When should I stop pension contributions?

hammerhead2000

Looking for some advice on pension contributions - wondering if I am thinking about my situation the right way. I've been in work 7 years, and I've been fortunate enough to have enough income to invest in my pension.

Age: 27
Pension value: £70k
Current employer contrib: £13k (base amount, employer doesn't match contribs)

I was contributing around £5k/year into my pension, but due to the rumoured budget changes to pension tax relief I stopped. Assuming there are now no changes in the budget, I could restart contributions. However, with a conservative(?) 4% real growth rate and my employer pension contribs projected forward at their current level, I think by 60 I'll be getting very close to the LTA.

For this reason I was thinking of stopping contributions and investing elsewhere instead - probably to make use of the new dividend allowance (I use my full ISA allowance each year in S&S).

Does that make sense to the experts here? Pensions planning seems pretty complex given how much could change over the next 30+ years!

racing_blue

I'm no expert but over the last few years the LTA has been fiddled with more times than Nigel Kennedy's au pair. Who knows where it will be in 30+ years.

robin61

I am not sure what your rationale was for stopping due to concerns about tax relief changes ? However at £70k you are nowhere near the lifetime allowance and if you are only 27 then hopefully it will have increased by the time you are due to retire. Always worth keeping an eye on of course but I would not be worrying about this unless I was a lot closer to the lifetime allowance than you are.

kidmugsy

You certainly want to contribute enough to ensure that your employer pays that £13k p.a. After that, pay enough to avoid Higher Rate Tax, or, if that's not relevant, enough to exploit salary sacrifice while it still exists (if your employer offers it).

Look upon the whole thing as opportunistic: while the tax treatment is generous, use it. Once it's less generous, look elsewhere.

Thrugelmir

hammerhead2000 wrote: »

However, with a conservative(?) 4% real growth rate and my employer pension contribs projected forward at their current level, I think by 60 I'll be getting very close to the LTA.

What if these assumptions are totally wrong? Better to focus on now rather than what might happen. Personally I expect growth forecasts to be cut in Wednesdays budget. The UK is one of the better performers in the G20. Hardly an endorsement for spectacular real growth rates.

kidmugsy

By the way, if you are not a higher rate taxpayer, and don't have access to salary sacrifice, I'd suggest that pension contributions (above what's required to harvest your employer's contribution) may not be a necessary investment. You really (in my view) need a large financial incentive to compensate for the horrible inflexibility of pensions, at least until you are much closer to the age when you can draw the pension.

Another good tax shelter, and one that few Chancellors would dare touch, is owner-occupied housing.

PeacefulWaters

Serious question.

You stopped pension contributions due to a possible change that hadn't been announced. Why? There are numerous pension rumours prior to every budget. The vast majority are wrong.

You are currently at 7% of the LTA. Now is not the time to stop contributing because of this.

The points above around tax relief at 40%, national insurance benefits of salary sacrifice are key. Balanced by the flexibility argument for alternative investments outside of a pension wrapper.

jamesd

hammerhead2000 wrote: »

with a conservative(?) 4% real growth rate and my employer pension contribs projected forward at their current level, I think by 60 I'll be getting very close to the LTA.... Does that make sense to the experts here?

No, it doesn't make sense.

4% real return between now and age 60 will only produce a final pot value of 3.65 times the current one, far from the LTA. You have assumed that your employer contributions continue but is it really realistic to assume that you will stick with the same employer for long enough to reach the LTA?

If you don't like the pension relief you might consider using VCT investing. The 30% tax relief can be claimed every five years so you can cumulatively get far more relief than offered by a pension. Relief is capped at actual income tax paid in the year. Has to be repaid if you sell within five years. Dividends are tax exempt. In effect if you can afford to delay your income for five years you can arrange to get it tax free.

AnotherJoe

So, it was foolish enough to stop on account of proposed changes you couldn't possibly know about (indeed if anything you should have contributed more), and to do something now on the basis of what might happen in 40 years time, LTA, is double foolish. The LTA is also meant to start increasing with inflation in a year or two, because if it doesn't then in some 40 years time, it would just about buy a mars bar (OK i exaggerate but you get the drift i hope.......)

The time to stop adding would be when you are close to it. Which I doubt, on your current contributions, you'll be anywhere near for another 20 years.

Even if something like 'pension ISAs' happens,(the reason you stopped??) the overwhelming possibility is that existing schemes would be 'frozen' so you'd retain the benefits you'd accrued and the rules on withdrawal. Anything else would be massive retrospective law changes that would be close to unprecedented and also open to legal challenge all the way to the top.

As kidmugsy said "Look upon the whole thing as opportunistic: while the tax treatment is generous, use it. Once it's less generous, look elsewhere."

princeofpounds

4% real return between now and age 60 will only produce a final pot value of 3.65 times the current one, far from the LTA.

This is important. Your big assumption is that you continue similarly large contributions at all points. But it's still a big unknown.


I also happen to believe that a 4% real return estimate is likely to prove slightly too generous given the current low yield environment. What do the numbers say if you run it again at 3%? But that's just a personal opinion.


There are good arguments to believe that the lifetime allowance might be replaced in future (because it's a stupid system that is unpredictable and penalises investment gains, amongst other reasons). Perhaps by a system that limits the rate of contributions for high earners instead. We just don't know. But it might cease to be the same kind of issue at some point.


So if you are in the higher rate tax band, it probably still makes sense to use the tax relief and de-risk your assumptions for a bit longer.


But you are in a position where you have made a great start and you could scale back your additional personal contributions, as long as you realise that if you lose the current rate of employer contributions it needs to be replaced.

maximumgardener

hammerhead2000 wrote: »

Looking for some advice on pension contributions - wondering if I am thinking about my situation the right way. I've been in work 7 years, and I've been fortunate enough to have enough income to invest in my pension.

Age: 27
Pension value: £70k
Current employer contrib: £13k (base amount, employer doesn't match contribs)

I was contributing around £5k/year into my pension, but due to the rumoured budget changes to pension tax relief I stopped. Assuming there are now no changes in the budget, I could restart contributions. However, with a conservative(?) 4% real growth rate and my employer pension contribs projected forward at their current level, I think by 60 I'll be getting very close to the LTA.

For this reason I was thinking of stopping contributions and investing elsewhere instead - probably to make use of the new dividend allowance (I use my full ISA allowance each year in S&S).

Does that make sense to the experts here? Pensions planning seems pretty complex given how much could change over the next 30+ years!

stopping pension contributions seems very irrational, I would say.
you have time on your side so keep them going and look to maximise S & S isa's year on year if possible