention of working forever.
Edited by Condi on Tuesday 13th October 13:08
Condi said:
Not sure many companies now are paying 20%+ into pension schemes, somewhere between 5/5 and 10/10 seems to be most common. For the younger generations it's going to be hard to have anything like the pension their parents had, and it will mean that the gap between those who "have" and those who "have not" will only get larger when inertance money moves between generations, as those with money can afford assets which generate more money, while those with little will still have little.
It's a DB pension, so the 21.5% is used for illustration purposes only I believe. Basically I get 2.5% of my salary for every year I worked there and it rises with inflation.I've since moved organisations, now I'm contributing 5% and the company doubles it, so 15% total - Although I'll be TUPE'd back in next year so hopefully I'll get access to the DB again...
21.95% is the equivalent for comparison, 19.95% per year served with a 4% entry cost (so 4% gets you 15.95%) then 2% (plus SVC) into an investment pot that I’ve just put in the highest risk.
DB is great, but not so great when you are thinking about leaving.
Even at a half decent seniority level I was only getting 8-10% matched offers, generally a 15-20% rise results in the same overall package, so why would I leave. (Plus 4 days a week, 10 minutes from home, etc).
My younger brother is about 29 and is also in a DB but at a local authority.
Our last DB scheme (the lowly 1% per year served, my old boss was on 1.66%!) closed in 2012.
Their DC pensions will give them a greater flexibility to move around, change jobs and build their base salary much quicker.
My rule has always been dead simple, get paid, pay my bills, half what’s left, enjoy half / save (invest, or whatever) half.
DB is great, but not so great when you are thinking about leaving.
Even at a half decent seniority level I was only getting 8-10% matched offers, generally a 15-20% rise results in the same overall package, so why would I leave. (Plus 4 days a week, 10 minutes from home, etc).
My younger brother is about 29 and is also in a DB but at a local authority.
Our last DB scheme (the lowly 1% per year served, my old boss was on 1.66%!) closed in 2012.
Their DC pensions will give them a greater flexibility to move around, change jobs and build their base salary much quicker.
My rule has always been dead simple, get paid, pay my bills, half what’s left, enjoy half / save (invest, or whatever) half.
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