Teens first job, pension etc

[HoneyMoneyMoon]

Teen DD has just started a Saturday job which she loves. She is paid monthly and has just been paid. Shes in the first year of A levels.

I have talked to her about savings and a pension, and we are going to spend a bit of time setting things up.

The trouble is I am not good with maths and money. I’d really welcome some advice.

I have told her that I’ll pay for her travel and her mobile phone. I’ll give her £40 month in pocket money. She doesn’t really cost much else, isn’t into beauty. I’ll buy the clothes she needs, like coats and shoes. She mostly has lunches from home but will sometimes buy food out. She says she doesn’t want the £40 but I think she has to see something for working.

I put £20 a month into a savings account for her which she will get when she’s 18. She knows there will be about £5k in it and she wants to reinvest immediately.

She has the option of signing onto a works pension. Because of the amount she earns work won’t add to it. But I think she should sign up to it, and she thinks it’s a good idea. She just has to email payroll. IS this a good idea and if there is a choice what percentage of her wage should she pay into the pension?

Shes got a current account and we are going to open a separate Monzo account. In this she’s going to put her monthly spending money.

Then she wants to save. Should she have two lots of savings? One for nice but big things now like trips and driving lessons? And one to not touch, so saving for a flat deposit? If so what percentage of her wage should go into each? Where should she save these?

sorry if I sound naive but I’d like her to enjoy her money and have some for the future, set up decent spending and saving habits.

Thank you I didn’t know about this loophole.

Unless she wants to actively manage the investments, I can’t see any advantage of a SIPP over the employer pension. In fact, the employer pension may well have lower fees. If she stays long enough for the employer to start contributing, it might also be easier to have it all in one place.

I wouldn’t unless she’s above the threshold at which you start to pay tax ( assuming she’s not) or work pay into it. Otherwise there’s no benefit - she may as well put it into a stocks and shares isa. At least then she can access when she needs it.

From gov.uk website

If you do not pay Income Tax
Your pension provider can claim tax relief for you at 20% on contributions you pay into a pension each tax year (6 April to 5 April) up to either:

• 80% of your earnings in that year
• £2,880 if you have no earnings in that year

You don't just lose the government bonus. You lose 6.25% of the money you put in because of the way they apply the penalty

If you put in £80 the government adds at 25% bonus taking it up to £100. They apply a 25% penalty when you remove it. For every £100 you lose £25. This means if you put in £80 you will only be able to take out £75. This £5 loss is 6.25% of the total balance you put in place.

DS is on a gap year and has started paying a few quid towards his workplace pension. I wanted him to get in the habit of it.

I am not the first to say this - you still get tax relief even if you haven’t paid any tax.

Not necessarily in your workplace pension. If the pension payments are deducted before tax, the scheme does not reclaim tax. You will get the rebate (even if it isn’t a rebate) in a personal pension or SIPP that is not linked to your workplace.

Thank you all, such an education.

I do t know what to suggest to her for her pension.

shes hoping to stay in the job in some form or other for years, she loves it! It would certainly be easier to pay into the work pension.

However she may start earning through her self employed work. And I’m not sure you can have two pensions going at once? Can you? .

What i meant about saving for her tax was that she’ll likely get paid in dribs and drabs for her self employed work. Think something like an actor. I want her to save enough to be able to pay the taxman each year. It’s easy to say don’t worry about it, you’ll get told what you owe, but you’ve got to have that money available to give.

I’ve gone on MoneySaving Expert, which says that SIPPs should only be opened if you know what you are doing. I don’t!

Is there another type of pension she can have? It seems that defined contribution schemes are easiest but I can’t work out if you can get them yourself or if they have to be run by work.

I am in a union and I might see if they have a Financial Advisor scheme.

SIPPS with an investment company such as AJ Bell will have a plan that they do for you based on level of risk and involvement.

Yes you can have more than 1 pension running at once. Lots of people have a workplace pensions and a personal pension. You can pay into more than one at once, so long as you don't exceed the limits on tax relief on your total contributions (60k a year if you pay income tax; 80% of your earnings if you don't pay income tax; £2880 if you have no earnings)

There are two broad types of pensions

1. Defined benefit (also known as final salary and are available through some workplaces only)
2. Defined contribution (most workplace pensions and all personal pensions are defined contribution. A SIPP is a type of defined contribution pension)

Have a read of this
https://www.gov.uk/personal-pensions-your-rights
And this
https://www.moneyhelper.org.uk/en/pensions-and-retirement/pensions-basics/choosing-a-pension-yourself

So if your daughter opens a private pension it will be a type of defined contribution pension. There are lots of providers - look at insurance companies and investment platforms eg aviva, standard life, fidelity, hargreaves lansdown etc.

It sounds like you don't feel confident enough to choose your own investments, so feel a SIPP is too complicated. I understand, but I would argue that learning how to invest and removing the fear of the unknown at 18 is a huge life skill for your DD. She'll be working with with smallish amounts of money since she's just starting out. Eg if she's investing a pension pot that's £500 to £1k at 18 years old, that's much less scary than learning how to do that years later when her pot is £100k. Why not watch rebel finance school videos on YouTube together to improve both your confidence and knowledge before you start shopping around for a pension. I promise it's not actually complicated or scary

But if you decide not to go for a SIPP you can choose a standard personal pension, where the provider invests the money for you based on the level of risk you choose. Standard life for example offers 3 types of personal pensions - Standard, SIPP, Stakeholder

Personally I wouldn't pay a financial advisor to sort this out for me, when it's straight forward to do yourself and learning the basics about this stuff is important for building wealth

I think I’m worried because my parents had their retirement money in the Northern Rock. They lost lots of money in 2007 and it hit them emotionally and mentally , my mum never really recovered.

And I’ve never thought about building wealth. I’ve always thought about how to get through to the next pay day-and I don’t want that for my DC.

You are thinking very sensibly and long term though. You're thinking about securing your daughter's retirement when she's still a teenager. That's something a lot of people don't give a thought to until they're 40! You're thinking about making sure she has enough money put aside to pay her income tax from her self employment so she's not going to end up in a mess in January. And presumably you're having these conversations with your DD so she's more financially literate than she would be otherwise.

Northern rock going under was awful and I'm sorry your parents were caught up in that mess. It did lead to an improvement in regulation and safety. Seriously, watch the Rebel Finance videos with your DD over a few weeks and see how you feel when you understand more. They're not specifically about pensions, but explain investing brilliantly which is the scary unknown bit. The pension account is just the wrapper the money is in.

The key to a well funded retirement, and in fact to a stress free financial life, is to always live below your means.

We often discussed finances with our children and as soon as they were old enough for pocket money we encouraged saving.

Dickens explained it clearly:
“Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”

Whatever her income, it’s useful for her to think of the concept ‘pay yourself first’, i.e. before any other expenditure invest in your future self, whether that be in a pension, long term savings for a house deposit, or short term savings for passing the driving test. First thing to save for is an emergency fund of at least 3 months income in an easy access account in case of job loss (not in case of emergency trip to Ibiza with mates 😁)

Encourage forward planning; put away monthly sums for annual expenses, e.g. car tax, insurance, Christmas. I know people who are still surprised by the costs of Christmas!
Definitely put away a minimum of 20% of any self employed earnings for tax and NI bills in the future; I usually had a nice windfall after paying my tax bill as I didn’t earn loads and 20% was enough. Obviously if earnings are higher at least 25% would be needed. Depends on tax code and tax rates at the time.

Once pension, savings, and annual expenses are sorted, then look at things like holidays, clothes, haircuts etc. and budget a monthly sum for these. Again, they should not come as a surprise; look back at bank/credit card statements to see what has been spent on them in the past year and then divide by 12 for a rough idea of what to budget for each month.

The next item is monthly expenses; once you have your own home things like council tax, utilities etc, but for a teenager/young person living at home it might be a mobile bill or gym membership.

Then, and only then, you can spend what is left! If there is nothing left, then a) something needs to be cut back or b) you need to increase income.

On the issue of pensions, once in a scheme that has employer contributions then definitely pay in up to the amount matched by the employer, but if she is planning on some form of self employment in the future, then opening a low cost SIPP is a good idea, even if she only puts a small amount a month in. I use AJ Bell but it’s worth looking on MSE for suggestions. A world tracker fund with low charges is something to consider for investment, and yes HMRC give you tax relief direct into your SIPP. Having more than one pension is absolutely fine.

I’m now retired and not earning but still put £2880 into my SIPP every tax year, and get tax relief of £720 paid straight into my SIPP from HMRC.

I have repeated some of the good advice given by other posters, and this isn’t the definitive guide to finance by any means, but it should be a good start.

A simple spreadsheet is a good place to start budgeting, no fancy software needed, but some bank apps now have quite good budgeting capabilities.

As to my children; one took it all to heart and is very financially comfortable, the other not so much! You can lead a horse to water...

Thank you, you’ve been most helpful.

It is amazing how emotional thinking about money can make me!

I have found it difficult to talk to DD about all this, other than in a very general way. I didn’t want to worry over, or make her feel that finances were frightening. Just quickly at the Rebel Finance page has been an education in itself-a different way to think about money.

We have talked about saving for retirement, big things in the future, fun things and for tax!

They’re far too long to watch with her-I just know she won’t. It I’ll watch the series and tell her what I’ve learnt and maybe suggest some highlights! I’m also planning to do their Excel Spreedsheet course.

I love the idea of paying herself first, that’s such a positive way to frame things.

just Have to start now!

Money is just a tool. It's neutral. It's a metaphorical spade you use to dig your garden with. Don't give it so much power. You just need to know how to use it to it's best advantage. If you used that garden spade with your nose you wouldn't do so well, but you know to use your foot, because at some point you learnt how to use that tool.

I think you and your daughter should both blitz the you tube course Rebel Finance school.

you also seem shaky on some basic financials but appear to be motivated, encouraging and obviously care for your daughter.

do the course, you’ll really understand saving, investments and pensions after the sessions