Pension questions

A few remarks:

1. Wait until you start 'career-type' employment and see what your employer provides. If you enter the public sector, the pension scheme is very good, with defined benefit (e.g. % of final salary). All other schemes are money-purchase, with return dependent on investment (often equity) performance.
2. Keep your spare cash in a mini-cash ISA. Because of commissions, you will probably get less than you've paid in when you try to withdraw your money from a pension scheme for many years.
3. Save up for a deposit on a house - likely to be the best long-term investment you can make.
4. Once you have dependents, review your insurance cover - life, mortgage, permanent health (not private medical) policies.
5. Read 'Planning Your Pension' from Which?

Alec

You're not moving with the times. Commissions are irrelevant with stakeholder schemes, and are next to nothing now anyway. If you get back less than you've paid in it'll be because there was little actual growth.

Rob Graham

Very true I suppose, I was just wondering about the possibility of having my own pension as well as an employer one. What happens if I`m with an employer and then leave - jobs for life aren`t exactly in fashion these days. Do any (or many) employers let you carry on paying into their pension scheme once you`ve left them to work elsewhere? If not, then surely having say 5 pension pots spread about between different schemes would result in a smaller final sum than one larger pot (all other things being equal of course).

To be fair, the money paid into the pension would be money I wouldn`t need until retirement. That`s why I`d have other cash and investments made that give me a spread of availibility, from instant access high interest accounts to account with longer periods of notice, with higher returns. If everything went horribly wrong and I was out of work for a long time, I could work my way through these savings as required. As I said, at the moment I`m good for 3 years of living without a single penny coming in at current expenditure - I could cut down and live for longer without any major troubles.

Plus a mini-cash isa only gives you 7k p/a at the moment, and isn`t this being reduced to 3k p/a? That`s not really a lot of saving IMHO.

It is being done, but I`m not keen on concentrating on a single investment and excluding all others. I`d prefer to get the deposit together while building up a nest egg as well - for example, if I get the house and am then unable to work for a while I`d like to have enough money put away to cover all my expenses for a reasonable period, regardless of any insurance policy I might have in place.

Absolutely. Right now I have no dependents, so life insurance etc isn`t worth having. Once someone is depending on my money then yes, this would be discussed, we`d figure out how much cover each of us would need, and go from there.

Simon Finnigan:

The problem with this is that your nest egg, if you invest it in something safe, will likely produce less than the cost of interest on the mortgage, so you lose out. Besides, if you have or can change to a somewhat flexible mortgage, the mortgage can be used to store the nest egg, that is when you are unable to work, you increase borrowing, which is perfectly OK as long as it does not move the loan-to-value ratio too close to 100%. For instance, if you buy a house that's worth 5 times your yearly expenditure and put your

Similarly, a nest egg does not protect you from the property risk. Say you buy a house worth 5 times expenditure and you have 3 times in assets when you buy. If the house becomes worth 2 times expenditure following some disaster, you have no assets left, however you look at it and wherever you stored the nest egg.

You can wrap the house in a limited company so that the ltd company bankrupts without touching your other assets should the house become a liability, but that's quite expensive as you lose tax advantages of owner occupation and pay higher interest on the loan.

That wouldn't really work. First, the bank is likely to want a personal guarantee on the loan, and second, the company would have to pay tax on the income from renting the house out to you, or alternatively, you would have to pay tax on the benefit received from the company by not having to pay rent on it.

"Jonathan Bryce" wrote

Of course it would!

"Jonathan Bryce" wrote

If they do then they shouldn't be charging the higher interest, should they? They should *either* ask for the personal guarantee (and then charge personal rates) - *or* charge the higher rate (as mentioned by Frank above).

"Jonathan Bryce" wrote

I see that Frank also mentioned about the tax disadvantages of wrapping in a Ltd Co ("losing advantages" = "gaining disadvantages").

So - bearing in mind that you'd be accepting the higher interest & higher tax - *why* is it that "That wouldn't really work" ??

Jonathan Bryce:

No, they just apply regular commercial (e.g. buy-to-let) lending rules and corresponding higher rates and higher minimum deposit. That the company lets the property to the company owner or to a random punter is not their problem.

Only on the difference between market rent and interest payments, as interest payments are a cost to the company and reduce its taxable profit. Then indeed you have either corporate tax or benefits in kind income tax on this difference.

Capital gains, if any, will be taxable, while owner occupiers are exempt, and that may be costly.

So it's not cheap but not impossible either, but then it buys protection for other assets. It's of course only interesting if total assets are comparable in magnitude with the property value: if they're much less, the lot is needed for the deposit anyway, if they're much more, diversification is easy as losing the value of a house becomes a relatively small risk.