Pension in your twenties

T

Talking Money

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Just a pension health check please. I'm aged 27 and have been part of this pension scheme for the past three years. I'm currently paying into a 50:50 risk sharing scheme, DB Section & DC section. Just to note the Salary Cap is €48,000 - I expect to exceed that salary by 2021 - 2023.

Currently these are the figures:

Basic Salary: €36,000
Overtime: €4,000 - 6,000 (not pensionable I understand)
Total: €42,000

Pension: Enrolled since 24
Employer: Contributes 8%
Myself: Contributes 5%
AVC: Paid 2% AVC for two years, raised it to 6% in January.
Total: 19% combined total.

As I'm earning good money for my age, am I doing the right thing by having an AVC? I understand and accept that I won't see this until retirement.

Also my salary will rise to 40K by December of this year. Instead of increasing my AVC this December I was thinking of increasing my debt pay down by the surplus and building a solid emergency fund.

What would you advise?
 
Do you own a house?

Have you paid down the mortgage to a suitable level?

You should only voluntarily contribute to a pension scheme to the extent that your employer matches it, if you have not yet bought a house.

Save your money outside a pension scheme until you have bought a house and got the mortgage down to a comfortable level.

Brendan
 
Brendan Burgess said:
Do you own a house?

Have you paid down the mortgage to a suitable level?

You should only voluntarily contribute to a pension scheme to the extent that your employer matches it, if you have not yet bought a house.

Save your money outside a pension scheme until you have bought a house and got the mortgage down to a comfortable level.

Brendan
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Currently renting, but saving with partner for a property that will be for sale in two years, private sale.

Is it not best to let a fund grow with compound interest as other variables like rent, transport and food are well covered for.
 
Your savings outside the pension will also grow with compound interest!

The bigger your deposit, the better your choice of mortgages and the lower the interest rate you will pay on your mortgage.

Brendan
 
Brendan Burgess said:
Your savings outside the pension will also grow with compound interest!

The bigger your deposit, the better your choice of mortgages and the lower the interest rate you will pay on your mortgage.

Brendan
Click to expand...

Thank you Brendan.

Fair point regarding compound interest, although I won't get tax relief on savings outside pension pot.

Should have mentioned we are saving already, will increase from December.
 
Paying off expensive consumer debt should certainly take priority over making AVCs.

Beyond that, it's a question of balancing your long-term and medium-term financial needs.
 
Sarenco said:
Beyond that, it's a question of balancing your long-term and medium-term financial needs.
Click to expand...

Just to be clear putting your savings into a a deposit account is both for your long-term and medium-term financial needs.

It takes absolute priority over tying it up in an inaccessible pension fund.

Brendan
 
Brendan Burgess said:
Just to be clear putting your savings into a a deposit account is both for your long-term and medium-term financial needs.
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I fundamentally disagree.

I wouldn't use a taxable savings account for my long-term financial needs (such as retirement savings).

But a simple savings account is an ideal vehicle for saving for a medium-term objective (such as a house deposit).

Striking an appropriate balance between medium-term and long-term financial objectives is a matter of judgment. I don't know how you could possibly say that one takes "absolute priority" over the other.
 
Saving is saving. The long-term is just a series of short-terms.

The advantages of owning your own home are so big that this must take absolute priority over everything else. Buying a home and paying down the mortgage is a great form of long-term saving.

Brendan
 
Brendan,

Sorry, this is nonsense. You can't possibly state that "owning your own home should take absolute priority over everything else"

In Germany or Switzerland it is extremely normal to rent and this provides considerably flexibility in the labour market - a very relevant point for someone in their 20s and possibly more relevant to someone than getting on the housing ladder at all costs, only to find that it's against the wrong wall....
 
Hi Marc

With respect, it is not nonsense at all.

The advantages of home ownership in Ireland are huge.

  • No capital gains on any increase in value
  • Ignored for any means testing
  • Lower borrowing costs that for other asset classes
  • Protection if you get into financial difficulty
  • No taxation of the benefit. If you choose to rent a property and buy shares instead, you will pay tax on the income from the shares.
The cost of renting money to buy a property is usually much cheaper than renting property.

I suspect that they are different in Germany and Switzerland.
  • Professional landlords vs. the amateurs we have in Ireland
  • Do Germans get tax relief on borrowings to invest in equities?
I would agree that there is no theoretical reason why owning your own home should be preferable to renting, but in practice in Ireland, it has almost always been the best investment.

Brendan
 
Understand what Brendan is saying and some very valid points made, although a mortgage brings huge mortgage interest, challenges of the housing market if need to sell, as mentioned we're working on a five year plan or so as we're still young to invest in a property. I think while we are renting at a very good rate, able to well, and able to save a set amount for a house I'm happy to continue. Agree with Brendan that a home paid for is better than renting long term.

Q1: If I can bring the topic more on track to where I started. Would I be right that my combined 19% into the pension is quite good for this age bracket? and sufficient until at least 30 & home formation.

Q2: And regarding the extra €3,500K raise coming in December. Which I reckon could be an extra €140 per month after tax, how should I allocate that. Increase rainy day fund? begin investing in stock markets, or?

It's a pity that the government don't run another SSIA style scheme.
 
Q1: Yes, I think it's a very heathy contribution level for somebody at your age.

Q2: if you think you might want to buy a property in five years' time then you will need to save a chunk of cash for the deposit and the various acquisition costs (legal, stamp duty, etc). The best place to save for this is a regular savings account.

As I said above, it's a question of balancing your medium-term and long-term financial objectives.

Incidentally, I think you have a very good grasp of the pros and cons of property ownership. The notion that owning your own property "must take absolute priority over everything else" is just daft.
 
Talking Money said:
I think while we are renting at a very good rate, able to well, and able to save a set amount for a house I'm happy to continue. Agree with Brendan that a home paid for is better than renting long term.
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Hi Talking Money

If you are renting cheaply, then that is a very good argument for not buying a house now.

But it's still clearly correct to save up as much as possible for your deposit and not make any contribution to your pension scheme which is not matched by your employer. This is true despite Marc's "nonsense" and Sarenco's "daft" comments.

I repeat - your absolute priority is to buy a house. You may choose not to do so for 5 years, but it's your priority. The advantages are so huge, that nothing else should be considered.

In 5 years, after you buy your house, you will be 32 and will still have 33 years to contribute to a pension.

Brendan
 
Pension tax breaks could change in the future and need to be taken into account.When I first started paying into my pension I did not have to pay any prsi on the money I paid in ,There is a good chance tax breaks will see a cut once everyone who works has to pay into a pension by Law.I paid a small amount into an AVC each year since the early eighties best thing i ever did along with (Employer/Employee/Conts All defined benifit) . My AVC defined contributions,Up to 1988 I did not need a big Emergancy Fund that changed when Government changed away from paying 75% of your wages if you were unemployed ,
 
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Hi Brendan

You seem to agree that it makes sense to contribute to a pension scheme if it comes with a matching employer contribution before somebody owns a property. Right?

Well, if that's the case, how can you simultaneously argue that saving for a house purchase "must take absolute priority over everything else"? You have already allowed for one exception to your "absolute".
 
Sarenco

It's very clear from my first post

"You should only voluntarily contribute to a pension scheme to the extent that your employer matches it, if you have not yet bought a house."

You and Marc are just regurgitating the conventional "wisdom" of the pensions industry. It's wrong. It doesn't matter how many of you say it. It doesn't matter how you try to dismiss any challenge to this industry mantra by simply labeling it as "rubbish" or "nonsense", your views are still wrong.

Talking Money should not be making any contributions to a pension scheme which are not matched by his employer until he has bought a house and got his mortgage down to a comfortable level. He will have still have 33 years to contribute to a pension scheme.

Brendan
 
Brendan Burgess said:
your views are still wrong.
Click to expand...

Seems a bit mad to say someone's opinion is wrong? Surely an opinion is someone's held beliefs - Sarenco is not claiming that it is fact in all cases that you should max AVCs instead of saving for a mortgage - just that balancing medium to long term ambitions can be the right way to go.

For Talking Money, I would fall in the middle. I would say that getting money together for a deposit is very important, but contributing to your pension is extremely tax efficient. Your current contribution levels are very good for someone in their twenties so if you can keep them at that level and then look to get money into a deposit account to start building a deposit for a house, I would say that this is probably the best bet.
 
Brendan,

To be clear. I wasn't saying that having not bought a house, that the default alternative was therefore to invest in a pension. My point was that the benefits of labour market flexibility in your 20s may well outweigh the longer term structural advantages of home ownership in Ireland.

You have to include the costs of purchase (stamp duty, solicitors costs etc) and the costs of selling (more solicitors costs, estate agents fees) into your decision to buy relative to your holding period. Say, you buy a house today and need to move in 6 months to Frankfurt? Is it still the case that owning a house is now an absolute priority? Of course you could rent it out but really how many 20 somethings want to be dealing with the hassle of being a landlord having moved away??
 
Talking Money said:
Just a pension health check please. I'm aged 27 and have been part of this pension scheme for the past three years. I'm currently paying into a 50:50 risk sharing scheme, DB Section & DC section. Just to note the Salary Cap is €48,000 - I expect to exceed that salary by 2021 - 2023.

Currently these are the figures:

Basic Salary: €36,000
Overtime: €4,000 - 6,000 (not pensionable I understand)
Total: €42,000

Pension: Enrolled since 24
Employer: Contributes 8%
Myself: Contributes 5%
AVC: Paid 2% AVC for two years, raised it to 6% in January.
Total: 19% combined total.

As I'm earning good money for my age, am I doing the right thing by having an AVC? I understand and accept that I won't see this until retirement.

Also my salary will rise to 40K by December of this year. Instead of increasing my AVC this December I was thinking of increasing my debt pay down by the surplus and building a solid emergency fund.

What would you advise?
Click to expand...

Back to the original point as this thread seems to have been hijacked.

If you do not have an Emergency Fund, you should start one ahead of putting the money into your pension. While aggressively funding your pension now with stand you in good stead come retirement, it is a long way away and a lot will happen between now and then. It is important you have enough cashflow available now for when you need it.

Whether you did the correct thing in January depends on how much cash you have left as a result of increasing your pension contributions. Is your pension all your savings or are you able to put a few quid away each month? If it is all you are able to save, I would look at reducing the AVC's back down and building up some liquid cash.


Steven
www.bluewaterfp.ie
 
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