Good idea or not?

Jon211

I've recently started a new job and I will be earning over the 40% tax limit for the first time.

I don't really like the idea of paying 40% tax so I figure I may as well try and use it to my advantage.
Basically my plan is to put as much money into my pension as it takes to bring my taxable income down to £38.5K (or whatever the exact figure is for the 40% tax limit)

e.g. If total compensation for the year is £45K I would put £6.5K into my pension that year.
My reason being is that if I didn't do this I would only see 60% of that £6.5K so I may as well get all of it by sticking in into the pension pot.

It all seems to make financial sense but it just seems like a lot of money to be putting into a pension. I think it's because my Dad was always wary of pensions and puts the minimum he can in and invests the rest himself.

I'm 26, single and have no mortgage or car payments. My payrise on starting the new job was ~£10K so I know I can put a lot of money away and still be comfortable - I'm just not sure if this is the best way to be doing it.

I should point out that although I don't own a house I do have a reasonable deposit and am not too fussed about being able to add much to this. Personal circumstances mean I won't be looking to get onto the housing ladder for another couple of years anyway and I can reduce my AVCs then.

So, I suppose the question is do I stick this money into my pension or invest it in other ways?

dunstonh

6.5k gross of £45k isnt a lot of money in percentage terms. Many people on less money are having that amount in percentage terms going into their pension in total.

I think it's because my Dad was always wary of pensions and puts the minimum he can in and invests the rest himself.

A pension is just a tax wrapper which can contain investments. You can invest the money yourself in exactly the same way as you can ISAs, unit trusts etc. Just because you choose a pension tax wrapper doesnt mean that it stops being an investment.

So, I suppose the question is do I stick this money into my pension or invest it in other ways?

Start thinking of the pension as an investment in the same way as every other tax wrapper. The difference is the way the proceeds mature and the accessbility. Thats the bit to focus on along with deciding how valuable that higher rate tax relief is to your personal situation.

Debt_Free_Chick

Jon211 wrote:

e.g. If total compensation for the year is £45K I would put £6.5K into my pension that year.
My reason being is that if I didn't do this I would only see 60% of that £6.5K so I may as well get all of it by sticking in into the pension pot.

There's a very broad rule of thumb that suggests we ought to be saving a percentage of pay which is equal to half our age. That would be 13% in your case, which is not far off £6.5k

Andy_L

Does your employer make any matching contributions? In which case conventional wisdom is to pay in at least enough to get the maximium employer contribution