Pension - How much to out in? When to retire?

mither_2

Hello,

PENSION CONTRIBUTION PERCENTAGE?

I have been offered a new job. As part of this job I get a pesnion into which my employer puts in 6%.

I have the choice of how much to put in of my salary but not sure how much I should be putting in?

In my current job everyone else contributes 7% so i just went with that. However, I understand that my salary can go into this pension tax free which is clearly an advantage. I think I can afford to put in more like 10% - 15% but is there really that much advantage in my doing so? Can I change the percentage at a later date if I wish?

I'm 31. I have no wife, kids etc and the new job will relatively well paid leabving me with disposable income. If I don't pay more into my pension then I may use the additional free cash to make over payments on my mortgage which will obviously mean me paying less interest.

Very difficult to weigh up the benefits. Most of the advice on here seems to be for people who are already well into their pension schemes.

RETIREMENT AGE?

It also asks me which age I'd like to retire (55 - 75?). Clearly I'd like to retire at 55 so not sure what i should entre here as it seems unlikely that i'll be in any position to retire that early.

Any advice would be greatly appreciated. I'm not sure where to start with this.

Many thanks:)

WobblyDog

I think it's worth paying enough to get the maximum contribution from your employer.

Above that, you have to balance the tax (and possibly national insurance) benefits against having to lock up the money for a long time. Things like ISAs also avoid tax to some extent, and are more flexible, but the money that goes into them has already been taxed.

gadgetmind

mither wrote: »

I think I can afford to put in more like 10% - 15% but is there really that much advantage in my doing so?

Yes, because it's very tax efficient and money going in now is really going to work for you over the decades.

If I don't pay more into my pension then I may use the additional free cash to make over payments on my mortgage which will obviously mean me paying less interest.

That's also worth doing normally, but with interest rates so low, there is an argument that using "gearing" makes sense. You're effectively deciding to have a larger debt to make more investments, which isn't something you'd do in your 50s or 60s, but can make sense in your 30s.

Of course, you do also need rainy day savings, and some non-pension investments alongside also make sense if (and only if!) you're sure you can keep your hands off them.

Clearly I'd like to retire at 55 so not sure what i should entre here as it seems unlikely that i'll be in any position to retire that early.

That question is just so they can "lifestyle" your investments by moving to less risky assets as you near retirement age, and also so they know when to start trying to flog you an annuity. It's perhaps the least important question on the form.

When you can retire depends on your attitude to money.

Here is some light reading.

http://www.retirementinvestingtoday.com/

FatherAbraham

mither wrote: »

Any advice would be greatly appreciated. I'm not sure where to start with this.

Take a look at the link which GadgetMind posted, it's good stuff.

If you really want to retire at 55, you can achieve that, given your young age, but be prepared for some extreme saving (think 40%-50% of your salary).

Take a look too at Mr Money Mustache, who retired at about your age: http://www.mrmoneymustache.com/2013/02/22/getting-rich-from-zero-to-hero-in-one-blog-post/

It's fairly simple: stop wasting your money on the playthings and geegaws which "normal" people do. Save really hard. Invest your money in low-cost, well-diversified assets. Reduce charges, and avoid unnecessary taxation.

Remember that pensions have a slight tax advantage (5%) over ISAs, and that the flexibility which ISAs have isn't entirely relevant if your stash is being built up retire on -- you can't both spend it now and have it in the future to provide lifetime income. If you're committed to retiring, then the withdrawal restrictions on pensions are not a issue, and it's certainly not worth throwing the tax advantages of pensions away to obtain flexibility which you don't need.

Nevertheless, if you want to retire before 55, then ISAs become very important to fund your life until pensions can be accessed.

Warmest regards,
FA

jamesd

mither wrote: »

In my current job everyone else contributes 7% so i just went with that. However, I understand that my salary can go into this pension tax free which is clearly an advantage.

Is this by salary sacrifice, so you also save the employee NI and maybe also get some share of the employer NI saving? If so, it's even more useful.

mither wrote: »

I think I can afford to put in more like 10% - 15% but is there really that much advantage in my doing so? Can I change the percentage at a later date if I wish?

Decide when you want to retire and on what income. Use the tools in the Pension calculation help to get me to 25k pa discussion to work out what it will take to get there. Then decide whether you want to. Yes, you can change the amount.

mither wrote: »

If I don't pay more into my pension then I may use the additional free cash to make over payments on my mortgage which will obviously mean me paying less interest.

Is your mortgage costing you 10% a year in interest? If so, overpaying looks like a good idea. If it's a more normal 3-6% it looks like a way to make yourself worse off, though with low risk.

The main UK stock market has averaged about 5.2% plus inflation over the last hundred years. That's 8-9% without inflation and your mortgage capital debt doesn't increase with inflation. So it's more efficient to invest then pay it off with the gains from the investing. You can do that within say a S&S ISA.

You're 31. With current pension rules you can take a tax free lump sum of 25% of a pension pot at 55, 24 years from now. Unfortunately that's a bit too far in the future for you to use the lump sum for your mortgage unless it is interest only. If it is interest only and has an end date around then it's an excellent tool. If you were to do that what you'd almost certainly find is that the tax relief and employer contribution are more than enough to clear the mortgage, leaving you with your own money and still some of the tax relief or employer contribution as well to provide for retirement income. There's nothing quite like clearing a mortgage with free money.

mither wrote: »

It also asks me which age I'd like to retire (55 - 75?). Clearly I'd like to retire at 55 so not sure what i should entre here.

You can change this later. Better to set it too far into the future than too soon because it might be used to change to lower growth investments in the five to ten years before reaching this date, on an assumption that you will buy an annuity at the age given.

It's not impossible to retire at 55 or earlier. Depends on how committed you are and what income level you want. I set retirement target at no less than median pensioner income - about £18,000 - with good safety margins. It'll probably take me about 13-14 years from zero to reaching that target, with total investments being more than 60% of my net pay plus gross pension contributions over the 7-8 years so far. Pot value is around 90% of that figure due to growth.

mither_2

All,

Many thanks for your help. It is much appreciated.

My initial thinking is that I'll put 10% in and then consider increasing my contribution if I have the free cash. I need to do some more research first though.

Since I'm avoiding paying either basic rate tax or higher rate tax it would appear that I'm saving a minimum of 20% on whatever I put into my pension fund and then earn x% of the funds that are held in there which will hopefully be comparable to the returns that could be expected from an ISA.

If I could get enough of my income paid into my pension potentially I could work it so that my taxable income was below the £34,371 threshold for higher rate tax and so I only paid basic rate tax on my earnings. Is my understanding correct?

Is this done commonly? Obviously it would require tieing up a lot of cash but the tax benefits could be significant.

My new employer uses Aviva for their pensions so I need to contact them with particular questions. I'll have a look at some of the guides now but if anyone has any key questions that i should ask then please let me know.

Thanks again.

jamesd

It is extremely common for higher rate tax payers to pay enough money into pensions to eliminate all of their higher rate income tax liability.

If the scheme is salary sacrifice you get the full tax relief immediately when you get paid. If it is not salary sacrifice you can tell HMRC about how much you plan to pay in gross (which for HMRC means after adding 25% basic rate relief to the net) and they will increase your basic rate tax band by that much. They also adjust your tax code. That then gives you your higher rate relief.

mither_2

Thanks for all your replies.

I think i have misunderstood how this all works. I have been been receiving my salary for the last 6 months in my new job assuming that the element that i pay into my pension would be deducted from my salary before tax is applied therefore I still pay 20%* tax on my earnings. How do i go about getting the tax benefit from putting this 12% directly into my pension?

Also I think i have overpaid tax in previous years. is ther an onlibe systme to see my tax returns or does it all have to be done using papaer documents some of which i no longer have.

Any answers would be appreciated.

Many Thanks


(*not strictly true as my (944L code seems to have me pay 22% - not sure how that's worked out please can somebody advise?)

bigadaj

If you are contributing into an employers scheme then it is going in gross, can't think of many exceptions though if you paid higher rate tax you may have to complete a tax return to reclaim the additional. Hmrc may adjust your tax code to incorporate this.

You can check back your tax returns from previous years if you do self assessment but don't think if you are paye only, however you should have your p60 so can check from that.

Not sure why you think you're paying 22% tax, it could be you paid some higher rate tax on a small portion of your income?

jamesd

The contribution can be deducted before tax or after tax, it depends on how the scheme is set up. If it's a salary sacrifice scheme that also saves NI it's always before tax. If it's salary sacrifice the amount that ends up in the pension is the amount paid in. If it's not salary sacrifice the pension provider will automatically add basic rate tax relief to what you pay in yourself, but not to what your employer pays in.

Is any of your income taxed at higher rate? In that case salary sacrifice again gives you the tax relief automatically but if it isn't salary sacrifice you need to tell HMRC the gross (or net, they can adjust, just be sure to say which it is) and they will adjust your tax code to give you the higher rate tax relief.

If you're in the self-assessment system you can see the past returns that you made via that system. You can't see paper returns or anything done just by letters telling HMRC about income.

PeacefulWaters

Q: When to retire?
A: There's no harm having an aspirational target but keep it flexible. The lower the number you have in mind, the more you need to save.

Q: How much should I invest?
A: As much as possible while still getting some enjoyment from life. Assuming you live until you're 85 saving 15% of income for 25 years won't give you much if you wish to retire at 55 and need to rely on the cash saved for 30 years.

Q: Where should I invest?
A: Talking tax-wrappers rather than the investments within those wrappers. Start of with getting the maximum employer match in pension. Investigate other employee share schemes that may open to you like Sharesave or matching shares / share options. Consider further contributions (unmatched) to the company pension or a SIPP. Consider stocks and shares ISAs (more flexible, slightly less tax efficient than pensions). Buy to let too.

I'd prioritise all of the above ahead of mortgage debt reduction.