# Key Post: But you can be too young to start a pension



## mollser (16 Oct 2003)

From the Savings and Investments guide

Hi Brendan,

For punters nowadays who are late 20's/early 30's and haven't got on the property ladder, would you still suggest this? It may take quite a few years to get a mortgage under control, but it would seem like very risky advice to begin a mortgage at age 35/40??

Given pensions are a very efficient savings advice, would it not be better to get one going (even a nominal one) as well as a mortgage, even though it would be hard?

Cheers


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## daltonr (17 Oct 2003)

*Re: "But you can be too young to start a pension!"*

Mollser,

I think you are right, for people who have no plans to buy a house for a LONG time.  I'm not sure it's true for people who are trying to scrape together enough to get a house as soon as possible.

Even if "As soon as possible" is 5 or 10 years, then by definition contributing to a pension will add to that.

The one thing which confuses matters slightly is that pensions give you such a top up in terms of tax relief.

Take the example that's allways used to explain compounding.
Person A starts saving at 20 and saves regularly until age 30.   Then stops, leaving their savings to grow.  Person B starts at 30 and invests regularly for the rest of their life.  At age 60, person A is worth more than person B.

So, to get back to pensions, there may be something to be said for getting the money in their, getting the tax relief and letting both your investment and the governments grow.

As long as it doesn't mean delaying the desired house purchase forever.  Remember on the other side of the equation you've got rent, and that's doing nothing for your net worth.

Perhaps for someone living with Parents, it might work.

-Rd


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## andy (17 Oct 2003)

*Re: "But you can be too young to start a pension!"*

Could we have a practical example of this 

"Take the example that's allways used to explain compounding.
Person A starts saving at 20 and saves regularly until age 30. Then stops, leaving their savings to grow. Person B starts at 30 and invests regularly for the rest of their life. At age 60, person A is worth more than person B."

If a 20 year old pays €100 per month for ten years and the fund grows by 6% pa, at age 60 the fund is worth €67,210. Assumes 1% AMC.

Paying €100pm from 30 to 60 would give a fund of €81,502.48. Same assumptions.

What kind of calculator do you use daltonr?


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## Brendan Burgess (20 Oct 2003)

*Re: "But you can be too young to start a pension!"*

Hi andy

daltonr's ABC arithmetic may not be correct, but he was illustrating the point made by a lot of commentators that if you don't start a pension as soon as you get a job, you are going to die in abject poverty. 

To get back to the original question from mollser... I know a lot of people feel that they will never be able to get on the housing ladder, so they start a pension. But I think this strategy is incorrect. You are better off saving for the deposit for a house and buying it with one or two other people. Money in a pension scheme is of no use to you when you come to buy the house. 

You ask "it would seem like very risky advice to begin a mortgage at age 35/40??". 

It's more risky to start a mortgage at 35 than at 25. But it's very risky not to own a home. The risk of renting is much higher than the risk of buying a home.

Brendan


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## daltonr (20 Oct 2003)

*Compounding*



> Could we have a practical example of this




No problem.  The examples that are used to show the magic of compounding aften use rates like 15%, but it works with rates as low as 7%.

Person A begins investing 1000 per year at age 20.
Earning 7%.  At age 30 they've invested 10,000, but their balance is €14784 earning them interest of €1035.

Person B begins saving at 30, earning the same 7%, and paying in €1000.  

After 30 years of contributions Person B's savings will have grown to €101073.  Person A's savings will have grown to 112536.

it works because the fund build up in the first 10 years by person A, is generating more in interest than person B is contributing.  At 7%  I reckon A & B would be in their 80's before B caught up.

In fact, there is an interest rate at which the gap between A & B continues to increase.  B would never catch up.  I think it's as low as 7.2%

This doesn't tranaslate directly to pensions.  There are menagement fees, tax relief etc.  But it does illustrate  the benefit of having a fund in place as early as possible earning money for you.

-Rd


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## rainyday (20 Oct 2003)

*Re: Compounding*

I think the 'magic' of compounding is often overplayed by the pensions industry, or to be more specific, the 'black magic' of compounding on the interest rates that you are *paying out* on your mortgage are under-played. And of course, it is 100% certain that you will be paying interest on your mortgage - it is by no means certain that you will be getting any return on your pension fund at all at all.


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## daltonr (20 Oct 2003)

*Re: Compounding*



> or to be more specific, the 'black magic' of compounding on the interest rates that you are paying out on your mortgage are under-played.



As the saying goes, those who understand compounding earn it.  Those who don't, pay it.

-Rd


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## mad max (21 Oct 2003)

*Compounding*

Yes, the effects of compound returns for early starters can be overstated.  

Daltonr's own examples illustrate this - his first example showed the 20 year old who saved for 10 years ending up with less at 60 than the guy who started at 30 and saved for 30 years, whilst his second example showed the reverse.

It all depends on the assumptions...


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## daltonr (21 Oct 2003)

*Re: Compounding*



> his first example showed the 20 year old who saved for 10 years ending up with less at 60 than the guy who started at 30 and saved for 30 years, whilst his second example showed the reverse.



I wouldn't agree.  I only gave one example.  Andy put some figures on it that left person A with less (6% growth, 1% AMC),  I put some figures on it that left person A with more (7% growth, 0% AMC).

As I read it the difference of 1 or 2 % made a big difference.  

To get back to the original question.  If someone has no plans to buy a house for a long time.  Are they justified in starting some sort of pension to start taking advantage of tax relief and compounding? 

Brendan says no. It's better to save that money and purchase the house as quickly as possible.

I see the logic, but there's something about it nagging me.  
It seems like you could get into a situation where you have a big mortgage AND you also need to make big pension contributions just to have a reasonable income on retirement.  

Lower pension contributions (as a result of starting earlier) means more disposable cash which could be thrown at a mortgage.

It'd be interesting to see if there is a crossover point where the lower pension contributions can be used to compensate for a higher mortgage or to pay of the same mortgage sooner.  

I don't know if that crossover point exists, but I think that's the aspect of this that is nagging me.

-Rd


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