When should I stop pension contributions?

princeofpounds

Want to make two general comments


I think you are getting a slightly more negative response than you deserve because your thread title is simply 'stopping pension contributions'.


In fact, what you are doing is stopping your own contributions, but you are getting unusually hefty employer contributions that are not dependent upon your own.


The second point is that this is a great example of the mess that the lifetime allowance gets people into. The OP has done well to get a good job (at least for pension contribution) and to save a good starter pot.


And yet already they are being forced to consider 40 years of finger-in-the-air assumptions to avoid hitting a limit that may or may not exist at god-knows what level when they retire.


It's an insane way to approach pension planning. Pensions are in principle such a simple product, and yet almost every government since time immemorial tinkers away to make them a complicated pain. Stupid industry jargon doesn't help either.

Lokolo

princeofpounds wrote: »

The second point is that this is a great example of the mess that the lifetime allowance gets people into. The OP has done well to get a good job (at least for pension contribution) and to save a good starter pot.

I am in the same position (27, £15k a year in pension, currently stands at £55k) and I am trying to weigh up long term what to do.

I am a HRT and I would love to keep putting up my % but the LTA is only going one way, and as my contributions are increasing my current usage, I will hit the amount a lot sooner than I expect.

On a 4% annual gain and a 1.5% increase each year, I would reach £950k by 55. By 60 I would be over the current LTA. I suspect the retirement age will increase from 55 by the time I get there.

hammerhead2000

Thanks for all the comments - this got a much bigger response than I expected! The prompt for my question is exactly as princeofpounds explained - I have to consider the lifetime allowance, because if I continued at my current rate I could exceed it and back myself into a corner approaching retirement.

A 4% real growth rate for the global equities portfolio in my pension is relatively conservative, (many models have 5% or 6%, which seems optimistic!). I'm also using inflation of 2.5% p.a., which is very high relative to now, but close to the long term average. The inflation rate is less relevant here because as AnotherJoe says, the LTA is index linked starting 2018. With these projections I have to consider the LTA now - a small outperformance relative to my 4% prediction, or a further cut in the LTA puts me in a difficult position since as Lokolo says the retirement age is only going up (I'm expecting my state retirement age to be at least 70, so the earliest I could draw my pension would be 60).

All of this caused me to wonder if I'd be better putting the money elsewhere. I can always increase contributions a bit later on (e.g. if my employer contributions go down). I can't take out contributions I've put in historically (e.g. if my employer contribs rise with inflation, or my growth rate is better than expected that puts further strain on my LTA).

I'm maybe thinking about this a year or two early, but that seems better than thinking about it 5 years too late.

In response to the other comments:
* I don't need to contribute anything to get my employer's 13k p.a. I could move to a job which pays less, but I could equally end up getting promoted and saving more, or seeing it rise with inflation.
* I put a lump sum in last month and stopped contributions just in case the chancellor changed tax relief. I'm far ahead relative to where I would have been if I had done nothing, and I wanted to retain control in the event things changed. I can restart with a month's notice if I want to.
* If I reduce my growth rate to 3% I get to ~70% of the LTA by 60, at 4% it's 90% and at 5% it's 110%. Unfortunately modelling over such a long time period adds a huge amount of uncertainty

I know pensions have huge tax incentives - that is after all why I voluntarily put aside a lot of my income over the last 6 years! It's just a shame that because of the way the LTA works it's possible to cause my future self problems by trying to do the right thing now.

Once again thanks for all the comments, there's plenty to think about here.

Thrugelmir

At 27 you are over thinking matters somewhat. The one certainty in life is uncertainty. Trying to predict the future on historical averages is flawed. Your employer may not even exist in 10 years time let alone 30.

PeacefulWaters

* If I reduce my growth rate to 3% I get to ~70% of the LTA by 60, at 4% it's 90% and at 5% it's 110%. Unfortunately modelling over such a long time period adds a huge amount of uncertainty

I'm nudging up towards 50 and there are a huge number of variables over my retirement planning too.

Grabbing the tax relief while it's there and you're nowhere near LTA seems to make sense.

Strong investment growth might lead you to rethink further down the line.

Investments outside of a pension will impact your ability to claim means tested benefits. But they will also give you flexibility to retire before you get to 57 based on those assumptions you've used above.

And as your zest for the workplace diminishes alongside your health that would be welcome.

There is no point second guessing what governments will do though.

maximumgardener

hammerhead2000 wrote: »

Thanks for all the comments - this got a much bigger response than I expected! The prompt for my question is exactly as princeofpounds explained - I have to consider the lifetime allowance, because if I continued at my current rate I could exceed it and back myself into a corner approaching retirement.

A 4% real growth rate for the global equities portfolio in my pension is relatively conservative, (many models have 5% or 6%, which seems optimistic!). I'm also using inflation of 2.5% p.a., which is very high relative to now, but close to the long term average. The inflation rate is less relevant here because as AnotherJoe says, the LTA is index linked starting 2018. With these projections I have to consider the LTA now - a small outperformance relative to my 4% prediction, or a further cut in the LTA puts me in a difficult position since as Lokolo says the retirement age is only going up (I'm expecting my state retirement age to be at least 70, so the earliest I could draw my pension would be 60).

All of this caused me to wonder if I'd be better putting the money elsewhere. I can always increase contributions a bit later on (e.g. if my employer contributions go down). I can't take out contributions I've put in historically (e.g. if my employer contribs rise with inflation, or my growth rate is better than expected that puts further strain on my LTA).

I'm maybe thinking about this a year or two early, but that seems better than thinking about it 5 years too late.

In response to the other comments:
* I don't need to contribute anything to get my employer's 13k p.a. I could move to a job which pays less, but I could equally end up getting promoted and saving more, or seeing it rise with inflation.
* I put a lump sum in last month and stopped contributions just in case the chancellor changed tax relief. I'm far ahead relative to where I would have been if I had done nothing, and I wanted to retain control in the event things changed. I can restart with a month's notice if I want to.
* If I reduce my growth rate to 3% I get to ~70% of the LTA by 60, at 4% it's 90% and at 5% it's 110%. Unfortunately modelling over such a long time period adds a huge amount of uncertainty

I know pensions have huge tax incentives - that is after all why I voluntarily put aside a lot of my income over the last 6 years! It's just a shame that because of the way the LTA works it's possible to cause my future self problems by trying to do the right thing now.

Once again thanks for all the comments, there's plenty to think about here.

you really appear in good shape for the future here OP. well done!
its obvious you just need to keep an eye on it, maybe scale back your own pension contributions and invest elsewhere as well. Don't panic!
remember pensions are just a "wrapper" for your money and there are other wrappers, like
ISA's which are tax free on withdrawal (till Govt changes that !!!!) . fill your boots
you can have a million in pension pot and same in isa's , invested similarly
you can invest circa £15k pa in an isa under current rules. you may benefit from some specialist advice here . see couple IFA near you ?

wotsthat

Thrugelmir wrote: »

At 27 you are over thinking matters somewhat. The one certainty in life is uncertainty. Trying to predict the future on historical averages is flawed. Your employer may not even exist in 10 years time let alone 30.

You have to start somewhere.

I've run a retirement spreadsheet for nearly 20 years. As the uncertainties become certain the spreadsheet gets updated. For example in 2014 I estimated 2015's inflation, pay, bonuses, investment returns etc. By the end of 2015 these uncertainties were in the past and certain.

princeofpounds

I've run a retirement spreadsheet for nearly 20 years. As the uncertainties become certain the spreadsheet gets updated

Indeed - this is actually the way you pretty much have to manage things under the LTA system, and it's a good idea anyway.


The great thing about it is that is allows any wrong assumptions you make (especially over investment returns) to converge to reality very gradually. So if your expected returns don't materialise, you'll just see your end target slipping a little each year unless you up your contributions.


Still doesn't help much with the risk of overshooting the LTA however. Especially given it's often hard (or even illegal) to refuse employer pension contributions or convert them into cash salary.