Is this a crazy idea or a sensible one?

Looter

I've been working and saving hard since last Apr in order to have the maximum amount to save in a cash ISA on 6 Apr. I've virtually saved the £5,760 now, but let's face it, interest rates are disgustingly low and so it doesn't seem worth it to save any more!

I was thinking of increasing my pension contribution at work to a high percentage, maybe 70 or 80% and benefit from the tax relief whilst using the money I've saved to live on.

Is this a good idea? Please correct me if I'm wrong, but getting 20% tax relief on a pension is more appealing than getting 2 or 3% (if you're lucky!) in a cash ISA?

funscott

depends how far off 55 you are as your money is tied up until then. but an isa / savings account you can use the money.

Looter

funscott wrote: »

depends how far off 55 you are as your money is tied up until then. but an isa / savings account you can use the money.

Good point. I'm 36 but it would be only for the short term whilst interest rates are low, but interest rates won't be going up soon though so maybe it's not such a good idea thinking about it.

Linton

Looter wrote: »

....

I was thinking of increasing my pension contribution at work to a high percentage, maybe 70 or 80% and benefit from the tax relief whilst using the money I've saved to live on.

Is this a good idea? Please correct me if I'm wrong, but getting 20% tax relief on a pension is more appealing than getting 2 or 3% (if you're lucky!) in a cash ISA?

The 20% tax relief is useful but not quite as good as it may sound. You are charged tax on income from a pension so you pay it back later, unless of course you are below the tax threshold. Apart from that, the only advantage is that you can take a 25% tax free lump sum from your pension so thats a 5% gain (25% of 20%).

The downside is that you are using up flexible cash and putting the money in a pension which is more restricted in how and when you can get it.

If you have 6 months living expenses available in cash perhaps you could start thinking about funds/shares in an S&S ISA.

watcher13

It depends a lot on what type of pension scheme you have at work and what your projection might be.

You could also look at a SIPP - you would still get tax relief and benefit from market growth in the longer term

jimjames

Looter wrote: »

I've been working and saving hard since last Apr in order to have the maximum amount to save in a cash ISA on 6 Apr. I've virtually saved the £5,760 now, but let's face it, interest rates are disgustingly low and so it doesn't seem worth it to save any more!

I was thinking of increasing my pension contribution at work to a high percentage, maybe 70 or 80% and benefit from the tax relief whilst using the money I've saved to live on.

Is this a good idea? Please correct me if I'm wrong, but getting 20% tax relief on a pension is more appealing than getting 2 or 3% (if you're lucky!) in a cash ISA?

Any reason why you are only considering cash ISA or SIPP not a S&S ISA?

Obviously pension is a good way to get tax relief but you can't access the money till you are 55. S&S ISA has no lock in and if you are 36 and are considering putting it into a SIPP you have a long timeframe to save for.

marathonic

I'd stick with the ISA.

I contributed a high percentage of my salary to a pension in my early-mid twenties (I'm now 30).

However, my reason for doing it was that my employer are doing a salary sacrifice scheme and contribute their entire national insurance savings to my scheme meaning I get 20% Tax + 12% National Insurance savings and an additional 13.8% contribution from my employers NI savings.

You may find that you are employed by a company with this type of scheme in place in the future or that you become a higher-rate tax payer. At that point, maximise your pension contributions. Until then, contribute the minimum required to get your maximum employer contributions.

jimjames

marathonic wrote: »

I'd stick with the ISA.

But which sort? (see my post above)

As the OP was suggesting putting the money into a SIPP where it won't be accessible I made the assumption that they already have a suitable emergency cash fund. If that isn't the case then a cash ISA makes sense. Otherwise I'd say it was worth looking into a S&S ISA.

Looter

jimjames wrote: »

Any reason why you are only considering cash ISA or SIPP not a S&S ISA?

Obviously pension is a good way to get tax relief but you can't access the money till you are 55. S&S ISA has no lock in and if you are 36 and are considering putting it into a SIPP you have a long timeframe to save for.

I wouldn't know where to start with an S&S ISA to be honest.

VfM4meplse

Looter wrote: »

I wouldn't know where to start with an S&S ISA to be honest.

It's got to be money that you can afford to lose. You won't beat inflation with a cash ISA atm, but you won't have the pot diminished either.

watcher13

Looter wrote: »

I wouldn't know where to start with an S&S ISA to be honest.

There is a useful discussion on the S&S ISA thread which you might find interesting and it explains some of the myths of S&S ISAs