am I crazy?
Options
boglehead
Posts: 168 Forumite
I just wanted to double check our "savings/retirement" strategy, to make sure I am not crazy giving up on pension tax relief. Here is my situation:
Both my partner and I are contributing to our work pension up to the amount matched by the company - nothing less, nothing more.
The idea is that we are happy to do so because we both get the tax/NI relief (she gets 42% and I get 47%) and that company matches anything we put in, up to 7% of our compensation. However, although we still have £40K+ left of annual pension allowance, we do not want to put anything else on top of it, despite the tax relief.
The rationale for this is mainly 4-folds:
1- we both want to retire around 50y/o (15yrs from now), and wouldn't be able to access our pension pots until 55 - and that probably will be 60 by the time we get there. So we need a substantial amount of savings on the side, to live on from 50 to 60.
2- i am positive the pension tax benefits will be cropped over the years: e.g. don't believe the 25% tax free lump sum will still be allowed then
3- even without maxing out the pension contribution allowance, we still will hit our lifetime allowance before 50 y/o
4- we like the flexibility of being to take our savings out instantly, in case the pension laws really change for the worst - or the tax regulation gets even stricter (back to a 50% income tax rate for example)
As a result, we're using the extra money to max-out both our NISA's, and a junior ISA for our daughter, and what's left is invested in taxable account (super low cost broker and invested in vanguard index funds).
I really hate giving up on free tax money, especially given the big tax relief we would be entitled to, but based on the reasons highlighted above, I still think it makes sense....
Am I crazy?
Both my partner and I are contributing to our work pension up to the amount matched by the company - nothing less, nothing more.
The idea is that we are happy to do so because we both get the tax/NI relief (she gets 42% and I get 47%) and that company matches anything we put in, up to 7% of our compensation. However, although we still have £40K+ left of annual pension allowance, we do not want to put anything else on top of it, despite the tax relief.
The rationale for this is mainly 4-folds:
1- we both want to retire around 50y/o (15yrs from now), and wouldn't be able to access our pension pots until 55 - and that probably will be 60 by the time we get there. So we need a substantial amount of savings on the side, to live on from 50 to 60.
2- i am positive the pension tax benefits will be cropped over the years: e.g. don't believe the 25% tax free lump sum will still be allowed then
3- even without maxing out the pension contribution allowance, we still will hit our lifetime allowance before 50 y/o
4- we like the flexibility of being to take our savings out instantly, in case the pension laws really change for the worst - or the tax regulation gets even stricter (back to a 50% income tax rate for example)
As a result, we're using the extra money to max-out both our NISA's, and a junior ISA for our daughter, and what's left is invested in taxable account (super low cost broker and invested in vanguard index funds).
I really hate giving up on free tax money, especially given the big tax relief we would be entitled to, but based on the reasons highlighted above, I still think it makes sense....
Am I crazy?
Total Debt
12/2012 - £893k (mortgage and toys loans)
11/2019 - £556k (mortgage only)
12/2012 - £893k (mortgage and toys loans)
11/2019 - £556k (mortgage only)
0
Comments
-
Am I crazy?
No; I have a lot of sympathy for your caution. But
(i) You have a daughter: I believe there can be an adavantage in terms of tax credits if you use pension contributions to drive your taxable income low enough.
(ii) Consider the possibility that while extra contributions at present get 40%+ rebates, in future perhaps the 40% will be replaced by 30%, perhaps salary sacrifice will be abolished, etc, etc. In other words, prognostications can cut both ways.Free the dunston one next time too.0 -
No; I have a lot of sympathy for your caution. But
(i) You have a daughter: I believe there can be an adavantage in terms of tax credits if you use pension contributions to drive your taxable income low enough.
Good challenge Kingmugsy but even if we were contributing into the pension up to the annual allowance, we wouldn't be eligible for any child benefits(ii) Consider the possibility that while extra contributions at present get 40%+ rebates, in future perhaps the 40% will be replaced by 30%, perhaps salary sacrifice will be abolished, etc, etc. In other words, prognostications can cut both ways
Very true - prognostocations could go both way. The underlying argument to me is still the same; I don't like to bury cash in a hole for 25yrs... lots can happen over that period - which is out of my controlTotal Debt
12/2012 - £893k (mortgage and toys loans)
11/2019 - £556k (mortgage only)0 -
3- even without maxing out the pension contribution allowance, we still will hit our lifetime allowance before 50 y/o
This alone is good enough reason to put as much as you can into ISAs rather than more into pensions.
Looking at your signature - could you reduce your mortgage term and the mortgage interest you pay by making overpayments?0 -
Given your high household income I was thinking "yes", until I got to point 3. You're in the unfortunate fortunate position of having so much...:)0
-
Looking at your signature - could you reduce your mortgage term and the mortgage interest you pay by making overpayments?
Yes, good shout - starting next year we are going to start overpaying £1k on the mortgage, which would save 5years and nearly £65k of interest. That'd enable us to get rid of the mortgage the same year we are planning to retire.Total Debt
12/2012 - £893k (mortgage and toys loans)
11/2019 - £556k (mortgage only)0 -
I agree point 3 is the killer. Another worry would be that the life time allowance will be reduced still further. I'm much closer to my actual retirement than you are and I'm in the position of trying to manage hitting but not exceeding the LTA. If the LTA is reduced before I retire I would probably have to go for a "protection" option that would prevent further contributions and take away the option of "free" money from my employer.0
-
I agree point 3 is the killer. Another worry would be that the life time allowance will be reduced still further.
That's probably the wisest way to bet. But I wouldn't be surprised if one day the lifetime allowance were scrapped: once enough years of a (reduced?) annual allowance have been in place, the lifetime allowance will seem to be a largely redundant nuisance. I saw today a comment by Andy Bell of Sippdeal:
"Benefits in DB schemes should be controlled solely by a lifetime allowance and DC schemes controlled only by an annual allowance." You can sees why civil servants might not like that idea from the point of view of their own pensions, but it would simplify things a lot (though how would transfers be dealt with?).Free the dunston one next time too.0 -
I must be missing something .... with a mortgage debt that size, my priority would be clearing that asap!0
-
I must be missing something .... with a mortgage debt that size, my priority would be clearing that asap!
The thing is that 70-75% of our networth is currently tied up in our home equity. Although we are starting to overpay our mortgage, I want to limit our exposure to the London property market.
Additionally, given how big our mortgage is, paying off £100k over the next couple of years would "only" knock £500 off our monthly payments. Not a massive impact in the grand scheme of things... so we prefer to push on with our diversification strategy
To limit our exposure to rate volatility, (we are currently locked in a 1.9% mortgage), we are aiming at refinancing in the next 6/8months to lock ourselves in a 5year fixed rate around 2.8-3.0%Total Debt
12/2012 - £893k (mortgage and toys loans)
11/2019 - £556k (mortgage only)0 -
Once you have bought a house, you are exposed to the market - whether you have a large or small mortgage. I see a mortgage as a debt - to be cleared asap, particularly whilst interest rates are low. When we cleared our mortgage, we did it gradually by reducing the term, not the monthly repayments, principally to protect ourselves against interest rate rises. Although very nice to be mortgage free too.0
This discussion has been closed.
Categories
- All Categories
- 343.2K Banking & Borrowing
- 250.1K Reduce Debt & Boost Income
- 449.7K Spending & Discounts
- 235.3K Work, Benefits & Business
- 608K Mortgages, Homes & Bills
- 173.1K Life & Family
- 247.9K Travel & Transport
- 1.5M Hobbies & Leisure
- 15.9K Discuss & Feedback
- 15.1K Coronavirus Support Boards