Stop pension to increase savings

ViktorOnopko

Hi all

I've been following this forum for a while and wanted to get some input on my pension & savings.

I've been paying in to a company pension (where they match your contribution) for the last 10 years (I'm early 30s) and I'm also saving on the side. However, despite saving a reasonable amount each month (~£400) I want to make a bigger contribution to my savings (I've been watching the £12k in 2014 thread). I was therefore considering coming out of the company pension scheme for 2-3 years to increase my savings before going back in when I've been in a position to purchase my own property.

Has anyone else done this? Is it worth the short term gain given I've already been paying in to a pension for 10 years and have many more years left to contribute? THoughts?

Glen_Clark

Depends on how good your pension scheme is, and how much profit your savings would make. But the answer is almost certainly No - You would be better off to stay in the Company Pension Scheme. Anyone who tells you otherwise is probably trying to sell you something.

talexuser

You'd be losing the company contribution (and the tax relief going in) so the chances of your savings (even in a stockmarket isa) compensating is lowish I would say. Besides it's the compounding of these early years that gives the pension meaningful pots later on, so not worth missing out.

ColdIron

Almost certainly a bad idea, you would lose the company contribution and the tax relief, both of these are free money that will be nigh on impossible to make up in interest, especially with the low interest rates available at the moment

Linton

ViktorOnopko wrote: »

Hi all

I've been following this forum for a while and wanted to get some input on my pension & savings.

I've been paying in to a company pension (where they match your contribution) for the last 10 years (I'm early 30s) and I'm also saving on the side. However, despite saving a reasonable amount each month (~£400) I want to make a bigger contribution to my savings (I've been watching the £12k in 2014 thread). I was therefore considering coming out of the company pension scheme for 2-3 years to increase my savings before going back in when I've been in a position to purchase my own property.

Has anyone else done this? Is it worth the short term gain given I've already been paying in to a pension for 10 years and have many more years left to contribute? THoughts?

Stopping completely is a seriously bad idea in my view unless there is absolutely no other way to buy a house. Of course pensions are savings, just long term ones.

If you stop your pension you will be left with £320/month after tax to save assuming you are a basic rate taxpayer. But you would have lost £800/month going into your pension - £24K after 2.5 years. If you are a higher rate tax payer the case for keeping your pension is even stronger.

Is there no way you could spend less?

ViktorOnopko

Hi all

Thanks for the replies. I considered this at the start of the year and decided against it but thought I'd use this forum to get another opinion, and the result is fairly emphatic!

I shall certainly look to saving more by reducing spend in other areas and hopefully Santa brings me a bit of a payrise which I can use to increase my saving amount. I currently take out a certain amount each month which goes to my savings account but I think I'll look at what else I can save in addition to that.

Thanks for replies.

bowlhead99

ViktorOnopko wrote: »

I've been paying in to a company pension (where they match your contribution)


I was therefore considering coming out of the company pension scheme for 2-3 years to increase my savings before going back in when I've been in a position to purchase my own property.


Has anyone else done this? Is it worth the short term gain given I've already been paying in to a pension for 10 years and have many more years left to contribute? THoughts?

There isn't a 'short term gain'. There are however two, quite large, short term costs, as the others have said:

One is tax. If you don't put the money in the pension scheme, you can't just have it outside the pension scheme. You have to pay tax to get it. Whereas if you wait to retirement, you have made 30 years of tax free annual compound growth on it AND you get a lump of it tax free AND the bit that isn't tax free might be at a lower rate than you're currently paying (for example, annual tax free allowance and ongoing low marginal rate as a low income retiree rather than a strapping young worker).

Second is loss of FREE MONEY from your employer. They are matching your contribution. You put money in the scheme, they are giving you something that you would not get if you didn't put your own money in the scheme. They are willing to pay it to you, but if you turn it down they will be laughing all the way to the bank. Your co-workers all take their free money, and you just snub yours and throw it back in their faces ? Crazy.

So, you might see it as short term 'gain' but your total wealth after opting out is considerably lower. That is not a gain. So, it's short term ignorance leading to long term pain, because what would have been yours (tax relief and free employer cash) is no longer yours. Possibly you will still be alive in 70 or, with advances in healthcare etc, 80 years from now. You will really wish you had taken the long term gain rather than the short term gain.

If you really do need money for something now, rather than simply wanting to save more because the '£12k in a year' thread tells you to save £1000pm instead of £400pm to keep up with the Joneses... then consider all the consequential costs and make sure when you come back to the scheme you properly play catch up at a higher contribution rate, rather than just coming back in at the old rate.

In a few years time you can come back in the scheme and put in 20% of your salary then instead of 10% now and catch up quite quickly to where you would have been plus all the market growth you missed. You'll never get the free employer cash back though, because he won't match up to 20% contributions. So that's lost forever. And maybe your new employer, several years down the line, only matches up to 3% instead of 5% or whatever is currently on the table.

You might be lucky and have your marginal tax rate be higher in a few years time, which would be a good thing as making contributions then will save more tax than you could right now. But if you leave it too long until you need a massive lump sum to catch up, you might find it exceeds the annual allowance. Probably won't if you're not a big earner but you never know.

What often happens with people taking a few years off pensions is that they create a problem that snowballs out of control. Sure, you have a noble goal to use an extra few hundred a month into a property deposit fund.

Then you buy the house. Great, let's get back to the pensions.
- But no, you need to buy things to put in the house.
- Then you need to go on holiday because you gave up holidays to buy the house.
- Then the mortgage rate goes up so you need more per month for the house.
- Then you need a partner to put in the house, and a wedding and honeymoon to welcome the partner to the house.
- Then the partner helps you create some children to put in the house.
- Then the partner takes time off work to look after the children.
- Then they need a car to be ferried around in.
- Then they get bigger so you first buy an extension which doesn't really add to the house value as you hope, and then you need a deposit to upsize the house.

Then age 55 you think it's about time I got back to contributing to that pension that I stopped in my early 30s, and you find that even 100% of your salary for several years is not enough.

If you're currently contributing more than you need to for the free employer cash, perhaps reduce that and invest smartly outside the pension instead. But don't just give it up.

redmalc

Please tell me why anyone would turn FREE Money down,thats what you will be doing if you stop your pension contributions

colsten

ViktorOnopko wrote: »

I currently take out a certain amount each month which goes to my savings account but I think I'll look at what else I can save in addition to that.

What interest rate are you getting in your savings account? Are you a BR tax payer, will you stay one for the foreseeable future?

dunstonh

I've been paying in to a company pension (where they match your contribution) for the last 10 years (I'm early 30s) and I'm also saving on the side. However, despite saving a reasonable amount each month (~£400) I want to make a bigger contribution to my savings (I've been watching the £12k in 2014 thread). I was therefore considering coming out of the company pension scheme for 2-3 years to increase my savings before going back in when I've been in a position to purchase my own property.

Absolute madness. Turning down all that "free" money. Put it in context.....

£80 paid by you gets £20 added as tax relief and £100 added by the employer. So, your £80 is turned into £200 overnight.