Great pension scheme, but should I take less risk?

cpdc1030

Hi all,

I'm 32 and my current before tax salary is about £60k. My partner is 33 and before tax income is about £50k. I pay quite a lot of tax due to a company car and other benefits, my tax code is 302L or something like that. I'm hoping to retire at 55 and if everything goes according to projections, this should theoretically be easily achievable.

Currently, my employer contributes 8% of gross salary to a defined contribution pension, and I put in 12% via salary sacrifice. My partner's employer also puts 8% into a defined contribution pension scheme, with no employee contribution. As we are both far away from retirement, most of the funds are invested in the equity markets. Between the two of us our combined pension pots are about £50k currently. Other non pension assets are about £150k currently.

I realise we are both quite fortunate to be well compensated and have generous employer contributions. The tax relief as a higher rate payer is certainly favourable.

However I also realise two things are sub-optimal:
1. It's not very MoneySaving to have all your eggs in one basket
2. We are at risk from a future possible Government pensions tax grab or change in rules, like earliest retirement age.

Therefore, should I put less emphasis on my pension contributions, and instead put more into assets that I have more control over, such as property equity or ISAs? Or continue to take the risk for the sake of the generous tax relief?

I realise there isn't an easy single answer but would appreciate any thoughts.

Cheers,

cpdc1030

dunstonh

1. It's not very MoneySaving to have all your eggs in one basket

Depends on what you are referring to.

2. We are at risk from a future possible Government pensions tax grab or change in rules, like earliest retirement age.

In what way?

Therefore, should I put less emphasis on my pension contributions, and instead put more into assets that I have more control over, such as property equity or ISAs?

Is this instead of the pension, in addition to it or what?

Or continue to take the risk for the sake of the generous tax relief?

What risk are you referring to?

cpdc1030

dunstonh wrote: »

What risk are you referring to?

Well...currently the earliest age allowed by government rules to convert a pension into an annuity and take tax free cash if desired is 55. But it used to be 50. What if a future government policy makes it even older? Or what if they start taxing pension pots over a certain size? Both scenarios would materially affect my desired retirement plan.

Pensions in this country seem to be a political football, and it is a bit unsettling to see so many changes in the past few years.

So what I am asking is people's opinion on whether or not I should put less into the pension and instead invest more in assets that I have control over.

Miss_Havisham

no advice but from a personal perspective, I wish I had invested in a couple of properties while I was working, alongside my occupational pension, to give me a second income stream and potential to raise a large sum if needed, albeit it would take some time for the money to come through.

lvader

Both you and your partner should be putting more into your pensions and start to pay less tax. £100 in a pension vs £60 pounds in an ISAs a no brainer. The government could kill tax reilef at 40% and you will be kicking yourself for not making the most of it.

cpdc1030

lvader wrote: »

Both you and your partner should be putting more into your pensions and start to pay less tax. £100 in a pension vs £60 pounds in an ISAs a no brainer. The government could kill tax reilef at 40% and you will be kicking yourself for not making the most of it.

If they kill tax relief at 40%, then I'd probably move to a different country. But that's another topic altogether.

I somewhat agree. But what if I want to retire at 55 and the government won't let me access my pension till 60 or 65? Or state pension age which will be at least 68? That's what I'm concerned about.

I want to open up the discussion to a wide range of views about the future of pensions, not what the current situation is. Too many times have governments past and present muddied the waters by changing the rules.

Most of my colleagues don't contribute nearly as much as I so, either because they are profligate spenders, or have little trust in pensions. The most foolish of which lose out on the 8% employer contribution by saying they cannot afford the minimum 3%!

hugheskevi

I'm in quite a similar position to you.

My view is that even if pension rules change (which based on previous experience seems highly likely) it is still very probable that I will want a lot of money in a pension. For example, if the minimum age of access were to rise to 60 then that would just mean that I wanted less in a pension not that I wouldn't want a pension at all.

As such, I'd respond to the change as and when it happened. Being quite young, you are far from the position of being in a position post policy change of having more in a pension than you would like to have. There is usually a decent amount of notice given of changes to make such a response. It will get closer as you get older, as then you run a greater risk of being in a position of over-saving in a pension should an adverse policy change happen, potentially leading you to consider in the post-policy change environment inefficient things such as not saving in a pension and missing out on an employer contribution, or carry on over-saving which is inefficient.

Whilst my pension is a long way below what I want it to be, I'm less concerned about policy change risk because I have the flexibility to respond. Instead, my focus is on the incentives I face. Higher rate tax relief is a good incentive, and I consider it adequate to compensate me for bearing the policy change risk that comes with pensions (although it is somewhat close - I wouldn't dream of making pension contributions if I was a basic rate taxpayer unless I got employer contributions as well).

Although, the constant meddling with the lifetime allowance worries me - at ages like 30-35 you don't need much in a pension to exceed £1.25m at retirement if that allowance isn't increased (or even decreased further). The protections given out at such a change only work if you are close to the limits, they are of no use to those decades away from retirement who have to guess what future administrations will do.

I somewhat agree. But what if I want to retire at 55 and the government won't let me access my pension till 60 or 65? Or state pension age which will be at least 68? That's what I'm concerned about.

One would expect at least 5 years notice of such a change, hopefully more. Even so, there are ways of using money in a pension even if you can't access the pension, eg, not paying a mortgage down by retirement, and using the pension to make repayments instead. So whilst not as straightforward as accessing the pension you still have options.

Both you and your partner should be putting more into your pensions and start to pay less tax. £100 in a pension vs £60 pounds in an ISAs a no brainer. The government could kill tax reilef at 40% and you will be kicking yourself for not making the most of it.

I very much agree with this - take advantage of what is on offer when it is on offer, whilst there is no particular reason to expect change, nonetheless things change over time.

dunstonh

Pensions in this country seem to be a political football, and it is a bit unsettling to see so many changes in the past few years.

Pensions do get too many changes to them but most changes have been improvements. Indeed, the increase in minimum age from 50 to 55 is probably the only major negative but then seeing as so few people actually took their before age 55, it wasnt really much of a negative. Frustrating for those that actually had the finances to do it at 50.

But what if I want to retire at 55 and the government won't let me access my pension till 60 or 65? Or state pension age which will be at least 68? That's what I'm concerned about.

It is unlikely you would see such a draconian increase like that again (although if life expectancy increases above expectations then it may do). There were reasons for standardising it to 55. Standardising a minimum age across the board for one. Retirement annuity contracts and protected rights couldnt be taken until age 60 under the old rules. At the time of setting the pension simplification rules, there was more money in those than personal pensions. So, they actually saw the minimum age go lower. It was also very common for find that personal pensions set up in the early years after their introduction to have age 50 as the retirement age. Whilst, the personal pension "maturity" age doesnt actually mean it has to mature then, a lot of people with age 50 on their plans would commence benefits at 50 even though they didnt need the money at that point and committing yourself to an annuity at age 50, usually on level basis, would likely leave you short later on.

Legislative risk is going to be a problem in most areas. However, if you look back over the last 50 years, there actually hasnt been that many negative changes to defined contribution pensions fundamentally. The main targets have been to cap the tax free benefit for the very largest of funds.

40% tax relief makes the pension a good option. Employer contribution makes it a no brainer. How far you should go beyond the minimum required to get the maximum employer benefit will depend on your finances and objectives. All the alternatives will be missing the tax relief. You would need 66% growth just to match the pension. Could you afford to miss out on the tax relief and still hit your objectives?

CLAPTON

why would it matter to you if the pension age was increased to 60?

you could still retire at 55 and spend your other money knowing that we will get a biggger payout from your pension at 60... it would all work out about the same over all.

with employers contribtution and 40% tax relief (and salary sacrifice) contributing to the pension is a no brainer;

making other provisions is also a no brainer as you can clearly afford it.

cpdc1030

Contributing to the pension in my circumstances is a no brainer, certainly agree with that. But the amount I put in is the question. I could probably afford to put in another 20 or even 30% but then I'd lose a lot of flexibility in my finances.

dunstonh

cpdc1030 wrote: »

Contributing to the pension in my circumstances is a no brainer, certainly agree with that. But the amount I put in is the question. I could probably afford to put in another 20 or even 30% but then I'd lose a lot of flexibility in my finances.

do you need the flexibility?
Can you afford the flexibility? (noting that 40% tax relief would have to be replaced out of your own pocket).

You say you can afford to put in more but that doesnt mean you can afford to miss out on the tax relief as affordability doesnt just apply to now but your ability to be able to retire at your target age.

Also, pension is unlikely to be your only provision. Most would be building savings, some investments in another tax wrapper (such as S&S ISA). As Clapton says, the pension itself doesnt mean you have to take it at a certain age because you can. You could fund the gap by other means (and in some cases, it can be better to do it that way even if you can take the pension).

e..g you may save up £200,000 outside of pension to fund 5 years of "income" before you actually start the pension.

Start thinking of the pension as more of a tax wrapper and how it can fit into your plans rather than a product which must be taken on x date