Is my pension contribution "worth it"

Ad86

PeacefulWaters wrote: »

I'm in my mid-forties. Most of my retirement income will come from an old DB scheme.

But I am fed up with the workplace. I want out ASAP and I will be able to go before I get to 55 - sooner if the investment strategy pays off.

Something I didn't do when younger was AVCs. I thought everything I had would take care of it for me. I expected to work well into my sixties. A mistake. Not disastrous, but a mistake nonetheless.

Your 2% contribution is, politely speaking, a poor effort on your part. Using a £2k gross monthly income figure and assuming salary sacrifice you will free up around £27 monthly for your wedding if you stopped it.

90p a day.

You are thinking about massively restricting your options when you nudge towards retirement for the sake of 90p a day.

Approach this from the other end.

1) Both of you should increase your pension contributions to at least the level to maximise employer generosity. Do it next month. You will probably hardly notice it now but you will really appreciate it later on in life.

2) Sit down and work out where the penny pinching will start to pay for the wedding / house deposit. Here's some ideas that have worked for me.

- make your own lunch should free up £80 a month.
- SIM only mobile phones could be £50 a month.
- scrap pay TV and save £50 a month.
- give up coffee and save £80 a month
- park where it's free and walk / get off the bus at an earlier stop where the fare is cheaper.

There is an endless list of economies you can make. These assume joint benefits but there's £260 a month there v your pension contribution of £27 a month.

You can have a better pension. A decent wedding and a house deposit. If you really want to.

Our JOINT gross is less than 2k a month.

gadgetmind

Ad86 wrote: »

Our JOINT gross is less than 2k a month.

Ouch, that's harsh.

Investing in your skills base can help with this, but I don't know about your situation enough to even know where to start.

atush

Clifford_Pope wrote: »

I question that. Are you really saying no one in the last 100 years has failed to get on the housing ladder because of over-committment to a pension?

I question your interpretation.

I interpreted the post as saying that contributions into a pension (incl the tax rel and maybe even the employers) could fall below the % gain in the property. and I dont think over decades this would be the case. But that is my opinion. Isn't it nice we all get one?

PeacefulWaters

Ad86 wrote: »

Our JOINT gross is less than 2k a month.

In which case the point is even more valid.

Up your pension contributions. Savings made elsewhere will be an even bigger percentage of income.

jamesd

Clifford_Pope wrote: »

I question that. Are you really saying no one in the last 100 years has failed to get on the housing ladder because of over-committment to a pension?

The text you quoted is not what atush wrote and you missed what atush seemed to be replying to, which was the claim that

"The money in the pension will have a long time to grow, but this may be matched/exceeded by the growth in the value of the property if you can buy it earlier by not paying into the pension"

Assume a 20% property price increase in a year on a property originally valued at £200,000 and that the pension contributions of say £2,000 in a year including 100% employer match would have delayed the purchase of that property until after the increase. Buying early has in effect made a gain of £40,000 on the £800 of net individual pension contribution value. Or more conveniently on the £2,000 gross that was the main alternative. What does it take before the £2,000 in the pension exceeds the corresponding £40,800 in the property? It's 20.4 times gain and over say 40 years it would take a real growth rate of 7.8% a year to recover. 6.2% over 50 years. The property value itself would not be unchanging over the years so in practice it would probably take a sustained return in the region of 12% plus inflation for the pension to get ahead of the property. That's well above the 5% or so plus inflation long term UK market return. Adding to that is the possibility of reduced outgoings.

So I agree with HardCoreProgrammer that it is possible for fortunate or good timing to make the earlier property purchase the better choice.

I think that atush replied about long term growth trends but the actual point made was this much shorter term one.

jamesd

Ad86 wrote: »

Our JOINT gross is less than 2k a month.

That's pretty tight! It really takes knowing more about your expenses and savings rate with and without the pension contributions to suggest what to do but in general I'm content enough with the idea of suspending pension contributions for as long as two or three years.

It is worth remembering that the biggest gains can come from early buying of a place that needs work. That can let you move and get rid of the rent cost earlier, then do the upgrading work over time, perhaps moving two or three or more years earlier than otherwise possible.

atush

I think that atush replied about long term growth trends but the actual point made was this much shorter term one.

I was talking property over pension over the LONG term, hence the decades and even hundred years mentioned.

I did not mean short term property gain by fortuitous planning, blind luck or property flipping. After all, given the property would be needed to live in you can't sell ti to realize any profit like you can other assets incl pension assets. So any short term gain would be tempered over the decades.

In general, I favor property as an investment, in particular one's own home. It is one of the 4 main planks of both retirement planning and financial independence.

dunstonh

I beg to differ with most of the posters here. This may be more than a case of "employer offers free money, so accept it".

Fair enough. However, lets look at your points.

Yes, you get your contribution matched by your employer with tax and NI (assuming this is by salary sacrifice) added on top, but bear in mind that:
a. You do not pay tax when putting the money into a pension, but you still need to pay tax when getting the money out. The tax rate may be higher when you get the money out.

So, if the employer pays in £1200 over the year, it gets increased to £3000. The income from that £3000 is taxable above the personal allowance but the person can draw 25% of the pension fund tax free. That includes drawing it as income if they prefer.

If you paid it into an ISA, there would be no tax relief going in and no tax to pay coming out. It would be £1200 going in. no tax relief and no employer contribution. ISAs and pensions have the same tax free growth position and the same investments at the same charges. You will be able to draw the same amounts as income too (in percentage terms. So, ignoring growth, lets say the OP wants 5% as income:

ISA £1200 x 5% = £60
Pension £3000 x 5% = £150. Lets assume there is no personal allowance and this means £112.50 (75%) of it is taxed at basic rate. That is £22.50 tax.
End result is ISA £60 and pension £127.50.

So, your point on tax is useful only for information but doesnt come close to influencing whether the person should join or not.

b. You will not be able to get the money out from the pension until you are 55 (and even this may change in the future). In other words, you cannot change your mind and undo the transaction once the money has been paid into the pension, e.g. if you subsequently decide you would be better off using the money to buy a property, or to save yourself from repossession.

The age 55 minimum will rise to be set to 10 years less than state pension age. However, it is a pension. The clue is in the name. it is not a savings account. It is not meant to replace someones need to have personal savings.

* c. The money in the pension will have a long time to grow, but this may be matched/exceeded by the growth in the value of the property if you can buy it earlier by not paying into the pension. In extreme cases (e.g. if prices of properties are rising quickly out of your reach), it may even make the difference of whether you can afford to get on the housing ladder or not.

The property would need to more than double in value just to get to the same starting point as the pension. Property has capital gains tax to pay on the gains and income tax to pay on the rental. It is a totally unrealistic expectation to expect that to happen.

silver_4444_uk

OldBeanz wrote: »

I think this article should be a sticky!
http://www.telegraph.co.uk/finance/personalfinance/investing/10742396/When-saving-for-10-years-pays-more-than-saving-for-40.html

I agree with OldBeanz.


I have printed 3 copies off, one for my wife and one for each of my daughters.


Rgds.


Silver

greenglide

I agree with OldBeanz.

I have printed 3 copies off, one for my wife and one for each of my daughters.

But it is far too simplistic.

By far the "best" is to save throughout the 40 years. Save for 10 and then dont bother is the message here which people will associate with "I am over 30 / 40 / 50 - it is too late".

There is no single simplistic answer.