What pension options are there for a 22 year old graduate in the UK?

Question

Following graduation last July, I've managed to save quite a significant amount of 'emergency wonga', for those rainy days or, more likely, the catastrophic end to my job.

Anyway, now that I have a reasonable amount of savings I would like to start up a Pension fund alongside the Pension scheme I'm enrolled in with work - the reason being is that I contract alongside my full-time job and would like to allocate this extra cash sensibly. I anticipate that within 4-5 years I'll be looking at a deposit on a house - so perhaps investing into another Pension scheme isn't the greatest idea at this time?

Finally, I have been considering a SIPP scheme, but I'm worried that perhaps tying up money this early on in a scheme is risky considering I should be looking to the property market in a few years time. Perhaps I should just invest in the stock market generally and forget the SIPP? I assume this would give me more flexibility even if I do not make a return - though I understand that with a SIPP you're not subject to Capital Gains Tax and can avoid Income Tax. Perhaps the safest option is to keep paying into a savings account for the time being and wait until I have a deposit on a house...

In short, should I invest in another Pension scheme alongside my current work scheme, and if so, is enrolling in a SIPP a little risky at this time considering the potential of a housing deposit in a few years time?

Thanks, and hopefully this isn't too ambiguous.

PS - I have £19k of student debt, though I don't plan on paying this off early.

Answer 1

Major things to consider:

• What is the interest of your student debt? How does that compare to other investing vehicles? If the AER of your student loan is >= 5%, clearing that could be the most sensible investment. Don't take my word for it, do a Net Present Value calculation for competing investment vehicles: I predict the interest of the loan to single-handedly outweight whatever you'd be earning from alternative sources in a 5-year period.

If you're expecting to look at the property market:

• it might prove to be sensible to start doing it now, since the market is just recovering, and (IMHO warning -I'm not a professional investor, just a random guy on the internet) prices still hasn't caught up with value fundamentals.

• check out cash ISA's for a 24-36 month timeframe; most do a reasonable 3-4% AER, with the current inflation rate being around 4%, this will, at the very least, make sure your money doesn't loose it's purchasing power.

Finally, a word of caution: SIPPs have a rather rubbish AER rates. This, by itself, wouldn't be much of a problem on a 30-40 years timeframe, but keep the (current, and historically strictly monotonically increasing) 4% inflation rate in mind: this implies the purchasing power of any money tied in these vehicles will loose it's purchasing power, in a compounding manner.

Hope this helps, let me know if you have any questions.

Answer 2

I wouldn't go into a stock market related investment if you plan on buying a house in 4-5 years, you really need to tie money up in stocks for 10 years plus to be confident of a good return. Of course, you might do well in stocks over 4-5 years but historically it's unlikely.

I'd look for a safe place to save some money for the deposit, the more deposit you can get the better as this will lower your loan to valuation (LTV) and therefore you may find you get a better interest rate for your mortgage.

Regards the pension, are you paying the maximum you can into the company scheme? If not then top that up as much as you can, company schemes tend to be good as they have low charges, but check the documentation about that and make sure that is the case.

Failing that stakeholder pension schemes can also have very low charges, have a look at what's available.