Cash now or in the pension pot?

Mistermeaner

Hi All

Would appreciate others opinions on this pension / earnings quandry...

My company pension (DC) has a variety of options associated with it; it has the normal basic deduction + company contribution elements - the maximum company contribution is 11% which is achieved via making a 6% deduction. This is a no brainer for me and something I am doing.

Where I have a quandry is that there is an addition 10% with which you may do one of 3 things (and you change this at the beginning of each tax year)

option (i) all 10% straight into your pension (goes in tax fee but locked away until 55+)

option (ii) all 10% in todays pay taxed at HR for me, but 'cash in hand'

option (iii) 5% in pension, 5% in pay


I've done some calcs with the salary calculator and after tax:

Option 1 gives me an extra £277 each month in hand (£0 extra in pension)

Option 2 gives me an extra £139 each month in hand (£238 extra in pension)

Option 3 gives me an extra £0 each month in hand (£475 extra in pension)


Appreciate its a very good dilema to have but cant decide what best thing to do; seems obvious that you get more nett via the tax efficient all in pension route.... but that deprives me of the cash in hand today to do other stuff with and also who knows what tax rules may be place by the time I hit 55

If it helps with answering I am 35, have 3 and bit years to go on the mortgage (which I am overpaying massively), am saving cash and investing cash on a monthly basis outside the pension. Am single and have 1 son age 8. Plan is to retire ASAP

My current pension pot stands at £60K

This year I have taken the cash in hand on basis of using it to clear mortgage and save outside of pension, accepting the short term tax hit.

Would love to hear thoughts of others as to 'best' thing to do?

mgdavid

your two lists of options and outcomes don't match up.
If it were me, I'd put into pension every time.

Linton

Which is best depends very much on your circumstances. In priority order I suggest something like.....

1) Do you have an immediate access cash emergency fund which will cover all your living expenses for 6 months? If not that should be your first priority, irrespective of tax considerations.

2) Do you have money outside the pension and emergency fund to cover foreseeable needs for large scale expenditure beyond your normal take home pay for the next say 7 years? If not put some or all of the money there, some should be in cash and the rest in better returning investments..

3) Do you have a planned retirement date? Is your pension on target to provide sufficient money to cover your needs from 55 or retirement, which ever is the later? If not put extra money into the pension until it is.

4) If planning to retire before 55 are you on target to have the money available to support yourself? If not put your money into investments (not cash) held outside the pension, preferably in an S&S ISA.

5) If you have got this far split 50/50 into pension and S&S ISA investments.

It probably isnt financially the best decision to pay off your mortgage if the interest rate is say 3% or lower.

Triumph13

I'd echo everything said above about emergency funds etc. I'd add that it's going to be 57 (at least) not 55 that you'll be locking it up until as the minimum age is scheduled to change in 2028.


I'd recommend you play about with a spreadsheet to give yourself an idea of what kind of pension you might expect and when on the different options. A quick back-of-a-fag-packet on your numbers using 3% average real returns and a 4% draw down rate in retirement comes out a bit over £23k pa at 57 if you put the extra 10% in. If you don't then you have to work to past 64 to get the same amount. Is £277 a month worth working another 7 years for?

Mistermeaner

mgdavid wrote: »

your two lists of options and outcomes don't match up.
If it were me, I'd put into pension every time.

sry; jumbled the options but I'm sure you get the general idea!

My mortgage is at 5%, fixed until Jan 2017, currently paying 1500/month, outstanding balance is ~£60K, due to finish Summer 2018 (dont get the calculator out; these are rough from memory!)

I currently have £3K in cash and £3K in S&S isa, adding 300 each a month to these

I am on 12 months notice at work, so feel relatively secure should that all go belly up


Linton; thanks for thoughts - you are absolutely correct in your structured and tiered approach; guess the difficulty I have is that I don't yet have any fixed plans on when to retire, just know I want to go ASAP:) also there are so many variables...... ie. if my pension pot grows massively and legislation is such that you can draw down in tax efficient manner that would give me different options at 50ish than say if my investments do crap and pensioners must by an annuity etc etc.

My plan is to continue building both my pension pot and cash and S&S savings as I go.....

I'm so far away from being able to obtain my pension that its not worth detailed planning in that regard yet - I guess the basic question is £277 in hand today or £475 locked away in pension; what would others do (or the middle road option)

atush

I agree completely with Lintons list, but apart from your list not matching (i think you have reversed it?) the biggest problem is you think you have to do just ONE thing with your spare cash.

But you dont. You can split the cash into 3 or more 'pots' and do all 3. We save into pensions, overpay our mtg, and save into cash and save into investments ALL at the same time.

Your current stats are pretty good re your pot size, your 17% contribution, the length of your mtg term and your other savings and investments. However, you dont say the rate of your mtg, and if it is low, you could be better off investing in both pension and S&S isas instead of overpaying. Nor do you say if your current cash savings are 6 months spending.

I would say, w/o knowing the size of your cash and Investment pots, that the pension option (esp as you want to retire in 20 years) seems to be the most reasonable one to attain that goal.

Edit, as we cross posted. Your cash and investment pots are low. I'd raise these, esp the cash one. and at 5% your mtg is very high, so overpaying is a good idea.

So, more cash, more S&S isas then wade more heavily into your pension? REvisit the split of your extra cash every 6 months.

gadgetmind

I'd go for pension rather than cash myself, but that [STRIKE]pension[/STRIKE] mortage is pretty expensive! (Strike through because I got it wrong first time!)

The one thing I wouldn't be putting money into in your situation is S&S ISAs. You need a cash buffer but can work on non-pension investments once the mortgage is history.

Mistermeaner

gadgetmind wrote: »

I'd go for pension rather than cash myself, but that pension is pretty expensive!

The one thing I wouldn't be putting money into in your situation is S&S ISAs. You need a cash buffer but can work on non-pension investments once the mortgage is history.

Its a DC scheme so thats all 'my money' - not an expensive final salary scheme; more I put in more I'll have to take out

Thanks for all comments;m I think I am doing a little bit of everything (paying off mortgage, pension, S&S isa, cash) - generaly feedback I am getting is that I probably dont have enough in cash.....

Im building that pot and feel relatively secure because of the 12 months notice at work but take on board what has been said and will look to prioritise cash over S&S for a bit.

Still not decided on pension vs. cash today question though

Calc from triumph was most interesting; that extra £277/month in my hand today will take 7 years extra work.....

gadgetmind

ggb1979 wrote: »

Its a DC scheme so thats all 'my money' - not an expensive final salary scheme; more I put in more I'll have to take out

Sorry, my mistake, I meant to say that the *mortgage* was expensive!

I'm also 100% DC and fully understand the trade-offs that entails.

kangoora

Personally I'd go for a mixture.

1st year go cash and build up a cash reserve with the 'extra' cash. 3 months Outgoings will presumably be enough as that is a extremely generous notice period. I'm assuming your sickness benefit is of similar generosity as your notice period.

2nd and subsequent years go 50/50 cash/pension but use up the cash to build up ISAs. If, as it seems likely, the earliest age to draw a pension soon will be state pension age - 10 years if you want to retire before 58 you will need a good sum of cash to last you until you can access your DC pot.

You can probably switch off funnelling £300/month into cash savings shortly and concentrate on your ISA unless it is your holiday/Xmas fund or suchlike.

It would probably be useful to create a spreadsheet showing savings , pension contributions and investments going forward and adjust your proportions as required.

Triumph13

One other issue that you need to think about is higher rate tax relief on pension contributions. Many commentators believe there is a high chance of this being taken away in the near future. If you think this is likely then that is a further incentive to get the higher contributions in now rather than later.


One final thought, I'm not sure how 'single and have one son age 8' works in terms of child benefit, but if the child benefit is being restricted based on your salary then there could be a saving of around £300 pa there if you put the extra 10% into your pension.