Pension general advice

[Pepperwand]

During the lockdown I decided to take a look at my finances and get things organised and I've come to look at my pension but I get a bit confused so looking for some general advice if any exists about how much you should be saving.

I'm early 30s and been with my employer 5 years....first proper job after Uni so only have this pension. My company double match your contributions up to a max of 10% so from when I started working there I paid in 5% and my employer 10%. Last year I decided I could afford to pay more into my pension so upped my contribution to 10% to match my employers. Thing is I work part time due to having young DC and this is on a salary of £20k.

We're in a fortunate position where we can live off DH's salary so the money I bring in pays for the extra 'nice to have' bits like holidays, children's activities, going out (when all this is over!). Technically I could afford to up my pension contribution a bit more but should I? Is there anything better I could do with the excess? (We're only talking £100 a month or so.) I think I worry that compared to DH I don't earn a lot so I fixate on how best to manage my money.

For background we have a mortgage, two DC and have enough savings for 6 months of joint expenditure saved in case of DH losing his job. We also want to move to a bigger house in the next 5 years (when we're no longer paying nursery fees.)

Your savings needs are covered so in your shoes I’d put the £100 per month into an ISA: the stocks and shares variety. It’s more accessible than a pension and whilst you don’t get tax relief on the way in, as you do with a pension, your top rate of tax is only 20%. ISAs are tax free on the way out, so any growth is tax free when you sell your investments. It’s a medium to long term strategy.

You have to be prepared for some risk but you can mitigate risk - although not eliminate it - by investing £100 per month in an index tracker. That would be a good use of the money in my opinion.

Don’t bother with a cash ISA. The base rate is so low, and likely to remain so, that savings rates are pitiful and your capital will be eroded.

Good luck.

Thanks @Iamthewombat that's really helpful. I agree that with interest rates the way they are the money is doing nothing sat in my bank account. We moved our rainy day fund out of our cash ISA and into premium bonds at the end of the last year for the same reason. I've always been unsure of the S&S ISAs as I know nothing about investing but you've encouraged me to take a look into it.

If you don’t need the money and have other savings, the most efficient and profitable place is a pension.

If you DH is a higher rate tax payer consider offsetting more of his 40% band too

I agree with putting the extra into your pension and also your DH should look at upping his too if you can afford it.

Yes, DH is a higher rate tax payer and we've had this conversation before that I think he should up his pension contributions (he pays in the minimum). He's always said he'd prefer ready access to the cash in case we move somewhere bigger.....not sure which one of us is right!

The thing is, if you put it into one of your pensions, it’s locked up until you are 55 (age soon to increase, I believe).

There’s no doubt that saving into a pension is a good thing. I do it religiously, and for higher rate tax payers it’s tax efficient. However, I’ve always invested into an ISA alongside the pension because, like you, I know that I might want to access funds in five years, or ten years.

Even if I don’t need or want the money before I retire, I like the thought that the funds in my ISA can be drawn out tax free. You can get 25% out of your pension fund tax free when you retire, then the remainder is taxable (that’s because you get a tax deduction on the way in). I like the flexibility offered by an ISA: I take the funds out when I want, with no tax consequences.

One of the basic rules of investing is "don't have all your eggs in one basket". Keep the pension going but look at other things too.

He's always said he'd prefer ready access to the cash in case we move somewhere bigger.....not sure which one of us is right

Except if he's spending what he should really be saving into a pension on a house, then it's a house that you can't really afford. I suggest people aim for 15% of their salary if they haven't started saving from about age 22 - which few do.

Unless he saves sufficient into a pension heating and keeping that house may not be possible.

If you look at how much he has and then realistically what that might mean in pension, I expect that would be a bit of a wake up call.

Why not get an IFA to have a look at your finances and see what's realistic.