should i pay into a pension now with auto enrolment coming in?

A question about : should i pay into a pension now with auto enrolment coming in?

I am 31 and have no pension and no savings. I'm an idiot, i know. until yesterday i knew nothing about auto enrolment and was stressing over stakeholder pensions, pp and pipps.

My employer employs around 90 people. now if i've understood it correctly he will have to introduce auto enrolment next year and he will only have to match 1% of my salary(currently 38,000) going up to 3% in 2018. This seems like a good deal to me, insofar that prior to even knowing about auto enrolment i was going to start paying into a personal pension of 250 a month.

if i started paying 250 next year instead with the boss putting money in according to how he's meant to i would end up slightly better off than if the scheme never existed

I'm thinking rather than wasting time putting money into a personal pension now it would be better placed in a s&s isa.

have i got my facts right or have i got the wrong end of the stick here? Should i forget about what ever the boss is going to line up and go for a sipp (i suppose i should wait and see what he's offering first) i know 250 is not alot, but i was going to open up a s&s isa anyway.

I wish i'd taken an interest in this earlier. Oh well, live and learn!

Best answers:

• I don't think you're an idiot. 31 is young compared to I'd guess many, many people starting 30+ with lots of debts to clear 1st. I'm sure there are plenty on here who wish they'd started at 31.
  I'm sure someone will come along soon and give you a detailed answer/advice
• Best to wait and hope that your employer doesn't so something daft like picking NEST as the pension to offer. Particularly unsuitable where there are higher paid employees, because of its cap on how much can be paid in.
  Meanwhile you can invest within a S&S ISA. That's good practice for pension investing and gets you a pot of money that's available in an emergency. Though not first choice, because the emergency might come at a time when investment values are lower. A fair amount in a savings account is first choice for emergency fund.
  No need to kick yourself over the past, you're paying attention and doing something about it and that's good.
• Hi I'm 44 and work part time with a cleaning company and their pension scheme is NEST I don't earn enough to be automatically enrolled but have the option to opt in if I want, I don't really undeerstsnd pensions, I have a post office one which was frozen when I left about 15 -16 years ago and I was there about 9 years, I stated a couple up about 7 or 8 years ago with friends provident and scottish windows but stoped them because I decided just to live for today-now I'm married, I have qite alot in premium bonds-and just wanted some advice from people who understand these things more than I do.Thanks
• You're:
  1. old enough
  2. not earning much
  3. unlikely to be able to afford to retire before state pension age on your income and existing pensions
  4. inexperienced with investing
  That tends to make me think that it's in your best interest to ask to join the NEST scheme at work, even though I'm not generally keen on it.
• You are 31, so if starting a pension today should be paying in 490 per month (incl employers contribution and taxrelief along with your contribs. Waiting til next year would mean instead of 15.5% of your income going into pensions that 16% should as you should aim in your starting year to put in half your age as a %. Your proposed contribution of 250 would work out to be more like 10%.
  Saving into a S&S isa is all well and good, but for every 80 you put into an ISA you will have 80. for every 80 you put into a pension, you will have 100.
  At your age, you should aim to have 3 months spending saved in easy access cash (in ISAs to save tax), then a pension and S&S isas and other investments.
  So if you have no savings and investments at all, I'd get on to the cash bit first, then open a pension and S&S isa.
• No, not necessarily. The 100 in a pension fund could be only 75% taxed at basic rate (or even no rate if within your personal allowance). 25% is tax free.
  I am not saying not to have S&S isas (or cash ISAS) I am saying that ISAs should not be relied on alone.
• Pension, pay in Ј80, get Ј100 in the pension pot, take 25% tax free lump sum and you now have Ј75 in the pension for a net cost of Ј55.
  Put the same net Ј55 into an ISA and you have Ј55 in the ISA.
  So you need to compare the income you can get from Ј55 in an ISA with the income you can get from Ј75 in a pension.
  Lets pretend that all of the pension income is taxed at basic rate because the whole personal allowance for income tax is used. That reduces the effective value of the Ј75 in the pension to Ј75 * 0.8 = Ј60. Lets also pretend that the ISA is fully tax free for income generation.
  That in turn means that you need to somehow generate 9.1% more income from the ISA than the pension to break even ((60 / 55 - 1) * 100).
  You can't even break even with the purchased life annuities you can buy outside a pension because they are a less competitive market with lower payment rates than pension lifetime annuities. And of course the ISA PLA isn't really 100% tax free and for many at least part of the pension income is.
• A way a PLA can be useful in conjunction with a pension that you already have is by taking the 25% tax free lump sum and buying a PLA. The catch there is that the PLA annuity rate might be sufficiently below the pension lifetime annuity rate that leaving 100% in the pension and buying a pension annuity still comes out ahead. The advantage in this case is more likely to shift in the direction of the PLA if the income would be taxed at 40%.
  The text book exam answer to buy annuities with 100% of the value of a pension pot is take the pension 25% lump sum and buy a PLA with it but that's not so likely to be the correct real world answer because of the difference in market competitiveness.
• 100 is the answer. as we don't know how much if any tax would be paid as everyone has a personal allowance.
  Everyone should have a pension if just to give income that would take up the personal allowance. If you relied on ISA income only, you would waste your TF allowance
• no, the answer is we don't know.
  it's only 100 in very limited circumstances - when your pension is covered by your personal allowance - i.e. you don't already have other income using the allowance, and the pension doesn't take you over the allowance.
  it's misleading to say: it is 100 because there's 100 inside the pension fund ... when you're never actually going to get all of it into your dirty hands.
  it's like saying: i have an income of X (before tax), so i can spend all that money! ... in fact, it's exactly like that, since a pension is a tax deferral scheme.
• Say I'm 55 years old, pay Ј80 into a pension on 4 May and take a 25% tax free lump sum on 5 May. I ensure that at no time do lump sums taken within any 12 month period exceed 1% of the lifetime allowance. Meanwhile on 4 May I pay Ј80 into an ISA and withdraw Ј25 on 5 May. On 6 May I spend the tax free lump sum and Ј25 ISA money. I now have the extra amount of money in the pension to produce income and the funding for ISA and pension has been the same throughout. Both the ISA and pension got a little growth on the extra money while it was there.
  Are you more comfortable with the calculation with these circumstances specified? If you are, how many years younger than 55 must you be before you consider it to be unfair?
  Usually I use the calculation you used, looking at it from the taking money out end. But the calculation with gearing can be more useful when considering where to pay in the money. Say in cases where you have money for mortgage capital repayment that you could pay into a pension or an ISA. Then the pension gets the income leverage. Or viewed alternatively, you get tax relief on your mortgage capital payments.
  The gearing is interesting. Sometimes it's not so useful to use it in the calculations but it's really useful if you have dual purposes like that mortgage case or just happen to be 55 or older and able to get the 25% quite quickly, though more realistically in a month or two rather than days. If you don't allow for the gearing in those situations you end up understating the advantage delivered by the pension. In both cases there's investment growth on the money and the 25% ends up being used for capital repayment, leaving the leveraged amount of capital in the pension to compare to the unleveraged ISA remainder once the ISa portion is used for the capital repayment.
• With so much uncertainty now with low interest rates, means testing and increased longevity, who knows what annuity rates will be in 30 years time, what will the retirement age be etc.
  If you have a job with a company pension. Final salary etc, or good % defined contribution then a pension is probably a real good option, with the tax relief too.
  If you don't have this, then your stuck with personal pensions, stakeholders etc and tax relief. With the uncertainties above, if you could afford to put away Ј5000 away a year, should this be into a cheap, discounted stakeholder, cash is a, stocks is a?
  Is there anything wrong with saving into ISA's for years, then if the tax rate has increased' annuities are good etc, putting a load of cash into a pension then, or I'd annuities are better, using cash to buy one instead of a pension?
  When your hand is on the cheque book, paying into the isa seems more sensible compared to the pension, despite the tax relief.
  Will the next couple of budgets see any big changes?
  I intend to be auto-enrolled next year, just I cannot get my head around paying into a stakeholder again rather than an isa.
• ISAs are good, but should be used alongside any pension. Pension, after the TFLS will give you an income that Could be taxed if it is over your personal allowance. So make sure you have some pension at least.
  AS ISA income, being tax free, is best to be used After you use up your personal allowance.
  Means testing will have no affect on annuity rates. And you no longer Have to use annuities.